<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 30, 1997
REGISTRATION NO. 333-29213
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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VISION TWENTY-ONE, INC.
(Exact name of registrant as specified in its charter)
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<TABLE>
<S> <C> <C>
FLORIDA 8741 59-3384581
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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<TABLE>
<C> <C>
VISION TWENTY-ONE, INC. THEODORE N. GILLETTE, PRESIDENT AND CEO
7209 BRYAN DAIRY ROAD VISION TWENTY-ONE, INC.
LARGO, FLORIDA 34647 7209 BRYAN DAIRY ROAD
(813) 545-4300 LARGO, FLORIDA 34647
(Address, including zip code, and telephone (813) 545-4300
number, including area code, of registrant's (Name, address, including zip code, and
principal executive offices) telephone number, including area code, of
agent for service)
</TABLE>
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WITH COPIES TO:
<TABLE>
<C> <C>
DARRELL C. SMITH, ESQUIRE JEFFREY M. STEIN, ESQUIRE
SHUMAKER, LOOP & KENDRICK, LLP KING & SPALDING
101 E. KENNEDY BLVD., SUITE 2800 191 PEACHTREE STREET
TAMPA, FLORIDA 33602 ATLANTA, GEORGIA 30303-1763
(813) 229-7600 (404) 572-4600
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION -- DATED JULY 30, 1997
PROSPECTUS
- --------------------------------------------------------------------------------
2,100,000 Shares
[VISION TWENTY-ONE LOGO] [VISION TWENTY-ONE LOGO]
Common Stock
- --------------------------------------------------------------------------------
All of the 2,100,000 shares of common stock, par value $.001 per share (the
"Common Stock"), offered hereby are being sold by Vision Twenty-One, Inc. (the
"Company"). Prior to this offering (the "Offering"), there has been no public
market for the Common Stock of the Company. It is currently anticipated that the
initial public offering price will be between $11.00 and $13.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
The Company has applied for inclusion of the Common Stock in The Nasdaq Stock
Market's National Market (the "Nasdaq National Market") under the symbol "EYES."
SEE "RISK FACTORS" ON PAGES 6 TO 15 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=======================================================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
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<S> <C> <C> <C>
Per Share................................... $ $ $
- -----------------------------------------------------------------------------------------------------------------------
Total(3).................................... $ $ $
=======================================================================================================================
</TABLE>
(1) The Company, Theodore N. Gillette and Richard L. Sanchez, who are executive
officers, directors and principal stockholders of the Company, Bruce S.
Maller and Richard L. Lindstrom, M.D., who are directors of the Company, and
certain other selling stockholders of the Company (collectively the "Selling
Stockholders") have agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
See "Principal and Selling Stockholders" and "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $900,000.
(3) The Company and the Selling Stockholders have granted the several
Underwriters 30-day over-allotment options to purchase in the aggregate up
to 315,000 additional shares of Common Stock on the same terms and
conditions as set forth above. If all such additional shares are purchased
by the Underwriters, the total Price to Public will be $ , the
total Underwriting Discounts and Commissions will be $ , the total
Proceeds to Company will be $ and the total Proceeds to Selling
Stockholders will be $ . See "Principal and Selling Stockholders"
and "Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and the Selling Stockholders and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares to the Underwriters is expected
to be made at the office of Prudential Securities Incorporated, One New York
Plaza, New York, New York, on or about , 1997.
PRUDENTIAL SECURITIES INCORPORATED WHEAT FIRST BUTCHER SINGER
, 1997
<PAGE> 3
[The inside front cover depicts a graphic of the Company's Local Area
Delivery System. The graphic sets forth the four elements contained within the
Local Area Delivery System. The four elements are labeled primary, secondary,
tertiary and surgical facilities on four separate boxes, one on top of the
other, and each box is successively smaller, forming the shape of a pyramid.
Within each box is a description of these elements within a Local Delivery
System. In addition, the inside front cover folds out to depict a map of the
United States with the states in which the Company operates highlighted in a
different color.]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus and information under "Risk Factors." Unless the
context otherwise requires, references in this Prospectus to the Company or
Vision Twenty-One include Vision Twenty-One, Inc., its predecessors and its
subsidiaries. As used herein, the term "Managed Providers" refers to the
licensed optometrists and ophthalmologists employed by professional associations
and providing eye care services at Company clinic facilities and ambulatory
surgical centers ("ASCs"); "Managed Professional Associations" refers to the
professional associations which are managed by the Company pursuant to long-term
management agreements ("Management Agreements"); "Contract Providers" refers to
the licensed optometrists and ophthalmologists who provide eye care services at
optometry and ophthalmology clinics and ASCs pursuant to the Company's managed
care contracts; and "Affiliated Providers" refers collectively to the Managed
Providers and the Contract Providers. Except as otherwise indicated, the
information contained in this Prospectus (i) assumes that the Underwriters'
over-allotment options will not be exercised and (ii) gives retroactive effect
to a reverse stock split resulting in an exchange of 1 share for 1.5 shares of
Common Stock issued and outstanding.
THE COMPANY
The Company provides a wide range of management and administrative services
to local area delivery systems ("LADS(SM)") established by the Company. LADS are
integrated networks of optometrists, ophthalmologists, ASCs and retail optical
centers that are designed to offer the full continuum of eye care services in
local markets. The Company began operations in 1984, providing management
services to seven optometrists practicing at eight clinic locations. The Company
currently provides its services to 11 LADS located in six states through which
660 Affiliated Providers deliver eye care services. Of these Affiliated
Providers, 72 are Managed Providers, consisting of 46 optometrists and 26
ophthalmologists practicing at 48 clinic locations and five ASCs, and 588 are
Contract Providers, consisting of 258 optometrists and 330 ophthalmologists
practicing at over 300 clinic locations and 35 ASCs. The Company signed its
first managed care contract in 1988 for 18,000 patient lives serviced through
the Company's network of optometrists practicing within retail optical
locations. The Company's Affiliated Providers, in conjunction with select
national retail optical chains operating over 300 retail optical centers,
deliver eye care services under the Company's 22 managed care contracts and
seven discount fee-for-service plans covering approximately 1.8 million patient
lives.
Eye care services in the United States are delivered through a highly
fragmented system of local providers that industry sources estimate consisted of
approximately 47,000 practicing eye care professionals in 1996, including
approximately 29,500 optometrists and 17,500 ophthalmologists. According to
industry sources, expenditures for all eye care services in the United States
were approximately $31.2 billion in 1995. Industry sources estimate $19.6
billion of these expenditures was spent on primary care, including approximately
$13.8 billion for optical goods (frames, lenses and accessories) and $5.8
billion for primary eye care services (routine eye exams, contact lens fitting
and diagnosis/management of eye disease), while $11.6 billion was spent on
secondary and tertiary care, including $6.9 billion for ophthalmology services
(medical and surgical eye care) and $4.7 billion for facility services (services
provided by hospital facilities and ASCs). The Company believes several trends
are effecting the growth of the overall eye care industry as well as the
delivery of eye care services. First, as the "baby boom" generation ages, the
demand for eye care services at all levels is expected to increase to treat such
conditions as glaucoma, cataracts and other eye disorders that naturally occur
as part of the aging process. Second, technological advances and innovations in
such areas as refractive surgery utilizing the excimer laser to correct
nearsightedness are expected to contribute to increased spending on eye care
services. Third, the Company believes that patients are increasingly seeking
convenient and accessible primary eye care through retail centers where primary
eye care services and products are being bundled, thus making the retail optical
center an important access point for eye care delivery networks. Finally, as
more people become eligible to receive eye care benefits, the Company believes
there will be increased utilization of primary eye care services, which will in
turn lead to an increase in the demand for secondary and tertiary eye care
services.
3
<PAGE> 5
The Company's goal is to enable each of its LADS to capture the leading
market share of fee-for-service patients and managed care members. To achieve
its goal, the Company is focused on the following strategies: (i) developing
LADS in order to provide for a complete continuum of easily accessible, high
quality and affordable eye care services, (ii) increasing patient revenue and
cost efficiencies for each LADS through practice development and managed care
initiatives and (iii) expanding into select new markets to create regional
networks of LADS.
The Company earns practice management fees by providing Managed Providers
with a wide range of management and administrative services. These management
and administrative services are designed to increase patient flow, while
effecting cost efficiencies, and to permit the Managed Provider to concentrate
on the delivery of easily accessible, high quality and affordable eye care
services. The Company also earns revenues by entering into capitated managed
care contracts with third-party insurers and payors and by administering
indemnity fee-for-service plans for its Affiliated Providers. The Company
believes it provides its Affiliated Providers with significant advantages in
negotiating, obtaining and effectively administering managed care contracts
through its experienced management team, management information systems, greater
capital resources and more efficient cost structure.
THE ACQUISITIONS
In a series of acquisitions completed from December 1996 through July 1997,
the Company acquired the business assets of 28 optometry clinics, 20
ophthalmology clinics, 21 optical dispensaries and five ASCs. Business assets
consist of certain non-medical and non-optometric assets, including accounts
receivable, leases, contracts, equipment and other tangible and intangible
assets. Concurrently with the acquisitions, the Company entered into long-term
management agreements with the related professional associations employing 46
optometrists and 26 ophthalmologists. See "The Acquisitions."
THE OFFERING
Common Stock Offered by the Company....... 2,100,000 shares
Common Stock to be Outstanding after the
Offering(1)............................... 8,212,681 shares
Use of Proceeds........................... To repay outstanding indebtedness
and to finance the acquisition and
development of optometry and
ophthalmology clinics and ASCs.
See "Use of Proceeds," "Certain
Transactions" and "Underwriting."
Proposed Nasdaq National Market Symbol.... EYES
- ---------------
(1) Excludes (a) an aggregate of 1,600,000 shares of Common Stock reserved for
issuance under the Company's stock plans (the "Plans"), pursuant to which
options to purchase approximately 682,667 shares have been granted as of
July 22, 1997, (b) an aggregate of 751,666 shares of Common Stock which are
issuable upon the exercise of warrants granted by the Company and (c) an
aggregate of 79,805 shares of Common Stock which are being held in escrow as
contingent consideration in several acquisitions. See "The Acquisitions,"
"Management -- Stock Option Plans," "Certain Transactions" and
"Underwriting."
RISK FACTORS
Investors should consider the material risk factors involved in connection
with an investment in the Common Stock and the impact to investors from various
events which could adversely affect the Company's business. See "Risk Factors."
4
<PAGE> 6
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------------- ------------------------------
PRO FORMA PRO FORMA
1994 1995 1996 1996(1) 1996 1997 1997(2)
------- ------- ------- ---------- ------- ------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ 1,192 $ 3,082 $ 9,564 $ 40,712 $ 2,100 $ 7,718 $ 11,403
Operating expenses............... 1,340 4,299 15,524 43,330 2,923 7,960 11,265
------- ------- ------- ---------- ------- ------- ----------
Income (loss) from operations.... (148) (1,217) (5,960) (2,618) (823) (242) 138
Net income (loss)................ (153) (1,226) (6,120) (2,623) (825) (469) 132
Pro forma net income (loss) per
common share(3)................ $ (0.36) $ 0.02
Pro forma weighted average number
of common shares
outstanding(3)................. 7,372,440 7,372,440
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(4) AS ADJUSTED(5)
------- ------------ -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................. $(6,158) $(6,158) $10,774
Total assets.............................................. 19,968 26,715 38,253
Long-term debt and capital lease obligations,
including current maturities............................ 10,509 10,509 953
Stockholders' equity...................................... 3,373 10,120 32,656
</TABLE>
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(1) Gives effect to the following transactions as if they were completed on
January 1, 1996: (i) the 1996 Acquisitions, (ii) the Pinellas Acquisition,
(iii) the Recent Acquisitions, and (iv) the Offering and the application of
the estimated net proceeds therefrom. See "The Acquisitions" and "Selected
Pro Forma Financial Data."
(2) Gives effect to the following transactions as if they were completed on
January 1, 1997: (i) the Pinellas Acquisition, (ii) the Recent Acquisitions,
and (iii) the Offering and the application of the estimated net proceeds
therefrom. See "The Acquisitions" and "Selected Pro Forma Financial Data."
(3) Reflects the pro forma net income (loss) per share assuming an increase in
the weighted average number of outstanding shares to the extent necessary to
repay the existing indebtedness as described in "Use of Proceeds." See Note
6 to the Company's Unaudited Pro Forma Consolidated Financial Information
for a description of the computation of pro forma net income (loss) per
common share.
(4) Gives effect to the Recent Acquisitions as if they were completed as of
March 31, 1997. See "The Acquisitions."
(5) Gives effect to the Offering and the application of the estimated net
proceeds therefrom. See "Selected Pro Forma Financial Data."
5
<PAGE> 7
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to the other information set forth in this Prospectus,
in connection with an investment in the Common Stock offered hereby.
This Prospectus contains forward looking statements that involve risks and
uncertainties. Those statements appear in a number of places in this Prospectus
and include statements regarding the intent, belief or current expectations of
the Company, its directors or its officers with respect to, among other things:
(i) the financial prospects of the Company; (ii) potential acquisitions by the
Company and the successful integration of both completed and future
acquisitions; (iii) the ability of the Company to efficiently and effectively
manage its Managed Providers; (iv) the use of the proceeds of the Offering; (v)
the Company's financing plans; (vi) trends affecting the Company's financial
condition or results of operations; (vii) the Company's growth strategy and
operating strategy; (viii) trends in the health care and managed care
industries; (ix) government regulations; (x) the declaration and payment of
dividends; (xi) the Company's current and future managed care contracts; (xii)
the Company's ability to continue to recruit Contract Providers, to convert
Contract Providers to Managed Providers, and to maintain its relationships with
Affiliated Providers; (xiii) the Company's relationship with BSM Consulting
Group and Bruce Maller; and (xiv) the Company's relationships with affiliated
retail optical companies. Prospective investors are cautioned that any such
forward looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward looking statements as a result of various
factors. The accompanying information contained in this Prospectus, including
without limitation the information set forth under the headings "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business," identifies important factors that could cause such
differences.
HISTORY OF LOSSES. Although the Company has experienced substantial
revenue growth, the Company incurred operating and net losses in the years ended
December 31, 1994, 1995 and 1996 and in the three months ended March 31, 1997.
As of March 31, 1997, the Company had an accumulated deficit of $8.1 million.
There can be no assurance that the Company will not incur further operating and
net losses or achieve profitability in the near future.
RISKS ASSOCIATED WITH EXPANSION STRATEGY. A significant portion of the
Company's expansion strategy is to grow its Managed Provider network through the
acquisition of certain assets of ophthalmology and optometry practices, ASCs and
related businesses. The success of the Company's expansion strategy will depend
on factors which include the following:
Ability to Identify and Consummate Suitable Acquisitions. The Company
intends to devote substantial resources to identifying, negotiating and
consummating appropriate acquisitions. The Company may compete for
acquisition opportunities with entities that have greater resources than
the Company. Additionally, there can be no assurance that suitable
acquisition candidates are available or can be identified or that
acquisitions can be consummated on terms favorable to the Company.
Integration of Acquisitions. The Company has made significant
acquisitions in the past year. In the past twelve months, the number of
clinics and ASCs managed by the Company, the size of its Contract Provider
network, and the number and size of its managed care contracts and related
covered lives have increased significantly. The Company's financial results
in fiscal quarters immediately following a material acquisition or series
of acquisitions may be adversely impacted while the Company attempts to
integrate the acquisition or acquisitions. There can be no assurance that
there will not be substantial unanticipated costs or problems associated
with the integration effort. During the first few months after an
acquisition, the Company's expenses related to an acquisition may exceed
the revenue it realizes from the acquisition and, accordingly, any such
acquisition may have a negative effect on the Company's short-term
operating results. As the Company pursues its expansion strategy, there can
be no assurance that the Company will be able to continue to successfully
integrate acquisitions and any failure or inability to do so may have a
material adverse effect on the Company's results of operations or financial
condition. In addition, acquisitions require the Company to attract and
retain competent and experienced management
6
<PAGE> 8
personnel and require the integration of reporting and tracking systems,
management information systems and other operating systems. At the present
time, the Company's management information systems have not been fully
integrated into the Company's recent acquisitions, and there can be no
assurance that the Company will be able to fully integrate its management
information systems in the near future. There can also be no assurance that
the Company will be able to attract suitable management or other personnel
or effectively expand its operating systems. The success of the Company's
expansion strategy will depend on the Company's ability to effectively
manage an increasing number of new acquisitions while continuing to manage
its existing business.
Availability of Funds for Expansion Strategy. The Company's expansion
strategy will require that substantial capital investment and adequate
financing be available to the Company. Capital is needed not only for
acquisitions, but also for the integration of operations and the addition
of equipment and technology. The Company currently believes that the net
proceeds from this Offering, cash flow from operations and future
borrowings will be adequate to meet the Company's anticipated capital needs
for the next eighteen months. Thereafter, the Company may be required to
obtain financing through additional borrowings or the issuance of
additional equity or debt securities, which could have an adverse effect on
the value of the shares of Common Stock of the Company. There can be no
assurance that the Company will be able to obtain such financing or that,
if available, such financing will be on terms acceptable to the Company.
Any inability of the Company to obtain suitable additional financing could
cause the Company to change its expansion strategy, which could have a
material adverse effect on the Company.
Managed Care Contract Expansion. The success of the Company's
expansion strategy also will be dependent on its ability to expand its
managed care contract relationships. The ability of the Company to maintain
and expand its Contract Provider network and retail affiliations will be
important in expanding these contractual relationships with both existing
and new payors. Correspondingly, expanding managed care contract
relationships will be important in maintaining and expanding its Contract
Provider network and retail affiliations. Additionally, the ability to
effect acquisitions that add to the Company's Managed Provider network will
be dependent upon the Company's ability to expand its managed care contract
relationships.
Risks Associated with Merger Transactions. Several of the Company's
acquisitions have been accomplished by way of merger. As a result of such
merger transactions, there could be potential liabilities to which the
Company could be subject. The agreements entered into in connection with
the acquisitions provide for the Company to be fully indemnified against
any losses incurred by the Company as a result of certain material
liabilities. However, while the Company is not aware of any such
liabilities, there can be no assurance that the Company will not incur
losses in the event that the indemnifications are inadequate to reimburse
the Company for any such losses.
RELIANCE ON AFFILIATED PROVIDERS. The Company's revenue depends on revenue
generated by the Affiliated Providers. There can be no assurance that the
practices managed by the Company will continue to maintain successful practices,
that the Management Agreements between the Company and such professional
associations will not be terminated or that the Managed Providers will continue
to be employed by the professional associations. Under the Management
Agreements, the Company has agreed with the professional associations that,
subject to certain exceptions, it will not provide management services for any
practice located within five miles of such professional associations without
first obtaining the express written consent of the professional associations.
The Company's ability to expand the managed care business will be dependent upon
the Company's ability to recruit and maintain an expanded Contract Provider
network as well as to market such network successfully to payors. The inability
to effectively expand the network and contractual relationships with payors
would have a material adverse effect on the Company's growth strategy.
Additionally, the practice management fees earned by the Company pursuant to
substantially all of its Management Agreements will fluctuate depending on
variances in revenues and expenses of the Managed Professional Association and
thus the Company's revenue and profitability in connection with its Management
Agreements will be directly and adversely affected by poor operating results of
its Managed Professional Associations.
7
<PAGE> 9
RISKS ASSOCIATED WITH MANAGED CARE CONTRACTS AND CAPITATED FEE
ARRANGEMENTS. As an increasing percentage of the population is covered by
managed care organizations, the Company believes that its success will be, in
part, dependent upon its ability to negotiate managed care contracts with HMOs,
health insurance companies and other third party payors pursuant to which
services will be provided on a risk-sharing or capitated basis. Managed care
contracts accounted for 21.1% and 24.2% of the Company's pro forma revenues for
the year ended December 31, 1996 and the three month period ended March 31,
1997, respectively. Revenue derived from contractual arrangements with certain
affiliates of Humana Inc. ("Humana") accounted for 60.3% and 16.7% of the
Company's historical revenues for the year ended December 31, 1996 and the three
months ended March 31, 1997, respectively. Any adverse development in the
Company's relationship with Humana would have a material adverse effect on the
Company's results of operations and financial condition. There can be no
assurance that the Company will be able to maintain a relationship with Humana
or any other association with which it has a managed care contract. Most of the
Company's managed care contracts are for one year terms which automatically
renew and the contracts are terminable by either party on sixty days notice.
Under some of these contracts, the health care provider may accept a pre-
determined amount per month per patient in exchange for providing all necessary
covered services to the patients covered under the agreement. These contracts
pass much of the risk of providing care from the payor to the provider. The
proliferation of these contracts in markets served by the Company could result
in greater predictability of revenue, but less certainty with respect to
profitability. There can be no assurance, however, that the Company will be able
to negotiate satisfactory arrangements on a risk-sharing or capitated basis. In
addition, to the extent that patients or enrollees covered by these contracts
require, in the aggregate, more frequent or extensive care than is anticipated,
operating margins may be reduced or the revenue derived from these contracts may
be insufficient to cover the costs of the services provided. Any such
developments could have a material adverse effect on the Company's results of
operations or financial condition.
GOVERNMENT REGULATIONS. Business arrangements between business
associations that provide practice management services and ophthalmologists and
optometrists are regulated extensively at the state and federal levels,
including regulation in the following areas:
Corporate Practice of Optometry and Ophthalmology. The laws of many
states prohibit corporations that are not owned entirely by eye care
professionals from employing eye care professionals, having control over
clinical decision-making, or engaging in other activities that are deemed
to constitute the practice of optometry and ophthalmology. The Company
contracts with professional associations (which are owned by one or more
licensed optometrists or ophthalmologists), which in turn employ or
contract with licensed optometrists or ophthalmologists to provide
professional services. The Company performs only non-professional services,
is not representing to the public or its customers that it provides
professional eye care services, and is not exercising influence or control
over the practices of the eye care practitioners employed by the
professional associations. Furthermore, the Management Agreements between
the Company and the Managed Professional Associations specifically provide
that all decisions required by law to be made by professionals shall be
made by such professionals. While certain shareholders of Managed
Professional Associations that perform the practice of medicine or
optometry are also involved in Company management, they act independently
when making decisions on behalf of their professional corporations and the
Company has no right (and does not attempt to exercise any right) to
control those decisions.
Fee-Splitting and Anti-kickback Laws.
State Law. Many states prohibit "fee-splitting" by eye care
professionals with any party except other eye care professionals in the
same professional corporation or practice association. In most cases,
these laws have been construed as applying to the paying of a portion of
a fee to another person for referring a patient or otherwise generating
business, and not to prohibit payment of reasonable compensation for
facilities and services (other than the generation of referrals), even
if the payment is based on a percentage of the practice's revenues. In
addition, most states have laws prohibiting paying or receiving any
remuneration, direct or indirect, that is intended to induce referrals
for health care products or services. For example, the Florida
fee-splitting law prohibits
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paying or receiving any commission, bonus, kickback, or rebate, or
engaging in any split-fee arrangement in any form for patient referrals
to providers of health care goods or services. According to a Florida
court of appeals decision interpreting this law, it does not prohibit a
management fee that is based on a percentage of gross income of a
professional practice if the manager does not refer patients to the
practice. Similarly, the Arizona law prohibits "dividing a professional
fee" only if it is done "for patient referrals". Other states, such as
Illinois and New York, have fee-splitting statutes that have been
interpreted to prohibit any compensation arrangements that are based on
a percentage of physician's revenue, and such laws preclude the Company
from using its typical management arrangement in those states.
Federal Law. Federal law prohibits the offer, payment,
solicitation or receipt of any form of remuneration in return for the
referral of patients covered by federally funded health care programs
such as Medicare and Medicaid, or in return for purchasing, leasing,
ordering or arranging for the purchase, lease or order of any product or
service that is covered by a federal program. For this reason, the
Management Agreement provides that the Company will not engage in direct
marketing to potential sources of business, but will only assist the
practice's personnel in these endeavors by providing training, marketing
materials and technical assistance.
Advertising Restrictions. Many states prohibit eye care
professionals from using advertising which includes any name other than
their own, or from advertising in any manner that is likely to lead a
person to believe that a non eye care professional is engaged in the
delivery of eye care services. The Management Agreement provides that
all advertising shall conform to these requirements.
In addition, the Company's managed care arrangements with health care
service payors on the one hand, and its network of Affiliated Providers on the
other, are subject to federal and state regulations, including the following:
Insurance Licensure. Most states impose strict licensure requirements
on health insurance companies, HMOs, and other companies that engage in the
business of insurance. In most states, these laws do not apply to
discounted fee-for-service arrangements or networks that are paid on a
"capitated" basis, i.e. based on the number of covered persons the network
is required to serve without regard to the cost of service actually
rendered, unless the association with which the network provider is
contracting is not a licensed health insurer or HMO. There are exceptions
to these rules in some states. For example, certain states require a
license for a capitated arrangement with any party unless the risk-bearing
association is a professional corporation that employs the eye care
professionals. In the event that the Company is required to become licensed
under these laws, the licensure process can be lengthy and time consuming
and, unless the regulatory authority permits the Company to continue to
operate while the licensure process is progressing, the Company could
experience a material adverse change in its business while the licensure
process is pending. In addition, many of the licensing requirements mandate
strict financial and other requirements which the Company may not
immediately be able to meet. Once licensed, the Company would be subject to
continuing oversight by and reporting to the respective regulatory agency.
Limited Health Service Plans. Some states permit managed care
networks that assume insurance risk, but only as to a limited class of
health services, to be licensed as limited health service plans, and
thereby avoid the need to be licensed as an insurer or HMO even if its
arrangements are with individual subscribers or self-insured employers. The
Company intends to seek such licensure in those states where it is
available for eye care networks. However, the Company may not be able to
meet such requirements in all cases.
Physician Incentive Plans. Medicare regulations impose certain
disclosure requirements on managed care networks that compensate providers
in a manner that is related to the volume of services provided to Medicare
patients (other than services personally provided by the provider). If such
incentive payments exceed 25 percent of the provider's potential payments,
the network is also required to show that the providers have certain "stop
loss" financial projections and to conduct certain Medicare enrollee
surveys.
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"Any Willing Provider" Laws. Some states have adopted, and others are
considering, legislation that requires managed care networks to include any
provider who is willing to abide by the terms of the network's contracts
and/or prohibit termination of providers without cause. Such laws would
limit the ability of the Company to develop effective managed care networks
in such states.
The Company and its affiliated professional associations are subject to a
range of antitrust laws that prohibit anti-competitive conduct, including price
fixing, concerted refusals to deal and divisions of markets. Among other things,
these laws limit the ability of the Company to enter into Management Agreements
with separate practice groups that compete with one another in the same
geographic market. This does not apply to professionals within the same practice
group. In addition, these laws prevent acquisitions of business assets that
would be integrated into existing professional associations if such acquisitions
substantially lessen competition or tend to create a monopoly.
The several laws described above have civil and criminal penalties and have
been subject to limited judicial and regulatory interpretation. They are
enforced by regulatory agencies that are vested with broad discretion in
interpreting their meaning. The Company's agreements and activities have not
been examined by federal or state authorities under these laws and regulations.
For these reasons, there can be no assurance that review of the Company's
business arrangements will not result in determinations that adversely affect
the Company's operations or that certain agreements between the Company and eye
care providers or third-party payors will not be held invalid and unenforceable.
In addition, these laws and their interpretation vary from state to state. The
regulatory framework of certain jurisdictions may limit the Company's expansion
into, or ability to continue operations within, such jurisdictions if the
Company is unable to modify its operational structure to conform with such
regulatory framework. Any limitation on the Company's ability to expand could
have an adverse effect on the Company. See "Business -- Government Regulations."
COST CONTAINMENT AND REIMBURSEMENT TRENDS. The Company estimates that on a
pro forma basis for the year ended December 31, 1996, 74.5% of the revenues
received by the professional associations currently managed by it were derived
from government sponsored health care programs and private third-party payors.
The health care industry has experienced a trend toward cost containment as
government and private third-party payors seek to impose lower reimbursement and
utilization rates and negotiate reduced payment schedules with service
providers. The Company believes that these trends may result in a reduction from
historical levels in per patient revenue received by the professional
associations. Recent changes in Medicare payment rates will reduce payments to
optometrists and ophthalmologists. Medicare payments to physicians and other
practitioners are based on the "relative value units" ("RVUs") assigned to the
service in question. These RVUs were adjusted effective January 1, 1997 in a
manner that generally assigns a relatively lower value to services performed by
optometrists and ophthalmologists. As a result of these changes, the projected
Medicare payments to optometrists and ophthalmologists will be reduced by less
than five percent. Private insurance payments could also be affected to the
extent that the payment methodologies used by insurance companies are based on
the Medicare RVUs. Further reductions in payments to professionals or other
changes in reimbursement for health care services could have an adverse effect
on the Company's results of operations. There can be no assurance that any
potential reduced revenues and operating margins from such trends could be
offset through cost reductions, increased volume, introduction of new procedures
or otherwise. See "Business -- Governmental Regulations."
NON-COMPETITION COVENANTS. The Management Agreements require each
professional association to use its best efforts to enter into employment
agreements with each Managed Provider that include covenants not to compete with
the professional association for periods ranging from one to two years after
termination of employment, and which require the professional association's
shareholders to pay certain specified amounts to the Company if such shareholder
professionals violate their respective covenants not to compete. Laws affecting
the enforceability of such covenants vary significantly from state to state. In
most states, a covenant not to compete will be enforced only to the extent it is
necessary to protect a legitimate business interest of the party seeking
enforcement, does not unreasonably restrain the party against whom enforcement
is sought, and is not contrary to the public interest. This determination is
made based on all the facts and circumstances of the specific case at the time
enforcement is sought. For this reason, one cannot predict with certainty
whether a court will enforce such a covenant in a given situation. In addition,
it is unclear whether a management
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company's interest under a management agreement will be viewed by the courts as
the type of protectable business interest that would permit the management
company to enforce such a covenant or to require the managed professional
association to enforce such a covenant against the employed professional.
Furthermore, liquidated damages provisions will not be enforced unless the court
determines that the amount is a reasonable estimate of actual damages that would
be difficult to ascertain in a precise manner. Since the intangible value of the
Management Agreement depends primarily on the ability of the professional
association to preserve its business, which could be harmed if employed
professionals went into competition with the professional association, a
determination that these provisions will not be enforced could have a material
adverse effect on the Company. See "Business -- Management Agreements."
Additionally, the Company is not permitted under certain circumstances to expand
its Affiliated or Managed Provider network within a certain geographical area
surrounding a Managed Provider without prior consent of the Managed Provider.
Such covenants could serve to limit market penetration opportunities within a
LADS and thus have an adverse effect on the Company's ability to expand within a
LADS.
RISKS ASSOCIATED WITH BSM RELATIONSHIP. The Company has exclusive
consulting agreements with leading ophthalmology practice consultants BSM
Consulting Group ("BSM") and Bruce S. Maller. The agreements are for a term of
five years and may be terminated by a party only for "cause" in the event of a
material breach which remains uncured for 30 days or the occurrence of certain
events related to bankruptcy. Mr. Maller is the chief executive officer of BSM
and a director of the Company. BSM and Mr. Maller assist the Company in
identifying and evaluating suitable ophthalmology practices for acquisition,
integrating the acquired practices and providing strategic planning designed to
enhance the growth and development of the Affiliated Providers. A large part of
the success of the Company in implementing its growth strategy will depend on
the ability of such consultants to identify and evaluate suitable ophthalmology
practices and to assist Managed Providers in growing their practices, and there
can be no assurance that the consultants will be able to provide such services
successfully. Furthermore, in the event that such consultants are no longer able
to provide such services for any reason, there can be no assurance that the
Company will be able to retain other consultants with similar expertise or
undertake these tasks internally. Therefore, the loss of the services of either
BSM or Maller could have a material adverse effect on the Company. See "Certain
Transactions."
RISKS RELATED TO AMORTIZATION OF INTANGIBLE VALUE IN MANAGEMENT
AGREEMENTS. The Company's pro forma combined total assets reflect substantial
intangible assets in the form of Management Agreements with Managed Providers.
At March 31, 1997, intangible assets represent approximately 66.8% of total
assets and almost four times total stockholders' equity. The intangible asset
value represents the excess of cost over the fair value of the separate net
assets acquired in connection with rights received by the Company under its
acquired Management Agreements. There can be no assurance that the value of such
assets will ever be realized by the Company. These intangible assets are
expected to be amortized on a straight-line method over an average life of 25
years. The Company evaluates on a regular basis whether events and circumstances
have occurred that indicate that all or a portion of the carrying amount of the
asset may no longer be recoverable, in which case an additional charge to
earnings would become necessary. Any determination requiring the write-off of a
significant portion of unamortized intangible assets would adversely affect the
Company's results of operations. See "Selected Pro Forma Financial Data."
RELATIONSHIP WITH RETAIL OPTICAL COMPANIES. An important factor in the
Company's business and growth strategy is its strategic affiliations with retail
optical companies in the Company's markets. The Company currently has
contractual arrangements with ECCA Managed Vision Care, Inc. ("ECCA") and For
Eyes Managed Care, Inc. ("For Eyes"), subsidiaries of retail optical chains,
which are terminable by either party under certain circumstances, and there can
be no assurance that the Company will be able to maintain these arrangements.
The Company expects to gain benefits from strategic affiliations with optical
retailers through increasing patient flow into a LADS, increasing opportunities
to obtain managed care contracts and providing an opportunity to add affiliated
optometrists practicing within retail optical locations. However, under
applicable regulations these retailers may not be required to refer patients to
the Affiliated Providers and there can be no assurance that the Company's
arrangements with retail optical companies will result in the intended benefits
to the Company. Additionally, in those markets where more than one affiliated
optical retailer operates and competes with others, the Company may have to
choose among such optical
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retailers. There can be no assurance that the Company will be able to
successfully establish strategic affiliations in any particular market or that
any such affiliations will be successful. The inability of the Company to
maintain and develop its strategic affiliations could have a material adverse
effect on the Company's business, results of operations and financial condition.
COMPETITION. The health care industry is highly competitive and subject to
continual changes in the methods by which services are provided and the manner
in which health care providers are selected and compensated. The Company
believes that private and public reforms in the health care industry emphasizing
cost containment and accountability will result in an increasing shift of eye
care from highly fragmented, individual or small practice providers to larger
group practices, affiliated practice groups or other eye care delivery systems.
The Company competes with other physician practice management companies which
seek to acquire the allowable business assets of and provide management services
to eye care professionals, some of which have substantially greater financial
resources than the Company. Companies in other health care industry segments,
such as managers of other hospital-based specialties or currently expanding
large group practices, some of which have financial and other resources greater
than those of the Company, may become competitors in providing management to
providers of eye care services. Increased competition could have a material
adverse effect on the Company's financial condition and results of operations.
The basis for competition in the practice management area is service, pricing,
strength of the delivery network, strength of operational systems, the degree of
cost efficiencies and synergies, marketing strength, management information
systems, managed care expertise, patient access and quality assessment programs.
The Company also competes with other providers of eye care services, including
HMOs, PPOs and private insurers, for managed care contracts, many of which have
larger provider networks and greater financial and other resources than the
Company. Managed care organizations compete on the basis of administrative
strength, size, quality and geographic coverage of their provider networks,
marketing abilities, informational systems, the strategy of their managed care
contracts, operating efficiencies and price. See "Business -- Competition."
RISKS ARISING FROM HEALTH CARE REFORM. There can be no assurance that the
laws and regulations of the states in which the Company operates will not change
or be interpreted in the future either to restrict or adversely affect the
Company's relationships with its Affiliated Providers or the operation of the
professional associations with which it contracts. Federal and state governments
are currently considering various types of health care initiatives and
comprehensive revisions to the health care and health insurance systems. Some of
the proposals under consideration, or others that may be introduced, could, if
adopted, have a material adverse effect on the Company's financial condition and
results of operations. It is uncertain what legislative programs, if any, will
be adopted in the future, or what actions Congress or state legislatures may
take regarding health care reform proposals or legislation. In addition, changes
in the health care industry, such as the growth of managed care organizations
and provider networks, may result in lower payments for the services of the
Affiliated Providers, which could have a material adverse effect on the Company.
Congress and the Clinton administration recently announced a balance budget
agreement that is expected to lead to future legislation. When compared to
projected Medicare spending levels under current law, the agreement would reduce
Medicare spending by $115 billion over five years and $430 billion over 10
years. The vast majority of these savings would come from reductions in payments
for services of health care facilities, practitioners and other providers.
Although Congress has not agreed to specific reductions, it appears that
Congressional leaders will use the President's proposed fiscal 1998 budget as
the starting place for future legislation. The President's proposed budget
would, among other things, (i) reduce payments to managed care plans from the
current rate of 95% of fee-for-service rates, (ii) reduce payment rates in
geographic areas that have high service utilization rates, (iii) reduce the
annual inflation adjustment for ASC fees, (iv) eliminate disparities in payment
rates for similar services by physicians in different specialties, and (v)
eliminate payments for assistants at surgery. It is impossible to determine
precisely how these changes will affect payments for services of
ophthalmologists, optometrists and ASC facilities until the final legislation is
adopted. Any reductions in payment for these services could have an adverse
effect on the Company's results of operations and financial condition. See
"Business -- Governmental Regulations."
RISKS ASSOCIATED WITH EYE CARE SERVICES. The Company's business entails an
inherent risk of claims of liability. The optometrists, ophthalmologists and
ASCs which the Company contracts with are involved in the
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delivery of health care services to the public and, therefore, are exposed to
the risk of professional liability claims. As a result of the Company providing
management services pursuant to its Management Agreements, the Company may also
be named as a co-defendant in professional liability lawsuits against its
Affiliated Providers from time to time. The Company does not control the
practice of optometry or ophthalmology by the Affiliated Providers or the
compliance with regulatory and other requirements directly applicable to the
Affiliated Providers and their practices. Claims of this nature, if successful,
could result in substantial damage awards to the claimants that may exceed the
limits of any applicable insurance coverage. Insurance against losses related to
claims of this type can be expensive and varies widely from state to state. The
Company is indemnified under the Management Agreements for claims against the
professional associations with which it contracts and maintains liability
insurance for itself. Successful malpractice claims asserted against the
professional associations, however, could have an adverse effect on the
Company's profitability. The Company maintains an umbrella insurance policy
which includes professional liability and general liability insurance on a
claims made basis in the amounts of $5.0 million per incident, and $5.0 million
in the aggregate per year. While the Company believes it maintains reasonable
levels of liability insurance coverage, there can be no assurance that a pending
or future claim or claims will not be successful or, if successful, will not
exceed the limits of available insurance coverage or that such coverage will
continue to be available at acceptable costs and on favorable terms. See
"Business -- Management Agreements."
DEPENDENCE ON KEY INDIVIDUALS. The success of the Company is dependent
upon the continued services of the Company's senior management. The loss of the
services of one or more of these individuals, including the Company's Chairman,
President and Chief Executive Officer, Theodore N. Gillette, O.D. could have a
material adverse effect on the Company. The Company and Dr. Gillette are parties
to an employment agreement which expires on September 30, 2001 and is renewable
for subsequent one year terms. See "Management -- Employment Agreements." There
can be no assurance that Dr. Gillette will remain employed by the Company during
such period or that his employment agreement will be renewed. The Company
believes that its future success will also depend in part upon its ability to
attract and retain qualified management personnel. Competition for such
personnel is intense and the Company competes for qualified personnel with
numerous other employers, some of whom have greater financial and other
resources than the Company. There can be no assurance that the Company will be
successful in attracting and retaining such personnel. See "Management."
CONTROL BY CURRENT STOCKHOLDERS AND MANAGEMENT. Upon completion of the
Offering, the Company's current officers and directors will own approximately
44.5% of the outstanding shares of Common Stock. Accordingly, these individuals,
as a group, will have the ability to control all matters requiring stockholder
approval, including the election of the Company's directors and any amendments
to the Company's Articles of Incorporation and Bylaws, and to control the
business of the Company. Such control could preclude any acquisition of the
Company and could adversely affect the market price of the Common Stock. See
"Principal and Selling Stockholders" and "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, the
Company will have 8,212,681 shares of Common Stock outstanding of which the
2,100,000 shares sold in the Offering (2,415,000 shares if the Underwriters'
overallotment options are exercised in full), will be freely tradeable without
restriction or the requirement of future registration under the Securities Act
of 1933 (the "Securities Act"). All of the remaining 6,112,681 shares are
Restricted Securities ("Restricted Securities") as that term is defined by Rule
144 promulgated under the Securities Act and are subject to certain restrictions
described below. 2,830,023 of the Restricted Shares will become eligible for
sale 90 days following the completion of this Offering but are subject to
certain lock-up agreements described below. Holders of the 3,282,658 remaining
Restricted Shares will be eligible to sell a portion of such shares pursuant to
Rule 144 beginning in September 1997. These shares are subject to certain
lock-up agreements described below and also subject to registration rights
agreements requiring the Company to register such shares under certain
circumstances. See "Description of Capital Stock -- Registration Rights" and
"Shares Eligible for Future Sale." The Company has reserved 1,600,000 shares of
Common Stock under the Plans for issuance pursuant to stock options granted by
the Company, of which options to purchase 682,667 shares have been granted. See
"Management -- Stock Option Plans." In addition, 751,666 shares of Common Stock
are reserved for issuance pursuant to the exercise of warrants granted by the
Company. See "Description of Capital Stock -- Warrants." The warrant
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shares are subject to registration rights agreements requiring the Company to
register such shares under certain circumstances and otherwise will be eligible
for resale subject to all of the limitations on resale imposed by Rule 144. See
"Description of Capital Stock -- Registration Rights."
The Company, the Selling Stockholders, and certain of its executive
officers and directors have executed agreements pursuant to which each has
agreed not to, directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) of any shares of Common Stock
or other capital stock of the Company or any securities convertible into, or
exercisable or exchangeable for, any shares of Common Stock or other capital
stock of the Company, for a period of 180 days after the date of this
Prospectus, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, except for bona fide gifts or
transfers affected by such stockholders other than on any securities exchange or
in the over-the-counter market to donees or transferees that agree to be bound
by similar agreements (the "Lock-up Agreements") and except for sales made by
Selling Stockholders pursuant to options granted to the Underwriters to purchase
an additional 315,000 shares to cover over-allotments, if any. In addition,
certain non-affiliates of the Company have entered into 180-day Lock-up
Agreements with the Company similar to the above Lock-Up Agreements which
prohibit the direct or indirect disposition of shares without the prior written
consent of the Company. Such non-affiliates have also contractually agreed that
they will be subject to the same restrictions as affiliates of the Company under
Rule 144. Prudential Securities Incorporated may, in its sole discretion, at any
time and without notice, release all or any portion of the shares of Common
Stock subject to such agreements. Sales of substantial amounts of Common Stock
in the public market, or the availability of such shares for future sale, could
adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise additional capital through an offering of its
equity securities. See "Shares Eligible for Future Sale" and "Underwriting."
The Company intends to file several registration statements under the
Securities Act to register all shares of Common Stock subject to then
outstanding stock options and Common Stock issuable pursuant to the Plans. The
Company expects to file these registration statements promptly following the
closing of the Offering, and such registration statements are expected to become
effective upon filing. Shares covered by these registration statements will
thereupon be eligible for sale in the public markets, subject to the Lock-up
Agreements relating to shares held by executive officers. See "Management" and
"Shares Eligible for Future Sale."
Following the Offering, the Company may issue its Common Stock from time to
time in connection with the acquisition of stock or assets of other companies.
Such securities may be issued in transactions exempt from registration under the
Securities Act. The Company currently expects for the foreseeable future to
continue to require contractual lock-up agreements and to provide registration
rights consistent with previous transactions for sellers receiving stock in
acquisitions.
CERTAIN ANTI-TAKEOVER PROVISIONS. Certain provisions in the Company's
Articles of Incorporation and Bylaws and Florida law may make a change in
control of the Company more difficult to effect, even if a change in control
were in the stockholders' interest. Such provisions include certain
supermajority voting requirements contained in the Company's Articles of
Incorporation. The Company's Articles of Incorporation also provide that the
Board of Directors is divided into three classes of directors, elected for
staggered three-year terms. In addition, the Company's Articles of Incorporation
allow the Board of Directors to determine the terms of preferred stock which may
be issued by the Company without approval of the holders of the Common Stock,
and thereby enable the Board of Directors to inhibit the ability of the holders
of the Common Stock to effect a change in control of the Company. See
"Description of Capital Stock -- Certain Provisions of Florida Law." The Company
has entered into employment agreements with executive officers Theodore
Gillette, Richard Sanchez and Richard Welch, as well as certain other employees
of the Company, that require the Company to pay certain amounts to such
employees upon their termination following certain events including a change in
control of the Company. Such agreements may inhibit a change in control of the
Company. See "Management -- Employment Agreements."
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RESTRICTIONS ON PAYMENT OF DIVIDENDS. The Company's future credit
facilities may place certain restrictions on the future payment of dividends.
Furthermore, the Company currently intends to retain all future earnings for the
operation and expansion of its business and, accordingly, the Company does not
anticipate that any dividends will be declared or paid for the foreseeable
future. See "Dividend Policy."
POTENTIAL CONFLICTS OF INTEREST FROM RELATED PARTY TRANSACTIONS. There are
currently Management Agreements existing between the Company and professional
associations owned and controlled by several of the Company's officers,
directors and key employees which could create the potential for possible
conflicts of interests for such individuals. Any future transactions and
agreements or modifications of current agreements between the Company and such
individuals, other affiliates and their professional associations will be
approved by a majority of the Company's independent directors and will be on
terms no less favorable to the Company than those that could be obtained from
unaffiliated parties. See "Certain Transactions."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of shares of Common Stock
in the Offering will experience an immediate and substantial dilution of
approximately $10.47 per share in the net tangible book value per share of
Common Stock from the assumed initial public offering price. See "Dilution."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the
Offering, there has been no public market for the Company's Common Stock and
there can be no assurance that an active public market for the Common Stock will
develop or, if a trading market does develop, continue after the Offering. The
initial public offering price will be determined by negotiations among the
Company and the representatives (the "Representatives") of the Underwriters. See
"Underwriting" for a description of the factors to be considered in determining
the initial public offering price. The market price of the Common Stock could be
subject to significant fluctuations in response to variations in financial
results or announcements of material events by the Company or its competitors.
Quarterly operating results of the Company, changes in general conditions in the
economy or the health care industry, or other developments affecting the Company
or its competitors, could cause the market price of the Common Stock to
fluctuate substantially. The equity markets have, on occasion, experienced
significant price and volume fluctuations that have affected the market prices
for many companies' securities and that have often been unrelated to the
operating performance of these companies. Concern about the potential effects of
health care reform measures has contributed to the volatility of stock prices of
companies in health care and related industries and may similarly affect the
price of the Common Stock following the Offering. Any such fluctuations that
occur following completion of the Offering may adversely affect the market price
of the Common Stock.
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THE COMPANY
Vision 21 Physician Practice Management Company, Inc., a current subsidiary
of the Company ("Vision 21 PPMC"), was founded in 1984 to provide management
services to optometry practices owned primarily by the Company's Chief Executive
Officer, Theodore N. Gillette, O.D. At such time, Vision 21 PPMC contracted with
VisionWorks and Eckerd Optical (subsidiaries of Eckerd Corporation) to manage
optometry practices located within VisionWorks and Eckerd retail optical
centers. As Vision 21 PPMC expanded its network of optometry practices under
management, its management services were also expanded to include management
information systems, electronic claims processing, practice administration,
continuing education and credentialing of associated optometrists. By 1987,
management services were provided to over 20 optometry clinics located in the
state of Florida in close proximity to, or within, VisionWorks and Eckerd
Optical retail optical centers. Additionally, during that period, Vision 21 PPMC
began to form strategic relationships with independent ophthalmologists to
provide its optometric patients with access to secondary and tertiary eye care
services.
In 1986, Vision 21 Managed Eye Care of Tampa Bay, Inc., a current
subsidiary of the Company ("Vision 21 MCO"), began to provide management and
administrative services to networks of eye care providers that offered primary,
secondary and tertiary eye care services. Vision 21 MCO was awarded its first
managed care contract in 1988 covering in excess of 18,000 patient lives, with
retail optical and optometric services provided by its network of eye care
providers.
The Company was incorporated in Florida on May 9, 1996. The principal
operating subsidiaries of the Company are Vision 21 Managed Eye Care of Tampa
Bay, Inc. and Vision 21 Physician Practice Management Company, Inc., both of
which merged with the Company in November 1996. See "Certain Transactions."
The Company's 660 Affiliated Providers provide eye care services to 11 LADS
located in six states. Of these Affiliated Providers, 72 are Managed Providers,
consisting of 46 optometrists and 26 ophthalmologists practicing at 48 clinic
locations and five ASCs, and 588 are Contract Providers, consisting of 258
optometrists and 330 ophthalmologists practicing at over 300 clinic locations
and 35 ASCs. The Company's Affiliated Providers, in conjunction with select
national retail optical chains operating over 300 retail optical centers,
deliver eye care services under the Company's 22 managed care contracts and
seven discount fee-for-service plans covering approximately 1.8 million patient
lives.
The principal executive office of the Company is located at 7209 Bryan
Dairy Road, Largo, Florida 34647, and its telephone number is (813) 545-4300.
THE ACQUISITIONS
1996 ACQUISITIONS
In December 1996, the Company completed a series of transactions resulting
in the acquisition of the business assets of 22 optometry clinics, nine
ophthalmology clinics, 15 optical dispensaries and one ASC. Business assets
consist of certain non-medical and non-optometric assets, including accounts
receivable, leases, contracts, equipment and other tangible and intangible
assets. Concurrently, the Company entered into Management Agreements with the
related professional associations employing 34 optometrists and 13
ophthalmologists. These acquisitions were accounted for by recording the assets
and liabilities at fair value and allocating the remaining costs to the related
Management Agreements. Additionally, the Company acquired substantially all the
business assets of a managed care company servicing four capitated managed care
contracts covering over 100,000 patient lives, which was accounted for under the
purchase method of accounting (collectively, the "1996 Acquisitions"). In
connection with the 1996 Acquisitions, the Company provided aggregate
consideration of $11.2 million, consisting of 2.1 million shares of Common
Stock, unsecured promissory notes in the aggregate principal amount of $1.9
million and $800,000 in assumed debt. Additionally, the Company may be required
to provide additional consideration of up to $316,000, consisting of up to
79,805 shares of Common Stock, in connection with several of the 1996
Acquisitions, which will be
16
<PAGE> 18
transferred out of escrow to certain sellers in the event they meet certain
post-acquisition performance targets. See "Certain Transactions."
Acquisitions of significant size in the 1996 Acquisitions include: (i) the
business assets of a professional association providing optometry services at 11
clinics located in Tampa, Port Richey, Clearwater, St. Petersburg, Palm Harbor,
and Seminole, Florida for a total consideration of $1.9 million, consisting of
373,971 shares of Common Stock and a promissory note in the amount of $416,000;
(ii) the business assets of a professional corporation providing ophthalmology
services at three clinics located in Tucson, Arizona for a total consideration
of $1.6 million, consisting of 396,612 shares of Common Stock; (iii) the
business assets of a professional association providing ophthalmology services
at one clinic located in St. Paul, Minnesota for a total consideration of $1.4
million, consisting of 247,108 shares of Common Stock and a promissory note in
the amount of $460,000; and (iv) the business assets of a professional limited
liability company providing ophthalmology services at two clinics located in
Tucson and Oro Valley, Arizona for a total consideration of $1.7 million,
consisting of 327,717 shares of Common Stock and a promissory note in the amount
of $396,000.
PINELLAS ACQUISITION
In March 1997, the Company completed the acquisitions of the business
assets of one ophthalmology clinic and one optical dispensary located in
Pinellas County, Florida. Concurrently, the Company entered into Management
Agreements with the related professional associations employing one optometrist
and six ophthalmologists (the "Pinellas Acquisition"). These acquisitions were
accounted for by recording assets and liabilities at fair value and allocating
the remaining cost to the related Management Agreements. In connection with the
Pinellas Acquisition, the Company provided aggregate consideration of $1.1
million, consisting of 128,541 shares of Common Stock.
RECENT ACQUISITIONS
Between May 1, 1997 and July 30, 1997, the Company completed the
acquisition of the business assets of one optometry clinic, ten ophthalmology
clinics, five optical dispensaries and four ASCs located in Sierra Vista, Mesa,
Phoenix, and Tucson, Arizona, and Fort Lauderdale, Florida. Concurrently, the
Company entered into Management Agreements with the related professional
associations employing five optometrists and seven ophthalmologists (the "Recent
Acquisitions"). These acquisitions were accounted for by recording the assets
and liabilities at fair value and allocating the remaining cost to the related
Management Agreements. In connection with the Recent Acquisitions, the Company
provided aggregate consideration of $6.8 million, consisting of 777,118 shares
of Common Stock, $19,000 in promissory notes and $29,000 in cash, subject to
closing adjustments.
17
<PAGE> 19
RELATIONSHIPS WITH AFFILIATED PROVIDERS AND RETAIL OPTICAL COMPANIES
The Company provides practice management services pursuant to long-term
Management Agreements with professional associations employing Managed Providers
or with entities operating ASCs. This arrangement allows the Managed Providers
to focus on providing professional eye care services to patients. The related
professional associations receive payments from third-party payors or patients
for services provided. The Company receives management fees from the
professional associations for providing management services and employs all
administrative and non-professional staff for the clinic or ASC. The Company
owns all the business assets of the clinics and ASCs to the extent allowable by
law. Furthermore, the Company does not engage in the practice of optometry or
ophthalmology and does not control the practice of optometry or ophthalmology by
the Managed Providers or the compliance with regulatory and other requirements
directly applicable to the Managed Providers and their practices or the
operation of ASCs. The professional associations maintain full control over the
professional eye care services provided by the Managed Providers and set the
fees for all such services. See "Business -- Management Agreements."
The Company has also entered into managed care agreements with HMOs, health
insurance companies and other third-party payors pursuant to which the Company's
Managed Providers and Contract Providers provide eye care services to patients
who are covered by the payors' health benefit plans. The Company does not
provide practice management services to the Contract Providers. Furthermore, the
Company does not control the practice of optometry or ophthalmology by the
Contract Providers or the compliance with regulatory and other requirements
directly applicable to the Contract Providers and their practices or the
operation of ASCs.
The Company has contractual affiliations with ECCA and For Eyes,
subsidiaries of retail optical chains that operate a combined total of over 300
optical retail locations in 48 cities in the United States. As part of its
strategic relationship with ECCA, the Company's LADS provide certain eye care
services to customers of ECCA at retail optical centers located within the
Company's local area markets. In addition, the Company and ECCA jointly seek to
benefit from increasing managed care business by marketing to managed care plans
an integrated network of eye care providers that are able to offer primary,
secondary and tertiary care as well as retail optical products and services. In
its contractual agreement with For Eyes, the Company is a joint venture partner
in a general partnership called "Vision 21 Plus" in which the Company and For
Eyes each have a 50% interest. The objective of the joint venture is to maximize
opportunities for the Company in managed care by securing contracts and
providing comprehensive, fully integrated eye care products and services to
health care organizations and self-funded employer groups.
18
<PAGE> 20
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,100,000 shares of
Common Stock offered by the Company, at an assumed initial public offering price
of $12.00 per share, are estimated to be approximately $22.5 million (after
deducting underwriting discounts and commissions and estimated offering
expenses).
The Company intends to use the net proceeds from the Offering as follows:
(a) an aggregate of approximately $13.6 million to repay outstanding
indebtedness as follows: (i) $4.7 million of senior notes, the proceeds of which
were utilized for acquisitions and general corporate purposes and the repayment
of the Company's bank facility, which bear interest at 10% per annum and are due
in January 1998; (ii) $3.0 million of a senior note payable to Peter Fontaine, a
director of the Company, which bears interest at 8% per annum and is required to
be repaid upon completion of an initial public offering; (iii) $2.0 million of
senior subordinated notes, the proceeds of which were utilized for acquisitions
and general corporate purposes, which bear interest at 10% per annum and are due
upon the earlier of completion of an initial public offering or in December
1999; (iv) $1.9 million of notes payable to the sellers in the 1996
Acquisitions, which bear interest at 8% per annum and are due upon the earlier
of completion of an initial public offering or in March 1998; (v) $1.3 million
of senior subordinated notes which bear interest at 10% per annum and are due
upon the earlier of completion of an initial public offering or in December
1999; and (vi) $700,000 of notes payable in connection with an acquisition,
which bear interest at 8.5% per annum and are due upon completion of an initial
public offering and (b) an aggregate of $8.9 million to finance the acquisition
and development of optometry and ophthalmology clinics and ASCs. At this time,
the Company has no other pending or anticipated acquisitions which are
reasonably certain to occur. See "Certain Transactions" and "Underwriting."
Pending such uses, the net proceeds will be invested in short-term, investment
grade securities, certificates of deposit or direct or guaranteed obligations of
the United States government.
If the Underwriters' over-allotment options are exercised, the Company will
not receive any of the proceeds from the sale of the shares of Common Stock by
the Selling Stockholders. See "Principal and Selling Stockholders."
DIVIDEND POLICY
The Company has not paid or declared any dividends since its inception. The
Company currently intends to retain all future earnings for the operation and
expansion of its business and, accordingly, the Company does not anticipate that
any dividends will be declared or paid on the Common Stock for the foreseeable
future. Any future determination to pay cash dividends will be at the discretion
of the Board of Directors and will be dependent upon the Company's financial
condition, results of operations, capital requirements and other factors the
Board of Directors deems relevant. In addition, the Company's future credit
facilities may place certain restrictions on the payment of dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
19
<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997, (i) on an actual basis, (ii) on a pro forma basis to give effect
to the Recent Acquisitions and (iii) as adjusted for the issuance of 2,100,000
shares of Common Stock in the Offering at an assumed initial public offering
price of $12.00 per share and the application of the net proceeds therefrom,
which are estimated to be approximately $22.5 million (after deducting
underwriting discounts and commissions and estimated offering expenses). This
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Unaudited Pro Forma Consolidated Financial Information and
related Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt and capital lease
obligations(1)............................................ $ 4,415 $ 4,415 $ 796
------- ------- -------
Long-term debt and capital lease obligations(1)............. 6,094 6,094 157
------- ------- -------
Stockholders' equity(2):
Common Stock: $.001 par value; 50,000,000 shares
authorized, 5,335,563 shares outstanding, 6,112,681
shares outstanding, pro forma, 8,212,681 shares
outstanding, pro forma as adjusted..................... 5 6 8
Additional paid-in capital................................ 11,921 18,667 41,201
Deferred compensation..................................... (490) (490) (490)
Retained earnings......................................... (8,063) (8,063) (8,063)
------- ------- -------
Total stockholders' equity........................ 3,373 10,120 32,656
------- ------- -------
Total capitalization......................... $13,882 $20,629 $33,609
======= ======= =======
</TABLE>
- ---------------
(1) Actual and pro forma exclude $4.0 million of additional indebtedness
incurred by the Company after March 31, 1997 to be repaid from the proceeds
of the Offering.
(2) Excludes (a) an aggregate of 1,600,000 shares of Common Stock reserved for
issuance under the Plans, pursuant to which options to purchase 682,667
shares of Common Stock have been granted as of July 22, 1997, (b) an
aggregate of 751,666 shares of Common Stock which are issuable upon the
exercise of warrants granted by the Company and (c) an aggregate of 79,805
shares of Common Stock which are being held in escrow as contingent
consideration in several acquisitions. See "The Acquisitions,"
"Management -- The Stock Option Plans," "Shares Eligible for Future Sale"
and "Underwriting."
20
<PAGE> 22
DILUTION
Purchasers of Common Stock offered hereby will experience an immediate and
substantial dilution in the net tangible book value of the Common Stock from the
initial public offering price. At March 31, 1997, the pro forma net tangible
book value (deficit) of the Company was $(10.3 million), or $(1.69) per share.
Pro forma net tangible book value per share is determined by dividing the
Company's pro forma net tangible book value (tangible assets less total
liabilities, after giving effect to the Recent Acquisitions) by the number of
shares of Common Stock outstanding. After giving effect, as of such date, to the
sale of 2,100,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $12.00 per share and after deducting underwriting
discounts and commissions and estimated offering expenses, the pro forma net
tangible book value of the Company would have been $12.6 million, or $1.53 per
share. This represents an immediate increase in pro forma net tangible book
value of $3.22 per share to existing stockholders and an immediate dilution in
net tangible book value of $10.47 per share to new investors purchasing shares
of Common Stock in the Offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $ 12.00
Pro forma net tangible book value (deficit) at March
31, 1997.............................................. $ (1.69)
-------
Increase attributable to new investors................. 3.22
-------
Pro forma net tangible book value after the Offering........ 1.53
-------
Dilution in net tangible book value to new investors........ $ 10.47
=======
</TABLE>
The following table sets forth, on a pro forma basis at March 31, 1997 as
described above, the differences between the existing stockholders and the new
investors purchasing shares in the Offering with respect to the number of shares
of Common Stock purchased from the Company, the total consideration paid to the
Company and the average price per share at an assumed initial public offering
price of $12.00 per share, without giving effect to the underwriting discounts
and commissions and estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............. 6,112,681 74.4% $ 10,141,802 28.7% $ 1.66
---------- ----- ------------ ------
New investors..................... 2,100,000 25.6 25,200,000 71.3 12.00
---------- ----- ------------ ------
Total(1)................ 8,212,681 100.0% $ 35,341,802 100.0%
========== ===== ============ ======
</TABLE>
- ---------------
(1) Excludes (a) an aggregate of 1,600,000 shares of Common Stock reserved for
issuance under the Plans, pursuant to which options to purchase 682,667
shares have been granted as of July 22, 1997, (b) an aggregate of 751,666
shares of Common Stock which are issuable upon the exercise of warrants
granted by the Company and (c) an aggregate of 79,805 shares of Common Stock
which are being held in escrow as contingent consideration in several
acquisitions. To the extent that such stock options and warrants are
exercised, there will be further dilution to new investors. See
"Management -- The Stock Option Plans," "Shares Eligible for Future Sale,"
"Underwriting" and Notes 10 and 11 of Notes to Consolidated Financial
Statements. Assuming the Underwriters' over-allotment options are exercised
in full, the number of shares held by existing stockholders will be reduced
to 5,992,984 shares, or 71.3% of the total number of shares outstanding
after the Offering, and the number of shares held by new investors will
increase to 2,415,000 shares, or 28.7% of the total shares of Common Stock
outstanding after the Offering. See "Principal and Selling Stockholders."
21
<PAGE> 23
SELECTED PRO FORMA FINANCIAL DATA
The pro forma financial data are derived from the Unaudited Pro Forma
Consolidated Financial Information of the Company appearing elsewhere in this
Prospectus. The Pro Forma Statement of Operations Data for the year ended
December 31, 1996 give effect to the following transactions as if they had
occurred on January 1, 1996: (i) the 1996 Acquisitions, (ii) the Pinellas
Acquisition, (iii) the Recent Acquisitions, and (iv) the Offering at an assumed
public offering price of $12.00 per share and the application of the estimated
net proceeds therefrom. The Pro Forma Statement of Operations Data for the three
months ended March 31, 1997 give effect to the following transactions as if they
had occurred on January 1, 1997: (i) the Pinellas Acquisition, (ii) the Recent
Acquisitions, and (iii) the Offering at an assumed public offering price of
$12.00 per share and the application of the estimated net proceeds therefrom.
The Pro Forma Balance Sheet Data as of March 31, 1997 give effect to the Recent
Acquisitions and the completion of the Offering at an assumed public offering
price of $12.00 per share and the application of the estimated net proceeds
therefrom as if they had occurred as of March 31, 1997.
The pro forma financial data should be read in conjunction with the
Unaudited Pro Forma Consolidated Financial Information of the Company and the
related notes thereto included elsewhere in this Prospectus. Management believes
the assumptions used in the Unaudited Pro Forma Consolidated Financial
Information provide a reasonable basis on which to present the pro forma
financial data. The pro forma financial data are provided for informational
purposes only and should not be construed to be indicative of the Company's
financial position or results of operations had the transactions and events
described in the notes thereto been consummated on the dates assumed and are not
intended to project the Company's financial condition or results of operations
on any future date or for any future period.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 MARCH 31, 1997
------------------ ---------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA:
Revenues:
Managed care............................................ $ 8,583 $ 2,763
Practice management fees................................ 31,820 8,523
Other revenue........................................... 309 117
-------- --------
Total revenues..................................... 40,712 11,403
-------- --------
Operating expenses:
Medical claims.......................................... 10,269 2,338
Practice management expenses............................ 26,342 7,134
Salaries, wages and benefits............................ 1,927 1,046
Business development.................................... 1,927 --
General and administrative.............................. 1,375 414
Depreciation and amortization........................... 1,490 333
-------- --------
Total operating expenses........................... 43,330 11,265
-------- --------
Income (loss) from operations........................... (2,618) 138
Interest expense........................................ 5 6
-------- --------
Income (loss) before income taxes....................... (2,623) 132
Income taxes............................................ -- --
-------- --------
Net income (loss)....................................... $(2,623) $ 132
======== ========
Net income (loss) per common share...................... $ (0.36) $ 0.02
======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------
(IN THOUSANDS)
<S> <C> <C>
PRO FORMA BALANCE SHEET DATA:
Working capital........................................... $ 10,774
Total assets.............................................. 38,253
Long-term debt and capital lease obligations,
including current maturities............................ 953
Stockholders' equity...................................... 32,656
</TABLE>
See Notes to the Unaudited Pro Forma Consolidated Financial Information.
22
<PAGE> 24
SELECTED FINANCIAL DATA
The following selected financial data with respect to the Company's
statements of operations for the years ended December 31, 1994, 1995 and 1996,
and the balance sheet data as of December 31, 1995 and 1996 are derived from the
Consolidated Financial Statements of the Company which have been audited by
Ernst & Young LLP, independent certified public accountants. The selected
financial data presented below for the years ended December 31, 1992, 1993 and
for the three months ended March 31, 1996 and 1997 are unaudited and were
prepared by management of the Company on the same basis as the audited
Consolidated Financial Statements included elsewhere herein and, in the opinion
of management of the Company, include all adjustments necessary to present
fairly the information set forth therein. The results for the three months ended
March 31, 1997 are not necessarily indicative of the results to be expected for
the full year ending December 31, 1997 or future periods. The following data
should be read in conjunction with the Consolidated Financial Statements of the
Company and the related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Managed care(1).......................... $ -- $ -- $ 669 $ 2,446 $ 7,315 $ 1,936 $ 2,763
Practice management fees................. 645 653 392 424 1,943 140 4,838
Other revenue............................ 8 6 131 212 306 24 117
-------- -------- -------- -------- -------- -------- --------
Total revenues...................... 653 659 1,192 3,082 9,564 2,100 7,718
-------- -------- -------- -------- -------- -------- --------
Operating expenses:
Medical claims........................... -- -- 551 2,934 9,129 2,463 2,338
Practice management expenses............. -- -- -- -- 1,244 -- 3,931
Salaries, wages and benefits............. 494 501 538 904 1,889 299 1,046
Business development..................... -- -- -- -- 1,927 -- --
General and administrative............... 167 168 238 443 1,209 153 414
Depreciation and amortization............ 11 8 13 18 126 8 231
-------- -------- -------- -------- -------- -------- --------
Total operating expenses............ 672 677 1,340 4,299 15,524 2,923 7,960
-------- -------- -------- -------- -------- -------- --------
Loss from operations....................... (19) (18) (148) (1,217) (5,960) (823) (242)
Interest expense........................... 1 5 5 9 160 2 227
-------- -------- -------- -------- -------- -------- --------
Loss before income taxes................... (20) (23) (153) (1,226) (6,120) (825) (469)
Income taxes............................... -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net loss................................... $ (20) $ (23) $ (153) $ (1,226) $ (6,120) $ (825) $ (469)
======== ======== ======== ======== ======== ======== ========
Net loss per common share(2)............... $ (1.02) $ (0.08)
======== ========
Weighted average number of common shares
outstanding(2)........................... 5,980 5,980
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................ $ 19 $ (5) $ (193) $ (1,499) $ (2,857) $ (6,158)
Total assets............................. 53 67 49 165 15,712 19,968
Long-term debt and capital lease
obligations, including current
maturities............................. 56 89 85 363 7,735 10,509
Stockholders' equity (deficit)........... (16) (38) (191) (1,439) 2,536 3,373
</TABLE>
- ---------------
(1) Revenues related to managed care for 1992 and 1993 are included under other
revenue as managed care revenues were not separately accounted for during
such periods.
(2) See Note 3 to Notes to Consolidated Financial Statements for a description
of the computation of net loss per common share.
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
OVERVIEW
The Company provides a wide range of management and administrative services
to local area delivery systems ("LADS") established by the Company. LADS are
integrated networks of optometrists, ophthalmologists, ASCs and retail optical
centers that are designed to offer the full continuum of eye care services in
local markets. The Company began operations in 1984, providing management
services to seven optometrists practicing at eight clinic locations. The Company
currently provides its services to 11 LADS located in six states through which
660 Affiliated Providers deliver eye care services. Of these Affiliated
Providers, 72 are Managed Providers, consisting of 46 optometrists and 26
ophthalmologists practicing at 48 clinic locations and five ASCs, and 588 are
Contract Providers, consisting of 258 optometrists and 330 ophthalmologists
practicing at over 300 clinic locations and 35 ASCs. The Company signed its
first managed care contract in 1988 for 18,000 patient lives serviced through
the Company's network of optometrists practicing within retail optical
locations. The Company's Affiliated Providers, in conjunction with select
national retail optical chains operating over 300 retail optical centers,
deliver eye care services under the Company's 22 managed care contracts and
seven discount fee-for-service plans covering approximately 1.8 million patient
lives.
The Company enters into Management Agreements with the Managed Professional
Associations pursuant to which the Company is the sole provider of comprehensive
management, business and administrative services for the non-professional
aspects of the professional practices which obligate the Company to provide
certain facilities and equipment, accounting services, purchasing, assistance in
managed care, contract negotiations, management and clinical personnel,
informational systems, training, and billing and collection services. Each
Managed Provider maintains full authority, control and responsibility over the
provision of professional care and services to its patients. The Company does
not provide professional care to patients nor does the Company employ any of the
ophthalmologists or optometrists, or any other professional health care provider
personnel, of the Managed Professional Association. The Managed Professional
Association is responsible for, among other things, hiring, supervising, and
directing certain of the Managed Professional Association's professional
employees, adopting a peer review/quality assurance program and maintaining
appropriate worker's compensation, professional and comprehensive general
liability insurance. See "Business -- Management Agreements."
The initial term of the Management Agreement is typically 40 years. Under
substantially all of the Company's Management Agreements, the management fee
ranges from 24% to 37% of the Managed Professional Association's gross revenues
after deducting from such revenues all expenses of the clinic other than those
related to shareholders of the Managed Professional Associations. The practice
management fees earned by the Company pursuant to these Management Agreements
fluctuate depending on variances in revenues and expenses of the Managed
Professional Association. Therefore, in connection with the Management
Agreements, the amount of such fees will be significantly affected by the degree
of success of operations of the Managed Professional Association and the
Company's ability to successfully manage the practice. See "Risk
Factors -- Reliance on Affiliated Providers" and "Business -- Management
Agreement."
The Company recognizes as managed care revenue certain fixed payments
received pursuant to its managed care contracts on a capitated or risk-sharing
basis. The Company also recognizes fees received for the provision of certain
financial and administrative services related to its indemnity fee-for-service
plans. The Company manages risk of capitated managed care contracts by
monitoring utilization of each Affiliated Provider and comparing their
utilization to national averages, expected utilization at the time the contract
was bid, utilization of other providers and historical utilization of the
Affiliated Provider. Abnormal utilization of an Affiliated Provider results in a
medical chart review by the Company and further counseling on appropriate
clinical protocols. To further manage the risk of capitated managed care
contracts, the Company, in certain instances, enters into agreements to pay
Affiliated Providers a fixed per member per month fee for eye care services
rendered or a pro rata share of managed care capitated payments received (as
determined by the number of eye care procedures performed relative to other
Affiliated Providers). The Company targets these payments at a range of 80% to
90% of total payments received pursuant to the Company's capitated managed
24
<PAGE> 26
care contracts. Pursuant to its capitated managed care contracts, the Company
receives a fixed payment per member per month for a predetermined benefit level
of eye care services, as negotiated between the Company and the payor.
Profitability of the Company's capitated managed care contracts is directly
related to the specific terms negotiated, utilization of eye care services by
member patients and the effectiveness of administering the contracts. The
Company receives a percentage of collected medical billings for administering
indemnity fee-for-service plans for its Affiliated Providers. Although the terms
and conditions of the Company's managed care contracts vary considerably, they
are typically for a one year term. As of March 31, 1997, the Company maintained
16 capitated managed care contracts and administered six fee-for-service plans
for its Affiliated Providers. See "Risk Factors -- Risks Associated with Managed
Care Contracts and Capitated Fee Arrangements."
In December 1996, the Company completed the 1996 Acquisitions resulting in
the acquisition of the business assets of 22 optometry clinics, nine
ophthalmology clinics, 15 optical dispensaries and one ASC. Business assets
consist of certain non-medical and non-optometric assets, including accounts
receivables, leases, contracts, equipment and other tangible and intangible
assets. Concurrently, the Company entered into Management Agreements with the
related professional associations employing 34 optometrists and 13
ophthalmologists. These acquisitions were accounted for by recording the assets
and liabilities at fair value and allocating the remaining costs to the related
Management Agreements. Additionally, the Company acquired the business assets of
a managed care company servicing four capitated managed care contracts covering
over 100,000 patient lives which was accounted for under the purchase method of
accounting. In connection with the 1996 Acquisitions, the Company provided
aggregate consideration of $11.2 million, consisting of 2.1 million shares of
Common Stock, unsecured promissory notes in the aggregate principal amount of
$1.9 million and $800,000 in assumed debt. Additionally, the Company may be
required to provide additional consideration of up to $316,000, consisting of up
to 79,805 shares of Common Stock, in connection with several of the 1996
Acquisitions which will be transferred out of escrow to certain sellers in the
event they meet certain post-acquisition performance targets. If the 1996
Acquisitions had occurred at the beginning of 1996, they would have added $16.8
million in additional practice management fee revenue for 1996. The Company
recorded a one-time charge of $1.4 million in the fourth quarter of 1996 for
expenses associated with the planned acquisition of the business assets of
certain Contract Providers at the time of the 1996 Acquisitions which the
Company chose not to continue to pursue.
In March 1997, the Company completed the Pinellas Acquisition resulting in
the acquisition of the business assets of one ophthalmology clinic and one
optical dispensary. Concurrently, the Company entered into Management Agreements
with the related professional associations employing one optometrist and six
ophthalmologists. The Pinellas Acquisition was accounted for by recording the
assets and liabilities at fair value and allocating the remaining cost to the
related Management Agreements. In connection with the Pinellas Acquisition, the
Company provided aggregate consideration of $1.1 million, consisting of 128,541
shares of Common Stock. On a pro forma basis, had the Pinellas Acquisition
occurred at the beginning of 1996, the Company would have recorded $2.1 million
and $526,000 in practice management fee revenue for 1996 and the three months
ended March 31, 1997, respectively.
Between May 1, 1997 and July 30, 1997, the Company completed the Recent
Acquisitions resulting in the acquisition of the business assets of one
optometry clinic, ten ophthalmology clinics, five optical dispensaries and four
ASCs located in Sierra Vista, Mesa, Phoenix,and Tucson, Arizona, and Fort
Lauderdale, Florida. Concurrently, the Company entered into Management
Agreements with the related professional associations employing five
optometrists and seven ophthalmologists. These acquisitions were accounted for
by recording the assets and liabilities at fair value and allocating the
remaining cost to the related Management Agreements. In connection with the
Recent Acquisitions, the Company provided aggregate consideration of $6.8
million, consisting of 777,118 shares of Common Stock, $19,000 in promissory
notes and $29,000 in cash subject to closing adjustments. On a pro forma basis,
had the Recent Acquisitions occurred at the beginning of 1996, the Company would
have recorded $11.5 million and $3.3 million in practice management fee revenue
for 1996 and the three months ended March 31, 1997, respectively.
Effective October 1996, the Company renegotiated its agreements to pay
certain ophthalmology Contract Providers a per member per month fee for surgical
eye care services provided under the Company's largest
25
<PAGE> 27
capitated managed care contract. In exchange for entering into the renegotiated
agreement, selected ophthalmology Contract Providers obtained dedicated groups
of managed care members and the right to manage the utilization by these
members. The renegotiated capitation agreements improved the Company's medical
claims ratio (medical claims expense divided by managed care revenue) from
136.0% for the third quarter of 1996 to 90.1% for the fourth quarter of 1996 and
84.6% for the first quarter of 1997. On a pro forma basis for 1996, assuming the
renegotiated capitation agreement had been in place for the entire period,
medical claims expense would have been reduced by $2.6 million.
Effective June 1997, the Company renegotiated its agreement to pay the
existing operator of multiple surgical eye care facilities a per member per
month fee for facility services provided at its facilities pursuant to the
Company's largest capitated managed care contract. In exchange for entering into
the renegotiated agreement, the facility operator obtained dedicated groups of
managed care members. On a pro forma basis for the three months ended March 31,
1997, assuming the renegotiated capitation agreement had been in place for the
entire period, medical claims expense would have been reduced by $132,000.
Since December 31, 1996, the Company has expanded two existing capitated
managed care contracts and added five new capitated managed care contracts
covering approximately 323,000 lives. In addition, the Company leveraged its
strategic alliance with a leading optical retailer by adding five internally
developed optometry clinics located in Louisiana and Florida and entering into
Management Agreements with the related professional association employing five
optometrists. As of June 1, 1997, the Company reached a tentative agreement with
the same optical retailer to add at least 20 internally developed optometry
clinics throughout the remainder of 1997. The Company will continue to leverage
its strategic alliances by adding select internally developed optometry clinics
in affiliated optical retail locations.
The Managed Professional Associations currently receive revenues from a
combination of sources, including fees paid by private-pay patients, indemnity
insurance reimbursements, capitation payments from managed care companies and
government funded reimbursements (Medicare and Medicaid). The following table
outlines this payor mix for the Managed Professional Associations for the period
presented:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
(UNAUDITED)
<S> <C>
Private-pay................................................. 25.5%
Capitated managed care...................................... 27.4
Indemnity insurance plans................................... 20.4
Medicare/Medicaid........................................... 26.7
------
Total............................................. 100.0%
======
</TABLE>
The Managed Professional Associations derive their revenues from fees
received for professional services provided by optometrists and
ophthalmologists, charges for the use of ASCs and sales of optical goods. The
following table indicates the mix of revenues received by the Managed
Professional Associations for the period presented:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
(UNAUDITED)
<S> <C>
Optometry fees.............................................. 41.5%
Ophthalmology fees.......................................... 41.1
Optical goods............................................... 14.1
ASCs........................................................ 3.3
------
Total............................................. 100.0%
======
</TABLE>
A change in the future mix of payment sources and services of the Managed
Professional Associations could affect the Company's overall business, revenues,
profitability and cash flows, as the Company's management fees payable under
significantly all of the Company's Management Agreements are directly affected
by the revenues and expenses of the Managed Professional Association. Therefore,
certain changes in
26
<PAGE> 28
the mix of payment sources resulting in a change in margins for services
provided by the Managed Professional Association, or a change in timeliness and
success in the collection of fees for services provided by these practices,
could affect the operating results of the Company. See "Risk Factors -- Reliance
on Affiliated Providers" and "-- Risks Associated with Managed Care Contracts
and Capitated Fee Arrangements."
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total revenues, certain
items in the Company's statement of operations for the periods indicated. As a
result of the Company's 1996 Acquisitions, the Pinellas Acquisition, the Recent
Acquisitions and the Company's entering into capitated arrangements with its
Contract Providers, the Company does not believe that the historical percentage
relationships for 1994, 1995, 1996 and the three months ended March 31, 1996 and
1997 reflect the Company's expected future operations.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------- --------------
1994 1995 1996 1996 1997
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Managed care..................................... 56.1% 79.4% 76.5% 92.2% 35.8%
Practice management fees......................... 32.9 13.8 20.3 6.7 62.7
Other revenue.................................... 11.0 6.8 3.2 1.1 1.5
----- ----- ----- ----- -----
Total revenues........................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Operating expenses:
Medical claims................................... 46.2 95.2 95.5 117.3 30.3
Practice management expenses..................... -- -- 13.0 -- 50.9
Salaries, wages and benefits..................... 45.1 29.3 19.8 14.2 13.5
Business development............................. -- -- 20.1 -- --
General and administrative....................... 20.0 14.4 12.6 7.3 5.4
Depreciation and amortization.................... 1.1 0.6 1.3 0.4 3.0
----- ----- ----- ----- -----
Total operating expenses................. 112.4 139.5 162.3 139.2 103.1
----- ----- ----- ----- -----
Loss from operations............................... (12.4) (39.5) (62.3) (39.2) (3.1)
Interest expense................................... 0.3 0.3 1.7 0.1 3.0
----- ----- ----- ----- -----
Loss before income taxes........................... (12.7) (39.8) (64.0) (39.3) (6.1)
Income taxes....................................... -- -- -- -- --
----- ----- ----- ----- -----
Net loss........................................... (12.7) (39.8) (64.0) (39.3) (6.1)
===== ===== ===== ===== =====
Medical claims ratio............................... 82.5% 120.0% 124.8% 127.2% 84.6%
===== ===== ===== ===== =====
</TABLE>
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31,
1996
Revenues. Revenues increased 267.6% from $2.1 million for the three months
ended March 31, 1996 to $7.7 million for the three months ended March 31, 1997.
This increase was caused primarily by an increase in practice management fees
attributable to the 1996 Acquisitions and the Pinellas Acquisition, which
accounted for $4.8 million of the increase, and a 42.6% increase in managed care
revenues attributable to the addition of one capitated contract and the
expansion of an existing contract, which accounted for $826,000 of the increase.
Medical Claims. Medical claims expense decreased 5.1% from $2.5 million
for the three months ended March 31, 1996 to $2.3 million for the three months
ended March 31, 1997. The Company's medical claims ratio decreased from 127.2%
for the three months ended March 31, 1996 to 84.6% for the three months ended
March 31, 1997. These decreases were caused primarily by the Company's
renegotiated agreement to pay its ophthalmology Contract Providers a per member
per month fee for surgical eye care services provided under the Company's
largest capitated managed care contract. Medical claims expense consists of
payments by the Company to its Affiliated Providers for primary eye care
services, medical and surgical eye care services and facility services. These
payments are based on fixed payments per member per month, a pro rata share of
27
<PAGE> 29
managed care capitated payments received (as determined by the number of eye
care procedures performed relative to other Affiliated providers) or negotiated
fee-for-service schedules. Capitated payments and pro rata payments collectively
represented 58.5% and fee-for-service claims represented 41.5% of total medical
claims expense for the three months ended March 31, 1997. Medical claims for the
three months ended March 31, 1996 were based entirely on negotiated
fee-for-service schedules.
Practice Management Expenses. Practice management expenses were $3.9
million for the three months ended March 31, 1997 as a result of the 1996
Acquisitions and the Pinellas Acquisition. Prior to the 1996 Acquisitions, the
Company recognized no practice management expenses related to its management
services. Practice management expenses consist of salaries, wages and benefits
of certain clinic staff, professional fees, medical supplies, advertising,
building and occupancy costs, and other general and administrative costs related
to the operation of clinics and ASCs.
Salaries, Wages and Benefits. Salaries, wages and benefits expense
increased 249.8% from $299,000 for the three months ended March 31, 1996 to $1.0
million for the three months ended March 31, 1997. This increase was caused
primarily by an increase in corporate staff necessary to support the Company's
expanded practice management and managed care business. Salaries, wages and
benefits expense consists of expenses related to management and administrative
staff located at the Company's corporate headquarters and regional offices. As a
percentage of revenues, salaries, wages and benefits expense decreased from
14.2% for the three months ended March 31, 1996 to 13.6% for the three months
ended March 31, 1997. This decrease was caused primarily by increased economies
of scale resulting from the Company's expanding business.
General and Administrative. General and administrative expenses increased
170.6% from $153,000 for the three months ended March 31, 1996 to $414,000 for
the three months ended March 31, 1997. This increase was caused primarily by
increases in travel expenses, professional fees and occupancy costs. As a
percentage of revenues, general and administrative expenses decreased from 7.3%
for the three months ended March 31, 1996 to 5.4% for the three months ended
March 31, 1997. This decrease was caused primarily by increased economies of
scale resulting from the Company's expanding business.
Depreciation and Amortization. Depreciation and amortization expense
increased from $8,000 for the three months ended March 31, 1996 to $231,000 for
the three months ended March 31, 1997. As a percentage of revenues, depreciation
and amortization expense increased from 0.4% for the three months ended March
31, 1996 to 3.0% for the three months ended March 31, 1997. These increases were
caused primarily by the amortization of intangibles attributable to the 1996
Acquisitions and the Pinellas Acquisition.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Revenues increased 210.3% from $3.1 million for 1995 to $9.6
million for 1996. This increase was caused primarily by a 358.3% increase in
practice management fees attributable to the 1996 Acquisitions, which accounted
for $1.5 million of the increase, and a 199.1% increase in managed care revenues
attributable to the addition of one new capitated contract and the expansion of
the Company's largest managed care contract, which accounted for $4.9 million of
the increase.
Medical Claims. Medical claims expense increased 211.1% from $2.9 million
in 1995 to $9.1 million in 1996. The Company's medical claims ratio increased to
124.8% for 1996 from 120.0% for 1995. These increases were caused primarily by
excess utilization of surgical eye care services and facility services related
to the Company's largest managed care contract, which accounted for $4.8 million
of the increase, and an increase in members covered by the Company's capitated
managed care contracts, which accounted for $1.8 million of the increase.
Capitated payments and pro rata payments represented 11.3% and fee-for-service
payments represented 88.7% of total medical claim expense for 1996. Medical
claims for 1995 were based entirely on negotiated fee-for-service schedules.
Practice Management Expenses. Practice management expenses were $1.2
million for 1996, all of which resulted from the 1996 Acquisitions. Prior to the
1996 Acquisitions, the Company recognized no practice management expenses
related to its management services, because the Company was not liable for
expenses of the practices.
28
<PAGE> 30
Salaries, Wages and Benefits. Salaries, wages and benefits expense
increased 109.0% from $904,000 in 1995 to $1.9 million in 1996. This increase
was caused primarily by an increase in corporate staff necessary to support the
Company's expanded practice management and managed care business. As a
percentage of revenues, salaries, wages and benefits expense decreased from
29.3% in 1995 to 19.8% in 1996. This decrease was caused primarily by increased
economies of scale resulting from the Company's expanding business.
Business Development. Business development expenses were $1.9 million in
1996. Business development expenses consisted of a one-time charge of $1.4
million related to potential acquisitions that were not completed and $500,000
related to the amortization of deferred compensation charges attributable to
consulting services.
General and Administrative. General and administrative expenses increased
172.9% from $443,000 in 1995 to $1.2 million in 1996. This increase was caused
primarily by increases in travel expenses, professional fees, occupancy costs,
temporary labor and recruitment costs related to the Company's expanding
business. As a percentage of revenues, general and administrative expenses
decreased from 14.4% in 1995 to 12.6% in 1996. This decrease was caused
primarily by increased economies of scale resulting from the Company's expanding
business.
Depreciation and Amortization. Depreciation and amortization expense
increased from $18,000 in 1995 to $126,000 in 1996. As a percentage of revenues,
depreciation and amortization expense increased from 0.6% in 1995 to 1.3% in
1996. This increase was caused primarily by the amortization of intangibles
attributable to the 1996 Acquisitions.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Revenues increased 158.6% from $1.2 million for 1994 to $3.1
million for 1995. This increase was primarily caused by an increase in managed
care revenues as a result of the Company obtaining its first complete eye care
capitated contract from a leading HMO, which accounted for $1.8 million of the
increase.
Medical Claims. Medical claims expense increased 432.5% from $551,000 for
1994 to $2.9 million for 1995. The Company's medical claims ratio increased to
120.0% for 1995 from 82.5% for 1994. These increases were caused primarily by
excess utilization of surgical eye care services and facility services related
to the Company's largest managed care contract. All medical claims for 1995 and
1994 were based on negotiated fee-for-service schedules.
Practice Management Expenses. The Company incurred no practice management
expenses during 1994 or 1995. Prior to the 1996 Acquisitions, the Company
recognized no practice management expenses related to its management services
because the Company was not liable for the expenses of the practices.
Salaries, Wages and Benefits. Salaries, wages and benefits expense
increased 68.0% from $538,000 in 1994 to $904,000 in 1995. This increase was
caused primarily by an increase in corporate staff necessary to support the
Company's expanded practice management and managed care business. As a
percentage of revenues, salaries, wages and benefits expense decreased from
45.1% in 1994 to 29.3% in 1995. This decrease was caused primarily by increased
economies of scale resulting from the Company's expanding business.
Business Development. The Company incurred no business development
expenses during 1994 or 1995.
General and Administrative. General and administrative expenses increased
86.1% from $238,000 in 1994 to $443,000 in 1995. This increase was caused
primarily by increases in travel expenses, professional fees, occupancy costs
and temporary labor and recruitment costs. As a percentage of revenues, general
and administrative expenses decreased from 20.0% in 1994 to 14.4% in 1995. This
decrease was caused primarily by increased economies of scale resulting from the
Company's expanding business.
Depreciation and Amortization. Depreciation and amortization expense
increased 38.5% from $13,000 in 1994 to $18,000 in 1995. This increase was
caused primarily by the amortization of intangibles. As a percentage of
revenues, depreciation and amortization expense decreased from 1.1% in 1994 to
0.6% in 1995.
29
<PAGE> 31
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its working capital and capital
expenditure requirements primarily through institutional borrowings and private
debt and equity financings. Net cash provided by operating activities for 1994
was $30,000 and net cash used in operating activities for 1995 and 1996 and the
three months ended March 31, 1997 was $138,000, $4.2 million and $275,000,
respectively. Net cash provided by operating activities for 1994 was caused
primarily by an increase in liabilities more than offsetting a net loss. Net
cash used in operating activities for 1995 and 1996 and the three months ended
March 31, 1997 was caused primarily by net losses offset in part by increases in
medical claims payable, deferred compensation and accrued acquisition expenses.
Net cash used in investing activities for 1994, 1995 and 1996 and the three
months ended March 31, 1997 was $14,000, $88,000, $1.6 million and $1.6 million,
respectively, and was caused primarily by the purchase of furniture and
equipment and payments for capitalized acquisition and offering costs.
Net cash used in financing activities for 1994 was $4,000. Net cash
provided by financing activities for 1995 and 1996 and the three months ended
March 31, 1997 was $256,000, $5.8 million and $2.9 million, respectively. The
amounts for 1996 and for the three months ended March 31, 1997 were attributable
to private debt and equity financings and higher levels of institutional
borrowings to support the Company's internal expansion and acquisition
activities.
In June 1996, the Company borrowed $3.0 million from Peter Fontaine, a
director of the Company, for working capital purposes pursuant to an unsecured
promissory note (the "Fontaine Note"). The Fontaine Note bears interest at 8.0%
per annum and is due upon completion of an initial public offering by the
Company. The Fontaine Note will be repaid by the Company from the net proceeds
of the Offering. In addition, the Company borrowed $200,000 and $500,000 from
Mr. Fontaine in November and December 1996, respectively, for working capital
purposes pursuant to unsecured promissory notes. The unsecured promissory notes
each bear interest at 8.5% per annum and are due in January 1998. See "Certain
Transactions."
In December 1996, the Company completed the 1996 Acquisitions for an
aggregate consideration of $11.2 million, consisting of 2.1 million shares of
Common Stock, unsecured promissory notes in the aggregate principal amount of
$1.9 million and $800,000 in assumed debt. Additionally, the Company has agreed
to aggregate contingent consideration of $316,000, consisting of 79,805 shares
of Common Stock, in connection with several of the 1996 Acquisitions which will
be transferred out of escrow to certain sellers in the event they meet certain
post-acquisition performance targets. The promissory notes bear interest at 8.0%
per annum and are due at the earlier of March 1, 1998 or 15 business days after
the completion of an initial public offering by the Company. These promissory
notes will be repaid by the Company from the net proceeds of the Offering.
In December 1996, the Company borrowed an aggregate of $1.3 million from
certain individuals for working capital purposes pursuant to the issuance of
senior subordinated notes (the "1996 Subordinated Notes"). The 1996 Subordinated
Notes included detachable warrants to purchase an aggregate of 208,333 shares of
Common Stock at exercise prices ranging from $6.00 to $7.11 per share. The 1996
Subordinated Notes bear interest at 10.0% per annum and are due at the earlier
of December 19, 1999 or upon a Liquidation Event, as defined in the 1996
Subordinated Notes. The 1996 Subordinated Notes will be repaid by the Company
from the net proceeds of the Offering.
In February 1997, the Company borrowed an aggregate of $2.0 million from
Piper Jaffray Healthcare Fund II Limited Partnership ("Piper Jaffray") for
working capital purposes pursuant to the issuance of senior subordinated notes
(the "1997 Subordinated Notes"). The 1997 Subordinated Notes included a
detachable warrant to purchase an aggregate of 333,333 shares of Common Stock at
exercise prices ranging from $6.00 to $7.11 per share. The 1997 Subordinated
Notes bear interest at 10.0% per annum and are due at the earlier of December
19, 1999 or upon a Liquidation Event, as defined in the 1997 Subordinated Notes.
The 1997 Subordinated Notes will be repaid by the Company from the net proceeds
of the Offering.
In March 1997, the Company completed the Pinellas Acquisition, and provided
aggregate consideration of $1.1 million, consisting of 128,541 shares of Common
Stock.
30
<PAGE> 32
Between May 1, 1997 and July 31, 1997, the Company completed the Recent
Acquisitions and provided aggregate consideration of $6.8 million, consisting of
777,118 shares of Common Stock, $19,000 in promissory notes and $29,000 in cash
subject to closing adjustments.
In April 1997, the Company entered into a credit facility in the aggregate
amount of $4.7 million with Prudential Securities Group Inc. ("Prudential")
pursuant to a Note and Warrant Purchase Agreement (as amended and restated, the
"Note and Warrant Purchase Agreement"). The proceeds from the borrowing were
used to repay the Company's existing credit facility with Barnett Bank N.A. in
the principal amount of $2.0 million and for general working capital purposes.
Under the Note and Warrant Purchase Agreement, the Company issued a senior note
secured by all the Company's assets (the "Prudential Note"). The Prudential Note
bears interest at 10% per annum and is due at the earlier of January 1, 1998 or
upon completion of an initial public offering. In addition, the Note and Warrant
Purchase Agreement includes a detachable warrant to purchase 210,000 shares of
Common Stock at an exercise price per share equal to the price of the Common
Stock at the Company's initial public offering. The Prudential Note will be
repaid by the Company from the net proceeds of the Offering. See "Underwriting".
The Note and Warrant Purchase Agreement contains negative and affirmative
covenants and agreements requiring the maintenance of certain financial ratios.
The Company has treated as deferred compensation the issuance of shares of
restricted stock in September and October 1996, for future services related to
various business development initiatives and management incentives. In September
1996, the Company entered into a five year services agreement with its Chief
Medical Officer and current director of the Company and issued 108,133 shares of
restricted stock. These shares were valued at $2.77 per share or $300,068. Of
these shares, 40% vested immediately and the Company recorded a business
development charge of $119,984. The remaining 60% of the shares were recorded as
an offset in stockholders' equity as deferred compensation for $180,041. In
October 1996, the Company entered into a five year advisory agreement with an
industry consultant and issued 125,627 shares of restricted stock which vest
over the life of the advisory agreement. These shares were valued at $2.77 per
share or $348,614. The Company recorded the issuance of these shares as an
offset in stockholder's equity as deferred compensation. This deferred
compensation is being amortized as the shares vest on a pro rata basis. See
"Certain Transactions."
Intangible assets consist of the Management Agreements with the Managed
Professional Associations. The Management Agreements have 40-year terms and are
being amortized over an average life of 25 years. Intangible assets represent
66.8% of the Company's total assets as of March 31, 1997. In determining the
useful life of a Management Agreement, the Company considers the operating
history and other characteristics of each practice. A principal consideration is
the degree to which the practice has demonstrated its ability to extend its
existence indefinitely. The Company will review the carrying value of its
intangible assets at least quarterly on an entity-by-entity basis to determine
if facts and circumstances exist which would suggest that the intangible assets
may be impaired or that amortization periods need to be modified. Among the
factors the Company considers in making the valuation are changes in the Managed
Professional Associations market position, reputation, profitability, and
geographic penetration. See "Risk Factors -- Risks Related to Amortization of
Intangible Value in Management Agreements" and Note 3 to Notes to Consolidated
Financial Statements.
In addition to the business assets purchased, the Company assumes certain
payables and accrued expenses. Generally, the acquired tangible assets exceed
the assumed liabilities. The Company has assumed liabilities of $2.5 million,
including $745,000 of long-term debt, for acquisitions completed through March
31, 1997.
Based upon the Company's anticipated capital needs for operation of its
business, general corporate purposes, the acquisition of clinics and ASCs and
repayment of certain indebtedness, management believes that the combination of
the funds expected to be provided from the Company's operations, anticipated
future institutional borrowings, seller financing and the net proceeds received
from the Offering will be sufficient to meet the Company's funding requirements
to conduct its operations and for further implementation of its growth strategy
for a period of approximately twelve months. The Company will continue to offer
Common Stock, notes or combinations thereof as consideration for certain future
mergers and acquisitions related to the
31
<PAGE> 33
growth of its LADS and currently expects for the foreseeable future to continue
to require contractual lock-up agreements and to provide registration rights
consistent with previous transactions for sellers receiving stock in
acquisitions. After the twelve-month period, or in the event the Company's
capital expenditures are greater than currently expected and to the extent
additional capital resources are needed, the Company expects to utilize
supplemental borrowings and/or the proceeds from the offering of debt or equity
securities.
ANALYSIS OF PRELIMINARY SECOND QUARTER RESULTS
The Company expects that its results of operations for the three months
ended June 30, 1997 will be substantially similar to its results of operations
for the three months ended March 31, 1997, including a substantially similar
loss from operations and net loss. The primary differences in financial
performance between the two quarters are expected to result from (i) the
management by the Company of the Pinellas Acquisition practice for the entire
second quarter; (ii) the management by the Company of the practices and ASCs
included in the Recent Acquisitions beginning June 1, 1997; (iii) an increase in
the medical claims ratio due to an increase in facility utilization (which the
Company believes will not recur, as a result of its renegotiation of its largest
managed care contract, effective July 11, 1997); and (iv) the increase in
interest expense resulting from borrowings by the Company pursuant to the 1997
Subordinated Notes (existing for the entire second quarter) and the Note and
Warrant Purchase Agreement. See "Management Discussion and Analysis of Financial
Conditions and Results of Operations -- Overview" and "-- Liquidity and Capital
Resources."
32
<PAGE> 34
BUSINESS
OVERVIEW
The Company provides a wide range of management and administrative services
to local area delivery systems ("LADS") established by the Company. LADS are
integrated networks of optometrists, ophthalmologists, ASCs and retail optical
centers that are designed to offer the full continuum of eye care services in
local markets. The Company began operations in 1984, providing management
services to seven optometrists practicing at eight clinic locations. The Company
currently provides its services to 11 LADS located in six states through which
660 Affiliated Providers deliver eye care services. Of these Affiliated
Providers, 72 are Managed Providers, consisting of 46 optometrists and 26
ophthalmologists practicing at 48 clinic locations and five ASCs, and 588 are
Contract Providers, consisting of 258 optometrists and 337 ophthalmologists
practicing at over 300 clinic locations and 35 ASCs. The Company signed its
first managed care contract in 1988 for 18,000 patient lives serviced through
the Company's network of optometrists practicing within retail optical
locations. The Company's Affiliated Providers, in conjunction with select
national retail optical chains operating over 300 retail optical centers,
deliver eye care services under the Company's 22 managed care contracts and
seven discount fee-for-service plans covering approximately 1.8 million patient
lives.
THE EYE CARE INDUSTRY
The Eye Care Market. According to industry sources, expenditures for all
eye care services in the United States were approximately $31.2 billion in 1995.
Industry sources estimate $19.6 billion of these expenditures was spent on
primary care, including approximately $13.8 billion for optical goods (frames,
lenses and accessories) and $5.8 billion for primary eye care services (routine
eye exams, contact lens fitting and diagnosis/management of eye disease), while
$11.6 billion was spent on secondary and tertiary care, including $6.9 billion
for ophthalmology services (medical and surgical eye care) and $4.7 billion for
facility services (services provided by hospital facilities and ASCs).
The aging of the "baby boom" generation in the United States is expected to
result in increased spending on all eye care services. As individuals age, their
need for eye services at all levels of care -- primary, secondary and
tertiary -- increases with the onset of cataracts, glaucoma and other eye
diseases and disorders. According to the American Academy of Ophthalmology, U.S.
surgeons performed 1.4 million cataract surgeries in 1995, up from 1.2 million
procedures in 1994. Additionally, according to The Journal of the American
Medical Association, cataract surgery is the largest single Medicare
expenditure.
Technological advances and innovations are also expected to contribute to
increased spending on eye care services. Innovative procedures in the area of
refractive surgery, such as Photo Refractive Keratectomy (PRK) procedures,
utilize the excimer laser to surgically correct nearsightedness. Additionally,
enhancements in current technology and micro surgical protocols have allowed for
less invasive and disruptive outpatient ocular procedures utilizing local rather
than general anesthesia. For example, according to industry sources, PRK
procedures alone are expected to increase from 108,000 in 1996 to 945,000 in the
year 2000.
Today's Delivery of Eye Care. Eye care services in the United States are
delivered through a highly fragmented system of local providers which industry
sources estimate consisted of approximately 47,000 practicing eye care
professionals in 1996, including approximately 29,500 optometrists and 17,500
ophthalmologists. A patient's first encounter with an eye care provider
frequently occurs with an optometrist or optical retailer for some form of
primary care. According to the American Optometric Association, approximately 86
million eye exams are performed each year in the U.S., 70% of which are
performed by optometrists. During the eye exam, the optometrist typically issues
prescriptions for corrective eye wear and evaluates the need for secondary
and/or tertiary procedures. As such, the optometrist is in a natural position as
the "gate keeper" for additional eye care services, influencing in excess of
$17.0 billion in domestic eye care expenditures annually.
The Company believes that patients are increasingly seeking convenient and
accessible primary eye care through retail optical centers that typically
feature extended hours of operation, convenient locations, walk-in service, wide
selections of familiar name brand eyeglass frames and contact lenses, prompt
service, lower pricing, extensive advertising and the availability of an
optometrist on the premises. While optometrists have
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<PAGE> 35
traditionally marketed eye wear in their offices, the proliferation of large
retail optical centers has placed pressure on an optometrist's ability to
compete for patients and has caused optometrists to increasingly affiliate with
retailers by locating within, or in close proximity to, retail optical centers.
Through such affiliations, optometrists attempt to improve their access to
patients. As a result, the Company believes primary eye care services and
products are increasingly being bundled together at the retail level making the
retail optical center an important access point for eye care delivery networks.
While some ophthalmologists provide certain primary eye care services, such
as eye exams, their main focus is on the delivery of secondary care, such as
cataract surgery, and tertiary care, such as retina/vitreous procedures,
predominantly at office-based clinics and ASCs. Because optometrists are an
important source of patients, many ophthalmologists develop informal and
non-binding referral networks in conjunction with optometrists. However, despite
these initiatives, industry sources estimate that only 4.8% of all optometrists
actually provide eye care services within the same practice as an
ophthalmologist.
Eye Care Payors. The number of people covered by managed care and
indemnity eye care insurance plans has increased significantly in recent years
and is expected to continue to increase as health insurers seek to gain a
competitive advantage by offering insurance packages that include primary eye
care coverage. Many of these insurers are HMOs presently focused on the need to
increase revenue and market share by offering a full range of health insurance
options, including coverage for primary eye care, to both commercial and
Medicare patients. According to industry sources, HMO enrollment overall has
increased from 41.0 million members in 1992 to 58.0 million members in 1995,
while HMO Medicare membership increased to approximately 3.6 million in 1995 and
is expected to reach 7.2 million by 1999. It is estimated that in 1995, 65.0% of
commercial HMO plans and 86.0% of Medicare plans offered primary eye care
benefits.
While both private and government funded insurance programs vary widely in
their coverage and benefits, these programs are expected to significantly impact
the structure of the eye care industry. As more people become eligible to
receive eye care benefits, the Company believes there will be increased
utilization of primary eye care services, which will in turn lead to an increase
in the demand for secondary and tertiary eye care services. As such, provider
networks that can deliver and effectively manage all levels of eye care are
becoming increasingly attractive to health insurance companies that are then
able to market comprehensive "carve out" eye care plans covering not only
primary eye care, but also secondary and tertiary eye care. Additionally, health
insurance companies, including HMOs and other managed care companies, are
contracting with eye care provider networks on a capitated basis to provide eye
care services as well as all related administrative and quality assurance
services. In 1995, 45% of HMO contracts with specialty care networks (i.e., eye
care, dentistry and other medical specialties) were capitated, up from 35% in
1994.
Emerging Eye Care Delivery Models. Optometrists and ophthalmologists have
traditionally provided eye care services on a fee-for-service basis, primarily
through independent, office-based practices. The fee-for-service model provides
few incentives for the efficient utilization of resources and, the Company
believes, has contributed to increases in health care costs at rates
significantly higher than inflation. Concerns over the accelerating costs of
health care have resulted in the increasing prominence of managed care,
pressuring eye care providers to deliver care at a lower cost while maintaining
quality. The Company believes that this recent focus on cost containment has
placed independent optometry and ophthalmology practices at a disadvantage.
These practices typically lack the capital to expand, develop information and
billing systems, and purchase new technologies, which often facilitate increased
patient visits and per patient revenue, improve quality of care and reduce
costs. These practices also lack the cost accounting and quality management
systems necessary to allow eye care providers to enter into capitated or
risk-sharing contracts with private third-party payors. Finally, small to
mid-sized eye care provider groups and individual practices often have higher
operating costs because overhead must be spread over a relatively small revenue
base.
In order to remain competitive in the changing eye care service
environment, optometrists and ophthalmologists are increasingly seeking to
affiliate with larger organizations, which offer skilled and experienced
management, improved access to payors and their enrollees, more sophisticated
information systems, greater capital resources and more efficient cost
structures. Much of this consolidation is taking place through the formation of
physician practice management companies ("PPMs"). Eye care PPMs are growing
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in response to the demand by managed care companies for larger practice groups
which can offer full service, quality eye care over a wide geographic area. This
consolidation is still in the early stages as less than 2% of optometrists and
ophthalmologists have affiliated with a PPM. However, the mere consolidation of
practices and creation of a PPM will most likely not, in itself, be sufficient
to enhance the competitive position of combined eye care professional groups.
Rather, the Company believes that a cost efficient eye care delivery system
integrated within local markets is required to effectively compete in today's
changing eye care industry.
THE VISION TWENTY-ONE LOCAL AREA DELIVERY SYSTEM ("LADS")
The Company's goal is to enable each of its LADS to capture the leading
market share of fee-for-service patients and managed care members. To achieve
its goal, the Company is focused on the following strategies: (i) developing
LADS in order to provide for a complete continuum of easily accessible, high
quality and affordable eye care services, (ii) increasing patient revenue and
cost efficiencies for each LADS through practice development and managed care
initiatives and (iii) expanding into select new markets to create regional
networks of LADS.
Developing Integrated LADS (The LADS Model)
LADS are integrated networks of eye care providers that are designed to
offer the full continuum of eye care services in local markets. This continuum
of eye care services begins with primary eye care services provided by
optometrists practicing at free-standing clinics, optometrists located in retail
optical locations and primary care ophthalmologists. To provide greater access
for patients seeking primary eye care, the Company affiliates with both
optometrists and retail optical centers. To facilitate this patient access, the
Company has strategic affiliations with two major national retail optical
chains, one regional optical chain and numerous smaller, independent retail
optical centers. The Company generally has an affiliated optometrist in or
adjacent to each affiliated retail optical center that is located within a LADS.
Once patients have initially accessed a LADS to obtain primary eye care
services, they are well positioned to move within the LADS to the next
appropriate level of eye care. The Company affiliates with general
ophthalmologists and cataract surgeons that provide secondary eye care, with
subspecialty ophthalmologists (including subspecialties such as oculoplastics,
retina/vitreous and cornea) that provide tertiary eye care, and with ASCs that
provide facility services. LADS are especially attractive to managed care
companies because the Company's Affiliated Providers are able to deliver all
levels of eye care to the managed care plan's members.
Each Affiliated Provider generally begins as a fully credentialed Contract
Provider who delivers eye care services to members of the Company's contracted
managed care plans. The Company intends to acquire the business assets, employ
the non-professional personnel of and enter into Management Agreements with
select Contract Providers who then become Managed Providers. To date, the
Company has successfully acquired the business assets of 52 Contract Providers.
In addition, the Company intends to add optometry clinics located within retail
optical centers of leading national retail optical chains. To date, the Company
has added five optometry clinics located within retail optical centers and has
reached a tentative agreement with a leading optical retailer to add at least 20
additional internally developed optometry clinics throughout the remainder of
1997.
The successful integration of optometrists, ophthalmologists and ASCs is a
key component to the development of each LADS. The integration of Affiliated
Providers is accomplished through the implementation of proprietary quality
assurance, management and governance programs (the "V-21 TEAM CARE" program).
The V-21 TEAM CARE quality assurance program is administered by the Company's
Credentialing Committee, Clinical Protocol and Risk Management Committee, Peer
Review Committee, Outcome Assessment and Utilization Review Committee and a
Medical Advisory Board whose members include select Affiliated Providers. The
V-21 TEAM CARE quality assurance program provides for (i) the review and
implementation of technology standards and clinical protocols for the provision
of high quality and cost effective eye care services, and (ii) continuing
assessments as to the quality of facilities, equipment, record keeping,
physician credentials, utilization trends and clinical outcomes. The integration
of Managed Providers
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is accomplished through the V-21 TEAM CARE management and governance programs.
The V-21 TEAM CARE management program includes (i) development of LADS-specific
and practice-specific strategic plans, (ii) integration of operations,
personnel, facilities and equipment, (iii) consolidation of specialty and
ancillary services and (iv) coordination of marketing initiatives. The V-21 TEAM
CARE governance program establishes an active local governance structure
consisting of Practice Advisory Councils, Local Advisory Councils and a National
Appeals Council. These councils are designed to provide for substantial
involvement and clinical leadership by select Managed Providers in the local
operations, physician relationships and business development plans within each
practice and LADS.
Increasing Patient Revenue and Cost Efficiencies
Managed care initiatives are implemented for each LADS to enable the
Affiliated Providers to gain incremental market share and increased patient
visits. In conjunction with its affiliated retail optical centers and affiliated
optometrists, the Company jointly markets regional primary eye care networks to
managed vision plans. In addition, the Company markets regional networks of
affiliated ophthalmologists and ASCs to managed care plans for the provision of
medical and surgical eye care. More importantly, the Company is able to market
each of its LADS to managed care plans seeking to contract with integrated
networks of optometrists, ophthalmologists, retail optical centers and ASCs that
can offer all primary, secondary and tertiary eye care services pursuant to
comprehensive "carve out" eye care plans.
The Company also seeks to increase patient visits for each LADS through
cooperative marketing initiatives. The Company assists in developing cooperative
marketing campaigns between affiliated optometrists and optical retailers to
attract incremental fee-for-service primary eye care patients. The Company and,
in some cases, managed care companies sponsor extensive free community screening
activities. The Company has also initiated outreach programs through its Managed
Providers, such as providing primary eye care to long-term care facilities and
more complicated tertiary care to rural areas where such care might otherwise
not be available.
The Company also seeks to generate incremental per patient revenue for its
Managed Providers by providing access to new eye care services and products for
its LADS. This may be as a core service for fee-for-service patients or as a
value-added option for managed care patients over and above their insured
benefit. Patients are educated at the primary eye care level on new products and
procedures, including refractive surgery, oculoplastic procedures, pediatric
services, eye wear upgrades, specialty contact lenses and accessories. By
facilitating the addition of new eye care services and products, the Company is
able to leverage existing facilities and equipment to generate incremental per
patient revenue for the Company's Managed Providers. For example, the Company's
Chief Medical Officer, Richard Lindstrom, M.D., a world renowned refractive
surgeon, is assisting in the development of refractive surgery initiatives for
each LADS.
Finally, the Company develops and implements a practice development program
to increase productivity and efficiency thereby reducing costs per patient. The
practice development program includes re-engineering patient flow, establishing
clinical protocols, providing physician development programs and practice
governance, monitoring patient feedback, and improving office design. The
Company has exclusively retained BSM Consulting Group, a highly respected leader
in ophthalmology consulting, to assist the Company in developing these practice
development programs. Additionally, the Company will continue to consolidate the
back office functions of Managed Providers, including payroll, benefit
administration, accounts payable, accounts receivables, purchasing and general
administrative services, to gain further efficiencies for its LADS.
The Company's ability to successfully manage and develop the Managed
Providers will depend on its ability to increase patient revenue and achieve
cost efficiencies for the Managed Professional Associations. The Company's
future results of operations will depend on the Company's ability to
successfully manage and develop its Managed Providers as the Company's
management fees are directly related to the revenues and expenses of the Managed
Professional Associations. See "Risk Factors -- Reliance on Affiliated
Providers", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Management Agreements."
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Expanding the LADS Model to New Markets
The Company intends to continue expanding its LADS model to new markets.
The Company seeks to enter select markets where (i) the Company has a strategic
affiliation with a leading corporate retail optical provider, (ii) there is an
existing network of optometrists and ophthalmologists that the Company can
affiliate with, and/or (iii) the Company is able to obtain a managed care
contract that provides an initial patient base. Other considerations include an
analysis of the competitive environment, the legal and regulatory environment as
it pertains to delivery of eye care services and the level of managed care
penetration. The Company also intends to leverage existing managed care
relationships to expand into new markets where such managed care providers have
established a significant presence.
The Company's practice acquisition team continuously searches for
Affiliated Providers to develop additional LADS in new markets and to supplement
the eye care services offered by its LADS in existing markets. The Company's
acquisition team meets with selected acquisition candidates within a particular
local market area and evaluates such acquisition candidates on the basis of
their clinical reputation, quality of care, provider credentials, market share,
profitability and mix of payors. The Company's acquisition team also bases its
acquisition decisions on the strengths of the candidate's management team, the
stability of the practice, the existence of an ASC or optical dispensary, the
compatibility of the candidate's work philosophy and values, the potential to
expand the types of eye care services provided and the potential to increase
patient access to the candidate through the Company's managed care and practice
management initiatives. The Company's goal is to affiliate with well-respected
practices and intends to utilize such practices to assist in identifying
additional acquisition candidates for the LADS. In determining the consideration
for each acquisition, the Company primarily evaluates the acquisition criteria
along with projected future cash flows for the practice and the projected
management fee to be received.
The Company's ability to successfully expand the LADS model to new markets
will depend on a number of factors including the ability to obtain acceptable
financing to fund expansion, identify and consummate suitable acquisitions,
successfully integrate the acquisitions and effectively expand its managed care
relationships into such local markets. See "Risk Factors -- Risk Associated With
Expansion Strategy."
LADS LOCATIONS
The following table sets forth the location of and certain data regarding
the Company's existing LADS as of June 1, 1997:
<TABLE>
<CAPTION>
AFFILIATED PROVIDERS(1) AFFILIATED MANAGED
------------------------ RETAIL(1) CONTRACT
LOCAL AREA MDS ODS ASCS OPTICAL LOCATIONS LIVES(2)
- ---------- ----- ----- ------ ----------------- ---------
<S> <C> <C> <C> <C> <C>
Tampa Bay.......................... 93 109 17 18 717,000
Miami.............................. 55 64 4 24 394,000
Orlando............................ 20 46 8 12 112,000
Jacksonville....................... 8 16 3 3 139,000
Tallahassee........................ 3 12 1 4 5,000
Chicago............................ 66 17 -- 18 10,000
Phoenix............................ 31 15 4 11 107,000
Tucson............................. 19 9 3 -- 50,000
Minneapolis........................ 4 11 -- -- --
Long Island........................ 57 1 -- 4 225,000
New Orleans........................ -- 4 -- 13 --
--- --- -- --- ---------
Total.................... 356 304 40 107 1,759,000
</TABLE>
- ---------------
(1) Excludes in excess of 700 Contract Providers in select markets where the
Company is beginning to conduct managed care business.
(2) Represents HMO members exclusively contracted to the Company and does not
include the managed care patients directly contracted to the Affiliated
Providers or any fee-for-service patients of Managed Providers.
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LADS MANAGEMENT AND SUPPORT SERVICES
The Company provides all necessary management and support services to
develop and expand its LADS. The Company employs over 80 team members at its
corporate headquarters and approximately 300 team members located within the
LADS to provide a wide range of management and support services, including
information services, managed care development, practice integration and
development, administration, credentialing, provider relations, outcome
assessment, human resources, financial management, marketing and communications,
member services, and purchasing.
Information Services. The Company's management information system combines
current computer technology with proprietary software developed over the past
ten years that integrates front-end practice management, back-end corporate
management, managed care administration, accounting, and marketing. The Company
utilizes its management information system to coordinate patient flow and
administer patient documentation; track patient inquiries/problems from
inception to resolution; support credentialing of Affiliated Providers;
administer managed care contracts, including billing, collection and claims
processing; and organize marketing initiatives. Furthermore, the Company's
proprietary software allows it to effectively manage sophisticated risk-sharing
arrangements with Affiliated Providers and third-party payors, administer
disease state management initiatives, and track and assess utilization trends.
By electronically integrating all aspects of LADS management, the Company is
able to decrease duplication of efforts, enhance quality control, and maximize
cost efficiencies.
Managed Care Development. The Company assists its Affiliated Providers in
obtaining both fee-for-service and capitated managed care contracts. After
analyzing competitive market demographics and managed care penetration, the
Company identifies potential managed care relationships. The Company's managed
care development team responds to requests for proposals (RFPs) from selected
payors and works with HMOs to develop custom eye care benefit programs and
services for their members.
Practice Integration and Development. The Company assists in developing
the practices of its Managed Providers and the implementation of long-term
strategic initiatives to increase revenue and enhance operating efficiencies.
The Company has entered into exclusive consulting agreements with BSM Consulting
Group, a leading professional practice development consultant, and its chief
executive officer, Bruce S. Maller, to assist with the Company's practice
integration and development efforts. The Company's regional operating personnel
assist with implementing practice integration and development initiatives and
measure improvements achieved through such efforts.
Administrative Services. The Company provides certain administrative
services to its Affiliated Providers, including billing, collections,
eligibility verification and claims processing. The Company handles over 300,000
claims per year, including Medicare and Medicaid. The Company's administrative
services department utilizes sophisticated information systems to provide claims
processing support and submit claims electronically to payors in order to reduce
time for reimbursement.
Credentialing. The Company provides credentialing services according to
national standards as set forth by the National Committee for Quality Assurance
("NCQA") by which all health plans are measured for compliance with quality
assurance initiatives. All Affiliated Providers are fully credentialed. The
credentialing process includes collection of data from Affiliated Providers in
the form of an application; verification of licenses, insurance and education;
review of the Affiliated Provider's file in the National Practitioner Data Bank;
computerized management of all Affiliated Provider credentials and renewals; and
approval by an Affiliated Provider peer group. Several managed care companies
have awarded the Company "Delegated Provider" status. Delegated Provider status
is awarded only after a managed care company has audited credentialing policies
and procedures as well as each health care provider's patient files and has
determined each provider is in compliance with NCQA standards. The Company
re-credentials its Affiliated Providers every two years.
Provider Relations. The Company actively maintains its relationships and
communication with all Affiliated Providers. The Company has established
Provider Relations Representatives who educate, assist and
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<PAGE> 40
support Affiliated Providers and their clinic staff with respect to all their
managed care needs. Provider Relations Representatives are available 24-hours a
day through a toll-free telephone support number.
Outcome Assessment. The Company provides outcome assessment services to
its Managed Providers, including custom developed protocols and disease state
management. Through the measurement of outcomes, the Managed Providers are able
to evaluate the effectiveness of clinical initiatives. Certain of the Company's
Managed Providers have been selected as a beta site for the implementation of a
study developed by Johns Hopkins University School of Medicine to evaluate the
need for and outcome of cataract surgery. The Company is currently developing
additional disease management modules for laser and glaucoma surgery.
Human Resources. The Company provides human resource services to its
Managed Providers, including recruitment of optometrists, ophthalmologists and
clinic staff as well as administration of payroll, benefits and paid time off
programs. In addition, the Company develops training programs to enhance the
management and administrative skills of the clinic staff employed by the Company
and maintains management and administrative protocols and policies.
Financial Management. The Company provides financial management services
to its Managed Providers, including the development of budgets, implementation
of financial controls, capital budgeting and initiation of cost-containment
measures designed to improve operating and financial performance. The Company
also provides comprehensive financial analysis and cash management, tax and
accounting services.
Marketing and Communications. The Company's marketing department works in
conjunction with an outside advertising agency to create and produce marketing
materials supporting the development initiatives of its LADS and Managed
Providers. The Company's communications department develops and produces
corporate newsletters and works with the Company's Managed Providers and clinic
staff to produce feature news articles, press releases and related promotional
materials.
Member Services. The Company's Member Services Representatives provide
customer service for issues related to the Company's managed care business.
Member Services Representatives expedite the resolution of managed care service
issues and track member service inquiries in a database maintained by the
Company. Statistics are developed and tracked to identify trends in specific
member service issues.
Purchasing. The Company purchases certain clinical and office supplies and
equipment for its Managed Providers. The Company has developed purchasing
arrangements and relationships to facilitate more efficient bulk purchasing and
delivery.
MANAGEMENT AGREEMENTS
The Company intends to continue to acquire the business assets of select
optometry and ophthalmology practices as it establishes and develops LADS and
expands into new markets. In conjunction with acquiring the assets of eye care
practices, the Company has entered, and will continue to enter, into long-term
business management agreements with the professional associations conducting
such practices (the "Managed Professional Associations") to provide management
and administrative services to Managed Professional Associations, as well as
managed care business development and administration. The Company also expects
to acquire ASC facilities.
The Company enters into Management Agreements with the Managed Professional
Associations pursuant to which the Company is the sole provider of comprehensive
management, business and administrative services for the non-professional
aspects of the professional practices. Each Managed Provider maintains full
authority, control and responsibility over the provision of professional care
and services to its patients. The Company does not provide professional care to
patients nor does the Company employ any of the ophthalmologists or
optometrists, or any other professional health care provider personnel, of the
Managed Professional Association. The following is a summary of the typical form
of the Management Agreements the Company enters into with each Managed
Professional Association, and is qualified by reference to the actual Management
Agreements and terms may vary depending upon the particular facts and
circumstances, as well as the different laws and regulations of each state.
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The Company enters into Management Agreements with professional
associations managed by the Company, the initial term of which is typically 40
years. Under significantly all of the Company's Management Agreements, the
management fee ranges from 24% to 37% of the Managed Professional Associations'
gross revenues after deducting from such revenues all expenses of the clinic
other than those related to shareholders of the Managed Professional
Associations. The practice management fees earned by the Company pursuant to
these Management Agreements fluctuate depending on variances in revenues and
expenses of the Managed Professional Associations.
Under the Management Agreements, the Company is obligated, among other
things, to (i) provide, maintain and repair office and clinical equipment for
the Managed Professional Association, (ii) order and purchase all reasonable
supplies on behalf of the Managed Professional Association, (iii) provide
appropriate support services for the operation of the Managed Professional
Association's offices, (iv) assist the Managed Professional Association in
establishing and implementing quality assessment, risk management and
utilization review programs, (v) employ all management, clinicians,
administrative, clerical, secretarial, bookkeeping, accounting, payroll, billing
and collection personnel, and other nonprofessional personnel as necessary, (vi)
assist the Managed Professional Association in negotiating managed care
contracts, (vii) bill and collect professional and other fees on behalf of the
Managed Professional Association, (viii) establish and administer accounting
procedures, controls and systems for the financial books and records relating to
the business of the Managed Professional Association, (ix) monitor and maintain
the files and records of the Managed Professional Association and (x) provide
such management services as are necessary and appropriate for the day-to-day
administration of the business aspects of the Managed Professional Association.
The Management Agreements provide that the Managed Professional Association
is responsible for, among other things, (i) hiring, supervising, and directing
certain of the Managed Professional Association's professional employees, (ii)
adopting a peer review/quality assurance program and (iii) maintaining
appropriate worker's compensation, professional and comprehensive general
liability insurance.
Pursuant to the Management Agreements, a Practice Advisory Council,
consisting of equal representation for the Company and the Managed Professional
Association, is responsible for (i) reviewing and making recommendations
regarding any renovation and expansion plans and capital equipment expenditures
relating to the Managed Professional Association's facilities, (ii) reviewing
and making recommendations regarding all marketing and public relations
services, (iii) reviewing and making recommendations regarding the fee schedule
and collection policies for the Managed Professional Association, (iv) approving
new non-professional ancillary services provided by the Managed Professional
Association, (v) approving and making recommendations regarding agreements with
institutional care providers and third party payors which are not in accordance
with guidelines established by the applicable Local Advisory Council (described
below), (vi) assisting the Managed Professional Association in developing
long-term strategic planning objectives, (vii) making recommendations regarding
the priority of major capital expenditures, (viii) recommending to the Managed
Professional Association the number and type of health care personnel required
for the efficient operation of the Managed Professional Association, (ix) making
recommendations regarding fee disputes, (x) approving the decision to terminate
higher level non-professional personnel employed by the Company who are
performing services at the Managed Professional Associations's offices, (xi)
approving any office relocation or expansion and the establishment of any new
ASC or optical business of the Managed Professional Association and (xii)
adopting, approving and amending the Managed Professional Association's budget.
Local Advisory Councils consist of Company representatives and delegates
from Managed Professional Associations located in each region. Each Managed
Professional Association is entitled to appoint one delegate to the Local
Advisory Council and the Company is entitled to appoint two delegates who will
have voting power equal to the combined voting power of all delegates appointed
by the Managed Professional Association. The Local Advisory Council makes
recommendations to the Company and the Managed Professional Associations as to
the regional policy and strategy issues within the region and as to (i) the
establishment of private pay fee schedules where permitted by law, (ii) the
establishment of guidelines for agreement with institutional health care
providers and third party payors and (iii) any agreement with an institutional
health care provider or third-party payor which materially differs from
guidelines established by
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the Local Advisory Council. The Local Advisory Council may also select
commercial carriers for professional, casualty and comprehensive general
liability insurance for the Managed Professional Associations in the region.
Finally, the Local Advisory Council considers and determines any issue upon
which the Practice Advisory Council is deadlocked, except for the determination
of the budget of each Managed Professional Association. Decisions of the Local
Advisory Council may be appealed to the National Appeal Council consisting of
one delegate appointed by each of the Local Advisory Councils and two delegates
appointed by the Company.
Each Managed Professional Association has the sole authority to set its
fees for patients, subject to obligations pursuant to managed care contracts. In
connection with managed care contracts the Managed Professional Associations may
contract directly with third-party payors. Otherwise, the managed care contracts
are entered into by the Company and at the option of the Managed Professional
Association the practice can be part of the provider group offered by the
Company in connection with the contract. See "-- Managed Care Contracts."
In accordance with its standard Management Agreement entered into with each
Managed Professional Association, the Company is responsible for, and authorized
to bill, in the Managed Professional Association's name, patients, third-party
payors and other fiscal intermediaries for all billable health care services
rendered by the practice. The Company is responsible for collecting and
receiving all payments for such health care services. Collections from
receivables are deposited by the Company into a cash collateral account from
which all amounts for the payment of expenses and other obligations are drawn.
In the event that any payments for billable services are received by the Managed
Professional Association or its employed professionals, such entities and
individuals are obligated to transfer such funds to the cash collateral account.
The Company has been provided a security interest in the cash collateral account
whereupon the Company is permitted, except where specifically limited by the
Management Agreement, to borrow against the account as well as against
receivables of the practice. The Company has the power to endorse checks payable
to the Managed Professional Association. The Company continuously monitors
outstanding accounts receivable and is authorized to take certain collection
actions, including extending the time for payment of accounts, and jointly
decides with the Managed Professional Association concerning any decision to
undertake extraordinary collection efforts. The Company has the obligation to
fund shortages in the account as necessary to pay practice management expenses
which must be paid as they become due. The Company reconciles the results of its
billing and collection efforts for its Managed Professional Associations on a
quarterly basis.
The Management Agreements are terminable by either party if the other party
materially defaults in the performance of any of its obligations under the
Management Agreement and such default continues for a certain period of time
after notice, if the other party files a petition for bankruptcy or upon the
occurrence of other similar events. The Management Agreements may also be
terminated by mutual agreement in writing.
During the term of the Management Agreement, the Company and the Managed
Professional Association agree not to compete with each other in the business of
providing management services to professional associations and agree not to
disclose certain confidential and proprietary information regarding the other.
The Management Agreements require the Company and the Managed Professional
Associations to indemnify and hold harmless the other party against claims
resulting from negligent or intentional acts or omissions.
The Managed Professional Association is required under each Management
Agreement to enter into written employment agreements with each of its
professional employees containing covenants not to compete with the Managed
Professional Association in a specified geographic area for a specified period
of time after termination of the employment agreement. The employment agreements
also require the payments of significant liquidated damages in the event of a
default by shareholders of the Managed Professional Associations and certain
employees of the Managed Professional Associations, early termination by such
shareholders and key non-shareholder professionals, or a breach of the covenant
not to compete.
Upon the expiration of the term of the Management Agreement, or in the
event that the Managed Professional Association breaches the Management
Agreement, and to the extent permitted by law, the Managed Professional
Association is obligated to purchase the related assets owned by the Company
(including the unamortized portion of the Management Agreement) at book value
and assume all related
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liabilities. For a period of five years from the date of the Management
Agreement, the shareholders of the Managed Professional Association are required
to personally guarantee any note provided in connection with the repurchase. If
the Company breaches the Management Agreement, the Managed Professional
Association has the option to purchase the related assets owned by the Company
pursuant to terms described in the Management Agreement.
STRATEGIC AFFILIATIONS WITH RETAIL OPTICAL COMPANIES
The Company has considered it important to enter into affiliations with
retail optical companies based on their market position, name recognition,
quality of service, accessibility through extended hours, geographic
distribution, and compatibility of management and facilities with the Company's
primary eye care objectives. The Company currently has contractual affiliations
with ECCA Managed Vision Care, Inc. and For Eyes Managed Care, Inc. which have a
combined total of over 300 retail locations in 48 cities in the United States.
Under the Company's strategic relationship with ECCA, the Company makes
available its LADS to provide the full continuum of high quality, cost effective
eye care services to customers at ECCA retail optical locations (Eyemasters,
Binyons and VisionWorks) in close proximity to the LADS. Further, the Company
seeks to expand revenues at ECCA through increasing managed care business which
require easy accessibility to optical products. In return, the Company believes
its strategic affiliations with retail optical companies will assist the LADS in
increasing their managed care market share. The Company believes most HMOs
strongly prefer a recognized retail optical company as the contracted vendor for
eye wear. By "bundling" retail optical services with LADS that provides
comprehensive eye care services at the primary, secondary and tertiary levels,
the Company believes it significantly improves its joint opportunity with ECCA
to obtain managed care business. The Company expects its retail optical
affiliates to serve increasingly as an important access point to its LADS for
fee-for-service and primary care patients. Further, the Company's relationship
with ECCA has resulted in the addition of five internally developed Managed
Provider optometry clinics adjacent to five ECCA retail optical locations, along
with a tentative agreement to add at least an additional 20 similar clinics
throughout the remainder of 1997. These arrangements are expected to further
increase the above described benefits sought by both parties in connection with
their affiliation.
The Company is a joint venture partner in a general partnership called
"Vision 21 Plus" in which the Company and For Eyes each have a 50% interest. The
objective of the joint venture is to maximize opportunities for the Company in
managed eye care by securing contracts and providing comprehensive, fully
integrated eye care products and services to health care organizations and
self-funded employer groups. The general benefits to For Eyes in its
relationship with the Company are similar to that derived by ECCA. Under the
joint venture agreement, Vision 21 Plus is to enter into, perform and carry out
contracts and agreements related to the development of managed eye care business
and to explore opportunities to develop certain ancillary eye care businesses.
MANAGED CARE CONTRACTS
As an increasing percentage of the population is covered by managed care
organizations, the Company believes that its success will be, in part, dependent
upon its ability to negotiate managed care contracts with HMOs, health insurance
companies and other third-party payors pursuant to which services will be
provided on a risk-sharing or capitated basis. The Company also has contracts
for the provision of certain financial and administrative services related to
its indemnity insurance and fee-for-service plans. Managed care contracts are
typically for one year terms that renew automatically and the contracts are
terminable by either party on sixty days notice.
The Company's typical contracts with third-party health benefits payors
(insurance companies and HMOs) provide that the Company will arrange and pay for
eye care services that are needed by the payor's members in exchange for a fixed
amount per patient per month or a percentage of the premiums paid on behalf of
the patient, without regard to the volume of services that the patient requires.
Under these arrangements, the Company accepts the risk that the cost and
utilization of services may exceed expectations
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in exchange for its ability to profit if cost and utilization are kept below
expected levels. The Company can directly benefit by effectively managing costs
and utilizing its relationships with its Affiliated Providers. Because the
Company assures the credentials of the providers, establishes quality and
utilization control systems and implements payment arrangements with the
providers, third-party payors are able to use their limited resources in other
areas where they have greater expertise.
As of March 31, 1997, the Company maintained 16 capitated managed care
contracts and administered six fee-for-service plans. While the Company
contracts with a number of third-party health benefit payors, most of the
Company's largest managed care contracts are with certain affiliates of Humana.
Revenues derived from these contractual arrangements with certain Humana
affiliates accounted for 60.3% and 16.7% of the Company's revenues for the year
ended December 31, 1996 and the three months ended March 31, 1997, respectively.
On a pro forma basis, revenues derived from the Humana contracts would have
accounted for 14.2% and 11.3% of the Company's revenues for the year ended
December 31, 1996 and the three months ended March 31, 1997, respectively.
RECENT TRANSACTIONS
The Company was incorporated on May 9, 1996. The principal operating
subsidiaries of the Company are Vision 21 PPMC and Vision 21 MCO both of which
merged with the Company in November 1996. In the merger, all of the outstanding
shares of stock of Vision 21 PPMC and Vision 21 MCO were exchanged for an
aggregate of 2,685,318 shares of Common Stock of the Company. The previous
shareholders of these two entities consisted of certain executive officers and
directors of the Company. See "Certain Transactions."
In December 1996, the Company completed the 1996 Acquisitions resulting in
the acquisition of the business assets of 22 optometry clinics, nine
ophthalmology clinics, 15 optical dispensaries and one ASC. Business assets
consist of certain non-medical and non-optometric assets, including accounts
receivables, leases, contracts, equipment and other tangible and intangible
assets. Concurrently, the Company entered into Management Agreements with the
related professional associations employing 34 optometrists and 13
ophthalmologists. These acquisitions were accounted for by recording the assets
and liabilities at fair value and allocating the remaining cost to the related
Management Agreements. Additionally, the Company acquired the business assets of
a managed care company servicing four capitated managed care contracts covering
over 100,000 patient lives which was accounted for under the purchase method of
accounting. In connection with the 1996 Acquisitions, the Company provided
aggregate consideration of $11.2 million, consisting of 2.1 million shares of
Common Stock, unsecured promissory notes in the aggregate principal amount of
$1.9 million and $800,000 in assumed debt. Additionally the Company may be
required to provide additional consideration of up to $316,000, consisting of up
to 79,805 shares of Common Stock, in connection with several of the 1996
Acquisitions, which will be transferred out of escrow to certain sellers in the
event they meet certain post-acquisition performance targets. See "Certain
Transactions."
In March 1997, the Company completed the Pinellas Acquisition resulting in
the acquisition of the business assets of one ophthalmology clinic and one
optical dispensary located in Pinellas County, Florida. Concurrently, the
Company entered into Management Agreements with the related professional
associations employing one optometrist and six ophthalmologist. In connection
with the Pinellas Acquisition, the Company provided aggregate consideration of
$1.1 million, consisting of 128,541 shares of Common Stock.
Between May 1, 1997 and July 31, 1997, the Company completed the Recent
Acquisitions resulting in the acquisition of the business assets of one
optometry clinic, ten ophthalmology clinics, five optical dispensaries and four
ASC located in Sierra Vista, Mesa, Phoenix and Tucson, Arizona and Fort
Lauderdale, Florida. Concurrently, the Company entered into Management
Agreements with the related professional associations employing five
optometrists and seven ophthalmologists. In connection with the Recent
Acquisitions, the Company provided aggregate consideration of $6.8 million,
consisting of 777,118 shares of Common Stock, $19,000 in promissory notes and
$29,000 in cash, subject to closing adjustments.
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GOVERNMENTAL REGULATIONS
General Overview
The health care industry is highly regulated, and there can be no assurance
that the regulatory environment in which the Company operates will not change
significantly and adversely in the future. In general, regulation of health care
providers and companies is increasing.
There are currently several federal and state initiatives designed to amend
regulations relating to the provision of health care services, the access to
health care, the costs of health care and the manner in which health care
providers are reimbursed for their services. However, it is not possible to
predict whether any such initiatives will be enacted as legislation or, if
enacted, what their form, effective dates or impact on the Company will be.
Every state imposes licensing requirements on ophthalmologists,
optometrists and opticians ("Practitioners") and on their facilities and
services. In addition, many states require regulatory approval, including
certificates of need, before establishing certain types of health care
facilities, offering certain services or making expenditures in excess of
statutory thresholds for health care equipment, facilities or programs. The
execution of a management agreement with a Practitioner group currently does not
require any health care regulatory approval on the part of the Company or the
Practitioner group. However, in connection with the expansion of existing
operations and the entry into new markets, the Company and its associated
Practitioner groups may become subject to additional regulation.
Much of the revenue of the Affiliated Providers is derived from payments
made by government sponsored health care programs (principally Medicare). These
programs are subject to substantial regulation. Any change in reimbursement
regulations, policies, practices, interpretations or statutes that places
material limitations on reimbursement amounts or practices could adversely
affect the operations of the Company. Increasing budgetary pressures at both the
federal and state level and the rapidly escalating costs of health care and
reimbursement programs have led, and may continue to lead, to significant
reductions in government reimbursements for certain medical charges and
elimination of coverage for certain individuals under these programs. Federal
legislation could result in a reduction of Medicare funding. The agency that
administers the Medicare program is required by law to institute a
resource-based method for paying for physician practice overhead costs by
January 1, 1998. The initial proposal to implement this mandate would result in
a redistribution of Medicare funds from specialists and surgeons to primary care
physicians. There are two options currently being considered. The first would
increase optometrists' Medicare revenue by 11% and decrease ophthalmologists'
revenue by 6%. The second would increase optometrists' Medicare revenue by 11%
and decrease ophthalmologists' revenue by 15%. Medicare budget legislation
currently under consideration calls for a delay in implementation of the
resource-based method of paying for physician practice expenses until 1999. The
pending legislation also calls for a phase in that would be complete in 2002.
The Company cannot predict at this time whether or when any of such proposals
will be adopted or, if adopted and implemented, what effect such proposals would
have on the Company. There can be no assurance that payments under governmental
programs will remain at levels comparable to present levels. In addition, funds
received under these programs are subject to audit with respect to the proper
billing for physician services and accordingly, retroactive adjustments of
revenue from these programs may occur. See "Risk Factors -- Government
Regulations."
Health Care Regulations
Business arrangements between business associations that provide practice
management services and ophthalmologists and optometrists are regulated
extensively at the state and federal levels, including regulation in the
following areas:
Corporate Practice of Optometry and Ophthalmology. The laws of many
states prohibit corporations that are not owned entirely by eye care
professionals from employing eye care professionals, having control over
clinical decision-making, or engaging in other activities that are deemed
to constitute the practice of optometry and ophthalmology. The Company
contracts with professional associations (which
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are owned by one or more licensed optometrists or ophthalmologists), which
in turn employ or contract with other licensed optometrists or
ophthalmologists to provide professional services. The Company performs
only non-professional services, does not represent to the public or its
customers that it provides professional eye care services, and is not
exercising influence or control over the practices of the eye care
practitioners employed by the professional associations. Furthermore, the
Management Agreements between the Company and the Professional Associations
specifically provide that all decisions required by law to be made by
professionals shall be made by the professionals. While certain
shareholders of such Managed Professional Associations which perform the
practice of medicine or optometry are also involved in Company management,
they act independently when making decisions on behalf of their
professional corporations and the Company has no right (and does not
attempt to exercise any right) to control those decisions.
Fee-Splitting and Anti-kickback Laws.
State Law. Many states prohibit "fee-splitting" by eye care
professionals with any party except other professionals in the same
professional corporation or practice association. In most cases, these laws
have been construed as applying to the paying of a portion of a fee to
another person for referring a patient or otherwise generating business,
and not to prohibit payment of reasonable compensation for facilities and
services (other than the generation of referrals), even if the payment is
based on a percentage of the practice's revenues. In addition, most states
have laws prohibiting paying or receiving any remuneration, direct or
indirect, that is intended to induce referrals for health care products or
services. For example, the Florida fee-splitting law prohibits paying or
receiving any commission, bonus, kickback, or rebate, or engaging in any
split-fee arrangement in any form for patient referrals to providers of
health care goods or services. According to a Florida court of appeals
decision interpreting this law, it does not prohibit a management fee that
is based on a percentage of gross income of a professional practice if the
manager does not refer patients to the practice. Similarly, the Arizona law
prohibits "dividing a professional fee" only if it is done "for patient
referrals." Other states, such as Illinois and New York, have fee-splitting
statutes that have been interpreted to prohibit any compensation
arrangements that are based on a percentage of physician's revenue, and
such laws preclude the Company from using its typical management
arrangement in those states.
Federal Law. Federal law prohibits the offer, payment, solicitation
or receipt of any form of remuneration in return for the referral of
patients covered by federally funded health care programs such as Medicare
and Medicaid, or in return for purchasing, leasing, ordering or arranging
for the purchase, lease or order of any item or service that is covered by
a federal program. For this reason, the Management Agreements provide that
the Company will not engage in direct marketing to potential sources of
business, but will only assist the practices' personnel in these endeavors
by providing training, marketing materials and technical assistance.
Advertising Restrictions. Many states, prohibit eye care
professionals from using advertising which includes any name other than
their own, or from advertising in any manner that is likely to lead a
person to believe that a non eye care professional is engaged in the
delivery of eye care services. The Management Agreements provide that all
advertising shall conform to these requirements.
In addition, the Company's managed care arrangements with health care
service payors on the one hand, and its network of Affiliated Providers on the
other, are subject to federal and state regulations, including the following:
Insurance Licensure. Most states impose strict licensure requirements
on health insurance companies, HMOs, and other companies that engage in the
business of insurance. In most states, these laws do not apply to
discounted fee-for-service arrangements or networks that are paid on a
"capitated" basis, i.e. based on the number of covered persons the network
is required to serve without regard to the cost of service actually
rendered, unless the association with which the network provider is
contracting is not a licensed health insurer or HMO. There are exceptions
to these rules in some states. For example, certain states require a
license for a capitated arrangement with any party unless the risk-bearing
association is a professional corporation that employs the eye care
professionals. In the event that the Company is
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required to become licensed under these laws, the licensure process can be
lengthy and time consuming and, unless the regulatory authority permits the
Company to continue to operate while the licensure process is progressing,
the Company could experience a material adverse change in its business
while the licensure process is pending. In addition, many of the licensing
requirements mandate strict financial and other requirements which the
Company may not immediately be able to meet. Once licensed, the Company
would be subject to continuing oversight by and reporting to the respective
regulatory agency.
Limited Health Service Plans. Some states permit managed care
networks that assume insurance risk, but only as to a limited class of
health services, to be licensed as limited health service plans, and
thereby avoid the need to be licensed as an insurer or HMO even if its
arrangements are with individual subscribers or self-insured employers. The
Company intends to seek such licensure in those states where it is
available for eye care networks. However, the Company may not be able to
meet such requirements in all cases.
Physician Incentive Plans. Medicare regulations impose certain
disclosure requirements on managed care networks that compensate eye care
providers in a manner that is related to the volume of services provided to
Medicare patients (other than services personally provided by the
provider). If such incentive payments exceed 25 percent of the provider's
potential payments, the network is also required to show that the providers
have certain "stop loss" financial projections and to conduct certain
Medicare enrollee surveys.
"Any Willing Provider" Laws. Some states have adopted, and others are
considering, legislation that requires managed care networks to include any
provider who is willing to abide by the terms of the network's contracts
and/or prohibit termination of providers without cause. Such laws would
limit the ability of the Company to develop effective managed care networks
in such states.
The Company and its affiliated professional associations are subject to a
range of antitrust laws that prohibit anti-competitive conduct, including price
fixing, concerted refusals to deal and divisions of markets. Among other things,
these laws limit the ability of the Company to enter into Management Agreements
with separate practice groups that compete with one another in the same
geographic market. This does not apply to professionals within the same practice
group. In addition, these laws prevent acquisitions of business assets that
would be integrated into existing professional associations if such acquisitions
substantially lessen competition or tend to create a monopoly.
The several laws described above have civil and criminal penalties and have
been subject to limited judicial and regulatory interpretation. They are
enforced by regulatory agencies that are vested with broad discretion in
interpreting their meaning. The Company's agreements and activities have not
been examined by federal or state authorities under these laws and regulations.
For these reasons, there can be no assurance that review of the Company's
business arrangements will not result in determinations that adversely affect
the Company's operations or that certain agreements between the Company and eye
care providers or third party payors will not be held invalid and unenforceable.
In addition, these laws and their interpretation vary from state to state. The
regulatory framework of certain jurisdictions may limit the Company's expansion
into, or ability to continue operations within, such jurisdictions if the
Company is unable to modify its operational structure to conform with such
regulatory framework. Any limitation on the Company's ability to expand could
have an adverse effect on the Company. See "Risk Factors -- Government
Regulations."
COMPETITION
The health care industry is highly competitive and subject to continual
changes in the method in which services are provided and the manner in which
health care providers are selected and compensated. The Company believes that
private and public reforms in the health care industry emphasizing cost
containment and accountability will result in an increasing shift of eye care
from highly fragmented, individual or small practice providers to larger group
practices or other eye care delivery services. Companies in other health care
industry segments, such as managers of other hospital-based specialties or
currently expanding large group practices, some of which have financial and
other resources greater than those of the Company, may become competitors in
providing management to providers of eye care services. Increased competition
could have a
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material adverse effect on the Company's financial condition and results of
operations. The basis for competition in the practice management area includes
service, pricing, strength of the Company's delivery network (where applicable),
strength of operational systems, the degree of cost efficiencies and synergies,
marketing strength, managed care expertise, patient access and quality
assessments and assurances programs. The Company also competes with other
providers of eye care services for managed care contracts, many of which have
greater financial and other resources than the Company. These include HMOs, PPOs
and private insurers. The basis for competition in the managed care organization
area includes administrative strength, size and quality of network, marketing
abilities, informational systems and operating efficiencies. The future success
of the Company will be directly related to its ability to expand the managed eye
care delivery network geographically, attract reputable providers, expand the
scope of services offered by associated practices (i.e. not only optical and
optometric, but also ophthalmological), and dedicate resources to an active
sales team focused exclusively on the Company's sales effort.
EMPLOYEES
In most circumstances, at the time of its integration into the Company's
managed operations, each Managed Provider enters into an employment agreement
with his or her respective professional association. The employment agreements
with shareholder professionals are for an initial term of five years and for
non-shareholder professionals are for an initial term of two years. Shareholder
professionals are obligated to work for the full five-year term unless the
professional employment is terminated for reasons such as the professional's
death or disability or the occurrence of certain events outside the
professional's control. The professional employment agreements provide that the
employed professionals will not compete with the professional association during
the term of the agreement and following the termination of the agreement for a
term of two years for a shareholder professional and one year for a
non-shareholder professional in a specified geographical area. At June 30, 1997,
the Company had 421 employees, of which approximately 86 were employed at the
Company's headquarters and 335 were employed by the Company at Managed Provider
practices. The Company believes that its relationship with its employees is
good.
INSURANCE
The Company's business entails an inherent risk of claims of liability. The
optometrists and ophthalmologists with which the Company associates and certain
employees of the Company are involved in the delivery of health care services to
the public and, therefore, are exposed to the risk of professional liability
claims. Claims of this nature, if successful, could result in substantial damage
awards to the claimants that may exceed the limits of any applicable insurance
coverage. Insurance against losses related to claims of this type can be
expensive and varies widely from state to state. The Company is indemnified
under its service agreements for claims against the its Managed Providers
practices and maintains a blanket liability insurance policy for itself.
Successful malpractice claims asserted against the Managed Practices, however,
could have an adverse effect on the Company's profitability. The Company
maintains umbrella general liability insurance on a claims-made basis in the
amounts of $5.0 million per incident, and $5.0 million in the aggregate per
annum. While the Company believes it has adequate liability insurance coverage,
there can be no assurance that a pending or future claim or claims will not be
successful or, if successful, will not exceed the limits of available insurance
coverage or that such coverage will continue to be available at acceptable costs
and on favorable terms.
LITIGATION
There are no material pending legal proceedings other than routine
litigation arising in the ordinary course of business. The Company does not
believe that the results of such litigation, even if the outcome were
unfavorable to the Company, would have a material adverse effect on its
financial position.
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SERVICE MARKS
The Company has applied for registration of "Vision 21," "Eye Care for the
21st Century," "A Different Point of View," "LADS," and the Company's design
logo with the United States Patent and Trademark Office in 1997, which
applications are all currently pending.
PROPERTIES
The Company leases 9,902 square feet of office space in Largo, Florida, for
its corporate headquarters. The lease is for a term through September 1998, and
the Company believes that the facility is adequate for its current needs.
The Company leases or subleases the clinic locations it manages pursuant to
the Management Agreements with the Managed Professional Associations. The
Company anticipates that expanded facilities will be needed as the Managed
Professional Associations grow. The Company also expects to enter into leases
and subleases in the future as it acquires the allowable assets of Contract
Providers and enters into Management Agreements.
The Company also leases and subleases the ASC facilities it manages. The
Company does not expect that the current ASCs will need to be expanded. However,
the Company does anticipate that it will enter into leases and subleases as it
acquires additional ASC facilities.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the Company's
directors and executive officers, and positions they hold with the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Theodore N. Gillette, O.D................. 43 Chairman of the Board, Chief Executive Officer,
President and Director
Richard L. Sanchez........................ 44 Chief Development Officer, Secretary and Director
Richard T. Welch.......................... 46 Chief Financial Officer, Treasurer and Director
Richard L. Lindstrom, M.D................. 49 Chief Medical Officer and Director
Peter J. Fontaine......................... 43 Director
Herbert U. Pegues, II, M.D................ 47 Director
Bruce S. Maller........................... 43 Director
Jeffrey I. Katz, M.D...................... 51 Director
</TABLE>
THEODORE N. GILLETTE, O.D., CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER,
PRESIDENT AND DIRECTOR. Dr. Gillette has served as Chairman of the Board, Chief
Executive Officer, President, and director of the Company since its inception.
Dr. Gillette has served as President and director of the Company's wholly-owned
subsidiaries, Vision 21 Physician Practice Management Company and Vision 21
Managed Eyecare of Tampa Bay, Inc. since 1984 and 1993, respectively. He
obtained his Doctorate of Optometry from Southern California College of
Optometry in 1979 and his Bachelor of Science from Florida State University in
1975.
RICHARD L. SANCHEZ, CHIEF DEVELOPMENT OFFICER, SECRETARY AND DIRECTOR. Mr.
Sanchez has served as Chief Development Officer, Secretary and director of the
Company since its inception. From 1993 until assuming his positions with the
Company, Mr. Sanchez was Vice President of Marketing and Administration of the
Company's wholly-owned subsidiary, Vision 21 Managed Eyecare of Tampa Bay, Inc.
Prior to November 1992, Mr. Sanchez worked for Exxon Corporation for over 18
years in various management positions including divisional management
responsibility for over 300 employees and $600 million in revenues. Mr. Sanchez
obtained his Bachelor of Science in Chemistry from Florida State University in
1975.
RICHARD T. WELCH, CHIEF FINANCIAL OFFICER, TREASURER AND DIRECTOR. Mr.
Welch has served as Chief Financial Officer, Treasurer and director of the
Company since August 1996. Prior to joining the Company, Mr. Welch served as
Executive Vice President of Finance and Administration and as Vice Chairman of
the Board of Directors of Sports & Recreation, Inc., a public company engaged in
the business of retail sporting goods and equipment sales generating over $500
million in annual revenue, from December 1994 to March 1996. He served as its
Chief Financial Officer and a Director from January 1992 to December 1994. Mr.
Welch is a certified public accountant and he graduated from Louisiana State
University in 1973 with a Bachelor of Science in Management and Accounting.
RICHARD L. LINDSTROM, M.D., CHIEF MEDICAL OFFICER AND DIRECTOR. Dr.
Lindstrom has served as Chief Medical Officer of the Company since September
1996 and has served as a director since January 1997. Since October 1989, Dr.
Lindstrom has maintained a private practice adjacent to the Phillips Eye
Institute in Minneapolis where he serves as the Medical Director for Research
and Teaching. Dr. Lindstrom holds 22 patents in ophthalmology and has given
numerous presentations throughout the world including 13 named lectures. He is
active on multiple educational and advisory boards including chief medical
editor of Ocular Surgery News. He has co-authored two books, published 50
chapters in other books and published over 300 articles in refereed journals.
Dr. Lindstrom graduated from the University of Minnesota Medical School in 1972
followed by a research residency and cornea fellowship at the University of
Minnesota, an Anterior Segment fellowship at Mary Shields Eye Hospital in Dallas
and a third fellowship in Glaucoma/Anterior Segment at University Hospitals in
Salt Lake City.
PETER J. FONTAINE, DIRECTOR. Mr. Fontaine has served as a director of the
Company since July 1996. Mr. Fontaine is currently the Chairman of the Board of
Directors and Chief Executive Officer of Discount Auto
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Parts, Inc., a public company engaged in the business of retail automotive parts
sales, and he has been employed by Discount Auto Parts, Inc. in various
capacities since 1977. Mr. Fontaine has served on the Board of Directors of
Discount Auto Parts, Inc. since 1996 and as its Chief Executive Officer since
1994. From 1994 to January 1997, Mr. Fontaine also served as its President.
HERBERT U. PEGUES, II, M.D., DIRECTOR. Dr. Pegues has served as a director
of the Company since November 1996. He is currently Medical Director for managed
care at the Miami Children's Hospital, Miami, Florida and administers its
physician hospital organization. He has been the Vice President/Medical Director
for Memorial Sisters of Charity Health Network in Houston, Texas from 1995 to
1996. From 1988 to 1992, Dr. Pegues was the Associate Executive Director of
Medical Affairs for Humana Healthcare Plans in Tampa, Florida and Assistant
Clinical Professor of the Department of Family Medicine at the University of
South Florida College of Medicine. Dr. Pegues graduated from the University of
Illinois College of Medicine in 1975. He received his B.A. from Grinnell College
in Grinnell, Iowa and is a Diplomate, Certified by the American Board of Family
Practice and National Board of Medical Examiners. Dr. Pegues is also a Fellow of
the American Academy of Family Physicians, and is licensed to practice medicine
in Florida.
BRUCE S. MALLER, DIRECTOR. Mr. Maller has served as a director of Vision
Twenty-One since November 1996 and is an ophthalmology practice management
consultant to the Company. He is the founder of, and has been the President of,
the BSM Consulting Group of Incline Village, Nevada since 1978. BSM provides
consulting services predominantly in the fields of ophthalmology and cardiology
to individual physicians and corporate clients such as Allergan, Inc., Boston
Scientific, Columbia/HCA Healthcare, Inc. and Vision Twenty-One. Mr. Maller has
served as a Vice-President of Summit Medical Systems, Inc., the parent company
of BSM since October 1995. Mr. Maller is a frequent lecturer for various medical
societies, including the American Academy of Ophthalmology and the American
Society of Cataract and Refractive Surgery. Mr. Maller also heads BSM Healthcare
Publications, which produces works related to the field of medical practice
management. Mr. Maller received his Bachelor of Arts degree from the University
of Colorado in 1975.
JEFFREY I. KATZ, M.D., DIRECTOR. Dr. Katz has served as a director of the
Company since January 1997. Dr. Katz has operated an ophthalmology practice at
the Eye Institute of Southern Arizona in Tucson since 1984. He also serves as a
clinical associate professor in the Department of Ophthalmology at the
University of Arizona in Tucson and is the past president of the Tucson
Ophthalmologic Society. Dr. Katz graduated from George Washington University
Medical School in 1972. He was chief of ophthalmic surgery at El Dorado Hospital
in Tucson and has served as the Medical Director for the Tucson Laboratory of
the Arizona Lions eye Bank since 1978.
Pursuant to the terms of the Company's Articles of Incorporation and
Bylaws, the Board of Directors has the power to set the number of directors. The
number of directors is presently set at eight members. The directors are divided
into three classes. Each director in a particular class is elected to serve a
three-year term or until his or her successor is duly elected and qualified. The
classes are staggered so that their terms expire in successive years resulting
in the election of only one class of directors each year. The Class I directors
are Mr. Welch and Drs. Pegues and Katz, the Class II directors are Messrs.
Sanchez and Fontaine, and the Class III directors are Drs. Gillette and
Lindstrom and Mr. Maller. The initial terms of the current Class I, Class II and
Class III directors will expire at the annual meeting of the stockholders of the
Company in 1998, 1999 and 2000, respectively. Officers of the Company are
appointed by the Board of Directors and hold office until the first meeting of
directors following the annual meeting of stockholders and until their
successors are appointed, subject to earlier removal by the Board of Directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation (the "Articles") provide that a
Director will not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except: (i) for any
breach of duty of loyalty; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or knowing violations of laws; (iii) for
liability under the Florida Business Corporation Act (relating to certain
unlawful dividends, stock repurchases or stock redemptions); or (iv) for any
transaction from which the director derived any improper personal benefit. The
Company's Bylaws provides
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that the Company will indemnify each director and such of the Company's
officers, employees and agents as the Board of Directors shall determine from
time to time to the fullest extent provided by the Florida Business Corporation
Act.
The Company has entered into indemnification agreements (the
"Indemnification Agreements") with all of its directors and certain of its
officers. Similar Indemnification Agreements may from time to time be entered
into with additional officers of the Company or certain other employees or
agents of the Company. At present, there is no material pending litigation or
proceeding involving a director, officer, employee or agent of the Company where
indemnification is required or permitted, nor is the Company aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification. The Company is also empowered under its Articles to purchase
and maintain insurance or furnish similar protection on behalf of any person who
it is required or permitted to indemnify and the Company has acquired such
insurance in connection with such individuals that the Company believes is
warranted.
DIRECTORS' COMPENSATION
Directors are reimbursed for expenses in connection with attendance at
Board of Director and Committee meetings. Directors who are not officers of the
Company or affiliates of major stockholders are paid $500 per meeting plus
expenses, which will be increased to $1,000 per meeting plus expenses upon the
conclusion of the Offering. In addition, non-employee directors may be awarded
options under the Company's Stock Option Plans. See "-- Stock Option Plans."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors will establish, effective upon consummation of this
Offering, an Audit Committee, a Compensation Committee, and an Executive
Committee. The members of each Committee are expected to be determined at the
first meeting of the Board of Directors following the completion of this
Offering. At least a majority of the members of the Audit Committee and
Compensation Committee will be non-employee directors.
The functions of the Audit Committee will be to recommend annually to the
Board of Directors the appointment of the independent public accountants of the
Company, discuss and review the scope and the fees of the prospective annual
audit, to review the results thereof with the independent public accountants,
review and approve non-audit services of the independent public accountants,
review compliance with existing major accounting and financial policies of the
Company, review the adequacy of the financial organization of the Company,
review management's procedures and policies relative to the adequacy of the
Company's internal accounting control, and compliance with federal and state
laws relating to accounting practices and review and approve (with the
concurrence of a majority of the disinterested Directors of the Company)
transactions, if any, with affiliated parties.
The functions of the Compensation Committee will be to review and approve
annual salaries and bonuses for all officers, review, approve and recommend to
the Board of Directors the terms and conditions of all employee benefit plans or
changes thereto, to administer the Company's stock option plans, and to carry
out the responsibilities required by rules of the Securities and Exchange
Commission.
The Executive Committee, to the fullest extent allowed by Florida law, and
subject to the powers and authority delegated to the Audit Committee and the
Compensation Committee, will have and may exercise all the powers and authority
of the Board of Directors in the management of the business and affairs of the
Company during intervals between meetings of the Board of Directors.
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EXECUTIVE COMPENSATION
The following table sets forth information with respect to all compensation
paid or accrued in the fiscal year ended December 31, 1996, for services
rendered in all capacities to the Company by the Chief Executive Officer and the
one other executive officer of the Company who earned in excess of $100,000 in
salary and bonus for 1996. For the year ended December 31, 1996, no officer of
the Company other than Theodore N. Gillette, Chief Executive Officer and Richard
L. Sanchez, Chief Development Officer, received compensation in excess of
$100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
----------------
NAME AND PRINCIPAL POSITION YEAR SALARY
- --------------------------- ---- ---------
<S> <C> <C>
Theodore N. Gillette, O.D., Chief Executive Officer......... 1996 $189,072
Richard L. Sanchez, Chief Development Officer............... 1996 143,984
</TABLE>
EMPLOYMENT AGREEMENTS
Theodore N. Gillette, O.D. and Richard L. Sanchez have each entered into
Employment Agreements with the Company (the "Employment Agreements"), pursuant
to which they have agreed to serve as the Company's Chief Executive Officer and
Chief Development Officer, respectively. Each Employment Agreement is for a term
of five years ending on September 30, 2001, and is renewable for subsequent
one-year terms by mutual agreement of the parties. Dr. Gillette and Mr. Sanchez
will receive annual base salaries of not less than $220,000 and $180,000,
respectively, which are subject to review by the Compensation Committee of the
Board of Directors at annual intervals and may be adjusted from time to time as
the Compensation Committee deems to be appropriate. Under the Employment
Agreements, Dr. Gillette and Mr. Sanchez have agreed to devote their best
efforts and substantially all of their business time and services to the
business and affairs of the Company. Dr. Gillette and Mr. Sanchez will each be
eligible for annual incentive bonuses, up to 50% of their annual base salary, in
an amount to be determined by the Compensation Committee to the extent that the
Company achieves certain performance measures set by the Committee. Dr. Gillette
and Mr. Sanchez are also entitled to receive stock options or other stock awards
under the Company's Stock Incentive Plan to the extent that the Compensation
Committee determines such awards to be appropriate. Each Employment Agreement
provides that in the event that employment is terminated by the Company other
than (i) for cause, (ii) upon death or disability, or (iii) upon voluntary
termination by the employee, such employee will be entitled to receive from the
Company monthly payments equal to one-twelfth of the employee's annual base
salary for each month during the remaining term of such Employment Agreement,
but not less than twenty-four months. In the event of a change in control (as
defined in the Employment Agreements), each Employment Agreement provides that
if such employee's employment is terminated other than for cause within twelve
months following a change of control of the Company, the Company shall pay such
employee thirty-six monthly payments of one-twelfth of the sum of such
employee's base salary plus his previous year's bonus. Each Employment Agreement
also contains a covenant not to compete with the Company for a period of
twenty-four months following termination of employment.
The Company and Richard T. Welch are parties to an Employment Agreement
(the "Employment Agreement"), pursuant to which Mr. Welch has agreed to serve as
Chief Financial Officer of the Company. The term of the Employment Agreement is
for two years ending on August 31, 1998, and is renewable for subsequent
one-year terms by mutual agreement of the parties. Under the Employment
Agreement, Mr. Welch will receive an annual base salary of not less than
$150,000 which is subject to review by the Compensation Committee of the Board
of Directors at annual intervals and may be adjusted from time to time as the
Compensation Committee deems to be appropriate. Under the Employment Agreement,
Mr. Welch has agreed to devote his best efforts and substantially all of his
business time and services to the business and affairs of the Company. Mr. Welch
will be eligible for annual incentive bonuses, up to 50% of his annual base
salary, in an amount to be determined by the Compensation Committee of the Board
of Directors to the extent that the Company achieves certain performance
measures set by the Committee. Under the Employment
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Agreement, Mr. Welch received non-statutory stock options to purchase 80,000
shares of Common Stock pursuant to the Company's Stock Incentive Plan. The
options are exercisable at a price of $3.11 per share and vest pro rata on an
equal basis over a four-year period, except that in the event of an initial
public offering by the Company, Mr. Welch will be permitted to exercise options
as to 64,000 of the shares at such time. Additionally, in June 1997 Mr. Welch
received non-statutory stock options to purchase 20,000 shares of Common Stock
pursuant to the Company's Stock Incentive Plan. The options are exercisable at
the initial offering price and vest equally on April 1, 1999 and April 1, 2000.
Mr. Welch is also entitled to receive such additional stock options or other
stock awards under the Company's Stock Incentive Plan to the extent the
Compensation Committee determines such awards to be appropriate. The Employment
Agreement provides that in the event that employment is terminated by the
Company other than (i) for cause, (ii) upon death or disability, or (iii) upon
voluntary termination by the employee, such employee shall be entitled to
receive from the Company a series of monthly payments equal to one-twelfth of
the employee's annual base salary for each month during the remaining term of
such Employment Agreement, but not less than twelve months. In the event of a
change in control (as defined in the Employment Agreement), the Employment
Agreement provides that if such employee's employment is terminated other than
for cause within twelve months following a change of control of the Company, the
Company shall pay such employee a series of twelve monthly payments of
one-twelfth of the sum of such employee's base salary plus his previous year's
bonus. The Employment Agreement also contains a covenant not to compete with the
Company for a period of twelve months following termination of employment.
STOCK OPTION PLANS
In July 1996, the Board of Directors adopted, and the stockholders of the
Company approved, the 1996 Stock Incentive Plan (the "Incentive Plan") and the
1996 Affiliated Professionals Stock Plan (the "Professionals Plan," and together
with the Incentive Plan, the "Plans"). The purpose of the Plans is to provide
non-employee directors, officers, key employees, advisors and medical
professionals employed by Affiliated Practices with additional incentives by
increasing their proprietary interest in the Company or tying a portion of their
compensation to increases in the price of the Company's Common Stock. The
aggregate number of shares of Common Stock subject to the Plans is 1,600,000
shares.
The Incentive Plan permits the Company to grant incentive stock options
("ISOs"), as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), nonqualified stock options ("Nonqualified Options"), stock
appreciation rights ("SARs"), restricted shares of Common Stock ("Restricted
Shares") and performance shares of Common Stock (individually, an "Award" and
collectively, "Awards") to directors, officers, key employees and consultants of
the Company. The Professionals Plan permits the Company to grant Awards of
Nonqualified Stock Options, SARs and Restricted Shares to medical professionals
employed by Affiliated Practices. The various types of Awards are described in
more detail below.
The Incentive Plan is intended to qualify for favorable treatment under
Section 16 of the Exchange Act pursuant to Rule 16b-3 promulgated thereunder
("Rule 16b-3") and Awards under the Incentive Plan are intended to qualify for
treatment as "performance-based compensation" under Section 162(m) of the
Internal Revenue Code ("Section 162(m)"). Following the consummation of this
Offering, the Plans will be administered by the Compensation Committee, which
will be comprised of two or more non-employee directors who are "disinterested"
within the meaning of Rule 16b-3 and Section 162(m) (the "Committee"). The
Committee will have, subject to the terms of the Plans, the sole authority to
grant Awards under the Plans, to construe and interpret the Plans and to make
all other determinations and take any and all actions necessary or advisable for
the administration of the Plans. Prior to the consummation of this Offering, the
Plans have been administered by the Company's full Board of Directors.
Options. Options for the purchase of shares of the Common Stock may be
granted under both Plans. The exercise price for the ISOs granted under the
Incentive Plan may be no less than the fair market value of the Common Stock on
the date of grant (or 110% in the case of ISOs granted to employees owning more
than 10% of the Common Stock). Only employees of the Company are eligible to
receive ISOs. The exercise price for Nonqualified Options granted under the
Plans will generally be the fair market value of the Common
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Stock on the date of grant; however, the Compensation Committee may set an
exercise price at less than fair market value if it determines that special
circumstances warrant a lower price. Options will be exercisable during the
period specified in each option agreement and will generally be exercisable in
installments pursuant to a vesting schedule to be designated by the Committee.
No Option will remain exercisable later than ten years after the date of grant
(or five years from the date of grant in the case of ISOs granted to holders of
more than 10% of the Common Stock).
SARs. Stock appreciation rights may be granted under both Plans in tandem
with Options. An SAR represents the right to receive from the Company the
difference (the "Spread"), or a percentage thereof not in excess of 100 percent,
between the exercise price of the related Option and the market value of the
Common Stock on the date of exercise of the SAR. SARs may only be exercised at a
time when the related Option is exercisable and the Spread is positive, and the
exercise requires the surrender of the related Option for cancellation. The
amount payable by the Company upon exercise may be paid in cash, Common Stock or
a combination thereof, as determined by the Committee.
Restricted Shares. Restricted Shares may be granted under both Plans. An
award of Restricted Shares involves the immediate issuance by the Company to a
participating employee of ownership of a specific number of shares of Common
Stock in consideration of the performance of services. The employee is entitled
immediately to voting, dividend and other ownership rights in the shares. The
issuance may be made without additional consideration, or for payment of an
amount that is less than the market value of the shares on the date of grant, as
the Committee may determine. Restricted Shares must be subject to a "substantial
risk of forfeiture" for a period to be determined by the Committee. An example
of such forfeiture would be a provision that the employee's Restricted Shares
would be forfeited if he or she ceased to serve the Company as an officer at any
time before the end of a specified period of years. In order to enforce these
forfeiture provisions, the transferability of Restricted Shares will be
prohibited or restricted in a manner and to the extent prescribed by the
Committee for the period during which the forfeiture provisions are to continue.
The Committee may also condition the vesting of the Restricted Shares on the
achievement of specified performance objectives ("Management Objectives").
Performance Shares. Performance Shares may be granted under the Incentive
Plan. A Performance Share is the equivalent of one share of Common Stock. An
Incentive Plan participant may be granted any number of Performance Shares. The
participant will be given one or more Management Objectives to meet within a
specified period (the "Performance Period"). Maximum or minimum level of
acceptable achievement for each Management Objective will be established by the
Committee. If, by the end of the Performance Period, the specified Management
Objectives have been satisfied, the participant will be deemed to have fully
earned the Performance Shares. If the Management Objectives have not been
satisfied in full but predetermined minimum level of acceptable achievement has
been attained or exceeded, the participant will be deemed to have partly earned
the Performance Shares in accordance with a predetermined formula. To the extent
earned, the Performance Shares will be paid to the participant at the time and
in the manner determined by the Committee in cash or in shares of Common Stock
or any combination thereof.
Management Objectives may be described in terms of either Company-wide
objectives or objectives that are related to the performance of a department or
function within the Company or with respect to which the participant provides
services. The Committee may adjust any Management Objectives and the related
minimum level of acceptable achievement if, in its judgment, transactions or
events have occurred after the date of grant that are unrelated to the
participant's performance and result in distortion of the Management Objectives
or the related minimum level of acceptable achievement.
Notwithstanding the provisions of any agreement relating to an Award, in
the event of a change or threatened "change in control" (as defined in the
Plans) of the Company and in the event of certain mergers and reorganizations of
the Company, the Committee will have the discretion to (i) declare all Options
immediately exercisable, (ii) determine that all or any portion of conditions
associated with a Restricted Share or Performance Share award have been met,
(iii) grant SARs or cash bonus awards to holders of outstanding Options, (iv)
pay cash in exchange for the cancellation of Nonqualified Options, SARs,
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<PAGE> 56
Performance Share Awards or Restricted Shares, or (v) make other adjustments or
amendments to the Plans and outstanding Awards and/or substitute new Awards.
The Company anticipates that prior to or upon the consummation of this
Offering it will have outstanding options to purchase a total of approximately
682,667 shares of Common Stock which are generally exercisable for a period of
ten years from the date of grant, are subject to three to five year vesting, and
have an exercise price equal to fair market value on the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
To date executive compensation has been determined by the Company's chief
executive officer. Shortly after completion of the Offering, the Company intends
to establish a Compensation Committee of the Board of Directors, a majority of
whom will be independent directors.
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CERTAIN TRANSACTIONS
The information set forth herein briefly describes transactions over the
past three years between the Company and its directors, officers and 5%
stockholders. These transactions have been approved by the Company's Board of
Directors. Future transactions after the Offering, if any, with affiliated
parties will be approved by a majority of the Company's independent directors
and will be on terms no less favorable to the Company than those that could be
obtained from unaffiliated parties.
As part of a reorganization of the Company in November 1996, the Company
completed an acquisition of all the outstanding stock of Vision 21 Managed
Eyecare of Tampa Bay, Inc. in exchange for a certain number of shares of Common
Stock of the Company. In addition, in November 1996, the Company completed an
acquisition of all of the outstanding stock of Dr. Gillette & Associates, Inc.
(renamed Vision 21 Physician Practice Management Company). The shareholders of
these entities acquired by the Company were Theodore Gillette, Richard Sanchez
and Peter Fontaine. Dr. Gillette and Mr. Sanchez are executive officers and
directors of the Company and Mr. Fontaine is a director of the Company. In
connection with these transactions, Gillette, Sanchez and Fontaine received an
aggregate of 1,724,574, 600,302 and 360,442 shares of Common Stock,
respectively.
Effective December 1, 1996 the Company acquired all the business assets of
Gillette, Beiler & Associates, #6965 P.A. ("G&A"), a Florida professional
association owned in part by Theodore Gillette, an executive officer and
director of the Company, with nine optometry offices located in Tampa, Port
Richey, Clearwater, St. Petersburg, Palm Harbor, and Seminole, Florida. As
consideration for the acquisition, G&A received 373,971 shares of Common Stock,
of which Dr. Gillette is the beneficial owner of 196,064 shares, and a
promissory note in the amount of $416,103, which bears interest at 8% per annum.
The promissory note will be paid in full from the net proceeds of the Offering.
The Company has an agreement to provide practice management services to
G&A, pursuant to which G&A made payments of $392,206, $423,890 and $538,982 in
1994, 1995 and 1996, respectively. In December 1996, the Company and G&A entered
into a new Management Agreement pursuant to which the Company provides practice
management services for a management fee equal to a gross percentage of the
revenue of G&A's eye care practice. Payments earned by the Company under the new
Management Agreement in the three months ended March 31, 1997 were $292,895.
The Company entered into an Agreement with Bruce S. Maller, a director of
the Company, dated May 10, 1996, pursuant to which the Company issued to Maller
144,705 shares of Common Stock for services previously rendered by Mr. Maller to
the Company. In October 1996, the Company finalized a five-year Advisory
Agreement with Mr. Maller (the "Advisory Agreement"), pursuant to which Mr.
Maller agreed to render certain advisory services to the Company, including the
identification and integration of ophthalmology practices and the provision of
assistance to the Company with its strategic planning, growth and development.
In consideration for such services, the Company issued to Mr. Maller 135,165
shares of Common Stock. A decreasing percentage of such shares are subject to
forfeiture in the event the Advisory Agreement is terminated "for cause" prior
to January 1, 2000. The shares issued to Mr. Maller pursuant to the Advisory
Agreement are subject to certain piggyback and demand registration rights. See
"Description of Capital Stock -- Registration Rights."
The Company entered into a Services Agreement with the BSM Consulting Group
("BSM"), a consulting company which employs Mr. Maller, dated as of March 10,
1996 (the "Services Agreement"), pursuant to which BSM agreed to provide
substantial consulting services to assist the Company with its operational and
management development. The Services Agreement is for a term of five years and
the fees payable to BSM for such services are approximately $40,000 per month.
Payments earned by BSM under the Services Agreement were $332,128 and $120,912
in 1996 and the three months ended March 31, 1997, respectively.
The Company borrowed $3.0 million from Mr. Fontaine pursuant to a
Promissory Note dated June 1996 (the "Fontaine Note"). The Fontaine Note accrues
interest at 8% per annum and is due in full upon completion of the Company's
initial public offering, and will be repaid in full from the proceeds of the
initial
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public offering. In addition, the Company borrowed $200,000 and $500,000 from
Mr. Fontaine in November and December 1996, respectively, for working capital
pursuant to unsecured promissory notes. The unsecured promissory notes each bear
interest at 8.5% per annum and are due in January 1998.
Effective September 9, 1996, the Company entered into a Services Agreement
(the "Services Agreement") with Dr. Richard L. Lindstrom, a director of the
Company, who pursuant to the Services Agreement provides certain consulting and
advisory services primarily related to assisting the Company in the
identification and integration of Affiliated Providers into the Company's
managed eye care delivery network and assistance in the development of
Affiliated Provider practices. In consideration for his services, Dr. Lindstrom
is paid an annual base salary of $60,000 and received 108,132 shares of Common
Stock, of which 40% is non-forfeitable and the remaining 60% is subject to
forfeiture in various amounts if the Services Agreement is terminated by the
Company for cause or by Dr. Lindstrom prior to August 31, 2000. The shares
issued to Dr. Lindstrom pursuant to the Services Agreement are subject to
certain piggyback and demand registration rights. See "Description of Capital
Stock -- Registration Rights."
Effective December 1, 1996, the Company acquired all the business assets of
Lindstrom, Samuelson and Hardten Ophthalmology Associates, P.A. ("Lindstrom
P.A."), in which Dr. Lindstrom owns a majority interest, at a purchase price of
247,108 shares of Common Stock of the Company, of which Lindstrom received
151,732 shares, and a promissory note in the amount of $460,416. The shares are
subject to certain registration rights. See "Description of Capital
Stock -- Registration Rights." In connection with the acquisition, Lindstrom
P.A. and the Company entered into a Management Agreement which provides for a
management fee of 30% of the amounts remaining after certain expenses are paid
as set forth in the Management Agreement. The Company earned fees of $63,283
under the Management Agreement in the three months ended March 31, 1997. The
promissory note bears interest at 8% per annum will be paid in full from the net
proceeds of this Offering.
The Company acquired all of the stock of Midwest Eye Care Alliance, Inc.
("M.E.C.A."), a corporation in which Dr. Lindstrom owned an 8% interest, for a
total purchase price of $700,000, which is payable upon completion of the
Company's initial public offering. The Company also entered into Regional
Services Agreements with the shareholders of M.E.C.A., including Dr. Lindstrom
(collectively the "Coordinators"), effective at the time of an initial public
offering of the Company (collectively the "Regional Agreements"). The Regional
Agreements provide for the Coordinators to render advisory services to the
Company in connection with identifying potential ophthalmology and optometry
practices in the Midwestern region of the United States for acquisition or
affiliation and assisting the Company in negotiating agreements with such
practices in exchange for specific cash compensation that varies among the
Regional Agreements. Dr. Lindstrom will receive a total of $40,000 per year for
each of three years for his advisory services.
Effective December 1, 1996, the Company acquired all the business assets of
Eye Institute of Southern Arizona, P.C. ("Eye Institute"), an Arizona
professional corporation located in Tucson, Arizona and engaged in the provision
of ophthalmology services. Jeffrey I. Katz, M.D., a director of the Company,
owns a 50% interest in Eye Institute. The acquisition was accomplished by a
merger of Eye Institute into the Company's wholly-owned subsidiary, Vision 21 of
Southern Arizona, Inc. As consideration for the acquisition, Dr. Katz received
198,306 shares Common Stock. The shares are subject to certain registration
rights. See "Description of Capital Stock -- Registration Rights." As a result
of the merger of Eye Institute with and into Vision 21 of Southern Arizona,
Inc., Vision 21 of Southern Arizona, Inc. assumed Eye Institute's role as
business manager under a Management Agreement between Eye Institute and Vital
Sight, P.C., a newly-formed Arizona professional corporation to which Eye
Institute had transferred its medical assets prior to the merger. The Management
Agreement provides for a management fee of 35% of the amounts remaining after
certain expenses are paid as set forth in the Management Agreement. The Company
earned fees of $150,937 under the Management Agreement in the three months ended
March 31, 1997. Upon satisfaction of certain conditions in the future, the
Company and the shareholders of Eye Institute will transfer certain ASC assets
from such shareholders' wholly-owned corporation to a new, wholly-owned
corporation which is currently subject to a Management Agreement with Vision
Twenty-One of Southern Arizona, Inc. The parties have agreed to use their best
efforts to satisfy the conditions. Income associated with such ASC line of
business would thereafter become subject to the business management fee. The
obligation to transfer the ASC business
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shall terminate if the conditions of closing are not met within eighteen months
of the closing date of the merger of Eye Institute into Vision Twenty-One of
Southern Arizona, Inc. As consideration for this transaction, the shareholders
of Eye Institute are entitled, subject to post-closing adjustments, to receive
140,271 shares of Common Stock.
Effective December 1, 1996, the Company acquired all the business assets of
(i) Dr. Smith & Associates, #6950 P.A. ("Smith #6950"), a Florida professional
association, (ii) Dr. Smith & Associates, #6958 P.A. ("Smith #6958"), a Florida
professional association, and (iii) Dr. Smith & Associates, #6966 P.A. ("Smith
#6966"), a Florida professional association. Dr. Paul R. Smith, a Selling
Shareholder, is the sole shareholder of all such professional associations. The
acquisitions were accomplished by the merger of Smith #6950 into the Company and
a sale of the business assets of Smith #6958 and Smith #6966 to the Company. As
consideration for the acquisitions, (i) Dr. Smith, the sole shareholder of Smith
#6950, received 32,808 shares of Common Stock, (ii) Smith #6958 received 68,758
shares of Common Stock and a promissory note in the amount of $72,421 which
bears interest at 8% per annum, and (iii) Smith #6966 received 68,759 shares of
Common Stock and a promissory note in the amount of $72,421 which bears interest
at 8% per annum. The shares are subject to certain registration rights. See
"Description of Capital Stock -- Registration Rights." The Company has agreed to
provide practice management services to Smith #6950, #6958 and #6966. In
December 1996, the Company and Smith #6958 and #6966 entered into new Management
Agreements, and the Company assumed Smith #6950's role as business manager of a
new Management Agreement between Smith #6950 and Smith #6952 (a newly formed
professional association to which Smith #6958 had transferred its optometric
assets prior to the merger), pursuant to which the Company provides practice
management services. Payments earned by the Company pursuant to the new
Management Agreements were $80,736 for the three months ended March 31, 1997.
Effective December 1, 1996, the Company acquired (i) all the business
assets of Daniel B. Feller, M.D., P.C. ("Feller"), an Arizona professional
corporation with two offices in Phoenix, Arizona and one office in Scottsdale,
Arizona, engaged in the provision of ophthalmology services, (ii) all the
business assets of Eye Specialists of Arizona Network, P.C. ("Network"), an
Arizona professional corporation located in Scottsdale, Arizona and engaged in a
managed care business, and (iii) all the business assets of Sharona Optical,
Inc. ("Sharona"), an Arizona corporation located in Scottsdale, Arizona and
engaged in a retail optical business. Dr. Daniel B. Feller, an officer of the
Company, is the sole shareholder of Feller, Network and Sharona. Such
acquisitions were accomplished by a merger of Feller into the Company and a sale
of the assets of Network and Sharona to the Company. Sharona also transferred
all of its optical assets to Feller in connection with the acquisitions. As
consideration for the acquisitions, (i) Dr. Feller as the sole shareholder of
Feller received 144,869 shares of Common Stock, (ii) Network received 71,670
shares of Common Stock and a promissory note in the amount of $88,614 which
bears interest at 8% per annum, and (iii) Sharona received 63,983 shares of
Common Stock and a promissory note in the amount of $61,837 which bears interest
at 8% per annum. The shares are subject to certain registration rights. See
"Description of Capital Stock -- Registration Rights." As a result of the merger
of Feller with and into the Company, the Company assumed Feller's role as
Business Manager under a Management Agreement between Feller and Millennium
Vision, P.C., a newly-formed Arizona professional corporation to which Feller
had transferred its medical assets prior to the merger. The Management Agreement
provides for a management fee of 36.7% of the amounts remaining after certain
expenses are paid as set forth in the Management Agreement. The Company earned
fees of $203,360 under the Management Agreement in the three months ended March
31, 1997.
Effective May 1, 1997, the Company acquired all the medical assets of Drs.
Smith, Porter & Associates, P.A. ("Smith P.A."). Dr. Paul R. Smith is the sole
shareholder of Smith P.A and a Selling Shareholder. The acquisition was
accomplished by a sale of the business assets of Smith P.A. by the Company. As
consideration for the acquisition, Smith P.A. received 11,411 shares of Common
Stock, $29,065 in cash and a promissory note in the amount of $18,865. The
shares are subject to certain registration rights. In May 1997, the Company and
Smith P.A. entered into a Management Agreement pursuant to which the Company
will provide practice management services.
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<PAGE> 60
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Company's outstanding Common Stock as of June 30, 1997 and as
adjusted to reflect the sale of the Common Stock offered hereby by (i) each
person or entity known by the Company to be the beneficial owners of more than
5% of the outstanding shares of Common Stock, (ii) each director or executive
officer of the Company who beneficially owns any shares of Common Stock, (iii)
each Selling Stockholder and (iv) all directors and executive officers of the
Company as a group. Except as otherwise indicated, the persons listed below have
sole voting and investment power with respect to all shares of Common Stock
owned by them, except to the extent such power may be shared with a spouse. The
table assumes that the underwriters' over-allotment option is exercised in full.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER OFFERING
SHARES BENEFICIALLY IF OVER-ALLOTMENT
OWNED PRIOR TO PERCENT BENEFICIALLY OPTIONS ARE
THE OFFERING(2) OWNED AFTER OFFERING IF NUMBER OF SHARES EXERCISED IN FULL(2)
NAME AND ADDRESS ------------------------ OVER-ALLOTMENT OPTIONS SUBJECT TO ------------------------
OF BENEFICIAL OWNER(1) NUMBER PERCENT ARE NOT EXERCISED OVER-ALLOTMENT OPTIONS(3) NUMBER PERCENT
- ---------------------- --------------- ------- ------------------------- ------------------------- --------------- -------
<S> <C> <C> <C> <C> <C> <C>
DIRECTORS AND
EXECUTIVE OFFICERS
Gillette Family
Limited
Partnership(4)...... 1,702,494 27.9% 20.7% -- 1,702,494 20.2%
Theodore N. Gillette,
O.D.(5)............. 1,898,558 31.1 23.1 12,000 1,886,558 22.4
Sanchez Family Limited
Partnership(6)...... 593,329 9.7 7.2 12,000 581,329 6.9
Richard L.
Sanchez(7).......... 593,329 9.7 7.2 -- 581,329 6.9
Peter J. Fontaine..... 360,422 5.9 4.4 -- 360,422 4.3
Richard L. Lindstrom,
M.D.(8)............. 231,686 3.8 2.8 11,590 220,096 2.6
Bruce S. Maller(9).... 270,331 4.4 3.3 13,523 256,808 3.1
BSM Investments
Ltd................. 108,976 1.8 1.3 -- 108,976 1.3
Jeffrey I. Katz,
M.D................. 268,406 4.4 3.3 -- 268,406 3.2
Richard T.
Welch(10)........... 64,000 1.0 * -- 64,000 *
All directors and
executive officers
as a group (8
persons)............ 3,686,732 59.7 44.5 49,113 3,637,619 42.9
OTHER 5% STOCKHOLDER
Piper Jaffray
Healthcare Fund II
Limited
Partnership(11)..... 333,333 5.2 3.9 -- 333,333 3.8
OTHER SELLING
STOCKHOLDERS
Robert Kennedy,
O.D.(12)............ 76,895 1.3 * 3,847 73,048 *
Thomas Samuelson,
M.D.(8)............. 41,185 * * 2,060 39,125 *
David R. Hardten,
M.D.(8)............. 82,369 1.3 1.0 4,121 78,248 *
Gregory W. Kraupa,
O.D................. 31,572 * * 1,579 29,993 *
Bradley D. Richter,
O.D................. 31,572 * * 1,579 29,993 *
Jerald Turner,
M.D.(13)............ 129,398 2.1 1.6 6,473 122,925 1.5
William J. Fishkind,
M.D................. 163,858 2.7 2.0 8,197 155,661 1.9
Brock K. Bakewell,
M.D................. 163,858 2.7 2.0 8,197 155,661 1.9
Paul R. Smith, O.D.... 181,736 3.0 2.2 8,521 173,215 2.1
Mark Beiler, O.D...... 36,312 * * 1,817 34,495 *
Mark Salta, O.D....... 23,971 * * 1,199 22,772 *
Daniel Palmisano,
O.D................. 21,054 * * 1,053 20,001 *
Richard L. Short,
D.O................. 128,541 2.1 1.6 6,430 122,111 1.5
ACFS Limited
Partnership(14)..... 29,053 * * 15,511 13,542 *
</TABLE>
- ---------------
* Less than one percent.
(1) Unless otherwise indicated, the address of each of the beneficial owners
identified is 7209 Bryan Dairy Road, Largo, Florida 34647. See
"Management -- Directors and Executive Officers," "Management -- Employment
Agreements" and "Certain Transactions" for discussion of any material
relationship which any Selling Stockholder has had with the Company within
the past three years.
(2) Based on 6,112,681 shares of Common Stock outstanding prior to this
Offering (excluding 79,805 shares held in escrow in conjunction with
certain acquisitions, the "Contingent Shares") and 8,212,681 shares of
Common Stock to be outstanding immediately after the Offering excluding
Contingent Shares 8,407,984 shares to be outstanding if the Company's and
the Selling Shareholder's over-allotment
59
<PAGE> 61
options to purchase from the Company and the Selling Shareholders up to an
additional 315,000 shares of Common Stock granted to the several
underwriters are exercised in full, excluding Contingent Shares). Pursuant
to the rules of the Securities and Exchange Commission (the "Commission"),
certain shares of Common Stock which a person has the right to acquire
within 60 days of the date hereof pursuant to the exercise of stock options
are deemed to be outstanding for the purpose of computing the percentage
ownership of such person but are not deemed outstanding for the purpose of
computing the percentage ownership of any other person.
(3) Excludes 219,303 shares covered by over-allotment options granted to the
several underwriters by the Company.
(4) Shares are owned by the Gillette Family Limited Partnership, a Nevada
Limited Partnership, in which Dr. Theodore Gillette exercises voting
control.
(5) Represents (a) 1,702,494 shares owned by the Gillette Family Limited
Partnership over which Dr. Theodore Gillette has voting control as the sole
shareholder of the corporate general partners (b) 9,077 shares owned by
Gillette, Beiler & Associates, P.A. and (c) 186,987 shares owned
individually. See "Certain Transactions."
(6) Shares are owned by the Sanchez Family Limited Partnership, a Nevada
Limited Partnership in which Richard L. Sanchez exercises voting control.
(7) Represents 593,329 shares owned by the Sanchez Family Limited Partnership
over which Richard L. Sanchez has voting control.
(8) Excludes an aggregate of 56,356 shares held in escrow in connection with
the Company's acquisition of the business assets of Lindstrom, Samuelson,
Hardten Ophthalmology, P.A., for Messrs. Lindstrom, Samuelson and Hardten
of 28,178, 9,393 and 18,785 respectively.
(9) Includes 108,976 owned by BSM Investment, Ltd., over which Bruce Maller has
voting control.
(10) Represents shares issuable pursuant to options to purchase an aggregate of
80,000 shares, of which 64,000 shares vest and are fully exercisable at the
time of the Offering.
(11) Represents shares issuable to Piper Jaffray Healthcare Fund II Limited
Partnership, c/o Piper Jaffray Ventures, Inc. Piper Jaffray Tower, 222
South Ninth Street, Minneapolis, Minnesota 55401 pursuant to warrants
exercisable at the time of completion of the Offering.
(12) Excludes 6,209 shares held in escrow in connection with the Company's
acquisition of the business assets of J&R Kennedy, O.D., P.A.
(13) Excludes 17,240 shares held in escrow in connection with the Company's
acquisition of the business assets of Jerald B. Turner, M.D., P.A.
(14) ACFS Limited Partnership, c/o Advent International, 101 Federal Street,
Boston, Massachusetts 02110.
60
<PAGE> 62
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of (i) 50,000,000
shares of Common Stock, $.001 par value per share (the "Common Stock"), and (ii)
10,000,000 shares of preferred stock, $.001 par value per share (the "Preferred
Stock"). As of June 1, 1997, an aggregate of 8,212,681 shares of Common Stock
were outstanding and held of record by 28 stockholders and no shares of
Preferred Stock were outstanding. Copies of the Articles of Incorporation and
Bylaws have been filed as exhibits to the Registration Statement and are
incorporated by reference herein.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to the prior rights of the
holders of Preferred Stock, holders of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors from funds legally
available therefor, and to share ratably in the assets of the Company legally
available for distribution to the stockholders in the event of liquidation or
dissolution. The Common Stock has no preemptive rights and no subscription or
redemption privileges. The Common Stock does not have cumulative voting rights,
which means the holder or holders of more than half of the shares voting for the
election of directors can elect all the directors then being elected. See
"Principal and Selling Shareholders." All the outstanding shares of Common Stock
are, and the shares being offered hereby will be, when issued and paid for,
fully paid and not liable for further call or assessment.
WARRANTS
In December 1996, the Company issued to certain unrelated parties warrants
exchangeable for an aggregate maximum of 208,333 shares of Common Stock at an
exchange price ranging from $6.00 to $7.11 per share, or in a cashless exchange
for a reduced number of shares pursuant to a formula. The warrants are
exchangeable at any time up through the earlier of December 19, 2003 or five
years from the date of any initial public offering by the Company.
In February 1997, the Company issued to Piper Jaffray Healthcare Fund II
Limited Partnership ("Piper Jaffray") a warrant exchangeable for an aggregate
maximum of 333,333 shares of Common Stock at an exchange price ranging from
$6.00 to $7.11, or in a cashless exchange for a reduced number of shares
pursuant to a formula. The warrants are exchangeable at any time up through the
earlier of December 19, 2003 or five years from the date of any initial public
offering by the Company.
In April 1997, the Company entered into a credit facility in the aggregate
amount of $4.7 million with Prudential, pursuant to the Note and Warrant
Purchase Agreement. Under the Note and Warrant Purchase Agreement, the Company
sold to Prudential for $320,000 a warrant exchangeable for 210,000 shares of
Common Stock at any time during the five-year period commencing at the effective
date of the Company's initial public offering, at an exercise price per share
equal to the initial public offering price. See "Underwriting," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 11 to Notes to Consolidated Financial Statements.
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of Preferred Stock.
The Preferred Stock may be issued from time to time in one or more series, and
the Board of Directors is authorized to fix the dividend rights, dividend rates,
any conversion or exchange rights, any voting rights, rights and terms of
redemption (including sinking fund provisions), the redemption price or prices,
the liquidation preferences and any other rights, preferences, privileges and
restrictions of any series of Preferred Stock and the number of shares
constituting such series and the designation thereof. The Company has no present
plans to issue any shares of Preferred Stock.
61
<PAGE> 63
Depending upon the rights of such Preferred Stock, the issuance of
Preferred Stock could have an adverse effect on holders of Common Stock by
delaying or preventing a change in control of the Company, making removal of the
present management of the Company more difficult or resulting in restrictions
upon the payment of dividends and other distributions to the holders of Common
Stock.
CERTAIN FLORIDA LEGISLATION
The Company is subject to (i) the Florida Control Share Act, which
generally provides that shares acquired in excess of certain specified
thresholds will not possess any voting rights unless such voting rights are
approved by a majority vote of the corporation's disinterested shareholders, and
(ii) the Florida Fair Price Act, which generally requires supermajority approval
by disinterested directors or shareholders of certain specified transactions
between a corporation and holders of more than 10% of the outstanding shares of
the corporation (or their affiliates).
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION
AND BYLAWS
Certain provisions of the Articles of Incorporation and the Bylaws of the
Company could have an anti-takeover effect. These provisions are intended to
enhance the likelihood of continuity and stability in the composition of the
Board of Directors of the Company and in the policies formulated by the Board of
Directors and to discourage certain types of transactions, described below,
which may involve an actual or threatened change of control of the Company. The
provisions are designed to reduce the vulnerability of the Company to an
unsolicited proposal for a takeover of the Company that does not contemplate the
acquisition of all of its outstanding shares or an unsolicited proposal for the
restructuring or sale of all or part of the Company. The provisions are also
intended to discourage certain tactics that may be used in proxy fights. The
Board of Directors believes that, as a general rule, such takeover proposals
would not be in the best interests of the Company and its stockholders.
Classified Board of Directors. The Articles of Incorporation provide for
the Board of Directors to be divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of the Board of
Directors will be elected each year.
The Board of Directors believes that a classified Board of Directors will
help to assure the continuity and stability of the Board of Directors and the
business strategies and policies of the Company as determined by the Board of
Directors, because the likelihood of continuity and stability in the composition
of the Company's Board of Directors and in the policies formulated by the Board
will be enhanced by staggered three-year terms.
The classified board provision could have the effect of discouraging a
third party from making a tender offer or otherwise attempting to obtain control
of the Company, even though such an attempt might be beneficial to the Company
and its stockholders. In addition, the classified board provision could delay
stockholders who do not agree with the policies of the Board of Directors from
removing a majority of the Board for two years, unless they can show cause and
obtain the requisite vote. See "Number of Directors; Removal" below.
Special Meetings of Stockholders. The Articles of Incorporation provide
that no business may be brought up by a stockholder at a meeting of stockholders
except in accordance with certain provisions set forth in the Articles. Such
provisions require a minimum amount of notice to the Company of any such
business and certain disclosures relating to the business intended to be brought
up.
Amendment of Certain Provisions of the Articles of Incorporation. The
Articles of Incorporation requires the affirmative vote of the holders of at
least 80% of the votes entitled to be cast by the holders of all then
outstanding shares of voting stock in order to amend the Articles' provisions
relating to (i) the classified board, (ii) the method of bringing up business at
stockholders' meetings, (iii) the limitation on the liability of directors, (iv)
indemnification of officers and directors, and (v) the required vote to amend
the foregoing provisions. These voting requirements will make it more difficult
for stockholders to make changes in the Articles which would be designed to
facilitate the exercise of control over the Company. In addition, the
62
<PAGE> 64
requirement for approval by at least an 80% stockholder vote will enable the
holders of a minority of the voting securities of the Company to prevent the
holders of a majority or more of such securities from amending such provisions
of the Articles.
Number of Directors; Removal. The Articles of Incorporation provide that
the Board of Directors will consist of between two and fifteen members, the
exact number to be fixed from time to time by resolution adopted by a majority
of the directors then in office. The Company currently has eight directors and
no vacancies. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, the Articles provide that directors of the Company may
be removed only for cause and only by the affirmative vote of holders of a
majority of the outstanding shares of voting stock. This provision will preclude
a stockholder from removing incumbent directors without cause and simultaneously
gaining control of the Board of Directors by filling the vacancies created by
such removal with its own nominees.
REGISTRATION RIGHTS
The Company has granted holders of 3,048,903 shares of Common Stock
received in connection with the Company's acquisitions of the allowable assets
of certain optometric and ophthalmology practices certain piggyback and demand
registration rights pursuant to registration rights agreements. In general, each
holder has piggyback registration rights with respect to a maximum of 60% (30%
of which may be registered pursuant to an initial public offering) of such
holder's shares in the event the Company proposes to file a registration
statement under the Securities Act of 1933 for the purposes of effecting an
underwritten public offering of shares of the Company's Common Stock. Each
holder also has demand registration rights, which are effective one year after
completion of an initial public offering, to obligate the Company to file up to
two registration statements covering shares that were not registered in a prior
registration statement up to the 60% maximum. These rights expire two years from
the date of completion of an initial public offering and are subject to certain
conditions and limitations, including the right of the Company to limit the
number of shares included in the registration statement to the amount
recommended by the managing underwriter. The Company is obligated to pay all
costs and expenses of the registration statement except for underwriting
discounts, fees and commissions.
The Company has granted certain piggyback and demand registration rights to
Bruce Maller and Richard Lindstrom with respect to a total of 378,463 shares of
Common Stock. Following an initial public offering of Common Stock of the
Company, in the event the Company proposes to file a registration statement
under the Securities Act for purposes of effecting a public offering of the
Company's Common Stock, Maller and Lindstrom will be entitled to include up to
20% of their shares in the registration statement. If Maller and Lindstrom are
unable to sell 20% of their shares pursuant to such piggyback registration
rights, they may require the Company, on one occasion, to file a registration
statement under the Securities Act registering such number of shares as is
necessary to permit them to sell the full 20%. These rights expire upon the
expiration of their respective advisory and services agreements with the Company
and are subject to certain conditions and limitations, including the right of
the Company to limit the number of shares included in the registration statement
to the amount recommended by the managing underwriter. The Company is obligated
to pay all costs and expenses of the registration statement except for
underwriting discounts, fees and commissions.
The Company has granted certain piggyback and demand registration rights to
Prudential, Piper Jaffray and certain unrelated parties (the "Warrant Holders")
with respect to a maximum total of 751,666 shares of Common Stock underlying the
warrants issued to the Warrant Holders. In the event the warrants are exchanged
for shares, the Warrant Holders have piggyback registration rights with respect
to the shares in the event the Company proposes to file a registration statement
under the Securities Act for purposes of effecting a public offering of shares
of the Common Stock. Each of the Warrant Holders also have demand registration
rights to obligate the Company at any time after six months from the date of any
public offering, on one occasion, to use its best efforts to file a registration
statement covering any or all shares not registered in a prior registration
statement. These rights are subject to certain conditions and limitations,
including the right of the Company to limit the number of shares in the
registration to the amount recommended by the managing
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<PAGE> 65
underwriter. The Company is obligated to pay all costs and expenses of the
registration statement except for underwriting discounts, fees and commissions.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
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<PAGE> 66
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 8,212,681 shares of
Common Stock outstanding. Of these shares, the 2,100,000 shares offered hereby
will be freely tradeable without restriction or further registration under the
Securities Act (2,415,000 if the Underwriters' over-allotment options are
exercised in full) unless purchased by "affiliates" of the Company as that term
is defined in Rule 144 under the Securities Act. The remaining 6,112,681 shares
outstanding are "Restricted Securities" as that term is defined in Rule 144 and
fall into three categories: (i) 2,830,023 shares held by "affiliates" who have
already held their shares for more than one year, (ii) 1,223,479 shares held by
affiliates who have not held their shares for more than one year and (iii)
2,059,179 shares held by non-affiliates who have not held their shares for more
than one year. In addition, 1,600,000 shares of Common Stock are reserved under
the Plans for exercise of stock options granted by the Company, of which options
to purchase approximately 682,667 shares have been granted (the "Option
Shares"). See "Management -- Stock Option Plans." Finally, 751,666 shares of
Common Stock are reserved for issuance in the event the warrants issued to
Prudential, Piper Jaffray and certain unrelated parties are exercised (the
"Warrant Shares"). See "Description of Capital Stock -- Warrants" and
"Underwriting."
The Restricted Securities may not be sold unless they are registered under
the Securities Act or are sold pursuant to an exemption from registration, such
as the exemption provided by Rule 144. Rule 144 imposes certain restrictions and
limitations on resale. In general, under Rule 144 as currently in effect, any
affiliate of the Company or any person (or persons whose shares are aggregated
in accordance with the Rule), who has beneficially owned Restricted Securities
for at least one year would be entitled to sell, within any three-month period a
number of such shares that does not exceed the greater of 1% of the then
outstanding shares of Common Stock (approximately 82,126 shares after the
Offering), or the reported average weekly trading volume of the Common Stock on
the Nasdaq National Market during the four calendar weeks preceding the date on
which notice of the sale is filed with the Commission. Sales under Rule 144 are
also subject to certain manner of sale restrictions and notice requirements and
to the availability of current public information concerning the Company. A
person (or persons whose shares are aggregated) who is not an "affiliate" of the
Company at any time during the 90 days preceding a sale, and who has
beneficially owned such shares for at least two years, is currently entitled to
sell such shares under Rule 144(k) without regard to the availability of current
public information, volume limitations, manner of sales provisions or notice
requirements. Beginning 90 days after the date of this Prospectus, 2,820,484
Restricted Securities held by affiliates will be eligible for sale in the public
market pursuant to Rule 144, but are subject to certain "lock-up" agreements
described below and beginning September 9, 1997; December 31, 1997; January 15,
1998; and May 1, 1998, respectively, 43,252; 375,983; 592,788; and 11,411
Restricted Securities held by affiliates will be eligible for sale in the public
market pursuant to Rule 144 unless otherwise registered pursuant to certain
registration rights agreements, but are subject to certain lock-up and other
contractual arrangements described below. Beginning on December 31, 1997;
January 15, 1998; April 1, 1998; and May 1, 1998, respectively, 275,860;
898,610; 128,541; and 169,150 Restricted Securities held by non-affiliates will
be eligible for sale on the public market pursuant to Rule 144 unless otherwise
registered pursuant to certain registration rights agreements, but are subject
to certain lock-up and other contractual agreements related to Rule 144
described below.
The Company and certain of its officers and directors which include
affiliates and the Selling Stockholders holding 4,828,106 Restricted Securities,
have executed agreements pursuant to which each has agreed not to, directly or
indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or any other securities
convertible into, or exercisable or exchangeable for, Common Stock or other
capital stock of the Company or any right to purchase or acquire Common Stock or
other capital stock of the Company, for a period of 180 days after the date of
this Prospectus, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, except for bona fide gifts or
transfers effected by such stockholders other than on any securities exchange or
in the over-the-counter market to donees or transferees that agree to be bound
by similar agreements and except for sales made by the Selling Stockholders
pursuant to options granted to the Underwriters to purchase an additional
315,000 shares to cover over-allotment
65
<PAGE> 67
options, if any. Prudential Securities Incorporated may, in its sole discretion,
at any time and without notice, release all or any portion of the shares of
Common Stock subject to such agreements. In addition, certain non-affiliates of
the Company holding 1,472,161 Restricted Securities have entered into
contractual 180-day lock-up agreements with the Company similar to the above
agreements which prohibit the direct or indirect disposition of shares without
the prior written consent of the Company. Such non-affiliates have also
contractually agreed with the Company to be bound by the same Rule 144
restrictions placed on affiliates of the Company.
The Option Shares are subject to all the limitations on resale imposed by
Rule 701. In general, shares subject to Rule 701 are subject to the resale
restrictions of Rule 144. However, with respect to resales by non-affiliates, 90
days after the date of this Prospectus, the Option Shares may be resold without
conformance with Rule 144 except for its manner of sale limitation. With respect
to resale of Option Shares by affiliates, 90 days after the date of this
Prospectus, all Rule 144 limitations continue to apply except the one-year
holding period. Additionally, the Company intends to file one or more
registration statements under the Securities Act to register all shares of
Common Stock subject to then outstanding stock options and Common Stock issuable
pursuant to the Plans. The Company expects to file these registration statements
promptly following the closing of the Offering, and such registration statements
are expected to become effective upon filing. Shares covered by these
registration statements will thereupon be eligible for sale in the public
markets, subject to lock-up agreements, to the extent applicable. See
"Management." The Warrant Shares are also subject to registration rights
agreements requiring the Company to register such shares under certain
circumstances and otherwise will be eligible for resale subject to all of the
limitations on resale imposed by Rule 144.
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<PAGE> 68
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated, and Wheat, First Securities, Inc. are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions contained in the Underwriting Agreement, to purchase from
the Company the number of shares of Common Stock set forth below opposite their
respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ------------------------------------------------------------ ---------
<S> <C>
Prudential Securities Incorporated..........................
Wheat, First Securities, Inc................................
---------
Total................................................ 2,100,000
=========
</TABLE>
The Company and the Selling Stockholders are obligated to sell, and the
Underwriters are obligated to purchase, all the shares of Common Stock offered
hereby if any are purchased.
The Underwriters, through their Representatives, have advised the Company
and the Selling Stockholders that they propose to offer the Common Stock
initially at the public offering price set forth on the cover page of this
Prospectus; that the Underwriters may allow to selected dealers a concession of
$ per share; and that such dealers may reallow a concession of
$ per share to certain other dealers. After the initial public
offering, the offering price and the concessions may be changed by the
Representatives.
The Company and the Selling Stockholders have granted the Underwriters
options, exercisable for 30 days from the date of this Prospectus, to purchase
up to 315,000 additional shares of Common Stock at the initial public offering
price, less underwriting discounts and commissions, as set forth on the cover
page of this Prospectus. The Underwriters may exercise such options solely for
the purpose of covering over-allotments incurred in the sale of the shares of
Common Stock offered hereby. To the extent such options are exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number set
forth next to such Underwriter's name in the preceding table bears to
.
The Company's officers and directors, who in the aggregate will
beneficially own approximately 3,515,000 shares of Common Stock upon the
completion of the Offering (assuming the Underwriters' over-allotment options
are exercised in full) and the Company, the Selling Stockholders and certain
other stockholders of the Company, have agreed not to, directly or indirectly,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any shares of Common Stock or other capital stock or any
securities convertible into, or exercisable or exchangeable for, any share of
Common Stock or other capital stock of the Company or any right to purchase or
acquire Common Stock or other capital stock of the Company, for a period of 180
days after the date of this Prospectus without the prior written consent of
Prudential Securities Incorporated, on behalf of the Underwriters, other than
pursuant to, stock issued by the Company in connection with acquisitions, the
exercise of currently outstanding stock options and except for bona fide gifts
or transfers effected by such stockholders other than on any securities exchange
or in the over-the-counter market to donees or transferees that agree to execute
and be bound by such agreements, except for sales made by the Selling
Stockholders pursuant to options granted to the Underwriters to purchase an
additional 315,000 shares to cover over-allotments, if any. Prudential
Securities Incorporated may, in its sole discretion, at any time and without
prior notice, release all or any portion of the shares of Common Stock subject
to such agreement.
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<PAGE> 69
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
The Representatives have informed the Company and the Selling Stockholders
that the Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined through negotiations among the Company and the
Representatives. Among the factors to be considered in making such determination
will be prevailing market conditions, the Company's financial and operating
history and condition, its prospects and the prospects of the industry in
general, the management of the Company, and the market prices of securities for
companies in businesses similar to that of the Company.
In connection with the Offering, certain Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M under the Securities Exchange Act of 1934,
pursuant to which such persons may bid for or purchase Common Stock for the
purpose of stabilizing its market price. The Underwriters also may create a
short position for the account of the Underwriters by selling more Common Stock
in connection with the Offering than they are committed to purchase from the
Company and in such case may purchase Common Stock in the open market following
completion of the Offering to cover all or a portion of such short position. The
Underwriters may also cover all or a portion of such short position, up to
315,000 shares of Common Stock, by exercising the Underwriters' over-allotment
options referred to above. In addition, Prudential Securities Incorporated, on
behalf of the Underwriters, may impose "penalty bids" under contractual
arrangements with the Underwriters whereby it may reclaim from an Underwriter
(or any selling group member participating in the Offering) for the account of
the other Underwriters, the selling concession with respect to Common stock that
is distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph are required, and, if they are
undertaken, they may be discontinued at any time.
In June 1997, an affiliate of Prudential Securities Incorporated, loaned an
aggregate of $4.7 million to the Company. The loan is represented by a senior
secured note that bears interest at 10% per annum, payable monthly, and is due
at the earlier of January 1, 1998 or upon completion of an initial public
offering. In connection with the loan, the Company has sold to Prudential for
$320,000 a warrant to purchase 210,000 shares of Common Stock at a purchase
price per share equal to the initial public offering price. The shares of Common
Stock underlying the warrant are accorded one demand registration right
exercisable at any time during the warrant exercise period and unlimited
piggyback registration rights exercisable at any time between one and seven
years after the warrants are issued. See "Description of Capital
Stock -- Warrants" and "-- Registration Rights," and "Shares Eligible for Future
Sale."
Under the Conduct Rules of the National Association of Securities Dealers,
Inc. ("NASD"), because more than ten percent of the net proceeds from the
Offering are intended to be used to repay the loan made by Prudential, the
public offering price can be no higher than that recommended by a "qualified
independent underwriter" meeting certain standards. In accordance with the
requirement, Wheat, First Securities, Inc. will serve in such role and will
recommend a price in compliance with the requirements of the NASD Conduct Rules.
Wheat, First Securities, Inc., in its role as qualified independent underwriter,
will perform a due diligence investigation and has reviewed and participated in
the preparation of this Prospectus and the registration statement of which this
Prospectus forms a part. In accordance with the NASD Conduct Rules, no NASD
member participating in the distribution is permitted to confirm sales to
accounts over which it exercises discretionary authority without prior specific
written consent.
68
<PAGE> 70
LEGAL MATTERS
Certain legal matters in connection with the sale of the shares of Common
Stock offered hereby will be passed upon for the Company and certain of the
Selling Stockholders by Shumaker, Loop & Kendrick, LLP, Tampa, Florida and for
the Underwriters by King & Spalding, Atlanta, Georgia.
EXPERTS
The financial statements of the following entities, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent certified public accountants, to the extent indicated in their
reports thereon also appearing elsewhere herein and the Registration Statement:
- Vision Twenty-One, Inc. and Subsidiaries
- Northwest Eye Specialists, P.L.L.C.
- Cambridge Eye Clinic, P.A. -- John W. Lahr, Optometrist, P.A. and
Eyeglass Express Optical Lab, Inc.
- J & R Kennedy, O.D., P.A. and Roseville Opticians, Inc.
- Lindstrom, Samuelson & Hardten Ophthalmology Associates, P.A. and Vision
Correction Centers, Inc.
- Jerald B. Turner, M.D., P.A.
- Eye Institute of Southern Arizona, P.C.
- Optometric Eye Care Centers, P.A.
- Dr. Smith and Associates, P.A. #6950, Dr. Smith and Associates, P.A.
#6958, and Dr. Smith and Associates, P.A. #6966
- Daniel B. Feller, M.D., P.C., d/b/a Paradise Valley Eye Specialists; Eye
Specialists of Arizona Network, P.C.; and Sharona Optical, Inc.
- Gillette, Beiler & Associates, P.A.
Such financial statements have been included herein in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1, together with all exhibits and schedules thereto, the "Registration
Statement," including amendments thereto, under the Securities Act with respect
to the Common Stock offered hereby. This Prospectus omits certain of the
information contained in the Registration Statement, and reference is hereby
made to the Registration Statement and related exhibits and schedules for
further information with respect to the Company and the Common Stock offered
hereby. Any statements contained herein concerning the provisions of any
document are not necessarily complete, and in each such instance reference is
made to the copy of such document filed as an exhibit to the Registration
Statement. Each such statement is qualified in its entirety by such reference.
The Registration Statement and the exhibits and schedules forming a part thereof
can be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, DC 20549, and
should also be available for inspection and copying at the following regional
offices of the Commission: 7 World Trade Center, Suite 1300, New York, New York
10048; and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Registration Statement may also be obtained
through the Commission's Internet address at "http://www.sec.gov".
The Company intends to furnish to its stockholders annual reports,
containing audited financial statements and a report thereon by the Company's
independent public accountants, and quarterly reports for the first three fiscal
quarters of each fiscal year, containing certain unaudited interim financial
information.
69
<PAGE> 71
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Basis of Presentation....................................... F-4
Unaudited Pro Forma Consolidated Statements of
Operations -- Year Ended December 31, 1996................ F-5
Unaudited Pro Forma Consolidated Statements of
Operations -- Three-Month Period Ended March 31, 1997..... F-6
Unaudited Pro Forma Consolidated Balance Sheet as of March
31, 1997.................................................. F-7
Notes to Unaudited Pro Forma Consolidated Financial
Information............................................... F-8
FINANCIAL STATEMENTS OF VISION TWENTY-ONE, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants.......... F-11
Consolidated Balance Sheets as of December 31, 1995 and 1996
and March 31, 1997 (Unaudited)............................ F-12
Consolidated Statements of Operations for the Years Ended
December 31, 1994, 1995 and 1996 and the Three-Month
Periods Ended March 31, 1996 and 1997 (Unaudited)......... F-13
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1994, 1995 and 1996 and
the Three-Month Period Ended March 31, 1997 (Unaudited)... F-14
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996 and the Three-Month
Periods Ended March 31, 1996 and 1997 (Unaudited)......... F-15
Notes to Consolidated Financial Statements.................. F-17
FINANCIAL STATEMENTS OF EYE INSTITUTE OF SOUTHERN ARIZONA, P.C.
Report of Independent Certified Public Accountants.......... F-30
Balance Sheets as of December 31, 1995 and November 30,
1996...................................................... F-31
Statements of Operations for the Year Ended December 31,
1995 and Eleven-Month Period Ended November 30, 1996...... F-32
Statements of Stockholders' Equity (Deficit) for the Year
Ended December 31, 1995 and Eleven-Month Period Ended
November 30, 1996......................................... F-33
Statements of Cash Flows for the Year Ended December 31,
1995 and for the Eleven-Month Period Ended November 30,
1996...................................................... F-34
Notes to Financial Statements............................... F-35
</TABLE>
F-1
<PAGE> 72
FINANCIAL STATEMENTS OF
DANIEL B. FELLER, M.D., P.C., D/B/A
PARADISE VALLEY EYE SPECIALISTS;
EYE SPECIALISTS OF ARIZONA NETWORK, P.C.;
AND SHARONA OPTICAL, INC.
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Certified Public Accountants.......... F-39
Combined Balance Sheets as of December 31, 1995 and November
30, 1996.................................................. F-40
Combined Statements of Income for the Year Ended December
31, 1995 and for the Eleven-Month Period Ended November
30, 1996.................................................. F-41
Combined Statements of Stockholders' Equity for the Year
Ended December 31, 1995 and the Eleven-Month Period Ended
November 30, 1996......................................... F-42
Combined Statements of Cash Flows for the Year Ended
December 31, 1995 and for the Eleven-Month Period Ended
November 30, 1996......................................... F-43
Notes to Combined Financial Statements...................... F-44
FINANCIAL STATEMENTS OF NORTHWEST EYE SPECIALISTS, P.L.L.C.
Report of Independent Certified Public Accountants.......... F-50
Balance Sheets as of December 31, 1995 and November 30,
1996...................................................... F-51
Statements of Income for the Year Ended December 31, 1995
and for the Eleven-Month Period Ended November 30, 1996... F-52
Statements of Partners' Equity for the Year Ended December
31, 1995 and for the Eleven-Month Period Ended November
30, 1996.................................................. F-53
Statements of Cash Flows for the Year Ended December 31,
1995 and for the Eleven-Month Period Ended November 30,
1996...................................................... F-54
Notes to Financial Statements............................... F-55
FINANCIAL STATEMENTS OF LINDSTROM, SAMUELSON & HARDTEN
OPHTHALMOLOGY ASSOCIATES, P.A. AND
VISION CORRECTION CENTERS, INC.
Report of Independent Certified Public Accountants.......... F-59
Combined Balance Sheets as of December 31, 1995 and November
30, 1996.................................................. F-60
Combined Statements of Operations for the Year Ended
December 31, 1995 and for the Eleven-Month Period Ended
November 30, 1996......................................... F-61
Combined Statements of Stockholders' Equity for the Year
Ended December 31, 1995 and for the Eleven-Month Period
Ended November 30, 1996................................... F-62
Combined Statements of Cash Flows for the Year Ended
December 31, 1995 and for the Eleven-Month Period Ended
November 30, 1996......................................... F-63
Notes to Combined Financial Statements...................... F-64
FINANCIAL STATEMENTS OF CAMBRIDGE EYE CLINIC, P.A. --
JOHN W. LAHR, OPTOMETRIST, P.A. AND
EYEGLASS EXPRESS OPTICAL LAB, INC.
Report of Independent Certified Public Accountants.......... F-69
Combined Balance Sheets as of December 31, 1995 and November
30, 1996.................................................. F-70
Combined Statements of Operations for the Year Ended
December 31, 1995 and for the Eleven-Month Period Ended
November 30, 1996......................................... F-71
Combined Statements of Stockholders' Equity for the Year
Ended December 31, 1995 and for the Eleven-Month Period
Ended December 31, 1996................................... F-72
Combined Statements of Cash Flows for the Year Ended
December 31, 1995 and for the Eleven-Month Period Ended
November 30, 1996......................................... F-73
Notes to Combined Financial Statements...................... F-74
FINANCIAL STATEMENTS OF OPTOMETRIC EYE CARE CENTERS, P.A.
Report of Independent Certified Public Accountants.......... F-80
Balance Sheets as of December 31, 1995 and November 30,
1996...................................................... F-81
Statements of Income for the Year Ended December 31, 1995
and for the Eleven-Month Period Ended November 30, 1996... F-82
</TABLE>
F-2
<PAGE> 73
<TABLE>
<S> <C>
Statements of Stockholders' Equity for the Year Ended
December 31, 1995 and for the Eleven-Month Period Ended
November 30, 1996......................................... F-83
Statements of Cash Flows for the Year Ended December 31,
1995 and for the Eleven-Month Period Ended November 30,
1996...................................................... F-84
Notes to Financial Statements............................... F-85
FINANCIAL STATEMENTS OF JERALD B. TURNER, M.D., P.A.
Report of Independent Certified Public Accountants.......... F-89
Balance Sheets as of December 31, 1995 and November 30,
1996...................................................... F-90
Statements of Income for the Year Ended December 31, 1995
and for the Eleven-Month Period Ended November 30, 1996... F-91
Statements of Stockholder's Equity for the Year Ended
December 31, 1995 and for the Eleven-Month Period Ended
November 30, 1996......................................... F-92
Statements of Cash Flows for the Year Ended December 31,
1995 and for the Eleven-Month Period Ended November 30,
1996...................................................... F-93
Notes to Financial Statements............................... F-94
FINANCIAL STATEMENTS OF GILLETTE, BEILER & ASSOCIATES, P.A.
Report of Independent Certified Public Accountants.......... F-97
Balance Sheets as of December 31, 1995 and November 30,
1996...................................................... F-98
Statements of Operations for the Year Ended December 31,
1995 and for the Eleven-Month Period Ended November 30,
1996...................................................... F-99
Statements of Stockholders' Deficit for the Year Ended
December 31, 1995 and for the Eleven-Month Period Ended
November 30, 1996......................................... F-100
Statements of Cash Flows for the Year Ended December 31,
1995 and for the Eleven-Month Period Ended November 30,
1996...................................................... F-101
Notes to Financial Statements............................... F-102
FINANCIAL STATEMENTS OF J&R KENNEDY, O.D., P.A.
AND ROSEVILLE OPTICIANS, INC.
Report of Independent Certified Public Accountants.......... F-106
Combined Balance Sheets as of December 31, 1995 and November
30, 1996.................................................. F-107
Combined Statements of Income for the Year Ended December
31, 1995 and for the Eleven-Month Period Ended November
30, 1996.................................................. F-108
Combined Statements of Stockholders' Equity for the Year
Ended December 31, 1995 and for the Eleven-Month Period
Ended November 30, 1996................................... F-109
Combined Statements of Cash Flows for the Year Ended
December 31, 1995 and for the Eleven-Month Period Ended
November 30, 1996......................................... F-110
Notes to Combined Financial Statements...................... F-111
FINANCIAL STATEMENTS OF DR. SMITH AND ASSOCIATES, P.A.
#6950, DR. SMITH AND ASSOCIATES,
P.A. #6958, AND DR. SMITH AND
ASSOCIATES P.A. #6966
Report of Independent Certified Public Accountants.......... F-116
Combined Balance Sheets as of December 31, 1995 and November
30, 1996.................................................. F-117
Combined Statements of Income for the Year Ended December
31, 1995 and for the Eleven-Month Period Ended November
30, 1996.................................................. F-118
Combined Statements of Stockholders' Equity for the Year
Ended December 31, 1995 and for the Eleven-Month Period
Ended November 30, 1996................................... F-119
Combined Statements of Cash Flows for the Year Ended
December 31, 1995 and for the Eleven-Month Period Ended
November 30, 1996......................................... F-120
Notes to Combined Financial Statements...................... F-121
</TABLE>
F-3
<PAGE> 74
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
BASIS OF PRESENTATION
Effective December 1, 1996, Vision Twenty-One, Inc. (the "Company")
acquired substantially all of the assets, primarily consisting of accounts
receivable, leases, contracts, equipment and other tangible and intangible
assets (the "business assets") and assumed certain liabilities of 10
ophthalmology and optometry practices located in Minnesota, Arizona and Florida
(the "1996 Acquisitions"). In conjunction with the 1996 Acquisitions, the
Company entered into various business management agreements (the "Management
Agreements") with the professional associations operating those practices. In
March 1997, the Company acquired the business assets of an ophthalmology
practice located in Florida (the "Pinellas Acquisition"). In conjunction with
the Pinellas Acquisition, the Company entered into a Management Agreement with
the professional association operating that practice. Between May 1, 1997 and
July 31, 1997, the Company acquired the business assets of four eye care
practices and an ASC located in Arizona and Florida and entered into a
Management Agreement with each of the four professional associations operating
the practices and the entity operating the ASC (the "Recent Acquisitions"). The
1996 Acquisitions, the Pinellas Acquisition and the Recent Acquisitions, are
collectively referred to as the "Acquisitions." Each of the Acquisitions has
been accounted for by recording the assets and liabilities at fair value and
allocating the remaining cost to the related management agreements.
The following unaudited pro forma consolidated financial statements are
based on the historical consolidated financial statements of the Company,
adjusted to give effect to the transactions described below. The unaudited pro
forma consolidated statements of operations of the Company for the year ended
December 31, 1996 give effect to the following transactions as if they had
occurred on January 1, 1996: (i) the 1996 Acquisitions, (ii) the Pinellas
Acquisition, (iii) the Recent Acquisitions, and (iv) the Offering and the
application of the estimated net proceeds therefrom. The unaudited pro forma
consolidated statements of operations of the Company for the three-month period
ended March 31, 1997 give effect to the following transactions as if they had
occurred on January 1, 1997: (i) the Pinellas Acquisition (ii) the Recent
Acquisitions, and (iii) the Offering and the application of the estimated net
proceeds therefrom. The unaudited pro forma consolidated balance sheet of the
Company as of March 31, 1997 gives effect to the Recent Acquisitions at that
date and the consummation of the Offering and the application of the estimated
net proceeds therefrom, as described under "Use of Proceeds."
The unaudited pro forma consolidated financial statements are based on the
historical financial statements of the Company and the professional entities
which owned the business assets which were the subject of the Acquisitions and
give effect to the Acquisitions and the Offering and the assumptions and
adjustments described in the notes thereto. The unaudited pro forma consolidated
financial information does not purport to indicate what the results of
operations or financial conditions would have been if the Acquisitions and the
Offering had been effected on the dates indicated or to project future results
of operations or financial condition of the Company. Such pro forma financial
information should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto.
F-4
<PAGE> 75
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ACQUISITION PRO FORMA OFFERING CONSOLIDATED
COMPANY ADJUSTMENTS CONSOLIDATED ADJUSTMENTS AFTER OFFERING
----------- ----------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Revenues:
Managed care............. $ 7,315,196 $ 1,268,000(1) $ 8,583,196 $ 8,583,196
Practice management
fees.................. 1,942,843 29,877,000(2) 31,819,843 31,819,843
Other revenue............ 305,654 3,000(1) 308,654 308,654
----------- ----------- ----------- -----------
9,563,693 31,148,000 40,711,693 40,711,693
Operating expenses:
Medical claims........... 9,128,659 1,140,000(1) 10,268,659 10,268,659
Practice management
expenses.............. 1,244,173 25,098,000(2) 26,342,173 26,342,173
Salaries, wages and
benefits.............. 1,889,395 38,000(1) 1,927,395 1,927,395
Business development..... 1,926,895 -- 1,926,895 1,926,895
General and
administrative........ 1,208,678 166,000(1) 1,374,678 1,374,678
Depreciation and
amortization.......... 126,046 1,364,000(3) 1,490,046 1,490,046
----------- ----------- ----------- -----------
15,523,846 27,806,000 43,329,846 43,329,846
----------- ----------- ----------- -----------
Income (loss) from
operations............... (5,960,153) 3,342,000 (2,618,153) (2,618,153)
Interest expense........... 159,484 204,000(4) 363,484 $(359,000)(5) 4,484
----------- ----------- ----------- --------- -----------
Income (loss) before income
taxes.................... (6,119,637) 3,138,000 (2,981,637) (359,000) (2,622,637)
Income taxes............... -- -- -- -- --
----------- ----------- ----------- --------- -----------
Net income (loss).......... $(6,119,637) $ 3,138,000 $(2,981,637) $(359,000) $(2,622,637)
=========== =========== =========== ========= ===========
Net loss per common
share.................... $ (1.02) $ (0.45) $ (0.36)(6)
=========== =========== ===========
Weighted average number of
common shares
outstanding.............. 5,979,543 6,576,100 7,372,440(6)
=========== =========== ===========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial
information.
F-5
<PAGE> 76
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
THREE-MONTH PERIOD ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ACQUISITION PRO FORMA OFFERING CONSOLIDATED
COMPANY ADJUSTMENTS CONSOLIDATED ADJUSTMENTS AFTER OFFERING
---------- ----------- ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues:
Managed care............. $2,762,978 $ -- $ 2,762,978 $2,762,978
Practice management
fees.................. 4,838,478 3,685,000(2) 8,523,478 8,523,478
Other revenue............ 116,889 -- 116,889 116,889
---------- ---------- ----------- ----------
7,718,345 3,685,000 11,403,345 11,403,345
Operating expenses:
Medical claims........... 2,338,071 -- 2,338,071 2,338,071
Practice management
expenses.............. 3,931,452 3,203,000(2) 7,134,452 7,134,452
Salaries, wages and
benefits.............. 1,045,535 -- 1,045,535 1,045,535
General and
administrative........ 413,897 -- 413,897 413,897
Depreciation and
amortization.......... 231,605 102,000(3) 333,605 333,605
---------- ---------- ----------- ----------
7,960,560 3,305,000 11,265,560 11,265,560
---------- ---------- ----------- ----------
Income (loss) from
operations............... (242,215) 380,000 137,785 137,785
Interest expense........... 227,107 -- 227,107 $(221,000)(5) 6,107
---------- ---------- ----------- --------- ----------
Income (loss) before income
taxes.................... (469,322) 380,000 (89,322) (221,000) 131,678
Income taxes............... -- -- -- -- --
---------- ---------- ----------- --------- ----------
Net income (loss).......... $ (469,322) $ 380,000 $ (89,322) $(221,000) $ 131,678
========== ========== =========== ========= ==========
Net income (loss) per
common share............. $ (0.08) $ (0.01) $ 0.02(6)
========== =========== ==========
Weighted average number of
common shares
outstanding.............. 5,979,543 6,576,100 7,372,440(6)
========== =========== ==========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial
information.
F-6
<PAGE> 77
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED
HISTORICAL ACQUISITION PRO FORMA OFFERING AFTER
COMPANY ADJUSTMENT CONSOLIDATED ADJUSTMENTS OFFERING
----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.... $ 1,072,275 $ -- $ 1,072,275 $11,870,869(8) $12,943,144
Accounts receivable.......... 2,052,738 -- 2,052,738 2,052,738
Other receivables............ 748,293 -- 748,293 748,293
Prepaid expenses and other
current assets............. 192,385 -- 192,385 192,385
----------- ---------- ----------- ----------- -----------
Total current
assets............. 4,065,691 -- 4,065,691 11,870,869 15,936,560
Fixed assets, net.............. 2,130,420 -- 2,130,420 2,130,420
Intangible assets.............. 13,340,413 6,747,000(7) 20,087,413 20,087,413
Deferred offering costs........ 332,792 -- 332,792 (332,792)(8) --
Other assets................... 98,762 -- 98,762 98,762
----------- ---------- ----------- ----------- -----------
Total assets.......... $19,968,078 $6,747,000 $26,715,078 $11,538,077 $38,253,155
=========== ========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable............. $ 308,015 $ -- $ 308,015 $ 308,015
Accrued expenses............. 1,417,929 -- 1,417,929 1,417,929
Accrued acquisition
expenses................... 1,441,849 -- 1,441,849 $(1,441,849)(8) --
Accrued compensation......... 938,414 -- 938,414 938,414
Due to Managed Professional
Associations............... 276,346 -- 276,346 276,346
Current portion of long-term
debt....................... 4,361,577 -- 4,361,577 (3,619,290)(8) 742,287
Current portion of
obligations under capital
leases..................... 53,838 -- 53,838 53,838
Medical claims payable....... 1,425,962 -- 1,425,962 1,425,962
----------- ---------- ----------- ----------- -----------
Total current
liabilities........ 10,223,930 -- 10,223,930 (5,061,139) 5,162,791
Deferred rent payable.......... 277,079 -- 277,079 277,079
Obligations under capital
leases....................... 100,321 -- 100,321 100,321
Long-term debt, less current
portion...................... 5,993,510 -- 5,993,510 (5,936,784)(8) 56,726
Stockholders' equity:
Common stock................. 5,336 777(7) 6,113 2,100(8) 8,213
Additional paid-in capital... 11,920,467 6,746,223(7) 18,666,690 22,533,900(8) 41,200,590
Deferred compensation........ (489,960) -- (489,960) (489,960)
Accumulated deficit.......... (8,062,605) -- (8,062,605) (8,062,605)
----------- ---------- ----------- ----------- -----------
Total stockholders'
equity............. 3,373,238 6,747,000 10,120,238 22,536,000 32,656,238
----------- ---------- ----------- ----------- -----------
Total liabilities and
stockholders'
equity............. $19,968,078 $6,747,000 $26,715,078 $11,538,077 $38,253,155
=========== ========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial
information.
F-7
<PAGE> 78
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
(1) These adjustments to managed care revenue, medical claims, salaries,
wages and benefits, and general and administrative expenses reflect the results
of the managed care business of one of the managed professional entities
included in the 1996 Acquisitions, as follows:
<TABLE>
<CAPTION>
ELEVEN-MONTH
PERIOD ENDED
11/30/96
------------
<S> <C>
Revenues:
Managed care.............................................. $1,268,000
Other..................................................... 3,000
----------
1,271,000
----------
Expenses:
Medical claims............................................ 1,140,000
Salaries, wages and benefits.............................. 38,000
General and administrative................................ 166,000
----------
1,344,000
----------
Net loss.................................................... $ (73,000)
==========
</TABLE>
The unaudited pro forma consolidated statement of operations for the
three-month period ended March 31, 1997 did not include any acquisition
adjustments for managed care since the 1997 acquisitions did not include any
managed care companies.
(2) The practice management fees and practice management expenses for the
year ended December 31, 1996 reflect the pro forma additional practice
management fee revenue that would have been earned through the management of the
related managed professional entities under the Management Agreements if the
1996 Acquisitions (which were effective on December 1, 1996), the Pinellas
Acquisition and the Recent Acquisitions had occurred on January 1, 1996, less
approximately $479,000 earned by the Company on a historical basis through a
management agreement with managed professional entities included in the 1996
Acquisitions. The practice management fees and practice management expenses for
the three-month period ended March 31, 1997 reflect the pro forma additional
practice management fee revenue that would have been earned through the
management of the related managed professional entities under the Management
Agreements if the Pinellas Acquisition and the Recent Acquisitions had occurred
on January 1, 1997. This revenue represents reimbursement of practice management
expenses incurred by the Company, including depreciation of fixed assets. In
addition, the Company receives a percentage (ranging from 24 to 37 percent) of
the related managed professional entities net earnings before interest, taxes
and shareholder physician expenses, as determined under the related Management
Agreements.
F-8
<PAGE> 79
The following analysis summarizes the adjustments related to practice
management fees:
<TABLE>
<CAPTION>
ACQUISITION ADJUSTMENTS
---------------------------
ELEVEN-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED
11/30/96 3/31/97
------------ ------------
<S> <C> <C>
Practice management fee summary:
Reimbursement of practice management expenses:
Practice management expenses.............................. $25,098,000 $3,203,000
Depreciation and amortization............................. 1,219,000 87,000
----------- ----------
26,317,000 3,290,000
Share of Managed Professional Associations' net earnings.... 4,039,000 395,000
----------- ----------
30,356,000 3,685,000
Less management fee earned by the Company through a
management agreement with a Managed Professional
Association for the eleven-month period ended November 30,
1996...................................................... (479,000) --
----------- ----------
Practice management fee revenue............................. $29,877,000 $3,685,000
=========== ==========
</TABLE>
The pro forma adjustments for practice management fees and practice
management expenses are based on the actual results of operations of the
individual practices, as adjusted for the terms of the Management Agreements.
While the Company expects the operations of the practices to improve under its
management, there can be no assurance that operations will not deteriorate.
However, the Company believes this information is the best available objective
information to evaluate the performance of the practices.
(3) Depreciation and amortization reflect depreciation of the related
managed professional entities' fixed assets acquired over their estimated useful
life and amortization of intangible assets over an average life of 25 years:
<TABLE>
<CAPTION>
ACQUISITION ADJUSTMENTS
---------------------------
ELEVEN-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED
11/30/96 3/31/97
------------ ------------
<S> <C> <C>
Fixed assets(a)............................................. $ 615,000 $ 23,000
Intangible assets(b)........................................ 749,000 79,000
----------- ----------
$ 1,364,000 $ 102,000
=========== ==========
</TABLE>
(a) Depreciation on fixed assets is calculated on a straight-line method
over the estimated useful lives of the various classes of assets, which range
from three to seven years.
(b) Amortization of intangible assets is calculated on a straight-line
method over an average life of 25 years.
(4) The adjustment to interest expense reflects the additional interest on
the notes issued and the debt assumed in conjunction with the 1996 Acquisitions
as if the 1996 Acquisitions occurred on January 1, 1996, as follows:
<TABLE>
<CAPTION>
CARRYING
AMOUNT INTEREST INTEREST
DESCRIPTION 12/31/96 RATE PERIOD EXPENSE
- ----------- ---------- -------- ----------------- --------
<S> <C> <C> <C> <C>
Unsecured notes payable issued to
stockholders of the Managed
Professional Associations on
12/1/96............................ $1,924,959 8.00% 1/1/96 -- 11/30/96 $141,000
Certain notes payable and capital
lease obligations assumed of the
Managed Professional Associations
on 12/1/96......................... 744,481 9.25% 1/1/96 -- 11/30/96 63,000
--------
$204,000
========
</TABLE>
F-9
<PAGE> 80
(5) The adjustment reflects the savings on interest expense due to the
repayment of debt discussed in note 8 as follows:
<TABLE>
<CAPTION>
ELEVEN-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED
11/30/96 3/31/97
------------ ------------
<S> <C> <C>
Unsecured notes payable, 8%................................. $274,000 $ 99,000
Senior subordinated note, 10%............................... 1,300 41,000
Senior subordinated note, 10%............................... -- 22,000
Certain notes payable and capital lease obligations,
9.25%..................................................... 83,700 --
Revolving line of credit, 9.50%............................. 59,000
-------- --------
$359,000 $221,000
======== ========
</TABLE>
(6) To reflect the pro forma net income (loss) per common share assuming an
increase in the weighted average number of outstanding shares to the extent
necessary to repay the existing indebtedness as shown in pro forma adjustment
(8), representing an increase of 796,340 shares.
(7) The adjustment reflects the Recent Acquisitions. The fair value of the
net assets and Management Agreements associated with the Recent Acquisitions is
expected to approximate $6,747,000 and will be financed through the issuance of
777,118 shares of the Company's Common Stock valued at $3.96 to $9.00 per share.
The acquisition adjustment assumes the fair value of the net business assets is
immaterial and, accordingly, allocates the entire fair value of $6,747,000 to
intangible assets, principally representing the fair value of the Management
Agreements.
(8) The adjustments reflect the net proceeds from the sale of 2,100,000
shares of Common Stock in the Offering at an assumed initial public offering
price of $12.00 per share, estimated to be approximately $22.5 million (after
deducting underwriting discounts and commissions and estimated offering
expenses) and the repayment of an aggregate of $9.6 million of outstanding
indebtedness. This adjustment excludes $4.0 million of additional indebtedness
incurred by the Company after March 31, 1997. See "Use of Proceeds".
F-10
<PAGE> 81
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Vision Twenty-One, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Vision
Twenty-One, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Vision Twenty-One, Inc. and subsidiaries at December 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Tampa, Florida
March 22, 1997,
except for Note 11, as to which the date is
July 29, 1997
ERNST & YOUNG LLP
F-11
<PAGE> 82
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 42,272 $ 67,353 $ 1,072,275
Accounts receivable, net of allowance for doubtful
accounts of $685,000 and $714,000 in 1996 and 1997,
respectively....................................... -- 1,968,587 2,052,738
Other receivables..................................... -- 185,263 748,293
Prepaid expenses and other current assets............. 999 192,789 192,385
----------- ----------- -----------
Total current assets.......................... 43,271 2,413,992 4,065,691
Fixed assets, net....................................... 98,726 1,941,259 2,130,420
Intangible assets, net of accumulated amortization of
$29,125 and $140,540 in 1996 and 1997, respectively... -- 11,022,396 13,340,413
Deferred offering costs................................. -- 287,792 332,792
Other assets............................................ 23,222 46,792 98,762
----------- ----------- -----------
Total assets.................................. $ 165,219 $15,712,231 $19,968,078
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................................... $ 99,931 $ 529,427 $ 308,015
Accrued expenses...................................... 1,617 946,519 1,417,929
Accrued acquisition expenses.......................... -- 1,362,012 1,441,849
Accrued compensation.................................. 55,872 546,740 938,414
Due to Managed Professional Associations.............. 27,741 -- 276,346
Note payable to related party......................... 250,000 -- --
Current portion of long-term debt ($2,624,959 to
related parties in 1997)........................... 51,127 48,249 4,361,577
Current portion of obligations under capital leases... -- 43,849 53,838
Medical claims payable................................ 1,056,141 1,793,861 1,425,962
----------- ----------- -----------
Total current liabilities..................... 1,542,429 5,270,657 10,223,930
Deferred rent payable................................... -- 263,006 277,079
Obligations under capital leases........................ -- 71,870 100,321
Long-term debt, less current portion ($9,288, $5,983,098
and $3,000,000 to related parties in 1995, 1996 and
1997, respectively)................................... 61,840 7,570,974 5,993,510
Stockholders' equity (deficit):
Preferred stock, $.001 par value; no shares authorized
in 1995 and 10,000,000 shares authorized in 1996
and 1997; no shares issued......................... -- -- --
Common stock, $.001 par value; 50,000,000 shares
authorized; 2,324,876 (1995), 3,715,625 (1996) and
5,335,563 (1997) shares issued and outstanding..... 2,325 3,716 5,336
Additional paid-in capital............................ 32,271 4,736,361 11,920,467
Common stock to be issued (1,491,397 shares in
1996).............................................. -- 5,905,965 --
Deferred compensation................................. -- (517,035) (489,960)
Accumulated deficit................................... (1,473,646) (7,593,283) (8,062,605)
----------- ----------- -----------
Total stockholders' equity (deficit).......... (1,439,050) 2,535,724 3,373,238
----------- ----------- -----------
Total liabilities and stockholders' equity
(deficit)................................... $ 165,219 $15,712,231 $19,968,078
=========== =========== ===========
</TABLE>
See accompanying notes.
F-12
<PAGE> 83
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------- -----------------------
1994 1995 1996 1996 1997
---------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Managed care..................... $ 668,590 $ 2,446,010 $ 7,315,196 $1,936,590 $2,762,978
Practice management fees
($392,206, $423,890 and
$479,004 from a related party
in 1994, 1995 and 1996,
respectively)................. 392,206 423,890 1,942,843 139,729 4,838,478
Other revenue.................... 131,098 211,746 305,654 24,015 116,889
---------- ----------- ----------- ---------- ----------
1,191,894 3,081,646 9,563,693 2,100,334 7,718,345
Operating expenses:
Medical claims................... 551,408 2,934,180 9,128,659 2,462,602 2,338,071
Practice management expenses..... -- -- 1,244,173 -- 3,931,452
Salaries, wages and benefits..... 537,864 903,966 1,889,395 299,571 1,045,535
Business development............. -- -- 1,926,895 -- --
General and administrative
(including $53,000 to related
parties for rent in 1996)..... 237,702 443,374 1,208,678 152,989 413,897
Depreciation and amortization.... 13,052 18,005 126,046 7,679 231,605
---------- ----------- ----------- ---------- ----------
1,340,026 4,299,525 15,523,846 2,922,841 7,960,560
---------- ----------- ----------- ---------- ----------
Loss from operations............... (148,132) (1,217,879) (5,960,153) (822,507) (242,215)
Interest expense................... 4,444 8,557 159,484 2,291 227,107
---------- ----------- ----------- ---------- ----------
Loss before income taxes........... (152,576) (1,226,436) (6,119,637) (824,798) (469,322)
Income taxes....................... -- -- -- -- --
---------- ----------- ----------- ---------- ----------
Net loss........................... $ (152,576) $(1,226,436) $(6,119,637) $ (824,798) $ (469,322)
========== =========== =========== ========== ==========
Net loss per common share.......... $ (0.03) $ (0.21) $ (1.02) $ (0.14) $ (0.08)
========== =========== =========== ========== ==========
Weighted average number of common
shares outstanding............... 5,979,543 5,979,543 5,979,543 5,979,543 5,979,543
========== =========== =========== ========== ==========
</TABLE>
See accompanying notes.
F-13
<PAGE> 84
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON TOTAL
COMMON STOCK ADDITIONAL STOCK STOCKHOLDERS'
------------------ PAID-IN TO BE DEFERRED ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL ISSUED COMPENSATION DEFICIT (DEFICIT)
--------- ------ ----------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994........... 2,324,876 $2,325 $ 54,185 -- $ -- $ (94,634) $ (38,124)
Net loss........................... -- -- -- -- -- (152,576) (152,576)
--------- ------ ----------- ---------- --------- ----------- -----------
BALANCE AT DECEMBER 31, 1994......... 2,324,876 2,325 54,185 -- -- (247,210) (190,700)
Net loss........................... -- -- -- -- -- (1,226,436) (1,226,436)
Capital distribution............... -- -- (21,914) -- -- -- (21,914)
--------- ------ ----------- ---------- --------- ----------- -----------
BALANCE AT DECEMBER 31, 1995......... 2,324,876 2,325 32,271 -- -- (1,473,646) (1,439,050)
Sale of common stock............... 360,442 360 999,640 -- -- -- 1,000,000
Issuance of shares of common stock
for 1996 Acquisitions consummated
effective December 1, 1996....... 651,842 652 2,580,645 -- -- -- 2,581,297
1,491,397 shares of common stock to
be issued in 1997 for 1996
Acquisitions consummated
effective December 1, 1996....... -- -- -- 5,905,965 -- -- 5,905,965
Issuance of detachable stock
purchase warrants................ -- -- 125,000 -- -- -- 125,000
Issuance of shares of common stock
for prior service................ 144,705 145 401,410 -- -- -- 401,555
Issuance of shares of common stock
for advisory agreement........... 125,627 126 348,488 -- (348,614) -- --
Issuance of shares of common stock
for services agreement........... 108,133 108 299,960 -- (180,041) -- 120,027
Amortization of deferred
compensation..................... -- -- -- -- 11,620 -- 11,620
Net loss........................... -- -- -- -- -- (6,119,637) (6,119,637)
Capital distribution............... -- -- (51,053) -- -- -- (51,053)
--------- ------ ----------- --------- --------- ----------- -----------
BALANCE AT DECEMBER 31, 1996......... 3,715,625 3,716 4,736,361 5,905,965 (517,035) (7,593,283) 2,535,724
Unaudited:
Issuance of shares of common stock
for business combinations........ 1,619,938 1,620 6,960,956 (5,905,965) -- -- 1,056,611
Issuance of detachable stock
purchase warrants................ -- -- 203,500 -- -- -- 203,500
Compensatory stock options
accounted for under SFAS 123..... -- -- 19,650 -- -- -- 19,650
Amortization of deferred
compensation..................... -- -- -- -- 27,075 -- 27,075
Net loss........................... -- -- -- -- -- (469,322) (469,322)
--------- ------ ----------- ---------- --------- ----------- -----------
BALANCE AT MARCH 31, 1997
(Unaudited)........................ 5,335,563 $5,336 $11,920,467 -- $(489,960) $(8,062,605) $ 3,373,238
========= ====== =========== ========== ========= =========== ===========
</TABLE>
See accompanying notes.
F-14
<PAGE> 85
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------- -----------------------
1994 1995 1996 1996 1997
--------- ----------- ----------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.............................. $(152,576) $(1,226,436) $(6,119,637) $(824,798) $ (469,322)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization....... 13,052 18,005 126,046 7,679 231,605
Noncash compensation expense........ -- -- 521,582 -- 19,650
Amortization of deferred
compensation...................... -- -- 11,620 -- 27,075
Interest accretion.................. -- -- -- -- 15,284
Changes in operating assets and
liabilities, net of effects from
business combinations:
Accounts receivable, net.......... 13,827 -- (298,328) -- 208,596
Other receivables................. -- -- (185,263) -- (556,767)
Prepaid expenses and other current
assets.......................... 308 516 (22,766) 999 9,881
Other assets...................... -- -- (32,984) -- (51,970)
Accounts payable.................. 5 87,141 429,496 (39,399) (312,091)
Accrued expenses.................. 170 614 119,955 21,039 485,483
Accrued acquisition expenses...... -- -- 522,963 -- (58,223)
Accrued compensation.............. 10,525 43,138 48,342 28,198 267,465
Medical claims payable............ 127,539 928,602 737,720 839,971 (367,899)
Due to Managed Professional
Associations.................... 17,557 10,184 (27,741) 34,081 276,346
--------- ----------- ----------- --------- ----------
Net cash provided by (used
in) operating activities... 30,407 (138,236) (4,168,995) 67,770 (274,887)
INVESTING ACTIVITIES
Purchases of furniture and equipment,
net................................. (13,783) (68,138) (443,577) (23,575) (210,939)
Payments for capitalized acquisition
and offering costs.................. -- (20,240) (1,138,829) -- (1,423,129)
--------- ----------- ----------- --------- ----------
Net cash used in investing
activities................. (13,783) (88,378) (1,582,406) (23,575) (1,634,068)
FINANCING ACTIVITIES
Proceeds from notes payable........... -- 270,737 3,700,000 -- --
Payments on notes payable............. -- (5,183) -- -- --
Net proceeds from issuance of senior
notes and warrants.................. -- -- 1,250,000 -- 2,000,000
Proceeds from bank loan............... 11,700 44,859 -- 100,891 --
Borrowings on line of credit.......... -- -- 1,489,707 -- 1,694,331
Repayments on line of credit.......... -- -- (1,305,443) -- --
Payments on long-term debt and lease
obligations......................... (15,451) (32,694) (56,729) (9,661) (780,454)
Proceeds from sale of common stock.... -- -- 750,000 -- --
Capital distribution.................. -- (21,914) (51,053) -- --
--------- ----------- ----------- --------- ----------
Net cash provided by (used
in) financing activities... (3,751) 255,805 5,776,482 91,230 2,913,877
--------- ----------- ----------- --------- ----------
</TABLE>
F-15
<PAGE> 86
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------- -----------------------
1994 1995 1996 1996 1997
--------- ----------- ----------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Increase in cash...................... $ 12,873 $ 29,191 $ 25,081 $ 135,425 $1,004,922
Cash and cash equivalents at beginning
of year............................. 208 13,081 42,272 42,272 67,353
--------- ----------- ----------- --------- ----------
Cash and cash equivalents at end of
year................................ $ 13,081 $ 42,272 $ 67,353 $ 177,697 $1,072,275
========= =========== =========== ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for
interest............................ $ 4,000 $ 9,000 $ 17,000 $ 4,900 $ 48,000
========= =========== =========== ========= ==========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Common stock issued upon conversion of
a note payable...................... $ -- $ -- $ 250,000 $ -- $ --
========= =========== =========== ========= ==========
</TABLE>
See Note 2 regarding affiliations with practices financed through the issuance
of common stock and notes payable.
See accompanying notes.
F-16
<PAGE> 87
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. DESCRIPTION OF BUSINESS
Vision Twenty-One, Inc. and Subsidiaries (Vision Twenty-One or the Company)
is a Florida corporation formed in May 1996 as a holding company. The Company's
principal subsidiaries include Vision 21 Physician Practice Management Company
(MSO) and Vision 21 Managed Eyecare of Tampa Bay, Inc. (MCO). The MSO provides
business management services for eye care professionals and related businesses.
The MCO is a managed care organization which contracts with third-party health
benefits payors to provide eye care services through a network of associated
optometry and ophthalmology practices, retail optical companies and ambulatory
surgical centers. Most of the managed care contracts are for one year terms
which automatically renew and the contracts are terminable by either party on
sixty days notice. Revenues from one payor constituted approximately 95%, 94%
and 79% of managed care revenues and 53%, 75% and 60% of total revenues for the
years ended December 31, 1994, 1995 and 1996, respectively. Any adverse
development in the Company's relationship with this payor would have a material
adverse effect on the Company's results of operations and financial condition.
Vision Twenty-One was formed to be a holding company to own the MSO and
MCO. The MSO and MCO were owned in identical proportions by two executive
officers and a member of the Board of Directors of the Company. During 1996, the
Company acquired the MSO and MCO through an exchange of 2,685,318 shares of
Common Stock for all of the outstanding shares of the MSO and MCO. There was no
other consideration paid by the Company. This transaction was accounted for as a
reorganization of companies under common control in a manner similar to that
used in a pooling of interests transaction. As a result, the accompanying
financial statements have been prepared to reflect the accounts of the Company
as if the reorganization had occurred as of the beginning of the earliest period
presented.
2. AFFILIATIONS WITH PRACTICES
Effective December 1, 1996, the Company acquired substantially all of the
assets and assumed certain liabilities of 10 ophthalmology and optometry
practices (the Managed Professional Associations) located in Minnesota, Arizona
and Florida. The 1996 Acquisitions were accounted for by recording the assets
and liabilities at fair value and allocating the remaining cost to the related
Management Agreements. In conjunction with these acquisitions, the Company
entered into various business management agreements (Management Agreements) with
the Managed Professional Associations and the Managed Professional Associations'
stockholders (collectively referred to as the 1996 Acquisitions). Under the
Management Agreements, the Company provides management, marketing and
administrative services to the Managed Professional Associations in return for a
management fee. The Management Agreements have a 40-year life and are cancelable
only for breach of its provisions or insolvency. The Managed Professional
Associations employ ophthalmologists and optometrists and provide all eye care
services to patients.
F-17
<PAGE> 88
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the 1996 Acquisitions and a preliminary allocation of the
purchase price, which is subject to revision on further investigation, are as
follows:
<TABLE>
<S> <C>
Net assets acquired:
Current and other assets.................................. $ 1,850,108
Furniture and equipment................................... 1,495,877
Business management agreements............................ 11,051,521
Liabilities assumed....................................... (2,274,959)
-----------
Net assets acquired............................... $12,122,547
===========
Consideration for net assets acquired:
Capitalized acquisition costs............................. $ 1,710,326
Long-term notes payable issued............................ 1,924,959
Common stock issued and to be issued...................... 8,487,262
-----------
Total consideration............................... $12,122,547
===========
</TABLE>
Vision Twenty-One issued 651,842 shares in 1996 and 1,491,397 shares of
Common Stock in 1997. The shares which were issued in 1997 were reported as
common stock to be issued as of December 31, 1996, in connection with the 1996
Acquisitions. All 2,143,239 shares of Common Stock were valued at $3.96 per
share at a minority level based on an independent valuation. An additional
79,805 shares of common stock are held in escrow. The shares held in escrow will
be due the owners of the Managed Professional Associations if various financial
goals are met in the future. The shares have been accounted for as contingent
considerations and, accordingly, have not been included in the purchase price
allocation.
As part of the purchase price allocation, no consideration has been
allocated to employment and noncompete agreements between the Company and the
Managed Professional Associations' stockholders because the Company believes
these agreements have no material value.
During 1996, the Company incurred $1,710,326 of acquisition costs which
were capitalized and allocated to the assets acquired and Management Agreements
entered into, including $839,049 which is included in accrued acquisition
expenses in the accompanying consolidated balance sheets.
The following unaudited pro forma information presents the Company's
results of operations with pro forma adjustments for 1995 as if the 1996
Acquisitions had been consummated as of January 1, 1995; for 1996 as if the 1996
Acquisitions and an acquisition completed on March 1, 1997 (Note 11) had been
consummated as of January 1, 1996; and for the three-month period ended March
31, 1997 as if the March 1, 1997 acquisition had been consummated as of January
1, 1997. This pro forma information does not purport to be indicative of what
would have occurred had the acquisitions been made as of those dates or of
results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, THREE-MONTH
------------------------- PERIOD ENDED
1995 1996 MARCH 31, 1997
----------- ----------- --------------
<S> <C> <C> <C>
Pro forma information (unaudited):
Total revenues....................................... $18,983,325 $29,258,689 $8,169,260
Net income (loss).................................... $ 836,374 $(4,189,641) $ (437,322)
Net income (loss) per common share................... $ 0.14 $ (0.70) $ (0.07)
</TABLE>
F-18
<PAGE> 89
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions have been
eliminated. The Company does not own any interests in or control the activities
of the Managed Professional Associations. Accordingly, the financial statements
of the Managed Professional Associations are not consolidated with those of the
Company.
UNAUDITED QUARTERLY FINANCIAL STATEMENTS
The quarterly financial statements as of March 31, 1997 and for the
three-month periods ended March 31, 1996 and 1997 do not provide all disclosures
included in the annual financial statements. These quarterly statements should
be read in conjunction with the annual audited financial statements and the
footnotes thereto. Results for the 1997 quarterly period are not necessarily
indicative of the results for the year ending December 31, 1997. However, the
accompanying quarterly financial statements reflect all adjustments which are,
in the opinion of management, of a normal and recurring nature necessary for a
fair presentation of the financial position and results of operations of the
Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Managed Care
Managed care revenues are derived from monthly capitation payments from
health benefits payors which contract with the Company for the delivery of eye
care services. The Company records this revenue at contractually agreed-upon
rates.
Practice Management Fees
Prior to December 1, 1996, practice management fee revenue was earned
through contractual arrangements between the Company and several optometry
practices under common control. This revenue totaled $392,206, $423,890 and
$479,004 for the years ended December 31, 1994, 1995 and 1996, respectively.
Subsequent to December 1, 1996, practice management fee revenue was earned
through management of the Managed Professional Associations under the Management
Agreements. This revenue represents reimbursement of practice management
expenses incurred by the Company, including depreciation and amortization
expense of $54,164 for the year ended December 31, 1996. In addition, the
Company receives a percentage (ranging from 24 to 37 percent) of the Managed
Professional Associations' net earnings before interest, taxes, and shareholder
F-19
<PAGE> 90
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
physician expenses, as determined under the related Management Agreements. For
the year ended December 31, 1996 and the three-month period ended March 31,
1997, this revenue was as follows:
<TABLE>
<CAPTION>
THREE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
(UNAUDITED)
<S> <C> <C>
Medical service revenues of Managed Professional
Associations.......................................... $1,667,025 $5,782,475
Less amounts retained by physician shareholders of
Managed Professional Associations..................... (203,186) (943,997)
---------- ----------
Management fees under Management Agreements with Managed
Professional Associations............................. $1,463,839 $4,838,478
========== ==========
</TABLE>
Included in net management fees are amounts representing reimbursement of
expenses for practice management expenses and a portion of depreciation and
amortization. These amounts were $1,298,337 for the year ended December 31, 1996
and $4,018,794 for the three-month period ended March 31, 1997.
Other Revenues
Other revenues consist of fees earned through consulting and other
contractual arrangements.
MEDICAL CLAIMS PAYABLE
In accordance with the capitation contracts entered into with certain
health benefits payors, the MCO is responsible for payment of providers' claims.
Medical claims payable represent provider claims reported to the MCO and an
estimate of provider claims incurred but not reported (IBNR).
The Company and its actuary estimate the amount of IBNR using standard
actuarial methodologies based upon the average interval between the date
services are rendered and the date claims are reported and other factors
considered relevant by the Company.
Prior to December 1, 1996, certain medical claims were paid to several
optometry practices under common control. Expense related to these transactions
totaled approximately $81,000, $299,000 and $249,000 for the years ended
December 31, 1994, 1995 and 1996, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of all current assets and current liabilities
approximates their fair value because of their short-term nature. The fair value
of long-term debt approximates its carrying value based on current rates offered
to the Company for debt of similar maturities.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable represent amounts due from the Managed Professional
Associations.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the various classes of
assets, which range from three to seven years. Leasehold improvements are
amortized using the straight-line method over the shorter of the term of lease
or the
F-20
<PAGE> 91
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated useful life of the improvements. Routine maintenance and repairs are
charged to expense as incurred, while betterments and renewals are capitalized.
DEFERRED OFFERING COSTS
Deferred offering costs consist primarily of costs deferred in connection
with the Company's anticipated initial public offering. These costs will be
charged against the offering proceeds upon successful completion. If the
offering is not successfully completed, these deferred costs will be charged to
expense.
TRANSACTIONS AND BUSINESS DEVELOPMENT COSTS
Direct, external legal, accounting and other costs associated with
successful acquisitions are capitalized as part of the related purchase price
allocation. External costs associated with unsuccessful acquisitions, including
start-up consulting services (Note 10), are expensed and are shown as business
development expense in the accompanying consolidated statements of operations.
All internal costs associated with acquisitions are expensed as incurred.
INTANGIBLE ASSETS
Intangible assets consist of the Management Agreements with the Managed
Professional Associations. The Management Agreements have 40-year terms and are
being amortized on a straight-line method over an average life of 25 years. In
evaluating the useful life of a Management Agreement, the Company considers the
operating history and other characteristics of each practice. The primary
consideration is the degree to which a practice has demonstrated its ability to
extend its existence indefinitely. In making this determination, the Company
considers (i) the number of physicians recruited into the practice, (ii) the
number of staff members, including physicians, (iii) the number of locations,
and (iv) the complexity of the procedures being performed, including disease
treatment and control.
The Company anticipates that the Emerging Issues Task Force of the
Financial Accounting Standards Board will be evaluating certain matters relating
to the physician practice management industry, which the Company expects to
include a review of accounting for business combinations. The Company is unable
to predict the impact, if any, that this review may have on the Company's
acquisition strategy, allocation of purchase price related to acquisitions, and
amortization life assigned to intangible assets.
Amortization expense with respect to intangible assets was $29,125 and
$111,415 (unaudited) for the year ended December 31, 1996 and the three-month
period ended March 31, 1997, respectively.
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of (SFAS 121). In accordance with SFAS 121, the
Company reviews the carrying value of its intangible assets at least quarterly
on an entity-by-entity basis to determine if facts and circumstances exist which
would suggest that the intangible assets may be impaired or that the
amortization period needs to be modified. Among the factors the Company
considers in making the evaluation are changes in the Managed Professional
Associations' market position, reputation, profitability and geographical
penetration. If indicators are present which may indicate impairments, the
Company will prepare a projection of the undiscounted cash flows of the specific
practice and determine if the intangible assets are recoverable based on these
undiscounted cash flows. If impairment is indicated, then an adjustment will be
made to reduce the carrying amount of the intangible assets to fair value.
CONCENTRATIONS OF CREDIT RISK
The Company does not believe that there are any credit risks associated
with receivables due from governmental agencies. Any concentration of credit
risk from other payors of the Managed Professional
F-21
<PAGE> 92
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Associations is limited by the number of patients and payors. The Company and
the Managed Professional Associations do not require any form of collateral from
their patients or third-party payors.
The Company places cash and cash equivalents with high-quality financial
institutions. At times, the Company maintains cash balances in excess of amounts
insured by the Federal Deposit Insurance Corporation (FDIC).
NET LOSS PER COMMON SHARE
Net loss per common share amounts in the consolidated statements of
operations are based upon the weighted average number of common shares
outstanding in each period and the guidance in a Staff Accounting Bulletin (SAB)
of the Securities and Exchange Commission. According to the SAB, stock, options
and warrants issued within a one-year period prior to the filing of an initial
public offering and at prices less than the proposed public offering price must
be reflected as outstanding for all reported periods.
In February 1997, the FASB issued Statement No. 128 (SFAS 128), Earnings
Per Share, which establishes new standards for computing and presenting earnings
per share. SFAS 128 is effective for financial statements issued for periods
after December 15, 1997, including interim periods. Management has not yet
determined whether the implementation of SFAS 128 will have any impact on the
Company's per share amounts.
COMMON STOCK TO BE ISSUED
Common stock to be issued represents stock to be issued in connection with
certain of the 1996 Acquisitions consummated on December 1, 1996. The stock was
issued in January 1997.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements under the
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25). In 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), which is effective for fiscal years
beginning after December 15, 1995. Under SFAS 123, the Company may elect to
recognize stock-based compensation expense based on the fair value of the awards
or continue to account for stock-based compensation under APB 25, and disclose
in the financial statements the effects of SFAS 123 as if the recognition
provisions were adopted.
The Company accounts for any stock-based compensation arrangements not
specifically addressed by APB 25 under the fair value provisions of SFAS 123,
including options granted to non-employees and professionals employed by the
Managed Professional Associations. The amounts for 1995 and 1996 are immaterial.
The pro forma disclosures required by SFAS 123 are provided for all stock-based
compensation which are accounted for under APB 25 (Note 10).
INCOME TAXES
The Company has applied the provisions of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (SFAS 109), which requires an
asset and liability approach for financial accounting and reporting. Deferred
income tax assets and liabilities are determined based upon differences between
the financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and lives that will be in effect when the
differences are expected to reverse.
F-22
<PAGE> 93
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
DESCRIPTION 1995 1996
- ----------- -------- ----------
<S> <C> <C>
Office furniture and equipment.............................. $189,973 $1,828,855
Leased equipment............................................ -- 119,825
Leasehold improvements...................................... 6,264 169,335
-------- ----------
196,237 2,118,015
Less accumulated depreciation and amortization.............. (97,511) (176,756)
-------- ----------
$ 98,726 $1,941,259
======== ==========
</TABLE>
Depreciation and amortization of fixed assets totaled approximately
$13,000, $18,000 and $97,000 in 1994, 1995 and 1996, respectively.
5. NOTE PAYABLE TO RELATED PARTY
Note payable to related party consists of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Note payable to a stockholder, due October 1, 1996, with
interest at 10% per annum. In 1996, the note was exchanged
for shares of the Company's common stock.................. $250,000 $ --
======== ========
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1995 1996 1997
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Unsecured notes payable to a stockholder, interest
and principal due on January 1, 1998, with
interest at 8.5% per annum....................... $ -- $ 700,000 $ 700,000
Notes payable under $300,000 line of credit, due on
demand, bearing interest at prime plus 1% (9.5%
at December 31, 1995 and 9.25% at December 31,
1996). Interest due monthly. The notes are
collateralized by accounts receivable and were
refinanced with a bank in 1997 (Note 11)......... -- 252,124 --
Unsecured note payable to a stockholder, due on
demand, with interest at 9% per annum. Interest
due monthly. The note was refinanced with a bank
in 1997 (Note 11)................................ -- 293,262 --
Unsecured note payable to a stockholder with
interest at 8% per annum. Interest and principal
due upon completion of an initial public
offering......................................... -- 3,000,000 3,000,000
</TABLE>
F-23
<PAGE> 94
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1995 1996 1997
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Unsecured notes payable to stockholders, interest
at 8%. Principal and interest due the earlier of
15 business days after closing of an initial
public offering or March 1, 1998................. $ -- $1,924,959 $1,924,959
Notes payable to a stockholder due in monthly
installments through 1999, with interest at 9.75%
The notes are collateralized by equipment, and
were refinanced with a bank in 1997 (Note 11).... 9,288 64,877 --
10% senior subordinated notes, interest due
semiannually at an effective rate of 13.5%. The
notes are unsecured and mature on the earlier of
a first liquidity event (initial public offering)
or December 19, 1999 (Notes 10 and 11)........... -- 1,125,000 2,936,784
Notes payable to a bank under $2 million revolving
line of credit, due on demand, bearing interest
at prime plus 1%. Interest due monthly. The notes
are collateralized by substantially all assets of
the Company (Note 11)............................ -- -- 1,694,331
Notes payable to banks due in monthly installments
through 2000, with interest ranging from 7% to
14% per annum. The notes are collateralized by
certain equipment, and were refinanced with a
bank in 1997 (Note 11)........................... 54,693 143,570 --
Notes payable to a corporation due in monthly
installments through 2000, with interest ranging
from the rate of prime plus .5% to prime plus 2%
(8.75% to 10.25% at December 31, 1996). The notes
are collateralized by equipment.................. 48,986 23,731 23,731
Notes payable to a bank and corporations due in
monthly installments through 2000, with interest
ranging from the rate of 8% to 8.75% per annum.
The notes are collateralized by certain
equipment........................................ -- 91,700 75,282
---------- ---------- ----------
112,967 7,619,223 10,355,087
Less current portion............................... (51,127) (48,249) (4,361,577)
---------- ---------- ----------
$ 61,840 $7,570,974 $5,993,510
========== ========== ==========
</TABLE>
As of December 31, 1996, the aggregate principal maturities of long-term
debt, without giving effect to an initial public offering and assuming the $3
million unsecured note payable to stockholder is repaid in 1998, are as follows:
<TABLE>
<S> <C>
1997........................................................ $ 48,249
1998........................................................ 6,403,721
1999........................................................ 1,156,812
2000........................................................ 10,441
----------
$7,619,223
==========
</TABLE>
F-24
<PAGE> 95
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. CAPITAL LEASE OBLIGATIONS
The Company leases equipment under noncancelable capital leases (with an
initial or remaining term in excess of one year). Future minimum lease
commitments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- ------------------------
<S> <C>
1997...................................................... $ 54,413
1998...................................................... 50,195
1999...................................................... 31,604
2000...................................................... 14,706
2001...................................................... 1,364
--------
Total minimum lease payments................................ 152,282
Less amount representing interest........................... (36,563)
--------
Present value of minimum lease payments..................... $115,719
========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases its headquarters, store locations and certain office
equipment under noncancelable operating lease arrangements which expire at
various dates, most with options for renewal. Certain locations are leased from
stockholders of the Managed Professional Associations. As of December 31, 1996,
future minimum lease payments under noncancelable operating leases with original
terms of more than one year are as follows:
<TABLE>
<S> <C>
1997........................................................ $ 1,624,776
1998........................................................ 1,620,771
1999........................................................ 1,440,429
2000........................................................ 1,278,998
2001........................................................ 1,167,241
Thereafter.................................................. 8,730,469
-----------
Total....................................................... $15,862,684
===========
</TABLE>
Rent expense in 1994, 1995 and 1996 was approximately $61,000, $76,000 and
$280,000, respectively. Rent expense related to locations leased from
stockholders of the Managed Professional Associations was approximately $53,000
during 1996.
Malpractice
The Company and the Managed Professional Associations are insured with
respect to medical malpractice risks primarily on a claims-made basis.
Management is aware of a claim pending against one of the Managed Professional
Associations. The claim, which alleges medical malpractice, is currently in the
discovery stage and no trial date has been set. The Managed Professional
Association, through its insurer, plans to vigorously contest the case. In the
opinion of Management, this litigation will not have a material adverse effect
on the results of operations, financial condition or liquidity of the Company.
Losses resulting from unreported claims cannot be estimated by management
and therefore, an accrual has not been included in the accompanying consolidated
financial statements.
F-25
<PAGE> 96
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The Company did not have a current or deferred tax provision or benefit for
the years ended December 31, 1994, 1995 and 1996 due to its net losses.
At December 31, 1995 and 1996, the Company had temporary differences
between amounts of assets and liabilities for financial reporting purposes and
such amounts measured by income tax reporting purposes. The Company also has net
operating loss (NOL) carryforwards available to offset future taxable income.
Significant components of the Company's deferred tax assets and liabilities as
of December 31 are as follows:
<TABLE>
<CAPTION>
DEFERRED TAX
ASSET (LIABILITY)
-----------------------
TEMPORARY DIFFERENCES/CARRYFORWARDS 1995 1996
- ----------------------------------- --------- -----------
<S> <C> <C>
Cash to accrual adjustments................................. $ 47,489 $ 469,859
Net operating losses........................................ 67,249 1,735,723
Other....................................................... -- 220,418
--------- -----------
Total deferred tax assets......................... 114,738 2,426,000
Identifiable intangible assets not deductible for tax
purposes.................................................. -- (1,190,582)
Other deferred tax liabilities.............................. (3,859) (278,282)
Valuation allowance......................................... (110,879) (957,136)
--------- -----------
Net deferred taxes................................ $ -- $ --
========= ===========
</TABLE>
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a full valuation allowance at December 31, 1995 and 1996 is
warranted.
Income taxes are different from the amount computed by applying the United
States statutory rate to income before income taxes for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- --------- -----------
<S> <C> <C> <C>
Income tax benefit at the statutory rate............ $(51,876) $(416,987) $(2,080,676)
Permanent differences............................... 59,197 78,078 7,888
S-Corporation (income) loss......................... (7,435) 248,185 924,203
State taxes, net of federal benefit................. (12) (9,686) (122,628)
Change in valuation allowance....................... 126 100,410 1,271,213
-------- --------- -----------
Income taxes........................................ $ -- $ -- $ --
======== ========= ===========
</TABLE>
The Company has net operating loss carryforwards of approximately
$4,612,000 at December 31, 1996 that expire in various amounts from 2008 to
2011. These net operating loss carryforwards will be subject to the "ownership
change" rules of Section 382 of the Internal Revenue Code of 1986 and may be
limited as to their future use if there are changes in ownership exceeding 50%.
10. STOCKHOLDERS' EQUITY
Issuance of Stock
The Company entered into an agreement in 1993 to issue common stock in
exchange for cash. The related shares of common stock were not physically issued
until June 30, 1996. For financial reporting purposes the Company has presented
these shares of common stock as if they had been issued in 1993.
F-26
<PAGE> 97
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Option Plans
In July 1996, the Board of Directors adopted, and the stockholders of the
Company approved, two stock option plans: the Stock Incentive Plan (the
Incentive Plan) and the Affiliated Professionals Stock Plan (the Professionals
Plan and together with the Incentive Plan, the Plans). The purpose of the Plans
is to provide directors, officers, key employees, advisors and professionals
employed by the Managed Professional Associations with additional incentives by
increasing their proprietary interest in the Company or tying a portion of their
compensation to increases in the price of the Company's common stock. The
aggregate number of shares of common stock reserve for issuance related to the
Incentive Plan and the Professionals Plan is 1,000,000 shares and 600,000
shares, respectively. During 1996, the Company granted 459,667 and 102,333 stock
options to employees and non-employees, respectively, under the provisions of
the Plans with exercise prices equal to the estimated fair market value of the
Company's stock on the date of grant of $3.11 to $7.11. The options vest over
three to four-year periods.
A summary of the Plans is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ---------
<S> <C> <C>
Options outstanding......................................... 562,000 620,667
Options exercisable......................................... -- --
</TABLE>
The weighted average grant-date fair value of all options granted during
1996 was $1.91. The weighted average remaining contractual life of those options
is 3.4 years.
Pro forma information regarding net income is required by SFAS 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that Statement. The fair value for these options
was estimated at the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions for 1996: risk-free interest
rate of 6.0%; a dividend yield of zero; volatility factors of the expected
market price of the Company's common stock based on industry trends; and a
weighted-average expected life of the options of 3.4 years. In addition, for pro
forma purposes, the estimated fair value of the options is amortized to expense
over the options' vesting period. Based on these assumptions, the pro forma net
loss and net loss per common share for the year ended December 31, 1996 would be
approximately $(6,235,000) and $(1.04), respectively.
Stock Compensation
In May 1996, the Company granted 144,705 shares of common stock to a
consultant as compensation for prior service (the Grant). In October 1996, the
Company entered into advisory and services agreements (the Agreements) with the
consultant and its chief medical officer whereby they would be entitled to
233,760 shares of common stock as compensation over the term of the Agreements.
The Company recorded issuance of the common stock at its fair value on the dates
of the Agreements and Grant. The expense is recognized in 1996 for the Grant and
over the related terms for the Agreements. For the year ended December 31, 1996,
the Company recognized expense of approximately $401,000 and $132,000, related
to the Grant and Agreements, respectively.
Warrants
During December 1996, the Company issued $1.25 million, 10% senior
subordinated notes (the Senior Notes) along with detachable warrants. The
warrants allow the holders to purchase 208,333 shares, subject to certain
adjustments, of the Company's common stock upon payment of $6 per share, subject
to certain adjustments. The Company has allocated $125,000 of the proceeds to
the warrants, representing their estimated fair value at the date of issuance,
as determined by an investment banking firm. The Senior Notes
F-27
<PAGE> 98
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are limited in aggregate principal amount to $1.25 million and mature on the
earlier of a first liquidity event or December 19, 1999. The Senior Notes bear
stated interest at the rate of 10% per annum payable semiannually in arrears on
June 19 and December 19, with an effective interest rate of 13.5% (Note 11). An
amount equal to the estimated value of the warrants will be amortized using the
interest method over the term of the Senior Notes.
11. SUBSEQUENT EVENTS
On February 7, 1997, the Company obtained a $2 million revolving line of
credit (LOC) from a commercial bank with interest at the rate of prime plus 1%.
Borrowings under the LOC are due on demand and are collateralized by
substantially all assets of the Company. A stockholder is also a guarantor of
the LOC. The proceeds from the LOC were used to refinance certain outstanding
debt as of December 31, 1996 and to provide additional working capital.
On February 28, 1997, the Company issued a $2 million, 10% senior
subordinated note with a detachable warrant to purchase 333,333 shares, subject
to certain adjustments, of the Company's common stock upon payment of $6 per
share, subject to certain adjustments. The Company allocated $200,000 of the
proceeds to the warrant, representing its estimated fair value at the date of
the transaction as determined by an investment banking firm. The warrant expires
on December 19, 2003. The note is due upon the earlier of a first liquidity
event (initial public offering) or December 19, 1999. The effective interest
rate on the note is 13.5% and the proceeds will be used to provide additional
working capital. An amount equal to the estimated value of the warrants will be
amortized using the interest method over the term of the note.
On April 11, 1997, the Company entered into a $4.68 million credit facility
bearing interest at 10%. The terms of the credit facility were amended on June
13, 1997 and July 29, 1997. The terms of the credit facility require the Company
to use $2 million of the proceeds from the credit facility to repay the $2
million revolving line of credit referred to above, with assignment of the
related collateral to the new lender. The remaining proceeds will be used to
provide additional working capital. The terms of the credit facility require the
Company to sell to the lender a warrant to purchase up to 210,000 shares of
common stock at a purchase price per share equal to the initial public offering
price. The warrant will be exercisable during the five-year period commencing at
the effective date of the Company's initial public offering. In addition to the
exercise price, the lender will pay the Company $320,000 for the warrant. The
Company believes the consideration paid and the exercise prices represent the
fair value of the warrant. Accordingly, no amounts will be amortized to interest
expense. The terms of the credit facility extend the maturity of the credit
facility to the earlier of January 1, 1998 or an initial public offering. The
credit facility places certain restrictions on the Company's ability to pay
dividends in the future.
The Company has acquired five additional eye care practices during 1997,
and has entered into a binding agreement to acquire an ambulatory surgery
facility. The Company also intends to enter into business management agreements
with these entities. The acquisitions have been and will be accounted for by
recording assets and liabilities at fair value and allocating the remaining cost
to the related Management Agreements. The fair value of the net assets and
business management agreements associated with these entities is expected to
approximate $7.9 million (subject to certain adjustments), and will be financed
through the issuance of 905,659 shares of the Company's common stock (subject to
certain adjustments). The Vision Twenty-One common stock to be issued in
connection with these acquisitions will be valued at $3.96 to $9.00 per share.
F-28
<PAGE> 99
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In May 1997, the Company agreed to acquire all of the outstanding common
stock of a medical consulting company for $700,000 in cash. This acquisition is
scheduled to close upon the Company's completion of an initial public offering.
On June 6, 1997, the Company's Board of Directors approved a 1-for-1.5
reverse stock split pursuant to the Company's initial public offering of common
stock. All share and per share amounts in the accompanying financial statements
have been restated to retroactively reflect the reverse split.
F-29
<PAGE> 100
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders
Eye Institute of Southern Arizona, P.C.
We have audited the accompanying balance sheets of Eye Institute of
Southern Arizona, P.C. (the Company) as of December 31, 1995 and November 30,
1996, and the related statements of operations, stockholders' equity (deficit),
and cash flows for the year ended December 31, 1995 and the eleven-month period
ended November 30, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Eye Institute of Southern
Arizona, P.C. at December 31, 1995 and November 30, 1996, and the results of its
operations and its cash flows for the year ended December 31, 1995 and the
eleven-month period ended November 30, 1996 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Tampa, Florida
January 15, 1997
F-30
<PAGE> 101
EYE INSTITUTE OF SOUTHERN ARIZONA, P.C.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 2,494 $ 49,943
Patient accounts receivable, net of allowances for
contractual adjustments and uncollectible accounts of
$612,000 and $466,000 at December 31, 1995 and November
30, 1996, respectively................................. 383,887 438,549
Due from related parties.................................. -- 8,032
Other receivables......................................... 94,023 39,113
Prepaid expenses.......................................... 14,354 14,818
---------- ----------
Total current assets.............................. 494,758 550,455
Deferred tax asset.......................................... 48,672 128,068
Property, equipment and improvements, net................... 1,552,728 1,463,539
---------- ----------
Total assets...................................... $2,096,158 $2,142,062
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 21,462 $ 42,844
Accrued compensation...................................... 180,022 141,449
Other current liabilities................................. 115,365 56,484
Due to related parties.................................... 57,985 --
Deferred tax liability.................................... 48,672 128,068
Current portion of capital lease obligation............... 50,884 55,107
---------- ----------
Total current liabilities......................... 474,390 423,952
Capital lease obligation, net of current portion............ 1,998,256 1,947,389
Stockholders' equity (deficit):
Common stock, $5 par value: 100,000 shares authorized;
2,000 shares issued and outstanding.................... 10,000 10,000
Deficiency in retained earnings........................... (386,488) (239,279)
---------- ----------
Total stockholders' equity (deficit).............. (376,488) (229,279)
---------- ----------
Total liabilities and stockholders' equity
(deficit)....................................... $2,096,158 $2,142,062
========== ==========
</TABLE>
See accompanying notes.
F-31
<PAGE> 102
EYE INSTITUTE OF SOUTHERN ARIZONA, P.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Revenues:
Net patient service revenues.............................. $3,649,990 $2,747,555
Premium revenue........................................... -- 69,401
Other..................................................... 355,644 338,774
---------- ----------
Total revenues.................................... 4,005,634 3,155,730
Expenses:
Salaries and benefits -- physicians....................... 2,522,538 1,658,590
Salaries and benefits -- other............................ 726,974 630,409
General and administrative................................ 358,936 298,254
Building and equipment rent............................... 175,918 168,424
Interest expense.......................................... 166,084 152,371
Depreciation and amortization............................. 112,175 100,473
---------- ----------
Total expenses.................................... 4,062,625 3,008,521
---------- ----------
Net income (loss)................................. $ (56,991) $ 147,209
========== ==========
</TABLE>
See accompanying notes.
F-32
<PAGE> 103
EYE INSTITUTE OF SOUTHERN ARIZONA, P.C.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK DEFICIENCY IN STOCKHOLDERS'
---------------- RETAINED EQUITY
SHARES AMOUNT EARNINGS (DEFICIT)
------ ------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995............................ 2,000 $10,000 $(329,497) $(319,497)
Net loss............................................ -- -- (56,991) (56,991)
----- ------- --------- ---------
BALANCE AT DECEMBER 31, 1995.......................... 2,000 10,000 (386,488) (376,488)
Net income.......................................... -- -- 147,209 147,209
----- ------- --------- ---------
BALANCE AT NOVEMBER 30, 1996.......................... 2,000 $10,000 $(239,279) $(229,279)
===== ======= ========= =========
</TABLE>
See accompanying notes.
F-33
<PAGE> 104
EYE INSTITUTE OF SOUTHERN ARIZONA, P.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ (56,991) $147,209
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 112,175 100,473
Changes in operating assets and liabilities:
Patient accounts receivable, net....................... (122,887) (54,662)
Due from related parties............................... 23,951 (8,032)
Other receivables...................................... (74,157) 54,910
Prepaid expenses....................................... 2,627 (464)
Accounts payable, accrued compensation and other
current liabilities................................... 46,505 (76,072)
Due to related parties................................. 42,152 (57,985)
--------- --------
Net cash provided by (used in) operating
activities...................................... (26,625) 105,377
INVESTING ACTIVITIES
Purchases of property and equipment......................... (24,783) (11,284)
--------- --------
Net cash used in investing activities....................... (24,783) (11,284)
FINANCING ACTIVITIES
Repayment of capital lease obligations...................... (46,984) (46,644)
--------- --------
Net cash used in financing activities....................... (46,984) (46,644)
--------- --------
Increase (decrease) in cash................................. (98,392) 47,449
Cash, beginning of period................................... 100,886 2,494
--------- --------
Cash, end of period......................................... $ 2,494 $ 49,943
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest...................................... $ 165,691 $148,741
========= ========
Cash paid for income taxes.................................. $ 40,168 $ --
========= ========
</TABLE>
See accompanying notes.
F-34
<PAGE> 105
EYE INSTITUTE OF SOUTHERN ARIZONA, P.C.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Eye Institute of Southern Arizona, P.C., an Arizona Professional Company
(the Company), operates a professional medical practice in Tucson, Arizona,
specializing in general ophthalmology.
PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements are carried at cost. The Company's
building is held under a capital lease agreement. Depreciation and amortization,
including amortization of assets held under capital lease agreements, are
computed using the straight-line method, with useful lives generally ranging
from 5 to 31 years. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
NET PATIENT SERVICE REVENUES
Net patient service revenues are based on established billing rates less
allowances for contractual adjustments for patients covered by Medicare, the
Arizona Health Care Cost Containment System (AHCCCS) and various other discount
arrangements. Payments received under these programs and arrangements, which
generally are based on predetermined rates, are generally less than the
Company's customary charges, and the differences are recorded as contractual
adjustments at the time the related service is rendered.
The Company has contracted, effective August 1, 1996, with CIGNA as a
qualified provider of general ophthalmology services. The Company receives a
monthly capitation payment for all plan members in its assigned geographic area.
The premium revenue is paid pursuant to CIGNA HealthCare of Arizona guidelines
and administered on their behalf by Connecticut General Life Insurance Company.
On December 1, 1996, the Company contracted with FHP as a qualified
provider of general ophthalmology services. The Company will receive a monthly
capitation payment for all plan members in its assigned geographic area. The
premium revenue will be paid pursuant to FHP guidelines and administered on
their behalf by the Eye Specialists of Arizona Network.
The following table summarizes the percent of patient service revenues by
payor class:
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Medicare................................................... 35% 38%
FHP and CIGNA.............................................. 36 31
Other (including self-pay)................................. 29 31
--- ---
100% 100%
=== ===
</TABLE>
Laws and regulations governing the Medicare and AHCCCS programs are complex
and subject to interpretation. The Company believes that it is in compliance
with all applicable laws and regulations and is not aware of any pending or
threatened investigations involving allegations of potential wrong doing. While
no such regulatory inquiries have been made, compliance with such laws and
regulations can be subject to future government review and interpretation as
well as significant regulatory action including fines, penalties and exclusion
from the Medicare and AHCCCS programs.
F-35
<PAGE> 106
EYE INSTITUTE OF SOUTHERN ARIZONA, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Income taxes have been provided using the liability method in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes (SFAS 109). Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount for cash approximates its fair value because of its
short-term maturity. The fair value of the Company's capital lease obligation
cannot be determined due to its related party nature.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amount reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. RELATED PARTY TRANSACTIONS
Kuskat Investment Company (Kuskat) owns certain real property and surgical
equipment which the Company leases. Kuskat is owned by the two shareholders of
the Company. Rent expense for property owned by Kuskat totaled approximately
$176,000 and $168,000 for the year ended December 31, 1995 and the eleven-month
period ended November 30, 1996, respectively.
Due (to) from related parties consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Due to stockholders......................................... $(29,290) $(21,375)
Due (to) from Kuskat........................................ (43,025) 22,757
Employee advances........................................... 14,330 6,650
-------- --------
$(57,985) $ 8,032
======== ========
</TABLE>
3. PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Building under capital lease................................ $ 2,450,000 $ 2,450,000
Leasehold improvements...................................... 53,005 53,005
Medical equipment........................................... 75,184 76,775
Office equipment............................................ 36,967 45,515
Automobiles................................................. 66,964 66,964
Computer equipment.......................................... 44,251 44,251
Other....................................................... 16,005 16,619
----------- -----------
2,742,376 2,753,129
Accumulated depreciation and amortization................... (1,189,648) (1,289,590)
----------- -----------
$ 1,552,728 $ 1,463,539
=========== ===========
</TABLE>
F-36
<PAGE> 107
EYE INSTITUTE OF SOUTHERN ARIZONA, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LEASE COMMITMENTS
The Company leases office space and medical equipment under capital and
operating leases.
Future minimum lease commitments under a related party capital lease and
noncancelable operating leases (with terms of one year or more) consist of the
following at November 30, 1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASES
----------- ---------
<S> <C> <C>
Month ending December 31, 1996.............................. $ 17,748 $ 13,265
Year ending December 31:
1997...................................................... 212,976 159,180
1998...................................................... 212,976 159,180
1999...................................................... 212,976 145,915
2000...................................................... 212,976 --
2001...................................................... 212,976 --
Thereafter................................................ 2,644,291 --
----------- --------
Total minimum lease payments................................ 3,726,919 $477,540
========
Less amount representing interest........................... (1,724,423)
-----------
Present value of minimum lease payments..................... $ 2,002,496
===========
</TABLE>
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
DEFERRED TAX ASSETS
Noncurrent:
Contribution carryforward................................. $ 663 $ 663
Net operating loss carryforward........................... 48,675 71,622
Lease capitalized for financial reporting purposes........ 207,771 196,746
Accumulated depreciation.................................. 59,474 62,615
-------- --------
316,583 331,646
Valuation allowance......................................... 267,911 203,578
-------- --------
Total deferred tax assets......................... $ 48,672 $128,068
======== ========
DEFERRED TAX LIABILITIES
Current:
Accrual to cash adjustment................................ $ 48,672 $128,068
-------- --------
Total deferred tax liabilities.................... $ 48,672 $128,068
======== ========
</TABLE>
F-37
<PAGE> 108
EYE INSTITUTE OF SOUTHERN ARIZONA, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income taxes are different from the amount computed by applying the United
States statutory rate to income before income taxes for the following reasons:
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Income taxes at the statutory rate.......................... $(19,377) $ 50,051
Permanent differences....................................... 8,892 3,494
State taxes, net of federal benefit......................... (1,832) 9,355
Change in valuation allowance............................... 12,598 (64,333)
Personal service corporation status......................... (281) 1,433
-------- --------
$ -- $ --
======== ========
</TABLE>
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $267,911 and $203,578 valuation allowance at December 31, 1995
and November 30, 1996, respectively, is necessary to reduce the deferred tax
assets to the amount that will more likely than not be realized. The change in
the valuation allowance for the current year is $(64,333). At November 30, 1996
and December 31, 1995, the Company has available net operating loss
carryforwards of approximately $174,000 and $119,000, respectively, which expire
in the years 2010 and 2011, respectively.
6. MALPRACTICE INSURANCE
The Company carries claims-made malpractice insurance for each of its
physicians. This insurance provides coverage of $3 million per incident, with a
$5 million annual limit. In addition, the Company has an umbrella policy which
provides coverage of $3 million per claim, with a $5 million annual limit.
Management is not aware of any reported claims pending against the Company.
Losses resulting from unreported claims cannot be estimated by management and,
therefore, are not included in the accompanying financial statements.
7. RETIREMENT PLAN
The Company maintains an employee savings plan under Section 401(k) of the
Internal Revenue Code. The plan covers substantially all employees. Management
has elected to not make matching or discretionary contributions to the plan.
8. SUBSEQUENT EVENT
On December 1, 1996, substantially all assets and liabilities of the
Company were acquired by Vision Twenty-One, Inc. (Vision) in exchange for
approximately 595,000 shares of Vision common stock. In connection therewith,
the Company entered into a 40-year business management agreement with Vision,
whereby Vision will provide substantially all nonmedical services to the
Company.
The financial statements of the Company have been prepared as supplemental
information about the association to which Vision will provide management
services following consummation of the acquisition. The Company previously
operated as a separate independent association. The historical financial
position, results of operations and cash flows do not reflect any adjustments
relating to the acquisition.
F-38
<PAGE> 109
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Daniel B. Feller, M.D., P.C., d/b/a
Paradise Valley Eye Specialists;
Eye Specialists of Arizona Network, P.C.; and
Sharona Optical, Inc.
We have audited the accompanying combined balance sheets of Daniel B.
Feller, M.D., P.C., d/b/a Paradise Valley Eye Specialists; Eye Specialists of
Arizona Network, P.C.; and Sharona Optical, Inc. (collectively referred to as
the Company), as of December 31, 1995 and November 30, 1996, and the related
combined statements of income, stockholders' equity, and cash flows for the year
ended December 31, 1995 and the eleven-month period ended November 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Daniel B. Feller,
M.D., P.C., d/b/a Paradise Valley Eye Specialists; Eye Specialists of Arizona
Network, P.C.; and Sharona Optical, Inc. at December 31, 1995 and November 30,
1996, and the combined results of their operations and their cash flows for the
year ended December 31, 1995 and the eleven-month period ended November 30, 1996
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Tampa, Florida
January 17, 1997
F-39
<PAGE> 110
DANIEL B. FELLER, M.D., P.C.,
D/B/A PARADISE VALLEY EYE SPECIALISTS;
EYE SPECIALISTS OF ARIZONA NETWORK, P.C.;
AND SHARONA OPTICAL, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 32,543 $ 36,711
Patient accounts receivable, net.......................... 110,452 80,081
Inventory................................................. 60,768 62,450
Prepaid expenses and other................................ 7,808 6,929
-------- --------
Total current assets.............................. 211,571 186,171
Property and equipment, net................................. 314,307 242,204
Deposits.................................................... 10,363 10,363
-------- --------
Total assets...................................... $536,241 $438,738
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 23,033 $ 70,260
Accrued salaries and benefits............................. 36,017 30,015
Notes payable and current portion of long-term debt....... 36,560 32,786
Current portion of obligations under capital leases....... 10,385 11,097
Deferred tax liability...................................... 23,632 11,468
-------- --------
Total current liabilities......................... 129,627 155,626
Deferred tax liability...................................... 27,377 23,039
Loan payable -- stockholder................................. -- 4,648
Long-term debt, less current portion........................ 97,412 58,914
Obligations under capital leases, less current portion...... 35,264 25,060
Stockholders' equity:
Common stock, $1 par value: PVES -- 100,000 shares
authorized, 500 shares issued and outstanding;
ESAN -- 10,000 shares authorized, issued and
outstanding; Sharona Optical -- 500,000 shares
authorized, 5,000 shares issued and outstanding........ 15,500 15,500
Retained earnings......................................... 231,061 155,951
-------- --------
Total stockholders' equity........................ 246,561 171,451
-------- --------
Total liabilities and stockholders' equity........ $536,241 $438,738
======== ========
</TABLE>
See accompanying notes.
F-40
<PAGE> 111
DANIEL B. FELLER, M.D., P.C.,
D/B/A PARADISE VALLEY EYE SPECIALISTS;
EYE SPECIALISTS OF ARIZONA NETWORK, P.C.;
AND SHARONA OPTICAL, INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Revenues:
Net patient service revenues.............................. $1,136,324 $ 888,289
Capitation revenues....................................... 1,433,085 1,272,761
Retail income............................................. 300,110 380,715
Rental income............................................. 19,700 16,550
Interest income........................................... 1,990 4,075
---------- ----------
Total revenues.................................... 2,891,209 2,562,390
Expenses:
Cost of sales............................................. 131,388 167,630
Salaries and benefits -- physicians....................... 743,957 530,226
Salaries and benefits -- all other........................ 745,425 760,307
Professional fees......................................... 383,478 381,707
Medical supplies.......................................... 108,964 46,210
General and administrative................................ 266,992 249,929
Building and equipment rent............................... 322,411 278,973
Depreciation and amortization............................. 76,596 82,340
Insurance................................................. 39,139 29,678
Interest.................................................. 12,945 12,525
---------- ----------
Total expenses.................................... 2,831,295 2,539,525
---------- ----------
Income before income taxes.................................. 59,914 22,865
Income tax expense (benefit)................................ (10,098) (16,502)
---------- ----------
Net income........................................ $ 70,012 $ 39,367
========== ==========
</TABLE>
See accompanying notes.
F-41
<PAGE> 112
DANIEL B. FELLER, M.D., P.C.,
D/B/A PARADISE VALLEY EYE SPECIALISTS;
EYE SPECIALISTS OF ARIZONA NETWORK, P.C.;
AND SHARONA OPTICAL, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- RETAINED STOCKHOLDERS'
NUMBER AMOUNT EARNINGS EQUITY
------ ------- --------- -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995........................ 15,500 $15,500 $ 233,049 $ 248,549
Distributions to stockholders................. -- -- (72,000) (72,000)
Net income.................................... -- -- 70,012 70,012
------ ------- --------- ---------
BALANCE, DECEMBER 31, 1995...................... 15,500 15,500 231,061 246,561
Distributions to stockholders................. -- -- (114,477) (114,477)
Net income.................................... -- -- 39,367 39,367
------ ------- --------- ---------
BALANCE, NOVEMBER 30, 1996...................... 15,500 $15,500 $ 155,951 $ 171,451
====== ======= ========= =========
</TABLE>
See accompanying notes.
F-42
<PAGE> 113
DANIEL B. FELLER, M.D., P.C.,
D/B/A PARADISE VALLEY EYE SPECIALISTS;
EYE SPECIALISTS OF ARIZONA NETWORK, P.C.;
AND SHARONA OPTICAL, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 70,012 $ 39,367
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 76,596 82,340
Loss on disposal of fixed assets.......................... -- 6,963
Provision for doubtful accounts........................... 1,000 --
Deferred income taxes..................................... (10,098) (16,502)
Changes in assets and liabilities:
Patient accounts receivable............................ 64,857 30,371
Inventory.............................................. (4,768) (1,682)
Prepaid expenses and other............................. 5,721 879
Accounts payable....................................... 7,493 47,227
Accrued salaries and benefits.......................... 4,729 (6,002)
Loan payable--stockholder.............................. -- 4,648
--------- ---------
Net cash provided by operating activities......... 215,542 187,609
INVESTING ACTIVITIES
Purchases of property and equipment......................... (128,337) (17,200)
--------- ---------
Net cash used in investing activities............. (128,337) (17,200)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt.................... 33,689 21,250
Payments of long-term debt.................................. (34,561) (63,522)
Principal payments of capital leases........................ (8,546) (9,492)
Distributions to stockholders............................... (72,000) (114,477)
--------- ---------
Net cash used in financing activities............. (81,418) (166,241)
--------- ---------
Net increase in cash........................................ 5,787 4,168
Cash at beginning of period................................. 26,756 32,543
--------- ---------
Cash at end of period............................. $ 32,543 $ 36,711
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest.................... $ 12,945 $ 12,525
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Purchase of property and equipment through issuance of
capital lease obligations................................. $ 19,950 $ --
========= =========
</TABLE>
See accompanying notes.
F-43
<PAGE> 114
DANIEL B. FELLER, M.D., P.C.,
D/B/A PARADISE VALLEY EYE SPECIALISTS;
EYE SPECIALISTS OF ARIZONA NETWORK, P.C.;
AND SHARONA OPTICAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Daniel B. Feller, M.D., P.C. d/b/a Paradise Valley Eye Specialists (PVES),
a professional corporation, operates a professional medical practice
specializing in optometry and general ophthalmology. Eye Specialists of Arizona
Network, P.C. (ESAN), a professional corporation with common ownership, was
formed in 1994 to negotiate capitated contracts with managed care companies.
Sharona Optical, Inc., a C-corporation, operates a retail store which sells
sunglasses and eyeglass frames. All three of the corporations operate in the
Phoenix area, and are hereinafter collectively referred to as the Company. All
significant intercompany transactions have been eliminated.
INVENTORIES
Inventories are stated at cost.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method, with the assets' useful lives estimated at five to
seven years.
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Medical equipment........................................... $ 312,785 $ 335,500
Office equipment............................................ 186,718 191,158
Computer equipment.......................................... 99,140 104,873
Automobile.................................................. 34,494 --
--------- ---------
633,137 631,531
Less accumulated depreciation and amortization.............. (318,830) (389,327)
--------- ---------
$ 314,307 $ 242,204
========= =========
</TABLE>
Included in medical equipment as of December 31, 1995 and November 30, 1996
are assets acquired through capital leases with original costs of approximately
$57,000.
Amortization expense related to capital leases is included in depreciation
and amortization in the combined statements of income.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and accounts receivable are reflected in the
financial statements at fair value because of the short-term maturity of these
instruments.
F-44
<PAGE> 115
DANIEL B. FELLER, M.D., P.C.,
D/B/A PARADISE VALLEY EYE SPECIALISTS;
EYE SPECIALISTS OF ARIZONA NETWORK, P.C.;
AND SHARONA OPTICAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amount and approximate fair values of the Company's long-term
debt and obligations under capital leases at December 31, 1995 and November 30,
1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
-------------------- --------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
$179,621 $183,516 $127,857 $143,161
======== ======== ======== ========
</TABLE>
Fair value is based on quoted market rates for debt with similar terms.
PATIENT SERVICE REVENUES
Revenues are based on established billing rates less allowances and
discounts for patients covered by Medicare, the Arizona Health Care Cost
Containment System (AHCCCS) and various other discount arrangements. Payments
received under these programs and arrangements, which are based on either
predetermined rates or the cost of services, are generally less than the
Company's customary charges. Revenues are recorded net of such contractual
adjustments or policy discounts.
For the year ended December 31, 1995 and the eleven-month period ended
November 30, 1996, the Company's net patient revenues derived from Medicare and
AHCCCS were approximately 15 percent. The Company does not believe that there
are any credit risks associated with receivables due from governmental agencies.
Concentration of credit risk from other payors is limited by the number of
patients and payors.
The Company has arrangements with third-party payors under capitated
medical services contracts. Under these contracts, the Company receives fixed,
monthly fees from the third-party payors for each covered life in exchange for
assuming responsibility for the provision of specified medical services.
Laws and regulations governing the Medicare and AHCCCS programs are complex
and subject to interpretation. The Company believes that it is in compliance
with all applicable laws and regulations and is not aware of any pending or
threatened investigations involving allegations of potential wrong doing. While
no such regulatory inquiries have been made, compliance with such laws and
regulations can be subject to future government review and interpretation as
well as significant regulatory action including fines, penalties and exclusion
from the Medicare and AHCCCS programs.
INCOME TAXES
Income taxes for PVES have been provided using the liability method in
accordance with Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
ESAN and Sharona Optical, Inc. have elected to have their income taxed as S
corporations under the federal Internal Revenue Code. As a result, in lieu of
corporate income tax, ESAN and Sharona Optical, Inc.'s taxable income is passed
through to the stockholders of ESAN and Sharona Optical, Inc. and taxed at the
individual level. Accordingly, no provision or liability for federal income tax
has been reflected in these combined financial statements for ESAN and Sharona
Optical, Inc.
F-45
<PAGE> 116
DANIEL B. FELLER, M.D., P.C.,
D/B/A PARADISE VALLEY EYE SPECIALISTS;
EYE SPECIALISTS OF ARIZONA NETWORK, P.C.;
AND SHARONA OPTICAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the combined financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Promissory note bearing interest at prime plus .5% (9.25%
and 8.75% at December 31, 1995 and November 30, 1996,
respectively), payable in equal installments of $1,564,
principal and interest, through April 2000, collateralized
by office equipment....................................... $ 82,875 $ 65,674
Note payable with interest at 8%, payable in monthly
installments of $1,564, principal and interest, through
October 1999.............................................. 21,418 17,095
Promissory note bearing interest at prime plus .5% (9.25% at
December 31, 1995), payable in equal installments of $573,
principal and interest, paid in full October 1996......... 23,490 --
Note payable with interest at 8.25%, payable in monthly
installments of $2,731, principal and interest, through
February 1997............................................. -- 8,082
Installment loan from vendor for medical equipment.......... 6,189 849
-------- --------
133,972 91,700
Less current portion........................................ (36,560) (32,786)
-------- --------
Notes payable and long-term debt............................ $ 97,412 $ 58,914
======== ========
</TABLE>
As of November 30, 1996, maturities of notes payable and long-term debt is
as follows:
<TABLE>
<S> <C>
Month ending December 31, 1996.............................. $ 5,498
Year ending December 31:
1997...................................................... 29,295
1998...................................................... 24,313
1999...................................................... 24,776
2000...................................................... 7,818
-------
$91,700
=======
</TABLE>
F-46
<PAGE> 117
DANIEL B. FELLER, M.D., P.C.,
D/B/A PARADISE VALLEY EYE SPECIALISTS;
EYE SPECIALISTS OF ARIZONA NETWORK, P.C.;
AND SHARONA OPTICAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. LEASE COMMITMENTS
Future minimum lease commitments under noncancelable operating and capital
leases (with an initial or remaining term in excess of one year) at November 30,
1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ----------
<S> <C> <C>
Month ending December 31, 1996.............................. $ 1,150 $ 17,947
Year ending December 31:
1997........................................................ 13,803 216,838
1998........................................................ 13,803 203,929
1999........................................................ 10,242 169,728
2000........................................................ 2,716 159,106
2001........................................................ -- 162,108
Thereafter.................................................. -- 229,653
------- ----------
Total minimum lease obligations............................. 41,714 $1,159,309
==========
Less amount representing interest........................... (5,557)
-------
Present value of minimum lease payments (including current
portion of $11,097)....................................... $36,157
=======
</TABLE>
4. MALPRACTICE INSURANCE
The Company carries claims-made malpractice insurance for each of its
physicians. This insurance provides coverage of $1,000,000 per incident, with a
$2,000,000 annual limit. In addition, the Company has an umbrella policy which
provides coverage of $5,000,000 per claim, with a $5,000,000 annual limit.
Management is not aware of any reported claims pending against the Company.
Losses resulting from unreported claims cannot be estimated by management and,
therefore, are not included in the accompanying combined financial statements.
5. RELATED PARTY TRANSACTIONS
The Company leases a medical building from a stockholder. Total lease
payments were approximately $167,000 for the eleven-month period ended November
30, 1996 and $122,000 for the year ended December 31, 1995. The Company also
leased a medical building from an employee with total lease payments
approximating $29,000 for the eleven-month period ended November 30, 1996 and
$36,000 for the year ended December 31, 1995.
The Company received rental income of approximately $17,000 for the
eleven-month period ended November 30, 1996 from a medical building sublease
arrangement with an affiliated physician. Future minimum rentals to be received
under this sublease arrangement total approximately $156,000 at November 30,
1996.
The Company paid a stockholder approximately $311,000 for the eleven-month
period ended November 30, 1996 and $448,000 for the year ended December 31, 1995
as compensation for services provided to the Company.
F-47
<PAGE> 118
DANIEL B. FELLER, M.D., P.C.,
D/B/A PARADISE VALLEY EYE SPECIALISTS;
EYE SPECIALISTS OF ARIZONA NETWORK, P.C.;
AND SHARONA OPTICAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
PVES' deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
DEFERRED TAX ASSETS
Noncurrent:
Tax credit carryforward................................... $ 5,286 $ 5,286
Net operating loss carryforward........................... 2,576 5,851
-------- --------
Total deferred tax assets......................... 7,862 11,137
DEFERRED TAX LIABILITIES
Current:
Accrual to cash........................................... 23,632 11,468
Noncurrent:
Capital lease............................................. 4,810 8,688
Depreciation expense...................................... 30,429 25,488
-------- --------
35,239 34,176
-------- --------
Total deferred tax liabilities.................... 58,871 45,644
-------- --------
Net deferred tax assets........................... $(51,009) $(34,507)
======== ========
</TABLE>
Components of the income tax provision (benefit) which relates only to PVES
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 NOVEMBER 30, 1996
----------------------------- -----------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Federal.................. $ -- $ (9,038) $ (9,038) $ -- $(12,866) $(12,866)
State.................... -- (1,060) (1,060) -- (3,636) (3,636)
------- -------- -------- ------- -------- --------
$ -- $(10,098) $(10,098) $ -- $(16,502) $(16,502)
======= ======== ======== ======= ======== ========
</TABLE>
Income taxes are different from the amount computed by applying the United
States statutory rate to income before income taxes for the following reasons:
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Income taxes at the statutory rate........................ $ 20,371 $ 7,774
Permanent differences..................................... 356 356
S corporation income...................................... (24,732) (21,865)
State taxes, net of federal benefit....................... (700) (2,400)
Tax credit................................................ (5,286) --
Personal service corporation status....................... (107) (367)
-------- --------
$(10,098) $(16,502)
======== ========
</TABLE>
At December 31, 1995 and November 30, 1996, PVES has available net
operating loss carryforwards of approximately $6,000 (which expires in 2010) and
$14,000 (which expires in 2011), respectively.
F-48
<PAGE> 119
DANIEL B. FELLER, M.D., P.C.,
D/B/A PARADISE VALLEY EYE SPECIALISTS;
EYE SPECIALISTS OF ARIZONA NETWORK, P.C.;
AND SHARONA OPTICAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. SUBSEQUENT EVENT
On December 1, 1996, substantially all assets and liabilities of Daniel B.
Feller, M.D., P.C., d/b/a Paradise Valley Eye Specialists, Eye Specialists of
Arizona Network, P.C., and Sharona Optical, Inc. were acquired by Vision
Twenty-One, Inc. (Vision) in exchange for approximately 421,000 shares of Vision
common stock and notes of approximately $150,000. In connection therewith, the
Company entered into a 40-year business management agreement with Vision,
whereby Vision will provide substantially all nonmedical services to the
practice.
The combined financial statements of Daniel B. Feller, M.D., P.C., d/b/a
Paradise Valley Eye Specialists; Eye Specialists of Arizona Network, P.C.; and
Sharona Optical, Inc. have been prepared as supplemental information about the
association to which Vision will provide management services following
consummation of the acquisition. The Company previously operated as a separate
independent association. The historical financial position, results of
operations and cash flows do not reflect any adjustments relating to the
acquisition.
F-49
<PAGE> 120
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Northwest Eye Specialists, P.L.L.C.
We have audited the accompanying balance sheets of Northwest Eye
Specialists, P.L.L.C. (the Company) as of December 31, 1995 and November 30,
1996, and the related statements of income, partners' equity, and cash flows for
the year ended December 31, 1995 and the eleven-month period ended November 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Northwest Eye Specialists,
P.L.L.C. at December 31, 1995 and November 30, 1996, and the results of its
operations and its cash flows for the year ended December 31, 1995 and the
eleven-month period ended November 30, 1996 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Tampa, Florida
January 15, 1997
F-50
<PAGE> 121
NORTHWEST EYE SPECIALISTS, P.L.L.C.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $135,148 $122,445
Patient accounts receivable, net of allowances for
uncollectible accounts of approximately $49,000 and
$96,000 at December 31, 1995 and November 30, 1996,
respectively........................................... 195,209 349,974
Due from related parties.................................. 32,420 32,107
Prepaid expenses.......................................... 24,963 40,384
Inventories............................................... -- 65,476
-------- --------
Total current assets.............................. 387,740 610,386
Property, equipment and improvements, net................... 105,841 141,201
Other assets................................................ 27,072 27,072
-------- --------
Total assets...................................... $520,653 $778,659
======== ========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 53,832 $250,386
Accrued compensation...................................... 34,421 72,452
Accrued distributions to physicians....................... -- 101,260
Other accrued liabilities................................. 8,727 8,018
Profit sharing payable.................................... 51,162 30,000
Due to related parties.................................... 7,082 7,082
Short-term borrowings..................................... -- 45,000
Current maturities of obligations under capital leases.... 7,962 8,341
-------- --------
Total current liabilities......................... 163,186 522,539
Obligations under capital leases, net of current portion.... 19,742 12,337
Partners' equity............................................ 337,725 243,783
-------- --------
Total liabilities and partners' equity............ $520,653 $778,659
======== ========
</TABLE>
See accompanying notes.
F-51
<PAGE> 122
NORTHWEST EYE SPECIALISTS, P.L.L.C.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Revenues:
Net patient service revenues.............................. $2,302,823 $2,160,519
Sales of optical goods.................................... -- 250,901
Other..................................................... 42,399 2,964
---------- ----------
Total revenues.................................... 2,345,222 2,414,384
Expenses:
Salaries, wages and benefits.............................. 559,124 620,435
Cost of optical goods sold................................ -- 94,901
Medical supplies.......................................... 177,681 156,962
General and administrative................................ 430,894 571,594
Insurance................................................. 190,045 146,808
Building and equipment rent............................... 120,000 140,657
Depreciation and amortization............................. 26,372 27,688
Consulting fee to physician............................... -- 11,000
Interest.................................................. 50,817 5,353
---------- ----------
Total expenses.................................... 1,554,933 1,775,398
---------- ----------
Net income........................................ $ 790,289 $ 638,986
========== ==========
</TABLE>
See accompanying notes.
F-52
<PAGE> 123
NORTHWEST EYE SPECIALISTS, P.L.L.C.
STATEMENTS OF PARTNERS' EQUITY
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Partners' equity, beginning of period....................... $ 278,895 $ 337,725
Net income................................................ 790,289 638,986
Cash contributions from partners.......................... 75,321 --
In-kind capital contributions from partner................ 120,000 151,657
Distributions to partners................................. (926,780) (884,585)
--------- ---------
Partners' equity, end of period............................. $ 337,725 $ 243,783
========= =========
</TABLE>
See accompanying notes.
F-53
<PAGE> 124
NORTHWEST EYE SPECIALISTS, P.L.L.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 790,289 $ 638,986
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 26,372 27,688
In-kind capital contributions from partner................ 120,000 151,657
Changes in operating assets and liabilities:
Patient accounts receivable, net....................... (25,534) (154,765)
Due from related parties............................... (3,025) 313
Prepaid expenses....................................... (17,529) (15,421)
Inventories............................................ -- (65,476)
Accounts payable, accrued expenses and other........... 17,350 313,974
--------- ---------
Net cash provided by operating activities......... 907,923 896,956
INVESTING ACTIVITIES
Cash contributions from partners............................ 75,321 --
Purchases of property and equipment......................... (66,650) (63,048)
--------- ---------
Net cash provided by (used in) investing activities......... 8,671 (63,048)
FINANCING ACTIVITIES
Proceeds from short-term borrowings......................... -- 45,000
Principal payments on capital leases........................ (7,041) (7,026)
Distributions to partners................................... (926,780) (884,585)
--------- ---------
Net cash used in financing activities....................... (933,821) (846,611)
--------- ---------
Decrease in cash............................................ (17,227) (12,703)
Cash at beginning of period................................. 152,375 135,148
--------- ---------
Cash at end of period....................................... $ 135,148 $ 122,445
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest...................... $ 48,013 $ 5,353
========= =========
</TABLE>
See accompanying notes.
F-54
<PAGE> 125
NORTHWEST EYE SPECIALISTS, P.L.L.C.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Northwest Eye Specialists, P.L.L.C. (the Company), an Arizona Professional
Company, operates a professional medical practice in Tucson, Arizona,
specializing in general ophthalmology and surgery. Per the operating agreement
dated June 1, 1993, the Company will cease to exist upon the occurrence of
certain events or on December 31, 2050. Each member's liability for the debts
and obligation of the Company shall be limited as set forth in the Arizona
Limited Liability Company Act, Section 29-651.
INVENTORIES
Inventories consist primarily of optical lenses, contact lenses and
eyeglass frames (collectively, "optical goods"). Inventories are stated at the
lower of cost or market, with cost determined on a specific-identification
basis.
PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements are carried at cost. Depreciation,
including amortization of assets held under capital lease obligations, is
computed using the straight-line method, with the assets' useful lives ranging
from 5 to 39 years. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
Property, equipment and improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Medical equipment........................................... $ 57,827 $ 74,611
Office equipment............................................ 38,120 42,954
Optical shop equipment...................................... 15,000 19,158
Medical equipment held under capital leases................. 39,924 39,924
Leasehold improvements...................................... 7,121 44,393
-------- --------
157,992 221,040
Less accumulated depreciation and amortization.............. (52,151) (79,839)
-------- --------
$105,841 $141,201
======== ========
</TABLE>
Amortization expense related to capital leases is included in depreciation
and amortization in the accompanying statements of income.
NET PATIENT SERVICE REVENUES
Net patient service revenues are based on established billing rates, less
allowances for contractual adjustments for patients covered by Medicare, Arizona
Health Care Cost Containment System (AHCCCS) and various other discount
arrangements. Payments received under these programs and arrangements, which are
based on predetermined rates, are generally less than the Company's established
billing rates and the differences are recorded as contractual adjustments at the
time the related service is rendered.
For the year ended December 31, 1995 and the eleven-month period ended
November 30, 1996, approximately 53% and 52%, respectively, of the Company's net
patient service revenues were derived from the Medicare and AHCCCS programs. The
Company does not believe that there are any credit risks associated with
receivables due from governmental agencies. Concentration of credit risk from
other payors is
F-55
<PAGE> 126
NORTHWEST EYE SPECIALISTS, P.L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
limited by the number of patients and payors. The Company does not require any
form of collateral from its patients or third-party payors.
Laws and regulations governing the Medicare and AHCCCS programs are complex
and subject to interpretation. The Company believes that it is in compliance
with all applicable laws and regulations and is not aware of any pending or
threatened investigations involving allegations of potential wrong doing. While
no such regulatory inquiries have been made, compliance with such laws and
regulations can be subject to future government review and interpretation as
well as significant regulatory action including fines, penalties and exclusion
from the Medicare and AHCCCS programs.
INCOME TAXES
The Company was organized as an Arizona Limited Liability Company and is
taxed as a partnership for federal and state income tax purposes. As a result,
in lieu of corporate income taxes, the Company's taxable income is passed
through to the partners of the Company and taxed at the individual taxpayer
level in accordance with their ownership interests. As a result, the
accompanying financial statements include no provision for income taxes for the
Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amount reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash reflects its fair value because of the
short-term maturity of that financial instrument. It is not practicable to
estimate the fair value of the Company's capital lease obligation because the
Company's incremental borrowing rate cannot reasonably be determined.
2. RELATED PARTY TRANSACTIONS
The Company leases its operating facilities and certain equipment from a
partner of the Company. Expenses under such leases amounted to approximately
$120,000 and $141,000 for the year ended December 31, 1995 and the eleven-month
period ended November 30, 1996, respectively. Such amounts are recognized as
in-kind capital contributions from partner because no payment was made to the
partner.
The Company recognized expense of $11,000 for the eleven-month period ended
November 30, 1996 under a consulting agreement with a partner of the Company.
Such amount is recognized as in-kind capital contributions from partner because
no payment was made to the partner.
The Company reimbursed a partner in 1995 for interest on a loan relating to
the Company's facility. Such interest expense reimbursement was approximately
$51,000 for the year ended December 31, 1995. Although the partner incurred
interest on the loan in 1996, the Company did not reimburse the partner for such
interest in 1996.
F-56
<PAGE> 127
NORTHWEST EYE SPECIALISTS, P.L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. LEASE COMMITMENTS
At November 30, 1996, approximate future minimum rental commitments under
noncancelable operating leases (with an initial or remaining term in excess of
one year) and a capital lease are as follows (including related party leases):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASE
---------- -------
<S> <C> <C>
Month ending December 31, 1996.............................. $ 10,984 $ 820
Year ending December 31:
1997...................................................... 133,955 9,845
1998...................................................... 134,492 9,845
1999...................................................... 121,820 2,461
2000...................................................... 120,000 --
Thereafter................................................ 6,000,000 --
---------- -------
Total minimum lease obligations............................. $6,521,251 22,971
==========
Less amount representing interest........................... (2,293)
-------
Present value of minimum lease obligations.................. $20,678
=======
</TABLE>
4. RETIREMENT PLAN
The Company maintains an employee savings and profit sharing plan under
Section 401(k) of the Internal Revenue Code. The plan covers substantially all
employees. Under the plan, the Company may make discretionary contributions
subject to various limits. Total Company expense related to the plan was
approximately $52,000 and $44,000 for the year ended December 31, 1995 and for
the eleven-month period ended November 30, 1996, respectively.
5. MALPRACTICE INSURANCE
The Company carries separate occurrence based malpractice insurance
policies for each of its two physicians. This insurance provides separate
per-occurrence coverage of $2,000,000 and $3,000,000, respectively, for the two
physicians with an aggregate limit of $4,000,000 and $5,000,000, respectively.
Management is not aware of any reported claims pending against the Company.
Losses resulting from unreported claims cannot be estimated by management and,
therefore, are not included in the accompanying financial statements.
6. SHORT-TERM BORROWINGS
Short-term borrowings represent a bank revolving line of credit of $75,000
for working capital needs, of which $30,000 is available at November 30, 1996.
The maturity date is June 16, 1997. Interest payments are due monthly with
interest accruing at the bank's prime rate (9.25% at November 30, 1996). The
revolving line of credit is collateralized by the Company's receivables and
guaranteed by the partners.
7. COMMITMENTS AND CONTINGENCIES
Other assets include an investment in an unrelated limited liability
investment company with a book value of $27,072 at December 31, 1995 and
November 30, 1996. Under the investment agreement, the investment company may
require additional capital contributions from the Company not to exceed $50,000
in the aggregate. Additional capital contributions of approximately $3,000 have
been made through November 30, 1996.
F-57
<PAGE> 128
NORTHWEST EYE SPECIALISTS, P.L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. OTHER REVENUE
Through December 31, 1995, an unrelated organization operated an optical
shop on the Company's premises. Other revenue for the year ended December 31,
1995 includes approximately $41,000 received by the Company related to the
optical shop arrangement with such unrelated organization.
9. SUBSEQUENT EVENT
On December 1, 1996, substantially all assets and liabilities of the
Company were acquired by Vision Twenty-One, Inc. (Vision) in exchange for
approximately 492,000 shares of Vision common stock and notes of approximately
$396,000. In connection therewith, the Company entered into a 40-year business
management agreement with Vision, whereby Vision will provide substantially all
nonmedical services to the practice.
The financial statements of the Company have been prepared as supplemental
information about the associations to which Vision will provide management
services following consummation of the acquisition. The Company previously
operated as a separate independent association. The historical financial
position, results of operations and cash flows do not reflect any adjustments
relating to the acquisition.
F-58
<PAGE> 129
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Lindstrom, Samuelson & Hardten Ophthalmology Associates, P.A.
and Vision Correction Centers, Inc.
We have audited the accompanying combined balance sheets of Lindstrom,
Samuelson & Hardten Ophthalmology Associates, P.A. and Vision Correction
Centers, Inc. as of December 31, 1995 and November 30, 1996, and the related
combined statements of operations, stockholders' equity, and cash flows for the
year ended December 31, 1995 and the eleven-month period ended November 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Lindstrom,
Samuelson & Hardten Ophthalmology Associates, P.A. and Vision Correction
Centers, Inc. at December 31, 1995 and November 30, 1996, and the combined
results of their operations and their cash flows for the year ended December 31,
1995 and the eleven-month period ended November 30, 1996 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Tampa, Florida
January 14, 1997
F-59
<PAGE> 130
LINDSTROM, SAMUELSON & HARDTEN OPHTHALMOLOGY ASSOCIATES, P.A. AND
VISION CORRECTION CENTERS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 353 $177,637
Patient accounts receivable, net of allowance for doubtful
accounts of approximately $51,000 and $48,000 at
December 31, 1995 and November 30, 1996,
respectively........................................... 305,103 290,272
Other receivables......................................... 5,000 11,706
Prepaid expenses.......................................... 12,473 3,932
-------- --------
Total current assets.............................. 322,929 483,547
Property, equipment and improvements, net................... 584,653 455,448
Other assets................................................ 51,912 36,771
-------- --------
Total assets...................................... $959,494 $975,766
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $125,531 $257,421
Due to related party...................................... -- 84,825
Revolving credit note payable............................. -- 60,000
Current portion of long-term debt......................... 53,713 46,439
Current portion of obligations under capital leases....... 81,419 111,817
-------- --------
Total current liabilities......................... 260,663 560,502
Long-term debt.............................................. 106,938 65,079
Obligations under capital leases, net of current portion.... 388,299 316,473
Stockholders' equity:
Common stock, $1 par value: 100 shares authorized, issued
and outstanding........................................ 100 100
Retained earnings......................................... 203,494 33,612
-------- --------
Total stockholders' equity........................ 203,594 33,712
-------- --------
Total liabilities and stockholders' equity........ $959,494 $975,766
======== ========
</TABLE>
See accompanying notes.
F-60
<PAGE> 131
LINDSTROM, SAMUELSON & HARDTEN OPHTHALMOLOGY ASSOCIATES, P.A. AND
VISION CORRECTION CENTERS, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Revenues:
Net patient service revenues.............................. $2,679,914 $3,404,975
Other..................................................... 61,171 57,991
---------- ----------
Total revenues.................................... 2,741,085 3,462,966
Expenses:
Compensation to physician stockholders.................... 884,903 947,780
Salaries, wages and benefits.............................. 585,386 746,251
Advertising............................................... 239,904 240,848
Professional fees -- related party........................ -- 591,455
Professional fees -- other................................ 197,680 164,794
General and administrative................................ 263,856 332,598
Medical supplies.......................................... 82,429 118,665
Insurance................................................. 73,697 31,496
Building and equipment rent............................... 162,534 171,980
Depreciation and amortization............................. 257,730 235,047
Interest.................................................. 79,674 51,934
---------- ----------
Total expenses.................................... 2,827,793 3,632,848
---------- ----------
Net loss.......................................... $ (86,708) $ (169,882)
========== ==========
</TABLE>
See accompanying notes.
F-61
<PAGE> 132
LINDSTROM, SAMUELSON & HARDTEN OPHTHALMOLOGY ASSOCIATES, P.A. AND
VISION CORRECTION CENTERS, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- RETAINED STOCKHOLDERS'
NUMBER AMOUNT EARNINGS EQUITY
------ ------ --------- -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995............................... 100 $100 $ 290,202 $ 290,302
Net loss............................................. -- -- (86,708) (86,708)
--- ---- --------- ---------
BALANCE, DECEMBER 31, 1995............................. 100 100 203,494 203,594
Net loss............................................. -- -- (169,882) (169,882)
--- ---- --------- ---------
BALANCE, NOVEMBER 30, 1996............................. 100 $100 $ 33,612 $ 33,712
=== ==== ========= =========
</TABLE>
See accompanying notes.
F-62
<PAGE> 133
LINDSTROM, SAMUELSON & HARDTEN OPHTHALMOLOGY ASSOCIATES, P.A. AND
VISION CORRECTION CENTERS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $ (86,708) $(169,882)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 257,730 235,047
(Gain) loss on disposal of fixed assets................... (8,477) 1,096
Changes in assets and liabilities:
Patient accounts receivable, net....................... (20,851) 14,831
Other receivables...................................... 6,000 (6,706)
Prepaid expenses....................................... (1,298) 8,541
Accounts payable and accrued expenses.................. 16,867 116,807
Due to related party................................... -- 84,825
--------- ---------
Net cash provided by operating activities......... 163,263 284,559
INVESTING ACTIVITIES
Purchases of property and equipment......................... (55,947) (47,884)
(Increase) decrease in other assets......................... (1,089) 4,700
--------- ---------
Net cash used in investing activities....................... (57,036) (43,184)
FINANCING ACTIVITIES
Proceeds from issuance of revolving credit note payable..... -- 80,000
Payment of revolving credit note payable.................... -- (20,000)
Payment of long-term debt................................... (83,898) (49,133)
Principal payments on capital leases........................ (60,035) (74,958)
--------- ---------
Net cash used in financing activities....................... (143,933) (64,091)
--------- ---------
(Decrease) increase in cash................................. (37,706) 177,284
Cash at beginning of period................................. 38,059 353
--------- ---------
Cash at end of period....................................... $ 353 $ 177,637
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest.................... $ 72,954 $ 56,000
========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITY
Capital lease obligations incurred to acquire equipment..... $ 45,889 $ 33,530
========= =========
Loan and vendor accounts payable incurred to acquire
equipment................................................. $ 24,856 $ 15,083
========= =========
</TABLE>
See accompanying notes.
F-63
<PAGE> 134
LINDSTROM, SAMUELSON & HARDTEN OPHTHALMOLOGY ASSOCIATES, P.A.
AND VISION CORRECTION CENTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Lindstrom, Samuelson & Hardten Ophthalmology Associates, P.A. (Practice), a
Minnesota corporation, operates a professional medical practice, specializing in
general ophthalmology and surgery. Vision Correction Centers, Inc. (VCC), a
Minnesota corporation with common ownership with the Practice, was formed in
1994 to provide ophthalmic surgery services. Both corporations operate in the
greater Minneapolis and St. Paul area, and are hereinafter collectively referred
to as the Company. During 1995, VCC transferred all of its assets and
liabilities to the Practice and ceased all operations. All significant
intercompany transactions have been eliminated.
PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements are carried at cost. Depreciation is
computed using straight-line and accelerated methods, with the assets' useful
lives estimated at five to seven years. Routine maintenance and repairs are
charged to expense as incurred, while costs of betterments and renewals are
capitalized.
Property, equipment and improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Medical equipment........................................... $ 991,724 $1,043,715
Office furniture and equipment.............................. 147,760 181,938
Computer software........................................... 25,021 25,521
Leasehold improvements...................................... 35,752 37,170
---------- ----------
1,200,257 1,288,344
Less accumulated depreciation and amortization.............. (615,604) (832,896)
---------- ----------
$ 584,653 $ 455,448
========== ==========
</TABLE>
Included in medical equipment as of December 31, 1995 and November 30, 1996
are assets acquired through capital leases with original costs of approximately
$558,000. Included in office furniture and equipment as of November 30, 1996 are
assets acquired through capital leases with original costs of approximately
$15,000.
Amortization expense related to capital leases is included in depreciation
and amortization in the combined statements of operations.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and revolving credit note payable reported in
the combined financial statements reflects their fair value because of the
short-term maturity of those financial instruments. It is not practicable to
estimate the fair value of the Company's long-term debt and obligations under
capital leases because the Company's incremental borrowing rate cannot
reasonably be determined.
NET PATIENT SERVICE REVENUES
Net patient service revenues are based on established billing rates, less
allowances for contractual adjustments for patients covered by Medicare,
Medicaid and various other discount arrangements. Payments received under these
programs and arrangements, which are based on predetermined rates, are generally
less
F-64
<PAGE> 135
LINDSTROM, SAMUELSON & HARDTEN OPHTHALMOLOGY ASSOCIATES, P.A.
AND VISION CORRECTION CENTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
than the Company's established billing rates and the differences are recorded as
contractual adjustments at the time the related service is rendered.
For the year ended December 31, 1995 and the eleven-month period ended
November 30, 1996, approximately 23% and 19%, respectively, of the Company's net
patient service revenues were derived from the Medicare and Medicaid programs.
The Company does not believe that there are any credit risks associated with
receivables due from governmental agencies. Concentration of credit risk from
other payors is limited by the number of patients and payors. The Company does
not require any form of collateral from its patients or third-party payors.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential wrong
doing. While no such regulatory inquires have been made, compliance with such
laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties and exclusion from the Medicare and Medicaid programs.
ADVERTISING COSTS
The Company expenses advertising costs as incurred.
INCOME TAXES
Income taxes for VCC have been provided using the liability method in
accordance with Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
The Practice is taxed under the provisions of Subchapter S of the Internal
Revenue Code, which generally provides that in lieu of corporate taxes, the
stockholders shall be taxed on the Practice's taxable income in accordance with
their ownership interests. As a result, the accompanying combined financial
statements include no provision for income taxes for the Practice.
USE OF ESTIMATES
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amount reported in the combined financial
statements and accompanying notes. Actual results could differ from those
estimates.
OTHER ASSETS
The Company purchased a physician practice in 1994. Costs of approximately
$43,000 and $32,000 (net of accumulated amortization of approximately $14,000
and $25,000) as of December 31, 1995 and November 30, 1996, respectively, are
included in other assets in the combined financial statements. The costs are
being amortized over five years and the related expense is included in
depreciation and amortization in the combined statements of operations.
F-65
<PAGE> 136
LINDSTROM, SAMUELSON & HARDTEN OPHTHALMOLOGY ASSOCIATES, P.A.
AND VISION CORRECTION CENTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Bank term loan bearing interest at prime plus 1% (9.75% and
9.25% at December 31, 1995 and November 30, 1996,
respectively), payable in equal installments of $3,000
(principal and interest) through December 1998............. $100,475 $ 75,219
Note payable with interest imputed at 10%, payable in
monthly installments of $1,200 (principal and interest)
through September 1999..................................... 44,876 36,299
Installment loan from vendor for medical equipment......... 15,300 --
-------- --------
160,651 111,518
Less current portion....................................... (53,713) (46,439)
-------- --------
$106,938 $ 65,079
======== ========
</TABLE>
The term loan is collateralized by substantially all of the assets of the
Company.
As of November 30, 1996, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Month ending December 31, 1996.............................. $ 4,222
Year ending December 31:
1997...................................................... 46,239
1998...................................................... 50,693
1999...................................................... 10,364
--------
$111,518
========
</TABLE>
3. LEASE COMMITMENTS
Future minimum lease commitments under noncancelable operating and capital
leases (with an initial or remaining term in excess of one year) at November 30,
1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
Month ending December 31, 1996.............................. $ 21,757 $ 15,277
Year ending December 31:
1997...................................................... 160,267 186,950
1998...................................................... 183,857 194,322
1999...................................................... 120,395 201,654
2000...................................................... 11,990 208,986
2001...................................................... 1,364 106,326
-------- --------
Total minimum lease payments................................ 499,630 $913,515
========
Less amount representing interest........................... (71,340)
--------
Present value of minimum lease payments..................... $428,290
========
</TABLE>
F-66
<PAGE> 137
LINDSTROM, SAMUELSON & HARDTEN OPHTHALMOLOGY ASSOCIATES, P.A.
AND VISION CORRECTION CENTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES
At December 31, 1995, VCC had no deferred tax assets or liabilities as the
result of the sale of its assets to the Practice. This sale resulted in income
during 1995 for tax purposes.
Income taxes are different from the amount computed by applying the United
States statutory rate to income before income taxes for the following reasons:
<TABLE>
<CAPTION>
1995
--------
<S> <C>
Income taxes at the statutory rate.......................... $(29,481)
Permanent differences....................................... 28,573
S-corporation income........................................ 14,448
State taxes, net of federal benefit......................... 2,576
Benefit of graduated rates.................................. (6,825)
Change in valuation allowance............................... (9,291)
--------
$ --
========
</TABLE>
The change in the valuation allowance for the year ended December 31, 1995
was $9,291.
5. MALPRACTICE INSURANCE
The Company carries claims-made malpractice insurance for each of its
physicians. This insurance provides coverage of $5,000,000 per incident, with a
$5,000,000 annual limit. In addition, the Company has an umbrella policy which
provides coverage of $2,000,000 per claim, with a $4,000,000 annual limit.
Management is not aware of any reported claims pending against the Company.
Losses resulting from unreported claims cannot be estimated by management and,
therefore, are not included in the accompanying combined financial statements.
6. RETIREMENT PLAN
The Company maintains an employee savings and profit sharing plan under
Section 401(k) of the Internal Revenue Code. The plan covers substantially all
employees. Under the plan, the Company may make discretionary contributions
subject to various limits. Total Company expense related to this plan was
approximately $42,000 for the year ended December 31, 1995 and for the
eleven-month period ended November 30, 1996.
7. COMMITMENTS
The Company has employment agreements with each of the three
physician-stockholders which provide for, among other things, base pay and
incentive compensation based on the Company's net income. Additionally, the
Company has a deferred compensation agreement with each physician-stockholder
which provides for compensation in the event of voluntary or involuntary
termination. In connection with the transaction described in Note 9, each of the
aforementioned agreements was terminated.
The Company has a revolving credit note payable of $100,000 due on demand,
bearing interest at a rate of prime plus 0.5% (8.75% at November 30, 1996). As
of November 30, 1996, the Company had $60,000 outstanding on this revolving
credit note payable.
8. RELATED PARTY TRANSACTIONS
During the eleven-month period ended November 30, 1996, the Company
incurred costs of approximately $591,000 for the use of laser equipment owned by
Laser Vision Centers, Inc. (LVC). As of
F-67
<PAGE> 138
LINDSTROM, SAMUELSON & HARDTEN OPHTHALMOLOGY ASSOCIATES, P.A.
AND VISION CORRECTION CENTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
November 30, 1996, $84,825 was payable to LVC and is included in due to related
party in the combined balance sheets. The majority stockholder of the Company is
a shareholder and director of LVC.
Subsequent to November 30, 1996, the Company executed a letter of intent
with LVC whereby the Company will sell certain equipment and assets with a net
book value of approximately $225,000. The letter of intent also states that the
Company will enter into a management service agreement with LVC for the
performance of various management services related to refractive surgery.
9. SUBSEQUENT EVENT
On December 1, 1996, substantially all assets and liabilities of the
Company were acquired by Vision Twenty-One, Inc. (Vision) in exchange for
approximately 371,000 shares of Vision common stock and notes of approximately
$460,000. In connection therewith, the Company entered into a 40-year business
management agreement with Vision, whereby Vision will provide substantially all
nonmedical services to the practice.
The combined financial statements of the Company have been prepared as
supplemental information about the associations to which Vision will provide
management services following consummation of the acquisition. The Company
previously operated as a separate independent association. The historical
financial position, results of operations and cash flows do not reflect any
adjustments relating to the acquisition.
F-68
<PAGE> 139
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Cambridge Eye Clinic, P.A. --
John W. Lahr, Optometrist, P.A. and
Eyeglass Express Optical Lab, Inc.
We have audited the accompanying combined balance sheets of Cambridge Eye
Clinic, P. A. -- John W. Lahr, Optometrist, P.A. and Eyeglass Express Optical
Lab, Inc. as of December 31, 1995 and November 30, 1996, and the related
combined statements of operations, stockholders' equity, and cash flows for the
year ended December 31, 1995 and the eleven-month period ended November 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Cambridge Eye
Clinic, P. A. -- John W. Lahr, Optometrist, P.A. and Eyeglass Express Optical
Lab, Inc. at December 31, 1995 and November 30, 1996, and the combined results
of their operations and their cash flows for the year ended December 31, 1995
and the eleven-month period ended November 30, 1996 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Tampa, Florida
January 10, 1997
F-69
<PAGE> 140
CAMBRIDGE EYE CLINIC, P. A.--
JOHN W. LAHR, OPTOMETRIST, P.A. AND
EYEGLASS EXPRESS OPTICAL LAB, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 45,061 $ 83,302
Patient accounts receivable, net of allowances for
uncollectible accounts of approximately $37,000 and
$25,000 at December 31, 1995 and November 30, 1996,
respectively........................................... 191,680 129,517
Other receivables......................................... 3,374 15,668
Inventories............................................... 207,968 210,701
Prepaid expenses.......................................... 11,381 11,581
-------- --------
Total current assets.............................. 459,464 450,769
Deferred tax assets......................................... 31,433 33,237
Other assets................................................ 600 462
Property, equipment and improvements, net................. 149,518 101,922
-------- --------
Total assets...................................... $641,015 $586,390
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 65,151 $141,222
Note payable to stockholder............................... 5,946 5,946
Demand notes payable...................................... 5,363 1,857
Current maturities of long-term debt...................... 24,795 22,330
Deferred tax liabilities.................................. 141,368 89,277
-------- --------
Total current liabilities......................... 242,623 260,632
Long-term debt, net of current portion...................... 155,480 161,557
Stockholders' equity:
Common stock, no par value: 2,500 shares authorized; 1,250
shares issued and outstanding.......................... -- --
Additional paid-in capital................................ 42,389 42,389
Note receivable from stock sales.......................... (12,850) --
Retained earnings......................................... 213,373 148,840
Treasury stock at cost (750 shares)....................... -- (27,028)
-------- --------
Total stockholders' equity........................ 242,912 164,201
-------- --------
Total liabilities and stockholders' equity........ $641,015 $586,390
======== ========
</TABLE>
See accompanying notes.
F-70
<PAGE> 141
CAMBRIDGE EYE CLINIC, P. A. --
JOHN W. LAHR, OPTOMETRIST, P.A. AND
EYEGLASS EXPRESS OPTICAL LAB, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Revenues:
Net patient service revenues.............................. $ 537,834 $ 527,068
Sales of optical goods.................................... 900,826 749,783
Other income.............................................. 2,080 2,724
---------- ----------
Total revenues.................................... 1,440,740 1,279,575
Expenses:
Compensation to physician stockholder..................... 65,175 62,306
Salaries, wages and benefits.............................. 582,086 639,931
Cost of optical goods sold................................ 348,984 316,115
General and administrative................................ 182,769 177,697
Insurance................................................. 15,791 6,891
Building and equipment rent............................... 136,965 125,894
Depreciation.............................................. 60,878 42,458
Interest.................................................. 21,759 16,931
Other..................................................... 6,503 3,107
---------- ----------
Total expenses.................................... 1,420,910 1,391,330
---------- ----------
Income (loss) before income taxes........................... 19,830 (111,755)
Income tax expense (benefit)................................ 7,984 (47,222)
---------- ----------
Net income (loss)........................................... $ 11,846 $ (64,533)
========== ==========
</TABLE>
See accompanying notes.
F-71
<PAGE> 142
CAMBRIDGE EYE CLINIC, P. A. --
JOHN W. LAHR, OPTOMETRIST, P.A. AND
EYEGLASS EXPRESS OPTICAL LAB, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTE
NO-PAR ADDITIONAL RECEIVABLE TOTAL
COMMON PAID-IN FROM RETAINED TREASURY STOCKHOLDERS'
STOCK SHARES CAPITAL STOCK SALES EARNINGS STOCK EQUITY
------------ ---------- ----------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995..... 1,250 $42,389 $(12,850) $201,527 $ -- $231,066
Net income................... -- -- -- 11,846 -- 11,846
----- ------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1995... 1,250 42,389 (12,850) 213,373 -- 242,912
Net loss..................... -- -- -- (64,533) -- (64,533)
Payment on note receivable
from stock sales.......... -- -- 12,850 -- -- 12,850
Purchase of treasury stock at
cost...................... -- -- -- -- (27,028) (27,028)
----- ------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1996... 1,250 $42,389 $ -- $148,840 $(27,028) $164,201
===== ======= ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-72
<PAGE> 143
CAMBRIDGE EYE CLINIC, P. A. --
JOHN W. LAHR, OPTOMETRIST, P.A. AND
EYEGLASS EXPRESS OPTICAL LAB, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 11,846 $(64,533)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation.............................................. 60,878 42,458
Loss on disposal of property, equipment and
improvements........................................... -- 2,774
Provision for deferred taxes.............................. 3,715 (53,895)
Changes in assets and liabilities:
Patient accounts receivable, net....................... 16,921 62,163
Other receivables...................................... 10,135 (12,294)
Inventories............................................ (7,968) (2,733)
Prepaid expenses....................................... (11,381) (200)
Other assets........................................... (320) 138
Accounts payable and accrued expenses.................. (28,483) 76,071
-------- --------
Net cash provided by operating activities......... 55,343 49,949
INVESTING ACTIVITIES
Proceeds from collection on notes receivable from stock
sales..................................................... -- 12,850
Proceeds from sale of property, plant and equipment....... -- 2,364
Purchases of property, equipment and improvements......... (42,350) --
-------- --------
Net cash (used in) provided by investing
activities...................................... (42,350) 15,214
FINANCING ACTIVITIES
Proceeds from long-term debt................................ 20,000 21,500
Repayment of long-term debt and demand notes payable........ (62,696) (21,394)
Purchase of treasury stock.................................. -- (27,028)
Proceeds from issuance of note payable to stockholder....... 5,946 --
-------- --------
Net cash used in financing activities............. (36,750) (26,922)
-------- --------
(Decrease) increase in cash................................. (23,757) 38,241
Cash at beginning of period................................. 68,818 45,061
-------- --------
Cash at end of period....................................... $ 45,061 $ 83,302
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest...................... $ 21,202 $ 16,931
======== ========
Cash paid during the year for income taxes.................. $ -- $ 6,673
======== ========
</TABLE>
See accompanying notes.
F-73
<PAGE> 144
CAMBRIDGE EYE CLINIC, P. A. --
JOHN W. LAHR, OPTOMETRIST, P.A. AND
EYEGLASS EXPRESS OPTICAL LAB, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Cambridge Eye Clinic, P. A. -- John W. Lahr, Optometrist, P.A. (the Clinic)
is a Minnesota corporation which operates professional medical practices,
specializing in general ophthalmology and optometry. The Clinic's service area
is Cambridge, Minnesota, and surrounding communities in North Branch, Mora,
Sandstone and Pine City, Minnesota.
The combined financial statements include the accounts of Cambridge Eye
Clinic, P. A. -- John W. Lahr, Optometrist, P.A. and Eyeglass Express Optical
Lab, Inc., which are companies under common ownership and are collectively
referred to herein as the "Company." All intercompany accounts and transactions
have been eliminated from these combined financial statements.
CASH EQUIVALENTS
The Company considers all liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories consist primarily of optical lenses, contact lenses and
eyeglass frames (collectively, "optical goods"). Inventories are stated at the
lower of cost or market, with cost determined on a specific-identification
basis.
PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements are carried at cost. Depreciation is
computed using accelerated methods, with the assets' useful lives estimated at
19 years for leasehold improvements and three to seven years for the other asset
categories. Routine maintenance and repairs are charged to expense as incurred,
while costs of betterments and renewals are capitalized.
INCOME TAXES
Income taxes have been provided using the liability method in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
NET PATIENT SERVICE REVENUES
Net patient service revenues are based on established billing rates less
allowances for contractual adjustments for patients covered by Medicare,
Medicaid and various other discount arrangements. Payments received under these
programs and arrangements, which generally are based on predetermined rates, are
generally less than the Company's customary charges, and the differences are
recorded as contractual adjustments at the time the related service is rendered.
For the year ended December 31, 1995 and the eleven-month period ended
November 30, 1996, approximately 35% of the Company's net patient service
revenues were derived from services rendered to Medicare and Medicaid patients.
The Company does not believe that there are any credit risks associated with
F-74
<PAGE> 145
CAMBRIDGE EYE CLINIC, P. A. --
JOHN W. LAHR, OPTOMETRIST, P.A. AND
EYEGLASS EXPRESS OPTICAL LAB, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
receivables due from governmental agencies. Concentration of credit risk from
other third-party payors is limited by the number of patients and payors. The
Company does not require any form of collateral from its patients or third-party
payors.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential wrong
doing. While no such regulatory inquiries have been made, compliance with such
laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties and exclusion from the Medicare and Medicaid programs.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expenses
amounted to $26,182 for the year ended December 31, 1995 and $21,740 for the
eleven-month period ended November 30, 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amount reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents reported in the combined
financial statements reflects its fair value because of the short-term nature of
that financial instrument. It is not practicable to estimate the fair value of
the Company's long-term debt because the Company's incremental borrowing rate
cannot reasonably be determined.
2. PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Equipment................................................... $ 504,616 $ 504,616
Leasehold improvements...................................... 19,088 19,088
Furniture and fixtures...................................... 102,544 102,544
Vehicles.................................................... 18,051 --
Other....................................................... 15,547 15,547
--------- ---------
659,846 641,795
Less accumulated depreciation............................... (510,328) (539,873)
--------- ---------
$ 149,518 $ 101,922
========= =========
</TABLE>
F-75
<PAGE> 146
CAMBRIDGE EYE CLINIC, P. A. --
JOHN W. LAHR, OPTOMETRIST, P.A. AND
EYEGLASS EXPRESS OPTICAL LAB, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
10% note payable due in 180 monthly installments of $526
principal and interest through January 2000............... $ 20,760 $ 16,705
8% note payable due in 120 monthly installments of $89
principal and interest through July 1996.................. 2,182 --
8.25% note payable due in 173 monthly installments of $1,050
principal and interest through May 2003................... 69,366 62,840
Bank term loan payable due in 102 monthly installments of
$143 principal and interest at 1% over the Wall Street
Journal's prime rate, through September 2, 1996........... 1,501 --
Line of credit secured by the Clinic's receivables,
equipment and inventory, payable in monthly installments.
A final payment of the unpaid principal balance plus
accrued interest is due and payable December 1, 2001. The
interest rate is 2.75% over the Wall Street Journal's
prime rate................................................ 86,466 104,342
-------- --------
180,275 183,887
Less current portion........................................ (24,795) (22,330)
-------- --------
$155,480 $161,557
======== ========
</TABLE>
Maturities under the long-term debt agreements described above are as
follows:
<TABLE>
<CAPTION>
YEAR
- ----
<S> <C>
Month ending December 31, 1996.............................. $ 1,860
Year ending December 31:
1997...................................................... 22,370
1998...................................................... 35,254
1999...................................................... 39,307
2000...................................................... 36,113
2001...................................................... 33,704
Thereafter................................................ 15,279
--------
$183,887
========
</TABLE>
4. LEASE COMMITMENTS
Rent expense relating primarily to operating leases for office space is
classified as building and equipment rent in the accompanying combined
statements of operations.
F-76
<PAGE> 147
CAMBRIDGE EYE CLINIC, P. A. --
JOHN W. LAHR, OPTOMETRIST, P.A. AND
EYEGLASS EXPRESS OPTICAL LAB, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease commitments under noncancelable operating leases (with
an initial or remaining term in excess of one year) at November 30, 1996 are as
follows (including related party leases):
<TABLE>
<S> <C>
Month ending December 31, 1996.............................. $ 3,458
Year ending December 31:
1997...................................................... 41,494
1998...................................................... 41,494
1999...................................................... 41,494
2000...................................................... 41,494
2001...................................................... 41,494
Thereafter................................................ 65,699
--------
Total minimum lease obligations................... $276,627
========
</TABLE>
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
DEFERRED TAX ASSETS
Noncurrent:
Net operating loss carryforward........................... $ 31,433 $33,237
-------- -------
Total deferred tax assets......................... 31,433 33,237
DEFERRED TAX LIABILITIES
Current:
Accrual to cash........................................... 141,368 89,277
-------- -------
Net deferred tax liabilities...................... $109,935 $56,040
======== =======
</TABLE>
Components of the income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN-MONTH PERIOD ENDED
DECEMBER 31, 1995 NOVEMBER 30, 1996
--------------------------- -----------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Federal................................... $2,476 $2,835 $5,311 $3,871 $(41,129) $(37,258)
State..................................... 1,793 880 2,673 2,802 (12,766) (9,964)
------ ------ ------ ------ -------- --------
$4,269 $3,715 $7,984 $6,673 $(53,895) $(47,222)
====== ====== ====== ====== ======== ========
</TABLE>
F-77
<PAGE> 148
CAMBRIDGE EYE CLINIC, P. A. --
JOHN W. LAHR, OPTOMETRIST, P.A. AND
EYEGLASS EXPRESS OPTICAL LAB, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Income taxes are different from the amount computed by applying the United
States statutory rate to income before income taxes for the following reasons:
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31 NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Income taxes at the statutory rate.......................... $ 6,742 $(36,821)
Permanent differences....................................... 2,532 (6,845)
State taxes, net of federal benefit......................... 1,684 2,459
Benefit of graduated rates.................................. (3,082) (4,815)
Personal service corporation status......................... 108 (1,200)
------- --------
$ 7,984 $(47,222)
======= ========
</TABLE>
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that no valuation allowance at December 31, 1995 and November 30,
1996 is necessary to reduce the deferred tax assets to the amount that will more
likely than not be realized. At November 30, 1996, the Company has available net
operating loss carryforwards of approximately $83,000, which expire in the year
2011.
6. MALPRACTICE INSURANCE
The Company carries claims-made malpractice insurance for each of its
physicians. This insurance provides coverage of $1,000,000 per incident, with a
$2,000,000 aggregate annual limit. In addition, the Company has an umbrella
policy which provides coverage of $1,000,000 per claim, with a $3,000,000
aggregate annual limit. Management is not aware of any reported claims pending
against the Company not covered by its malpractice insurance policy. Losses
resulting from unreported claims cannot be estimated by management and,
therefore, are not included in the accompanying combined financial statements.
7. RETIREMENT PLAN
The Company maintains an employee savings and profit sharing plan under
Section 401(k) of the Internal Revenue Code. The plan covers substantially all
employees. Under the plan, the Company may make discretionary contributions
subject to various limits. Total Company expense related to this plan was
approximately $7,000 for the year ended December 31, 1995 and $10,000 for the
eleven-month period ended November 30, 1996.
8. RELATED PARTY TRANSACTIONS
The Company leases office space from the general stockholder. Rent expense
on these leases amounted to approximately $125,000 for the year ended December
31, 1995 and $114,000 for the eleven-month period ended November 30, 1996.
F-78
<PAGE> 149
CAMBRIDGE EYE CLINIC, P. A. --
JOHN W. LAHR, OPTOMETRIST, P.A. AND
EYEGLASS EXPRESS OPTICAL LAB, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. SUBSEQUENT EVENT
On December 1, 1996, substantially all assets and liabilities of the
Company were acquired by Vision Twenty-One, Inc. (Vision) in exchange for
approximately 116,000 shares of Vision common stock. In connection therewith,
the Company entered into a 40-year business management agreement with Vision,
whereby Vision will provide substantially all nonmedical services to the
practice.
The financial statements of the Company have been prepared as supplemental
information about the association to which Vision will provide management
services following consummation of the acquisition. The Company previously
operated as a separate independent association. The historical financial
position, results of operations and cash flows do not reflect any adjustments
relating to the acquisition.
F-79
<PAGE> 150
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Optometric Eye Care Centers, P.A.
We have audited the accompanying balance sheets of Optometric Eye Care
Centers, P.A. as of December 31, 1995 and November 30, 1996, and the related
statements of income, stockholders' equity, and cash flows for the year ended
December 31, 1995 and the eleven-month period ended November 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Optometric Eye Care Centers,
P.A. at December 31, 1995 and November 30, 1996, and the results of its
operations and its cash flows for the year ended December 31, 1995 and the
eleven-month period ended November 30, 1996 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Tampa, Florida
January 17, 1997
F-80
<PAGE> 151
OPTOMETRIC EYE CARE CENTERS, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 23,954 $ 19,271
Accounts receivable, net of allowances for uncollectible
accounts of approximately $1,000 at December 31, 1995
and November 30, 1996.................................. 79,508 71,152
Inventories............................................... 82,397 109,106
Deferred tax asset........................................ -- 238
Other current assets...................................... 392 3,300
-------- --------
Total current assets.............................. 186,251 203,067
Deferred tax asset.......................................... 5,020 10,772
Property, equipment and improvements........................ 68,858 37,002
-------- --------
Total assets...................................... $260,129 $250,841
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 44,376 $ 54,642
Income taxes payable...................................... -- 3,096
Current maturities of obligations under capital leases.... 7,002 3,744
Current maturities of long-term debt...................... 24,196 27,132
-------- --------
Total current liabilities......................... 75,574 88,614
Long-term debt.............................................. 87,262 61,963
Obligations under capital leases............................ 18,644 6,817
Stockholders' equity:
Common stock, $1 par value: 2,500 shares authorized; 1,000
shares issued and outstanding.......................... 1,000 1,000
Retained earnings......................................... 77,649 92,447
-------- --------
Total stockholders' equity........................ 78,649 93,447
-------- --------
Total liabilities and stockholders' equity........ $260,129 $250,841
======== ========
</TABLE>
See accompanying notes.
F-81
<PAGE> 152
OPTOMETRIC EYE CARE CENTERS, P.A.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Revenues:
Net patient service revenues.............................. $ 213,384 $ 242,793
Sale of optical goods..................................... 811,509 820,392
Other..................................................... 7,775 1,780
---------- ----------
Total revenues.................................... 1,032,668 1,064,965
Expenses:
Compensation -- physician stockholders.................... 192,463 218,126
Salaries, wages and benefits.............................. 252,922 247,992
Cost of optical goods sold................................ 333,145 310,367
General and administrative................................ 102,887 139,730
Contract services......................................... 1,766 15,170
Optical and clinical supplies............................. 7,893 10,893
Insurance................................................. 9,945 2,164
Building and equipment rent............................... 56,717 52,361
Depreciation and amortization............................. 43,987 33,111
Interest.................................................. 18,741 15,081
---------- ----------
Total expenses.................................... 1,020,466 1,044,995
---------- ----------
Income before income taxes.................................. 12,202 19,970
Provision for income taxes.................................. 2,815 5,172
---------- ----------
Net income........................................ $ 9,387 $ 14,798
========== ==========
</TABLE>
See accompanying notes.
F-82
<PAGE> 153
OPTOMETRIC EYE CARE CENTERS, P.A.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- RETAINED STOCKHOLDERS'
NUMBER AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995............................... 1,000 $1,000 $68,262 $69,262
Net income............................................. -- -- 9,387 9,387
----- ------ ------- -------
BALANCE AT DECEMBER 31, 1995............................. 1,000 $1,000 77,649 78,649
Net income............................................. -- -- 14,798 14,798
----- ------ ------- -------
BALANCE AT NOVEMBER 30, 1996............................. 1,000 $1,000 $92,447 $93,447
===== ====== ======= =======
</TABLE>
See accompanying notes.
F-83
<PAGE> 154
OPTOMETRIC EYE CARE CENTERS, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 9,387 $ 14,798
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 43,987 33,111
Changes in assets and liabilities:
Patient accounts receivable, net....................... (9,766) 8,356
Inventories............................................ (3,928) (26,709)
Other current assets................................... 1,658 (2,908)
Deferred income taxes.................................. (6,891) (5,990)
Accounts payable and accrued expenses.................. 5,435 10,266
Income taxes payable................................... -- 3,096
-------- --------
Net cash provided by operating activities......... 39,882 34,020
INVESTING ACTIVITIES
Purchases of property plant and equipment................... -- (1,255)
-------- --------
Net cash used in investing activities....................... -- (1,255)
FINANCING ACTIVITIES
Repayment of long-term debt................................. (21,351) (22,363)
Repayment of capital lease obligations...................... (6,065) (15,085)
-------- --------
Net cash used in financing activities....................... (27,416) (37,448)
-------- --------
Net increase (decrease) in cash............................. 12,466 (4,683)
Cash at beginning of period................................. 11,488 23,954
-------- --------
Cash at end of period....................................... $ 23,954 $ 19,271
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest...................... $ 18,741 $ 15,081
======== ========
Cash paid during the year for income taxes.................. $ 3,900 $ 4,200
======== ========
</TABLE>
See accompanying notes.
F-84
<PAGE> 155
OPTOMETRIC EYE CARE CENTERS, P.A.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Optometric Eye Care Centers, P.A. (the Company), a Minnesota corporation,
operates a professional medical practice, specializing in general optometry. The
Company's service area is Fridley, Minnesota, and the surrounding communities of
Minneapolis, Minnesota.
INVENTORIES
Inventories consist primarily of optical lenses, contact lenses and
eyeglass frames (collectively, "optical goods"). Inventories are stated at the
lower of cost or market, with cost determined on a first-in, first-out basis.
PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements are carried at cost. Depreciation is
computed using straight-line and accelerated methods, with the assets' useful
lives estimated at five to seven years. Routine maintenance and repairs are
charged to expense as incurred, while costs of betterments and renewals are
capitalized.
Property, equipment and improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Medical equipment........................................... $ 137,125 $ 137,551
Leasehold improvements...................................... 94,971 94,971
Office equipment and furniture.............................. 34,795 35,624
--------- ---------
266,891 268,146
Less accumulated depreciation and amortization.............. (198,033) (231,144)
--------- ---------
$ 68,858 $ 37,002
========= =========
</TABLE>
Included in medical equipment as of December 31, 1995 and November 30, 1996
are assets acquired through capital leases with original costs of approximately
$38,000.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash reported in the financial statements reflects
its fair value because of the short-term maturity of this financial instrument.
It is not practicable to estimate the fair value of the Company's long-term debt
and obligations under capital lease because the Company's incremental borrowing
rate cannot reasonably be determined.
PATIENT SERVICE REVENUES
Net patient service revenues are based on establishing billing rates, less
allowances for contractual adjustments for patients covered by Medicare,
Medicaid and various other discount arrangements. Payments received under these
programs and arrangements, which are based on predetermined rates, are generally
less than the Company's established billing rates and the differences are
recorded as contractual adjustments at the time the related service is rendered.
For the year ended December 31, 1995, approximately 6% and 81% of the
Company's gross patient service revenues were derived from Medicare and various
third-party programs, respectively. For the eleven-month period ended November
30, 1996, approximately 5% and 76% of the Company's gross patient service
revenues were derived from Medicare and various third-party programs,
respectively. The Company does not believe that there are any credit risks
associated with receivables due from governmental agencies.
F-85
<PAGE> 156
OPTOMETRIC EYE CARE CENTERS, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of credit risk from other payors is limited by the number of
patients and payors. The Company does not require any form of collateral from
its patients or third-party payors.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential wrong
doing. While no such regulatory inquires have been made, compliance with such
laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties and exclusion from the Medicare and Medicaid programs.
INCOME TAXES
Income taxes have been provided using the liability method in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amount reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Bank term loan, bearing interest at prime plus 2.5% (11.00%
and 11.25% at December 31, 1995 and November 30, 1996,
respectively), payable in equal monthly installments of
$2,957 (principal and interest) through October 1999...... $111,458 $ 89,095
Less current portion........................................ (24,196) (27,132)
-------- --------
$ 87,262 $ 61,963
======== ========
</TABLE>
As of November 30, 1996, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Month ending December 1996.................................. $ 2,149
Year ending December 31:
1997...................................................... 27,377
1998...................................................... 30,545
1999...................................................... 29,024
-------
$89,095
=======
</TABLE>
F-86
<PAGE> 157
OPTOMETRIC EYE CARE CENTERS, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. LEASE COMMITMENTS
Future minimum lease commitments under noncancelable operating and capital
leases (with an initial or remaining term in excess of one year) at November 30,
1996 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
Month ending December 1996.................................. $ 3,256 $ 416
Year ending December 31:
1997...................................................... 31,224 4,990
1998...................................................... 27,330 4,990
1999...................................................... 2,275 2,159
------- -------
Total minimum lease payments...................... $64,085 12,555
=======
Less amount representing interest........................... (1,994)
-------
Present value of minimum lease payments (including current
portion of $4,080)........................................ $10,561
=======
</TABLE>
4. INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
DEFERRED TAX ASSETS
Current:
Allowance for doubtful accounts........................... $ -- $ 238
Noncurrent:
Depreciation expense...................................... 5,020 10,772
------ -------
Total deferred tax assets......................... $5,020 $11,010
====== =======
</TABLE>
Components of the income tax provision (benefit) consist of the following:
<TABLE>
<CAPTION>
ELEVEN-MONTH PERIOD ENDED
YEAR ENDED DECEMBER 31, 1995 NOVEMBER 30, 1996
------------------------------ ---------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
-------- --------- ------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Federal....................... $5,436 $(3,996) $1,440 $ 6,473 $(3,474) $2,999
State......................... 4,270 (2,895) 1,375 4,689 (2,516) 2,173
------ ------- ------ ------- ------- ------
$9,706 $(6,891) $2,815 $11,162 $(5,990) $5,172
====== ======= ====== ======= ======= ======
</TABLE>
F-87
<PAGE> 158
OPTOMETRIC EYE CARE CENTERS, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income taxes are different from the amount computed by applying the United
States statutory rate to income before income taxes for the following reasons:
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Income taxes at the statutory rate........................ $ 4,149 $ 6,790
Permanent differences..................................... 256 1,436
State taxes, net of federal benefit....................... 963 748
Benefit of graduated rates................................ (2,553) (3,802)
------- -------
$ 2,815 $ 5,172
======= =======
</TABLE>
5. MALPRACTICE INSURANCE
The Company carries malpractice insurance for each of its physicians
written on an occurrence basis. This insurance provides coverage of $1 million
per incident, with a $2 million annual limit. In addition, the Company has an
umbrella policy which provides coverage of $3 million per incident, with a $3
million annual limit. Management is not aware of any reported claims pending
against the Company. Losses resulting from unreported claims cannot be estimated
by management and, therefore, are not included in the accompanying financial
statements.
6. RELATED PARTY TRANSACTIONS
The physician stockholders of the Company provide all optometry services
for the Company and their salaries and related benefits are reported as
compensation -- physician stockholders in the accompanying statements of income.
Salaries and benefits of approximately $18,000 and $19,000 for the year ended
December 31, 1995 and the eleven-month period ended November 30, 1996,
respectively, which are paid to a related party, are included in salaries, wages
and benefits in the accompanying statements of income.
7. SUBSEQUENT EVENT
On December 1, 1996, substantially all assets and liabilities of the
Company were acquired by Vision Twenty-One, Inc. (Vision) in exchange for
approximately 94,700 shares of Vision common stock and notes of approximately
$46,800. In connection therewith, the Company entered into a 40-year business
management agreement with Vision, whereby Vision, will provide substantially all
nonmedical services to the practice.
The financial statements of the Company have been prepared as supplemental
information about the associations to which Vision will provide management
services following consummation of the acquisition. The Company previously
operated as a separate independent association. The historical financial
position, results of operations and cash flows do not reflect any adjustments
relating to the acquisition.
F-88
<PAGE> 159
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder
Jerald B. Turner, M.D., P.A.
We have audited the accompanying balance sheets of Jerald B. Turner, M.D.,
P.A. as of December 31, 1995 and November 30, 1996, and the related statements
of income, stockholder's equity, and cash flows for the year ended December 31,
1995 and the eleven-month period ended November 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Jerald B. Turner, M.D., P.A.
at December 31, 1995 and November 30, 1996, and the results of its operations
and its cash flows for the year ended December 31, 1995 and the eleven-month
period ended November 30, 1996 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Tampa, Florida
February 26, 1997
F-89
<PAGE> 160
JERALD B. TURNER, M.D., P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 59,029 $297,516
Patient accounts receivable, net of allowances for
uncollectible accounts of approximately $14,000 and
$15,000 at December 31, 1995 and November 30, 1996,
respectively........................................... 146,336 178,977
Inventories............................................... 25,020 32,134
Prepaid expenses and other current assets................. 9,566 23,791
-------- --------
Total current assets.............................. 239,951 532,418
Property, equipment and improvements, net................... 194,695 389,626
-------- --------
Total assets...................................... $434,646 $922,044
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 10,072 $ 14,666
Accrued salaries, wages and benefits...................... 59,539 128,192
Note payable to stockholder............................... -- 293,262
-------- --------
Total current liabilities......................... 69,611 436,120
Stockholder's equity:
Common stock, $1 par value: 7,500 shares authorized; 500
shares issued and outstanding.......................... 500 500
Additional paid-in capital................................ 7,822 7,822
Retained earnings......................................... 356,713 477,602
-------- --------
Total stockholder's equity........................ 365,035 485,924
-------- --------
Total liabilities and stockholder's equity........ $434,646 $922,044
======== ========
</TABLE>
See accompanying notes.
F-90
<PAGE> 161
JERALD B. TURNER, M.D., P.A.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Revenues:
Net patient service revenues.............................. $1,262,429 $1,520,911
Sales of optical goods.................................... 13,123 90,407
Other..................................................... 816 2,568
---------- ----------
Total revenues.................................... 1,276,368 1,613,886
Expenses:
Compensation to physician stockholder..................... 526,735 423,641
Salaries, wages and benefits.............................. 414,263 682,687
Cost of optical goods sold................................ 8,439 37,857
Medical supplies.......................................... 20,909 20,824
Optical supplies.......................................... 1,709 6,972
General and administrative................................ 80,054 119,429
Insurance................................................. 11,272 14,415
Building rent............................................. 67,998 61,531
Depreciation.............................................. 67,552 113,577
Repairs and maintenance................................... 9,070 4,269
Interest.................................................. -- 7,795
---------- ----------
Total expenses.................................... 1,208,001 1,492,997
---------- ----------
Net income........................................ $ 68,367 $ 120,889
========== ==========
</TABLE>
See accompanying notes.
F-91
<PAGE> 162
JERALD B. TURNER, M.D., P.A.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995...................... 500 $500 $7,822 $288,346 $296,668
Net income.................................... -- -- -- 68,367 68,367
--- ---- ------ -------- --------
BALANCE AT DECEMBER 31, 1995.................... 500 500 7,822 356,713 365,035
Net income.................................... -- -- -- 120,889 120,889
--- ---- ------ -------- --------
BALANCE AT NOVEMBER 30, 1996.................... 500 $500 $7,822 $477,602 $485,924
=== ==== ====== ======== ========
</TABLE>
See accompanying notes.
F-92
<PAGE> 163
JERALD B. TURNER, M.D., P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 68,367 $120,889
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 67,552 113,577
Loss on disposal of property, equipment and
improvements........................................... -- 1,600
Changes in operating assets and liabilities:
Increase in patient accounts receivable, net........... (9,749) (32,641)
Increase in inventories................................ (25,020) (7,114)
Decrease (increase) in prepaid expenses and other
current assets........................................ 4,043 (14,225)
Increase in accounts payable and accrued expenses...... 8,031 4,594
Increase in accrued salaries, wages and benefits....... 8,877 68,653
--------- --------
Net cash provided by operating activities......... 122,101 255,333
INVESTING ACTIVITIES
Purchases of property, equipment and improvements........... (113,451) (16,846)
--------- --------
Net cash used in investing activities....................... (113,451) (16,846)
FINANCING ACTIVITIES
Net cash provided by financing activities................... -- --
--------- --------
Increase in cash............................................ 8,650 238,487
Cash at beginning of period................................. 50,379 59,029
--------- --------
Cash at end of period....................................... $ 59,029 $297,516
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest...................... $ -- $ 5,605
========= ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITY
Note payable incurred to acquire property, equipment and
improvements.............................................. $ -- $293,262
========= ========
</TABLE>
See accompanying notes.
F-93
<PAGE> 164
JERALD B. TURNER, M.D., P.A.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Jerald B. Turner, M.D., P.A., a Florida corporation (the Company), operates
a professional medical practice, specializing in general ophthalmology. The
Company's service area is Clearwater, Florida, and surrounding communities in
Pinellas County, Florida.
INVENTORIES
Inventories consist primarily of optical lenses, contact lenses and
eyeglass frames (collectively, "optical goods"). Inventories are stated at the
lower of cost or market, with cost determined on a first-in, first-out basis.
PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements are carried at cost. Depreciation is
computed using straight-line and accelerated methods, with the assets' useful
lives estimated at five to ten years for equipment, furniture and fixtures, and
seven to thirty-nine years for leasehold improvements. Routine maintenance and
repairs are charged to expense as incurred, while costs of betterments and
renewals are capitalized.
NET PATIENT SERVICE REVENUES
Net patient service revenues are based on established billing rates, less
allowances for contractual adjustments for patients covered by Medicare,
Medicaid and various other discount arrangements. Payments received under these
programs and arrangements, which generally are based on predetermined rates, are
generally less than the Company's established billing rates, and the differences
are recorded as contractual adjustments at the time the related service is
rendered.
For the year ended December 31, 1995 and the eleven-month period ended
November 30, 1996, approximately 61% and 64%, respectively, of the Company's net
patient service revenues were derived from third-party payors (Medicare,
Medicaid and managed care contracts). The Company does not believe that there
are any credit risks associated with receivables due from governmental agencies.
Concentration of credit risk from other payors is limited by the number of
patients and payors. The Company does not require any form of collateral from
its patients or third-party payors.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties and exclusion from the Medicare and Medicaid programs.
INCOME TAXES
The Company has elected to have its income taxed as an S Corporation under
the federal Internal Revenue Code. As a result, in lieu of corporate income tax,
the Company's taxable income is passed through to the stockholder of the Company
and taxed at the individual level. Accordingly, no provision or liability for
federal income tax has been reflected in these financial statements.
F-94
<PAGE> 165
JERALD B. TURNER, M.D., P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount for cash reported in the balance sheets approximates
its fair value because of its short-term nature. It is not practicable to
estimate the fair value of the Company's note payable to stockholder due to its
related party nature.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amount reported in the financial statements and
accompanying footnotes. Actual results could differ from those estimates.
2. PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Medical equipment.......................................... $ 368,662 $ 567,746
Computer equipment......................................... 66,885 132,494
Furniture and fixtures..................................... 141,177 152,755
Leasehold improvements..................................... 3,800 26,421
--------- ---------
580,524 879,416
Less accumulated depreciation.............................. (385,829) (489,790)
--------- ---------
$ 194,695 $ 389,626
========= =========
</TABLE>
3. OPERATING LEASES
The Company leases office space at $1,148 per month under a short-term
operating lease expiring July 31, 1997 and a month-to-month lease in a space
owned by the physician stockholder for $5,000 per month. Lease agreements
generally provide for the payment of taxes, insurance, utilities and repairs by
the lessee.
4. NOTE PAYABLE TO STOCKHOLDER
On November 15, 1996, the Company entered into an unsecured demand note
agreement for approximately $293,000 at 9% with its principal stockholder,
Jerald B. Turner, M.D. The proceeds were used during the eleven-month period
ended November 30, 1996 to purchase property, equipment and improvements and
interest is payable monthly. Interest expense during the eleven-month period
ended November 30, 1996 amounted to $7,795.
5. MALPRACTICE INSURANCE
The Company carries claims-made medical malpractice insurance for each of
its physicians. This insurance provides coverage of $1,000,000 per incident,
with a $3,000,000 aggregate annual limit. In the normal course of business, the
Company has been named in various medical malpractice lawsuits; however,
management is not aware of any reported claims currently pending against the
Company. Losses from unreported claims cannot be estimated by management and,
therefore, are not included in the accompanying financial statements.
F-95
<PAGE> 166
JERALD B. TURNER, M.D., P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. PROFIT SHARING PLAN
The Company maintains an employee profit sharing plan covering
substantially all employees and the physician stockholder. Under the Plan, the
Company may make discretionary contributions subject to various limits. Total
Company expense related to this plan was approximately $53,000 and $64,000 for
the year ended December 31, 1995 and the eleven-month period ended November 30,
1996, respectively. Company contributions to the physician stockholder are
included in compensation to physician stockholder in the accompanying statements
of income.
7. SUBSEQUENT EVENTS
OPERATING LEASE AGREEMENT WITH PHYSICIAN STOCKHOLDER
On December 1, 1996, the Company and the physician stockholder executed a
long-term lease agreement expiring in the year 2001 under which the Company
leases office space in a building owned by the physician stockholder. The lease
agreement provides for the payment of taxes, insurance, utilities and repairs by
the lessee. The Company, at its option, can renew the lease at rental rates
adjusted by the consumer price index.
Future minimum lease payments as of November 30, 1996 are as follows:
<TABLE>
<S> <C>
Month ending December 31, 1996.............................. $ 7,782
Year ending December 31,
1997...................................................... 93,380
1998...................................................... 93,380
1999...................................................... 93,380
2000...................................................... 93,380
2001...................................................... 85,598
Thereafter................................................ --
--------
$466,900
========
</TABLE>
SALE OF ASSETS
On December 1, 1996, substantially all assets and liabilities of the
Company were acquired by Vision Twenty-One, Inc. (Vision) in exchange for
approximately 194,000 shares of Vision common stock and notes of approximately
$231,000. In connection therewith, Jerald B. Turner, M.D., principal
stockholder, entered into a 40-year business management agreement with Vision,
whereby Vision will provide substantially all nonmedical services to the
practice.
The financial statements of the Company have been prepared as supplemental
information about the associations to which Vision will provide management
services following consummation of the acquisition. The Company previously
operated as a separate independent association. The historical financial
position, results of operations and cash flows do not reflect any adjustments
relating to the acquisition.
F-96
<PAGE> 167
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Gillette, Beiler & Associates, P.A.
We have audited the accompanying balance sheets of Gillette, Beiler &
Associates, P.A. as of December 31, 1995 and November 30, 1996, and the related
statements of operations, stockholders' deficit, and cash flows for the year
ended December 31, 1995 and the eleven-month period ended November 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gillette, Beiler &
Associates, P.A. at December 31, 1995 and November 30, 1996, and the results of
its operations and its cash flows for the year ended December 31, 1995 and the
eleven-month period ended November 30, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Tampa, Florida
March 22, 1997
F-97
<PAGE> 168
GILLETTE, BEILER & ASSOCIATES, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 52,425 $ 16,846
Patient accounts receivable, net of allowance for
doubtful accounts of $14,000 in 1995 and $32,000 in
1996.................................................. 87,602 105,932
Due from related party................................... 27,741 79,722
--------- ---------
Total current assets............................. 167,768 202,500
Property and equipment, net................................ 179,243 187,023
Goodwill................................................... -- 127,574
--------- ---------
Total assets..................................... $ 347,011 $ 517,097
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accrued compensation..................................... $ 183,147 $ 221,962
Accounts payable and accrued expenses.................... 62,855 32,794
Current portion of loans payable to stockholder.......... 37,094 58,832
Notes payable and current portion of long-term debt...... 180,693 154,413
Due to related parties................................... -- 144,941
--------- ---------
Total current liabilities........................ 463,789 612,942
Loans payable to stockholder, less current portion......... 58,832 --
Long-term debt, less current portion....................... 162,832 93,926
Deferred rent payable...................................... 264,032 263,163
Other long-term liabilities................................ 18,012 14,834
Stockholders' deficit:
Common stock, $.01 par value: 50,000 shares authorized;
37,775 and 40,500 shares issued and outstanding in
1995 and 1996, respectively........................... 378 405
Additional paid-in capital............................... -- 127,547
Accumulated deficit...................................... (620,864) (595,720)
--------- ---------
Total stockholders' deficit...................... (620,486) (467,768)
--------- ---------
Total liabilities and stockholders' deficit...... $ 347,011 $ 517,097
========= =========
</TABLE>
See accompanying notes.
F-98
<PAGE> 169
GILLETTE, BEILER & ASSOCIATES, P.A.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Revenues:
Net patient service revenues.............................. $2,752,187 $3,086,443
Patient service revenue -- related party.................. 298,543 190,376
Other income.............................................. 53,336 --
---------- ----------
Total revenues.................................... 3,104,066 3,276,819
Expenses:
Salaries and benefits -- optometrists..................... 1,832,844 1,856,888
Salaries and benefits -- other............................ 156,712 193,676
Management fees to related party.......................... 423,890 479,004
Advertising............................................... 25,236 16,187
Professional fees......................................... 55,326 12,600
General and administrative................................ 75,345 138,006
Medical supplies.......................................... 27,513 23,924
Insurance................................................. 30,116 50,552
Building and equipment rent............................... 452,695 400,586
Depreciation and amortization............................. 36,880 49,763
Interest.................................................. 41,693 30,489
---------- ----------
Total expenses.................................... 3,158,250 3,251,675
---------- ----------
Net income (loss)................................. $ (54,184) $ 25,144
========== ==========
</TABLE>
See accompanying notes.
F-99
<PAGE> 170
GILLETTE, BEILER & ASSOCIATES, P.A.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN ACCUMULATED STOCKHOLDERS'
NUMBER AMOUNT CAPITAL DEFICIT DEFICIT
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995..................... 37,775 $378 $ -- $(565,005) $(564,627)
Distributions.............................. -- -- -- (1,675) (1,675)
Net loss................................... -- -- -- (54,184) (54,184)
------ ---- -------- --------- ---------
BALANCE, DECEMBER 31, 1995................... 37,775 378 -- (620,864) (620,486)
Purchase of minority interest.............. 2,725 27 127,547 -- 127,574
Net income................................. -- -- -- 25,144 25,144
------ ---- -------- --------- ---------
BALANCE, NOVEMBER 30, 1996................... 40,500 $405 $127,547 $(595,720) $(467,768)
====== ==== ======== ========= =========
</TABLE>
See accompanying notes.
F-100
<PAGE> 171
GILLETTE, BEILER & ASSOCIATES, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ (54,184) $ 25,144
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 36,880 49,763
Provision for bad debts................................... 14,000 17,573
Amortization of deferred rent and other................... 53,050 (12,817)
(Gain) loss on disposal of fixed assets................... (22,909) --
Changes in assets and liabilities:
Patient accounts receivable............................ (62,436) (35,903)
Due from related party................................. (10,183) (51,981)
Accrued compensation................................... 144,612 38,815
Accounts payable and accrued expenses.................. 20,077 (21,291)
Due to related parties................................. -- 144,941
--------- ---------
Net cash provided by operating activities......... 118,907 154,244
INVESTING ACTIVITIES
Purchases of property and equipment......................... (187,004) (57,543)
Proceeds from disposal of fixed assets...................... 37,909 --
--------- ---------
Net cash used in investing activities............. (149,095) (57,543)
FINANCING ACTIVITIES
Borrowings on revolving credit note......................... -- 196,012
Payments of revolving credit note........................... -- (222,627)
Proceeds from issuance of long-term debt.................... 276,737 13,179
Payments of long-term debt.................................. (167,052) (81,750)
Payments of related party debt.............................. (49,109) (37,094)
--------- ---------
Net cash provided by (used in) financing
activities.................................................. 60,576 (132,280)
--------- ---------
Increase (decrease) in cash................................. 30,388 (35,579)
Cash at beginning of period................................. 22,037 52,425
--------- ---------
Cash at end of period....................................... $ 52,425 $ 16,846
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest.................... $ 39,000 $ 34,000
========= =========
Goodwill recorded in connection with purchase of minority
interest.................................................. $ -- $ 127,574
========= =========
</TABLE>
See accompanying notes.
F-101
<PAGE> 172
GILLETTE, BEILER & ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Gillette, Beiler & Associates, P.A., a Florida corporation, operates
professional optometry practices in 11 VisionWorks stores located in the Tampa
Bay area.
The following corporations (the Predecessor Practices) previously operated
as entities under common control:
Drs. Gillette, Beiler & Associates, P.A.
Dr. Gillette & Associates, Tampa, P.A.
Dr. Gillette & Associates, St. Petersburg, P.A.
Dr. Gillette & Associates, Palm Harbor, P.A.
Dr. Gillette & Associates, Sarasota, P.A.
Dr. Gillette & Associates, St. Petersburg East, P.A.
Dr. Gillette & Associates, North Tampa, P.A.
Dr. Gillette & Associates, South Tampa, P.A.
Dr. Gillette & Associates, #6978, P.A.
Effective November 27, 1996, the Predecessor Practices merged with Dr.
Gillette & Associates, #6965, P.A. (the Surviving Practice). On December 31,
1996, the Surviving Practice changed its name to Gillette, Beiler & Associates,
P.A. (the Company). Each outstanding share of the Predecessor Practices was
converted into shares of the Company. This transaction was accounted for as a
reorganization of companies under common control in a manner similar to that
used in a pooling of interests transaction, except for a minority interest which
was recorded under the purchase method. The accompanying financial statements
have been prepared to reflect the accounts of the Company as if the
reorganization had occurred as of the beginning of the earliest period
presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method, with the assets' useful lives estimated at five to
seven years. Routine maintenance and repairs are charged to expense as incurred,
while costs of betterments and renewals are capitalized.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Office furniture and equipment.............................. $ 765,350 $ 822,893
Less accumulated depreciation............................... (586,107) (635,870)
--------- ---------
$ 179,243 $ 187,023
========= =========
</TABLE>
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable and short-term borrowings
reported in the financial statements reflect their fair value because of the
short-term maturity of those financial instruments. It is not practicable to
estimate the fair value of the Company's long-term debt and other noncurrent
liabilities because the Company's incremental borrowing rate cannot reasonably
be determined.
F-102
<PAGE> 173
GILLETTE, BEILER & ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NET PATIENT SERVICE REVENUES
Net patient service revenues are based on established billing rates, less
allowances and contractual adjustments for patients covered by Medicare,
Medicaid and various other discount arrangements. Payments received under these
programs and arrangements, which are based on predetermined rates, are generally
less than the Company's established billing rates and the differences are
recorded as contractual adjustments at the time the related service is rendered.
For the year ended December 31, 1995 and the eleven-month period ended
November 30, 1996, patient service revenue -- related party was earned through
contractual arrangements between the Company and an association under common
control.
The Company does not believe that there are any credit risks associated
with receivables due from governmental agencies. Concentration of credit risk
from other payors is limited by the number of patients and payors. The Company
does not require any form of collateral from its patients or third-party payors.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential wrong
doing. While no such regulatory inquires have been made, compliance with such
laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties and exclusion from the Medicare and Medicaid programs.
ADVERTISING COSTS
The Company expenses advertising costs as incurred.
INCOME TAXES
The Company has elected to have its income taxed as an S corporation under
the federal Internal Revenue Code. As a result, in lieu of corporate income tax,
the Company's taxable income is passed through to the stockholders of the
Company and taxed at the individual level. Accordingly, no provision or
liability for federal income tax has been reflected in the financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amount reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INTANGIBLE ASSETS
Goodwill is being amortized over its estimated useful life of 40 years.
F-103
<PAGE> 174
GILLETTE, BEILER & ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Notes payable under $100,000 line of credit, due on demand.
Interest due monthly at prime plus 1% (9.5% at December
31, 1995 and 9.25% at November 30, 1996). The note is
collateralized by accounts receivable..................... $ 94,475 $ 67,860
Bank term loans due in monthly installments of $663
(principal and interest) through 2000. The loans bear
interest at 12.5% and 14% and are collateralized by
certain equipment. The loans were refinanced with a bank
in 1997 and will be due on demand......................... 28,066 23,907
Notes payable to a corporation due in monthly installments
of $7,218 (principal and interest) through 2000. The notes
bear interest ranging from the prime rate plus .5% to the
prime rate plus 2% (8.75% to 10.25% at November 30, 1996)
and are collateralized by certain equipment............... 220,984 156,572
-------- ---------
343,525 248,339
Less current portion........................................ (180,693) (154,413)
-------- ---------
$162,832 $ 93,926
======== =========
</TABLE>
As of November 30, 1996, maturity of long-term debt is as follows:
<TABLE>
<S> <C>
Month ending December 31, 1996.............................. $ 74,463
Year ending December 31:
1997...................................................... 79,950
1998...................................................... 41,411
1999...................................................... 41,906
2000...................................................... 10,609
--------
$248,339
========
</TABLE>
F-104
<PAGE> 175
GILLETTE, BEILER & ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LOANS PAYABLE TO STOCKHOLDER
Loans payable to stockholder consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Note payable to the majority stockholder of the Company due
in monthly installments of $2,005 (principal and
interest) through 1999. The note bears interest at 9.75%
and is collateralized by certain equipment. The note was
refinanced with a bank in 1997........................... $ 75,093 $ 58,832
Unsecured note payable to the majority stockholder of the
Company due in monthly principal installments of $2,083
through 1996, plus interest at the rate of prime plus 1%.
The note was fully paid in 1996.......................... 18,750 --
Note payable to the majority stockholder of the Company due
in monthly principal installments of $694 through 1996
plus interest at the rate of prime plus 2%. The note was
collateralized by certain equipment, and was fully paid
in 1996.................................................. 2,083 --
-------- --------
95,926 58,832
Less current portion....................................... (37,094) (58,832)
-------- --------
$ 58,832 $ --
======== ========
</TABLE>
5. LEASE COMMITMENTS
Future minimum lease commitments under noncancelable operating leases (with
an initial or remaining term in excess of one year) at November 30, 1996 are as
follows:
<TABLE>
<S> <C>
Month ending December 31, 1996.............................. $ 38,217
Year ending December 31,
1997...................................................... 458,604
1998...................................................... 465,604
1999...................................................... 470,604
2000...................................................... 477,604
2001...................................................... 482,604
Thereafter................................................ 2,393,117
----------
$4,786,354
==========
</TABLE>
6. MALPRACTICE INSURANCE
The Company carries claims-made malpractice insurance for each of its
optometrists. This insurance provides coverage of $1 million per incident, with
a $3 million annual limit.
Management is aware of a claim pending against the Company. The claim,
which alleges medical malpractice, is currently in the discovery stage and no
trial date has been set. The Company, through its insurer, plans to vigorously
contest the case. In the opinion of management, this litigation will not have a
material adverse effect on the results of operations, financial condition or
liquidity of the Company.
Losses resulting from unreported claims cannot be estimated by management
and, therefore, are not included in the accompanying financial statements.
7. SUBSEQUENT EVENT
On December 1, 1996, substantially all assets and liabilities of the
Company were acquired by Vision Twenty-One, Inc. (a related company -- Vision)
in exchange for 560,957 shares of Vision common stock and notes of $416,103. In
connection with this transaction, the Company entered into a 40-year business
management agreement with Vision, whereby Vision will provide substantially all
nonmedical services to the practice.
F-105
<PAGE> 176
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
J & R Kennedy, O.D., P.A.
and Roseville Opticians, Inc.
We have audited the accompanying combined balance sheets of J & R Kennedy,
O.D., P.A. and Roseville Opticians, Inc. as of December 31, 1995 and November
30, 1996, and the related combined statements of income, stockholder's equity,
and cash flows for the year ended December 31, 1995 and the eleven-month period
ended November 30, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of J & R Kennedy,
O.D., P.A. and Roseville Opticians, Inc. at December 31, 1995 and November 30,
1996, and the combined results of their operations and their cash flows for the
year ended December 31, 1995 and the eleven-month period ended November 30, 1996
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Tampa, Florida
March 21, 1997
F-106
<PAGE> 177
J & R KENNEDY, O.D., P.A. AND
ROSEVILLE OPTICIANS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 25 $ 4,761
Patient accounts receivable............................... 71,488 77,529
Due from stockholder...................................... 1,623 2,779
Inventories............................................... 104,787 107,827
Prepaid expenses and other current assets................. 7,646 5,972
-------- --------
Total current assets.............................. 185,569 198,868
Property, equipment and improvements, net................... 75,238 76,848
Noncurrent deferred tax asset............................... -- 8,309
-------- --------
Total assets...................................... $260,807 $284,025
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Bank overdraft............................................ $ 30,980 $ 3,547
Accounts payable and accrued expenses..................... 67,374 88,606
Taxes payable............................................. 6,993 17,006
Current deferred tax liability............................ 14,130 14,076
Current maturities of long-term debt...................... 5,271 5,751
-------- --------
Total current liabilities......................... 124,748 128,986
Long-term debt.............................................. 14,946 9,709
Noncurrent deferred tax liability........................... 322 --
Stockholder's equity:
Common stock, $1 par value: 75,000 shares authorized;
1,010 shares issued and outstanding.................... 1,010 1,010
Retained earnings......................................... 119,781 144,320
-------- --------
Total stockholder's equity........................ 120,791 145,330
-------- --------
Total liabilities and stockholder's equity........ $260,807 $284,025
======== ========
</TABLE>
See accompanying notes.
F-107
<PAGE> 178
J & R KENNEDY, O.D., P.A. AND
ROSEVILLE OPTICIANS, INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Revenue:
Net patient service revenues.............................. $296,386 $324,416
Sale of optical goods..................................... 671,309 663,095
Other..................................................... 170 74
-------- --------
Total revenue..................................... 967,865 987,585
Expenses:
Compensation to physician stockholder..................... 231,838 221,875
Salaries, wages and benefits.............................. 267,728 314,686
Cost of optical goods sold................................ 233,276 234,154
General and administrative................................ 130,904 118,589
Insurance................................................. 6,345 4,114
Building and equipment rent............................... 52,259 48,066
Depreciation and amortization............................. 10,585 12,302
Interest.................................................. 1,319 939
-------- --------
Total expenses.................................... 934,254 954,725
-------- --------
Income before income taxes.................................. 33,611 32,860
Provision for income taxes.................................. 14,856 8,321
-------- --------
Net income.................................................. $ 18,755 $ 24,539
======== ========
</TABLE>
See accompanying notes.
F-108
<PAGE> 179
J & R KENNEDY, O.D., P.A.
AND ROSEVILLE OPTICIANS, INC.
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995............................... 1,010 $1,010 $101,026 $102,036
Net income............................................. -- -- 18,755 18,755
----- ------ -------- --------
BALANCE AT DECEMBER 31, 1995............................. 1,010 1,010 119,781 120,791
Net income............................................. -- -- 24,539 24,539
----- ------ -------- --------
BALANCE AT NOVEMBER 30, 1996............................. 1,010 $1,010 $144,320 $145,330
===== ====== ======== ========
</TABLE>
See accompanying notes.
F-109
<PAGE> 180
J & R KENNEDY, O.D., P.A. AND
ROSEVILLE OPTICIANS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 18,755 $ 24,539
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 10,585 12,302
Deferred income taxes..................................... 7,863 (8,685)
Changes in assets and liabilities:
Patient accounts receivable............................ (16,354) (6,041)
Due from stockholder................................... (1,623) (1,156)
Inventories............................................ (24,425) (3,040)
Prepaid expenses and other current assets.............. (4,899) 1,674
Bank overdraft and accounts payable and accrued
expenses.............................................. 30,319 (6,201)
Taxes payable.......................................... 6,993 10,013
-------- --------
Net cash provided by operating activities......... 27,214 23,405
INVESTING ACTIVITIES
Purchases of property and equipment......................... (47,456) (13,912)
-------- --------
Net cash used in investing activities............. (47,456) (13,912)
FINANCING ACTIVITIES
Borrowings from third parties............................... 23,000 -
Repayment of borrowings from third parties.................. (2,783) (4,757)
-------- --------
Net cash provided by (used in) financing
activities...................................... 20,217 (4,757)
-------- --------
(Decrease) increase in cash................................. (25) 4,736
Cash at beginning of year................................... 50 25
-------- --------
Cash at end of year......................................... $ 25 $ 4,761
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest.................... $ 1,300 $ 1,000
======== ========
</TABLE>
See accompanying notes.
F-110
<PAGE> 181
J & R KENNEDY, O.D., P.A. AND
ROSEVILLE OPTICIANS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
J & R Kennedy, O.D., P.A. and Roseville Opticians, Inc. (the Company),
commonly controlled Minnesota C corporations, operate as a professional medical
practice, specializing in general optometry and as an optical retail dispensary,
respectively. The Company's primary service area is Roseville, Minnesota, and
surrounding communities in Ramsey County, Minnesota.
INVENTORIES
Inventories consist primarily of optical lenses, contact lenses and
eyeglass frames (collectively, optical goods). Inventories are stated at the
lower of cost or market, with cost determined on an average cost basis.
PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements are carried at cost. Depreciation is
computed using straight-line and accelerated methods, with the assets' useful
lives estimated at 5 to 10 years for equipment, furniture and fixtures and
automobiles, and 31 years for leasehold improvements. Routine maintenance and
repairs are charged to expense as incurred, while costs of betterments and
renewals are capitalized.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash reflects its fair value because of the
short-term maturity of that financial instrument. It is not practicable to
estimate the fair value of the Company's long-term debt because the Company's
incremental borrowing rate cannot reasonably be determined.
NET PATIENT SERVICE REVENUES
Net patient service revenues are based on established billing rates, less
allowances for contractual adjustments for patients covered by Medicare,
Medicaid and various other discount arrangements. Payments received under these
programs and arrangements, which are based on predetermined rates, are generally
less than the Company's established billing rates, and the differences are
recorded as contractual adjustments at the time the related service is rendered.
For the year ended December 31, 1995 and the eleven-month period ended
November 30, 1996, approximately 19% and 24%, respectively, of the Company's net
patient service revenues were derived from third-party payors (Medicare,
Medicaid, and managed care contracts). The Company does not believe that there
are any credit risks associated with receivables due from governmental agencies.
Concentration of credit risk from other payers is limited by the number of
patients and payors. The Company does not require any form of collateral from
its patients or third-party payors.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential wrong
doing. While no such regulatory inquiries have been made, compliance with such
laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties and exclusion from the Medicare and Medicaid programs.
F-111
<PAGE> 182
J & R KENNEDY, O.D., P.A. AND
ROSEVILLE OPTICIANS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Income taxes have been provided using the liability method in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
USE OF ESTIMATES
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amount reported in the combined financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. RELATED PARTY TRANSACTIONS
The Company paid approximately $6,000 for the year ended December 31, 1995
and $7,000 for the eleven-month period ended November 30, 1996 for services
rendered to the Company by a related organization with certain common ownership.
The Company has an amount due from stockholder of $1,623 at December 31,
1995 and $2,779 at November 30, 1996. Such amounts relate to personal expenses
paid by the Company on behalf of the stockholder.
3. PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Equipment................................................... $ 191,111 $ 205,023
Furniture and fixtures...................................... 47,183 47,183
Automobiles................................................. 16,752 16,752
Leasehold improvements...................................... 18,690 18,690
--------- ---------
273,736 287,648
Less accumulated depreciation............................... (198,498) (210,800)
--------- ---------
$ 75,238 $ 76,848
========= =========
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Note payable to bank at 10% with monthly payments of $586,
including interest, due May 1999.......................... $20,217 $15,460
Less current portion........................................ (5,271) (5,751)
------- -------
$14,946 $ 9,709
======= =======
</TABLE>
F-112
<PAGE> 183
J & R KENNEDY, O.D., P.A. AND
ROSEVILLE OPTICIANS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As of November 30, 1996, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Month ending December 31, 1996.............................. $ 458
Year ending December 31:
1997...................................................... 5,800
1998...................................................... 6,407
1999...................................................... 2,795
-------
$15,460
=======
</TABLE>
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
DEFERRED TAX ASSETS
Noncurrent:
Charitable contribution................................... $ 426 $ 446
Net operating loss carryforward........................... 5,127 14,890
-------- -------
5,553 15,336
Valuation allowance......................................... -- (1,152)
-------- -------
Total deferred tax assets......................... 5,553 14,184
DEFERRED TAX LIABILITIES
Current:
Accrual to cash........................................... 14,130 14,076
Noncurrent:
Depreciation.............................................. 5,875 5,875
-------- -------
Total deferred tax liabilities.................... 20,005 19,951
-------- -------
Net deferred tax liabilities...................... $(14,452) $(5,767)
======== =======
</TABLE>
Components of the income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN-MONTH PERIOD ENDED
DECEMBER 31, 1995 NOVEMBER 30, 1996
---------------------------- ---------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Federal............................ $5,337 $5,987 $11,324 $12,978 $(6,579) $6,399
State.............................. 1,656 1,876 3,532 4,028 (2,106) 1,922
------ ------ ------- ------- ------- ------
$6,993 $7,863 $14,856 $17,006 $(8,685) $8,321
====== ====== ======= ======= ======= ======
</TABLE>
F-113
<PAGE> 184
J & R KENNEDY, O.D., P.A. AND
ROSEVILLE OPTICIANS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Income taxes are different from the amount computed by applying the United
States statutory rate to income before income taxes for the following reasons:
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Income taxes at the statutory rate.......................... $11,834 $5,301
Permanent differences....................................... 421 413
State taxes, net of federal benefit......................... 2,332 1,087
Change in valuation allowance............................... - 1,152
Personal service corporation status......................... 269 368
------- ------
$14,856 $8,321
======= ======
</TABLE>
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, requires a valuation allowance to reduce the deferred tax assets reported
if, based on the weight of the evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $1,152 valuation allowance at November 30, 1996 is necessary
to reduce the deferred tax assets to the amount that will more likely than not
be realized. The change in the valuation allowance for the current year is
$1,152. At December 31, 1995 and November 30, 1996, the Company has available
net operating loss carryforwards of approximately $13,000 and $37,000,
respectively, which expire in the year 2011.
6. MALPRACTICE INSURANCE
The Company carries claims-made malpractice insurance for each of its
physicians. This insurance provides coverage of $1,000,000 per incident, with a
$2,000,000 annual limit. In addition, the Company has an umbrella policy which
provides coverage of $2,000,000 per claim, with a $2,000,000 annual limit.
Management is not aware of any reported claims pending against the Company.
Losses resulting from unreported claims cannot be estimated by management and,
therefore, are not included in the accompanying combined financial statements.
7. RETIREMENT PLAN
The Company maintains an employee savings and profit sharing plan under
Section 401(k) of the Internal Revenue Code. The plan covers substantially all
employees. Under the plan, the Company may make discretionary contributions
subject to various limits. Total Company expense related to this plan was
approximately $2,000 and $4,000 for the year ended December 31, 1995 and the
eleven-month period ended November 30, 1996, respectively.
8. SUBSEQUENT EVENTS
On December 1, 1996 and December 20, 1996, the Company renewed
noncancelable operating leases for office space. The effective date of the
leases is December 1, 1996 and they are scheduled to terminate on
F-114
<PAGE> 185
J & R KENNEDY, O.D., P.A. AND
ROSEVILLE OPTICIANS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
November 30, 2001. The former operating leases had expired as of November 30,
1996. Approximate future minimum rental commitments under the noncancelable
operating leases are as follows:
<TABLE>
<S> <C>
Month ending December 31, 1996.............................. $ 4,488
Year ending December 31:
1997...................................................... 55,194
1998...................................................... 56,883
1999...................................................... 58,626
2000...................................................... 60,418
2001...................................................... 56,932
--------
$292,641
========
</TABLE>
On December 1, 1996, substantially all assets and liabilities of the
Company were acquired by Vision Twenty-One, Inc. (Vision) in exchange for
approximately 115,000 shares of Vision common stock and notes of approximately
$79,000. In connection therewith, the Company entered into a 40-year business
management agreement with Vision, whereby Vision will provide substantially all
nonmedical services to the practice.
The combined financial statements of the Company have been prepared as
supplemental information about the association to which Vision will provide
management services following consummation of the acquisition. The Company
previously operated as a separate independent association. The historical
combined financial position, results of operations and cash flows do not reflect
any adjustments relating to the acquisition.
F-115
<PAGE> 186
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Dr. Smith and Associates, P.A. #6950,
Dr. Smith and Associates, P.A. #6958, and
Dr. Smith and Associates, P.A. #6966
We have audited the accompanying combined balance sheets of Dr. Smith and
Associates, P.A. #6950, Dr. Smith and Associates, P.A. #6958, and Dr. Smith and
Associates, P.A. #6966 (the Company) as of December 31, 1995 and November 30,
1996, and the related combined statements of income, stockholders' equity, and
cash flows for the year ended December 31, 1995 and the eleven-month period
ended November 30, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Dr. Smith and
Associates, P.A. #6950, Dr. Smith and Associates, P.A. #6958, and Dr. Smith and
Associates, P.A. #6966 at December 31, 1995 and November 30, 1996, and the
combined results of their operations and their cash flows for the year ended
December 31, 1995 and the eleven-month period ended November 30, 1996 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Tampa, Florida
January 17, 1997
F-116
<PAGE> 187
DR. SMITH AND ASSOCIATES, P.A. #6950,
DR. SMITH AND ASSOCIATES, P.A. #6958, AND
DR. SMITH AND ASSOCIATES, P.A. #6966
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 23,538 $ 31,993
Patient accounts receivable, net of allowances for
doubtful accounts of approximately $4,000 and $39,000
at December 31, 1995 and November 30, 1996,
respectively........................................... 24,178 8,844
Prepaid expenses and other current assets................. -- 699
-------- --------
Total current assets.............................. 47,716 41,536
Property and equipment, net................................. 123,389 91,974
Due from stockholder........................................ 219,165 261,384
-------- --------
Total assets...................................... $390,270 $394,894
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 19,750 $ 28,200
Accrued expenses and other current liabilities............ 57,570 68,514
Amounts due under line of credit.......................... -- 14,000
Due to affiliate.......................................... 12,705 39,591
Income tax payable........................................ 1,182 --
Current portion of long-term debt......................... 38,917 39,931
Current portion of obligations under capital leases....... 26,220 25,428
-------- --------
Total current liabilities......................... 156,344 215,664
Long-term debt.............................................. 52,130 15,442
Obligations under capital leases............................ 48,717 25,469
Stockholders' equity:
Common stock, $.01 par value; 30,000 shares authorized,
and 3,000 shares issued and outstanding................ 30 30
Additional paid-in capital................................ 8,180 8,180
Retained earnings......................................... 124,869 130,109
-------- --------
Total stockholders' equity........................ 133,079 138,319
-------- --------
Total liabilities and stockholders' equity........ $390,270 $394,894
======== ========
</TABLE>
See accompanying notes.
F-117
<PAGE> 188
DR. SMITH AND ASSOCIATES, P.A. #6950,
DR. SMITH AND ASSOCIATES, P.A. #6958, AND
DR. SMITH AND ASSOCIATES, P.A. #6966
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Revenues:
Net patient service revenues.............................. $1,019,159 $ 990,014
Other..................................................... 18,248 14,137
---------- ----------
Total revenues.................................... 1,037,407 1,004,151
Expenses:
Compensation to physician stockholder..................... 75,000 70,000
Salaries, wages and benefits.............................. 511,033 547,622
General and administrative................................ 169,513 164,967
Medical supplies.......................................... 6,524 5,269
Building and equipment rent............................... 83,600 100,477
Depreciation and amortization............................. 35,038 35,442
Interest.................................................. 24,169 14,478
---------- ----------
Total expenses.................................... 904,877 938,255
---------- ----------
Income before income taxes.................................. 132,530 65,896
Provision for income taxes.................................. 1,182 --
---------- ----------
Net income........................................ $ 131,348 $ 65,896
========== ==========
</TABLE>
See accompanying notes.
F-118
<PAGE> 189
DR. SMITH AND ASSOCIATES, P.A. #6950,
DR. SMITH AND ASSOCIATES, P.A. #6958, AND
DR. SMITH AND ASSOCIATES, P.A. #6966
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN RETAINED STOCKHOLDERS'
NUMBER AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995....................... 3,000 $30 $8,180 $ 28,006 $ 36,216
Net income................................... -- -- -- 131,348 131,348
Distributions................................ -- -- -- (34,485) (34,485)
----- --- ------ -------- --------
BALANCE, DECEMBER 31, 1995..................... 3,000 30 8,180 124,869 133,079
Net income................................... -- -- -- 65,896 65,896
Distributions................................ -- -- -- (60,656) (60,656)
----- --- ------ -------- --------
BALANCE, NOVEMBER 30, 1996..................... 3,000 $30 $8,180 $130,109 $138,319
===== === ====== ======== ========
</TABLE>
See accompanying notes.
F-119
<PAGE> 190
DR. SMITH AND ASSOCIATES, P.A. #6950,
DR. SMITH AND ASSOCIATES, P.A. #6958, AND
DR. SMITH AND ASSOCIATES, P.A. #6966
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $131,348 $ 65,896
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 35,038 35,442
Changes in operating assets and liabilities:
Patient accounts receivable, net....................... (4,178) 15,334
Prepaid expenses....................................... -- (699)
Due from stockholder................................... (62,718) (42,219)
Accounts payable....................................... 15,036 8,450
Accrued expenses and other current liabilities......... 39,320 10,944
Due to affiliate....................................... (24,203) 26,886
Income tax payable..................................... 1,182 (1,182)
-------- ---------
Net cash provided by operating activities......... 130,825 118,852
INVESTING ACTIVITIES
Purchases of property, plant and equipment.................. (53,736) (4,027)
Other....................................................... 11,318 --
-------- ---------
Net cash used in investing activities............. (42,418) (4,027)
FINANCING ACTIVITIES
Borrowings on line of credit................................ -- 14,000
Distributions to shareholders............................... (34,485) (60,656)
Payment of capital lease obligations........................ (28,999) (24,040)
Payment of long-term debt................................... -- (35,674)
-------- ---------
Net cash used in financing activities............. (63,484) (106,370)
-------- ---------
Net increase in cash and cash equivalents................... 24,923 8,455
Cash and cash equivalents at beginning of period............ (1,385) 23,538
-------- ---------
Cash and cash equivalents at end of period........ $ 23,538 $ 31,993
======== =========
</TABLE>
See accompanying notes.
F-120
<PAGE> 191
DR. SMITH AND ASSOCIATES, P.A. #6950,
DR. SMITH AND ASSOCIATES, P.A. #6958, AND
DR. SMITH AND ASSOCIATES, P.A. #6966
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Dr. Smith and Associates, P.A. #6950 (P.A. #6950), a C corporation, Dr.
Smith and Associates, P.A. #6958 (P.A. #6958), an S corporation, and Dr. Smith
and Associates, P.A. #6966 (P.A. #6966), an S corporation, operate under common
ownership as a professional medical practice, specializing in general optometry.
These corporations are located in the Miami, Florida, area and are hereinafter
collectively referred to as the Company. All significant intercompany
transactions have been eliminated.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Property and equipment under
capital leases are stated at the net present value of the future minimum lease
payments at the inception of the related leases. Depreciation is computed using
straight-line and accelerated methods, with the assets' useful lives estimated
at five to seven years. Amortization expense related to capital leases is
included in depreciation and amortization in the combined statements of income.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and amounts due under line of credit reported
in the combined financial statements reflects their fair value because of the
short-term maturity of those financial instruments. It is not practicable to
estimate the fair value of the Company's long-term debt and obligations under
capital leases because the Company's incremental borrowing rate cannot
reasonably be determined.
NET PATIENT SERVICE REVENUES
Net patient service revenues are based on established billing rates, less
allowances for contractual adjustments for patients covered by Medicare,
Medicaid and various other discount arrangements. Payments received under these
programs and arrangements, which are based on predetermined rates, are generally
less than the Company's established billing rates and the differences are
recorded as contractual adjustments at the time the related service is rendered.
For the year ended December 31, 1995 and the eleven-month period ended
November 30, 1996, approximately 12% and 14%, respectively, of the Company's net
patient service revenues were derived from third-party payors. The Company does
not believe that there are any credit risks associated with receivables due from
governmental agencies. Concentration of credit risk from other payors is limited
by the number of patients and payors. The Company does not require any form of
collateral from its patients or third-party payors.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential wrong
doing. While no such regulatory inquires have been made, compliance with such
laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties and exclusion from the Medicare and Medicaid programs.
F-121
<PAGE> 192
DR. SMITH AND ASSOCIATES, P.A. #6950,
DR. SMITH AND ASSOCIATES, P.A. #6958, AND
DR. SMITH AND ASSOCIATES, P.A. #6966
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Income taxes for P.A. #6950 have been provided using the liability method
in accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (SFAS No. 109). Under this method, deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
P.A. #6958 and P.A. #6966 have elected to have their income taxed under the
provisions of Subchapter S of the federal Internal Revenue Code. As a result, in
lieu of corporate tax, #6958's and #6966's taxable income is passed through to
the stockholders of #6958 and #6966 and taxed at the individual level.
Accordingly, no provision or liability for federal income tax for #6958 and
#6966 has been reflected in these combined financial statements.
USE OF ESTIMATES
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amount reported in the combined financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Medical equipment........................................... $ 34,751 $ 37,552
Computer equipment.......................................... 25,556 26,782
Office furniture and equipment.............................. 4,380 4,380
Equipment under capital lease............................... 244,605 244,605
--------- ---------
309,292 313,319
Less accumulated depreciation and amortization.............. (185,903) (221,345)
--------- ---------
$ 123,389 $ 91,974
========= =========
</TABLE>
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Note payable to vendor with interest imputed at 10.75%,
payable in monthly installments of $528 through 1997
(collateralized by certain equipment)..................... $ 30,470 $ 21,450
Note payable to landlord bearing interest at prime plus 1%
(9.65% and 9.25% at December 31, 1995 and November 30,
1996, respectively), payable in monthly installments
through 1998)............................................. 60,577 33,923
-------- --------
91,047 55,373
Less current portion........................................ (38,917) (39,931)
-------- --------
$ 52,130 $ 15,442
======== ========
</TABLE>
F-122
<PAGE> 193
DR. SMITH AND ASSOCIATES, P.A. #6950,
DR. SMITH AND ASSOCIATES, P.A. #6958, AND
DR. SMITH AND ASSOCIATES, P.A. #6966
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As of November 30, 1996, maturity of long-term debt is as follows:
<TABLE>
<S> <C>
Month ending December 31, 1996.............................. $ 3,283
Year ending December 31:
1997...................................................... 40,031
1998...................................................... 12,059
1999...................................................... --
-------
Total............................................. $55,373
=======
</TABLE>
Interest payments approximate interest expense for the year ended December
31, 1995 and for the eleven-month period ended November 30, 1996.
4. LEASE COMMITMENTS
Future minimum lease commitments under capital leases and noncancelable
operating leases (with an initial or remaining term in excess of one year) at
November 30, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Month ending December 31, 1996.............................. $ 2,566 $ 9,000
Year ending December 31:
1997...................................................... 29,499 108,000
1998...................................................... 22,154 108,000
1999...................................................... 2,361 108,000
2000...................................................... 790 108,000
2001...................................................... -- 108,000
Thereafter................................................ -- 162,000
------- --------
Total minimum lease payments...................... 57,370 $711,000
========
Less amount representing interest........................... (6,473)
-------
Present value of minimum lease payments (including current
portion of $25,428)....................................... $50,897
=======
</TABLE>
F-123
<PAGE> 194
DR. SMITH AND ASSOCIATES, P.A. #6950,
DR. SMITH AND ASSOCIATES, P.A. #6958, AND
DR. SMITH AND ASSOCIATES, P.A. #6966
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
#6950's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
DEFERRED TAX ASSETS
Current:
Accrual to cash........................................... $ 8,722 $ --
Noncurrent:
Depreciation.............................................. 27,383 29,092
Valuation allowance......................................... (35,560) (24,593)
-------- --------
Total deferred tax assets......................... 545 4,499
DEFERRED TAX LIABILITIES
Current:
Accrual to cash........................................... -- 3,681
Noncurrent:
Capital lease............................................. 545 818
-------- --------
Total deferred tax liabilities.................... 545 4,499
-------- --------
Net deferred tax assets........................... $ -- $ --
======== ========
</TABLE>
Components of the income tax provision (benefit) which relate solely to
#6950 consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 NOVEMBER 30, 1996
--------------------------- --------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Federal................................. $1,182 $ -- $ 1,182 $ -- $ -- $ --
State................................... -- -- -- -- -- --
------ --- ------ -- --- --
$1,182 $ -- $ 1,182 $ -- $ -- $ --
====== === ====== == === ==
</TABLE>
Income taxes are different from the amount computed by applying the United
States statutory rate to income before income taxes for the following reasons:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Income taxes at the statutory rate.......................... $ 36,678 $ 17,691
Permanent differences....................................... 332 332
S-corporation income........................................ (32,250) (8,356)
State taxes, net of federal benefit......................... 508 1,032
Change in valuation allowance............................... (4,217) (10,967)
Personal service corporation status......................... 131 268
-------- --------
$ 1,182 $ --
======== ========
</TABLE>
SFAS No. 109 requires a valuation allowance to reduce the deferred tax
assets reported if, based on the weight of the evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
After consideration of all the evidence, both positive and negative, management
has determined that valuation allowances of $35,560 at December 31, 1995 and
$24,593 at November 30, 1996 are necessary to
F-124
<PAGE> 195
DR. SMITH AND ASSOCIATES, P.A. #6950,
DR. SMITH AND ASSOCIATES, P.A. #6958, AND
DR. SMITH AND ASSOCIATES, P.A. #6966
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
reduce the deferred tax assets to the amount that will more likely than not be
realized. The change in the valuation allowance for the year ended December 31,
1995 was $(4,217) and for the current year is $(10,967).
6. MALPRACTICE INSURANCE
The Company is covered by medical malpractice liability insurance written
on an occurrence basis. This insurance provides coverage of $5,000,000 per
incident, with a $5,000,000 aggregate limit. Management is not aware of any
reported claims pending against the Company. Losses resulting from unreported
claims cannot be estimated by management and, therefore, are not included in the
accompanying combined financial statements.
7. LITIGATION
During 1996, the Company entered into an out-of-court settlement related to
a wrongful termination claim. Payment under the out-of-court settlement of
$25,000 is classified in general and administrative expenses in the 1996
combined statement of income.
8. RELATED PARTY TRANSACTIONS
Amounts due from stockholder and due to affiliate of the Company reflect
net advances and borrowings between the Company and their owner and the owner's
related interests, including other affiliated corporations. Advances to and
borrowings from the shareholder accrue interest at approximately 6.5%.
Compensation to stockholder reflects wages earned by the stockholder acting
in the capacity as an optometrist and officer of the Company. Other related
party compensation for the year ended December 31, 1995 and the eleven-month
period ended November 30, 1996 was approximately $48,000 and $18,000,
respectively.
9. LINE OF CREDIT
The Company has a revolving credit note of $50,000 due on demand, which
bears interest at prime plus 3% (11.65% and 11.25% at December 31, 1995 and
November 30, 1996, respectively). At November 30, 1996, $14,000 was outstanding
under this facility.
The revolving credit note is collateralized by substantially all of the
assets of the Company.
10. SUBSEQUENT EVENT
On December 1, 1996, substantially all assets and liabilities of the
Company were acquired by Vision Twenty-One, Inc. (Vision) in exchange for
approximately 255,000 shares of Vision common stock and notes of approximately
$145,000. In connection therewith, the Company entered into a 40-year business
management agreement with Vision, whereby Vision will provide substantially all
nonmedical services to the practice.
The financial statements of the Company have been prepared as supplemental
information about the associations to which Vision will provide management
services following consummation of the acquisition. The Company previously
operated as a separate independent association. The historical financial
position, results of operations and cash flows do not reflect any adjustments
relating to the acquisition.
F-125
<PAGE> 196
[INSIDE BACK COVER]
[THE INSIDE BACK COVER SETS FORTH THE COMPANY NAME AND LOGO WITH PICTURES
DEPICTING EYEGLASSES, A COLLAGE OF VARIOUS MANAGED CARE MEMBERS IN THE PROCESS
OF RECEIVING EYE CARE AT MANAGED CLINICS; A MANAGED PROVIDER; AND A TELEPHONE
OPERATOR/RECEPTIONIST TAKING CALLS.]
<PAGE> 197
============================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS, OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 6
The Company............................... 16
The Acquisitions.......................... 16
Relationships with Affiliated Providers
and Retail Optical Companies............ 18
Use of Proceeds........................... 19
Dividend Policy........................... 19
Capitalization............................ 20
Dilution.................................. 21
Selected Pro Forma Financial Data......... 22
Selected Financial Data................... 23
Management's Discussion and Analysis of
Financial Conditions and Results of
Operations.............................. 24
Business.................................. 33
Management................................ 49
Certain Transactions...................... 56
Principal and Selling Stockholders........ 59
Description of Capital Stock.............. 61
Shares Eligible for Future Sale........... 65
Underwriting.............................. 67
Legal Matters............................. 69
Experts................................... 69
Additional Information.................... 69
Index to Consolidated Financial
Statements.............................. F-1
</TABLE>
============================================================
============================================================
2,100,000 Shares
[VISION TWENTY-ONE LOGO]
Common Stock
-------------------------
PROSPECTUS
-------------------------
PRUDENTIAL SECURITIES INCORPORATED
WHEAT FIRST BUTCHER SINGER
, 1997
============================================================
<PAGE> 198
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Company estimates that expenses payable by it in connection with the
Offering described in this registration statement (other than underwriting
discounts and commissions) will be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 9,514
NASD filing fee............................................. 3,640
Nasdaq National Market listing fee.......................... 36,402
Printing expenses........................................... *
Accounting fees and expenses................................ *
Legal fees and expenses..................................... *
Fees and expenses (including legal fees) for qualifications
under state securities laws............................... *
Registrar and Transfer Agent's fees and expenses............ *
Miscellaneous............................................... *
--------
Total............................................. $900,000
========
</TABLE>
- ---------------
* To be included by amendment to the Registration Statement.
All amounts except the Securities and Exchange Commission registration fee,
the NASD filing fee and the Nasdaq National Market listing fee are estimated.
The Company intends to pay all expenses of registration with respect to shares
being sold by the Selling Shareholders hereunder, with the exception of
underwriting discounts and commissions.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 607.0831 of the Florida Business Corporation Act ("FBCA") limits
the liability of directors of Florida corporations. Section 607.0831 provides as
follows:
1. A director is not personally liable for monetary damages to the
corporation or any other person for any statement, vote, decision, or
failure to act, regarding corporate management or policy, by a director,
unless:
a. The director breached or failed to perform his duties as a
director; and
b. The director's breach of, or failure to perform, those duties
constitutes:
(1) A violation of the criminal law, unless the director had
reasonable cause to believe his conduct was lawful or had no
reasonable cause to believe his conduct was unlawful. A judgment or
other final adjudication against a director in any criminal
proceeding for a violation of the criminal law estops that director
from contesting the fact that his breach, or failure to perform,
constitutes a violation of the criminal law; but does not estop the
director from establishing that he had reasonable cause to believe
that his conduct was lawful or had no reasonable cause to believe
that his conduct was unlawful;
(2) A transaction from which the director derived an improper
personal benefit, either directly or indirectly;
(3) A circumstance under which the liability provisions of
Florida Statutes sec. 607.0834 (liability for unlawful distributions)
are applicable;
(4) In a proceeding by or in the right of the corporation to
procure a judgment in its favor or by or in the right of a
shareholder, conscious disregard for the best interest of the
corporation, or willful misconduct; or
II-1
<PAGE> 199
(5) In a proceeding by or in the right of someone other than the
corporation or a shareholder, recklessness or an act or omission
which was committed in bad faith or with malicious purpose or in a
manner exhibiting wanton and willful disregard of human rights,
safety, or property.
2. For the purposes of this section, the term "recklessness" means the
action, or omission to act, in conscious disregard of a risk;
a. Known, or so obvious that it should have been known to the
director; and
b. Known to the director, or so obvious that it should have been
known, to be so great as to make it highly probable that harm would
follow from such action or omission.
3. A director is deemed not to have derived an improper personal
benefit from any transaction if the transaction and the nature of any
personal benefit derived by the director are not prohibited by state or
federal law or regulation and, without further limitation:
a. In an action other than a derivative suit regarding a decision
by the director to approve, reject, or otherwise affect the outcome of
an offer to purchase the stock of, or to effect a merger of, the
corporation, the transaction and the nature of any personal benefits
derived by a director are disclosed or known to all directors voting on
the matter, and the transaction was authorized, approved or ratified by
at least two directors who comprise a majority of the disinterested
directors (whether or not such disinterested directors constitute a
quorum);
b. The transaction and the nature of any personal benefits derived
by a director are disclosed or known to the shareholders entitled to
vote, and the transaction was authorized, approved, or ratified by the
affirmative vote or written consent of such shareholders who hold a
majority of the shares, the voting of which is not controlled by
directors who derived a personal benefit from or otherwise had a
personal interest in the transaction; or
c. The transaction was fair and reasonable to the corporation at
the time it was authorized by the board, a committee, or the
shareholders, notwithstanding that a director received a personal
benefit.
4. The circumstances set forth in subsection 3 are not exclusive and
do not preclude the existence of other circumstances under which a director
will be deemed not to have derived an improper benefit.
Section 607.0850 of the FBCA empowers a Florida corporation, subject to
certain limitations, to indemnify its directors and officers against expenses
(including attorneys' fees, judgments, fines and certain settlements) actually
and reasonably incurred by them in connection with any suit or proceeding to
which they are a party so long as they acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to a criminal action or proceeding, so long as
they had no reasonable cause to believe their conduct to have been unlawful.
The Articles of Incorporation of the Company provide that the Company shall
indemnify any person who is or was a director or officer of the Company to the
full extent permitted by Florida law. In addition, the Board of Directors of the
Company has approved the execution by the Company of indemnification agreements
with the Directors and certain officers of the Company, the form of which has
been filed as an exhibit to the Registration Statement.
The Company maintains director and officer liability insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In November 1996, the Company issued an aggregate of 2,685,318 shares of
Common Stock to Theodore Gillette, Richard Sanchez and Peter Fontaine in
connection with a reorganization of the Company. These transactions were exempt
from the registration requirements of the Securities Act pursuant to Section
4(2).
II-2
<PAGE> 200
In May 1996 and October 1996, the Company issued an aggregate of 270,331
shares of Common Stock to Bruce S. Maller, a director of the Company, as
compensation for consulting and advisory services. These transactions were
exempt from the registration requirements of the Securities Act pursuant to Rule
701.
In September 1996, the Company issued 108,132 shares of Common Stock to Dr.
Richard L. Lindstrom, a Director of the Company, as compensation for consulting
and advisory services. This transaction was exempt from the registration
requirements of the Securities Act pursuant to Rule 701.
In December 1996, the Company sold an aggregate principal amount of
$1,250,000 of its 10% Senior Subordinated Notes, Due December 19, 1999 (the
"Notes"), to certain unrelated parties in a private placement. Each Note has a
detachable Warrant exchangeable into 7,036 shares of Common Stock of the Company
at an exchange price ranging from $6.00 to $7.11 per share, or in a cashless
exchange for a reduced number of shares pursuant to a formula. This transaction
was exempt from the registration requirements of the Securities Act pursuant to
Section 4(2).
In February 1997, the Company sold a 10% Senior Subordinated Series 1997
Note, Due December 19, 1999, in the principal amount of $2,000,000 (the "Note"),
to Piper Jaffray Healthcare Fund II Limited Partnership in a private placement.
The Note has a detachable Warrant exchangeable into a maximum of 333,333 shares
of Common Stock at an exchange price ranging from $6.00 to $7.11 per share, or
in a cashless exchange for a reduced number of shares pursuant to a formula.
This transaction was exempt from the registration requirements of the Securities
Act pursuant to Section 4(2).
In a private placement April 1997, which was amended in June 1997, the
Company issued a promissory note to Prudential Securities Group Inc. in the
maximum aggregate amount of $4.7 million and warrants exchangeable into 210,000
shares of Common Stock at an exchange price per share equal to the initial
public offering price of the Company's Common Stock. This transaction was exempt
from the registration requirements of the Securities Act pursuant to Section
4(2).
In connection with the 1996 Acquisitions, the Company issued non-negotiable
promissory notes, as part of the purchase price, totalling approximately
$2,000,000 and issued an aggregate of 2,223,053 shares of Common Stock. These
transactions were exempt from the registration requirements of the Securities
Act pursuant to Section 4(2).
In 1996 and 1997, the Company granted options to purchase 682,667 shares of
Common Stock under the Plans to certain employees, executive officers and
affiliated professionals. These transactions were exempt from the registration
requirements of the Securities Act pursuant to Rule 701. The Company plans to
file registration statements under the Securities Act after this Offering to
register sales of shares of Common Stock under the Plans, if any.
In April 1997, the Company issued 128,541 shares of Common Stock in
connection with the Merger Agreement with Richard L. Short, D.O., P.A. This
transaction was exempt from the registration requirements of the Securities Act
pursuant to Section 4(2).
In May 1997, the Company issued 11,411 shares of Common Stock in connection
with the acquisition of certain assets of Drs. Smith, Porter & Associates, P.A.
This transaction was exempt from the registration requirements of the Securities
Act pursuant to Section 4(2).
In May 1997, the Company issued 169,150 shares of Common Stock in
connection with the Merger Agreement with Cochise Eye & Laser, P.C. This
transaction was exempt from the registration requirements of the Securities Act
pursuant to Section 4(2).
In June 1997, the Company issued 136,356 shares of Common Stock in
connection with the Merger Agreement with Valley Eye Specialist pursuant to a
binding commitment existing prior to the filing of the registration statement.
This transaction was exempt from the registration requirements of the Securities
Act pursuant to Section 4(2).
II-3
<PAGE> 201
In June 1997, the Company issued 320,000 shares of Common Stock in
connection with the acquisition of certain assets of Swagel/Wootton Eye Care
Center, Ltd. pursuant to a binding commitment existing prior to the filing of
the registration statement. This transaction was exempt from the registration
requirements of the securities requirements of the Securities Act pursuant to
Section 4(2).
In July 1997, the Company issued 140,201 shares of Common Stock in
connection with the Merger Agreement with Eye Institute of Southern Arizona,
P.C. pursuant to a binding commitment existing since December 1996. This
transaction was exempt from the registration of the Securities Act pursuant to
Section 4(2).
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- -------------------
<C> <C> <S>
1.1* -- Form of Underwriting Agreement.
3.1** -- Amended and Restated Articles of Incorporation of Vision
Twenty-One, Inc.
3.2** -- Bylaws of Vision Twenty-One, Inc.
4.1** -- Specimen of Vision Twenty-One, Inc. Common Stock
Certificate.
4.2** -- Promissory Note dated June 1996 from Vision Twenty-One, Inc.
to Peter Fontaine.
4.3** -- Promissory Note dated November 1996 from Vision Twenty-One,
Inc. to Peter Fontaine.
4.4** -- Promissory Note dated December 1996 from Vision Twenty-One,
Inc. to Peter Fontaine.
4.5** -- Note Purchase Agreement for 10% Senior Subordinated Notes
Due December 19, 1999 (Detachable Warrants Exchangeable Into
Common Stock) dated December 20, 1996, by and between Vision
Twenty-One, Inc. and certain purchasers.
4.6** -- Amendment No. 1 dated April 18, 1997, to that certain Note
Purchase Agreement dated December 20, 1996, by and between
Vision Twenty-One, Inc. and certain purchasers.
4.7** -- Note Purchase Agreement for 10% Senior Subordinated Series
1997 Notes Due December 19, 1999 (Detachable Warrants
Exchangeable Into Common Stock) dated February 28, 1997
between Vision Twenty-One, Inc. and Piper Jaffray Healthcare
Fund II Limited Partnership.
4.8* -- Amended and Restated Note and Warrant Purchase Agreement
dated June 1997 between Vision Twenty-One, Inc. and
Prudential Securities Group.
(The Company is not filing any instrument with respect to
long-term debt that does not exceed 10% of the total assets
of the Company and the Company agrees to furnish a copy of
such instrument to the Commission upon request.)
5.1* -- Opinion of Shumaker, Loop & Kendrick, LLP as to the Common
Stock being registered.
10.1** -- Employment Agreement dated October 1, 1996 between Vision
Twenty-One, Inc. and Theodore N. Gillette.
10.2** -- Employment Agreement dated October 1, 1996 between Vision
Twenty-One, Inc. and Richard Sanchez.
10.3** -- Employment Agreement dated September 1, 1996 between Vision
Twenty-One, Inc. and Richard T. Welch.
10.4** -- Services Agreement dated September 9, 1996 between Vision
Twenty-One, Inc. and Dr. Richard L. Lindstrom, M.D.
10.5** -- Vision Twenty-One, Inc. 1996 Stock Incentive Plan.
10.6** -- Vision Twenty-One, Inc. Affiliated Professionals Stock Plan.
</TABLE>
II-4
<PAGE> 202
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- -------------------
<C> <C> <S>
10.7** -- Agreement dated May 10, 1996 between Vision Twenty-One, Inc.
and Bruce S. Maller.
10.8** -- Advisory Agreement dated October 20, 1996 between Vision
Twenty-One, Inc. and Bruce S. Maller.
10.9** -- Services Agreement dated March 10, 1996 between Vision
Twenty-One, Inc. and The BSM Consulting Group.
10.10** -- Subscription Agreement dated June 4, 1996 between Vision
Twenty-One, Inc. and Peter Fontaine.
10.11** -- Promissory Note dated June 1996 from Vision Twenty-One, Inc.
to Peter Fontaine, filed as Exhibit 4.2 to this Registration
Statement and incorporated herein by reference.
10.12** -- Promissory Note dated November 1996 from Vision Twenty-One,
Inc. to Peter Fontaine, filed as Exhibit 4.3 to this
Registration Statement and incorporated herein by reference.
10.13** -- Promissory Note dated December 1996 from Vision Twenty-One,
Inc. to Peter Fontaine filed as Exhibit 4.4 to this
Registration Statement and incorporated herein by reference.
10.14** -- Note Purchase Agreement for 10% Senior Subordinated Notes
Due December 19, 1999 (Detachable Warrants Exchangeable Into
Common Stock), dated December 20, 1996, by and between
Vision Twenty-One, Inc. and certain purchasers filed as
Exhibit 4.5 to this Registration Statement and incorporated
herein by reference.
10.15** -- Amendment No. 1 dated April 18, 1997, to that certain Note
Purchase Agreement dated December 20, 1996, by and between
Vision Twenty-One, Inc. and certain purchasers filed as
Exhibit 4.6 to this Registration Statement and incorporated
herein by reference.
10.16** -- Note Purchase Agreement for 10% Senior Subordinated Series
1997 Notes Due December 19, 1999 (Detachable Warrants
Exchangeable Into Common Stock), by and between Vision
Twenty-One, Inc. and Piper Jaffray Healthcare Fund II
Limited Partnership, filed as Exhibit 4.7 to this
Registration Statement and incorporated herein by reference.
10.17* -- Amended and Restated Note and Warrant Purchase Agreement
dated June 1997 between Vision Twenty-One, Inc. and
Prudential Securities Group, Inc. filed as Exhibit 4.8 to
this Registration Statement and incorporated herein by
reference.
10.18** -- Form of Indemnification Agreement.
10.19+*** -- Ancillary Provider Participation Agreement and Provider
Amendment among Humana Medical Plan, Inc., Humana Health
Plan of Florida, Inc., Humana Health Insurance of Florida,
Inc., Humana Insurance Company and Vision 21.
10.20+*** -- Asset Purchase Agreement dated December 1, 1996, by and
among Gillette & Associates, #6965, P.A., Theodore N.
Gillette, O.D., Mark Sarno, O.D. and Mark Beiler, O.D. and
Vision Twenty-One, Inc.
10.21** -- Subordinated Promissory Note dated December 1, 1996, from
Vision Twenty-One, Inc. to Gillette & Associates, #6965,
P.A.
10.22*** -- Business Management Agreement dated December 1, 1996,
between Vision Twenty-One, Inc. and Gillette & Associates,
#6965, P.A.
10.23+** -- Agreement and Plan of Reorganization dated December 1, 1996,
by and among Eye Institute of Southern Arizona, P.C.,
Jeffrey I. Katz, M.D. and Barry Kusman, M.D., Vision
Twenty-One, Inc. and Vision 21 of Southern Arizona, Inc.
10.24** -- Business Management Agreement dated December 1, 1996,
between Eye Institute of Southern Arizona, P.C. and
ExcelCare, P.C. (as assigned to Vision Twenty-One, Inc.)
</TABLE>
II-5
<PAGE> 203
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- -------------------
<C> <C> <S>
10.25+*** -- Asset Purchase Agreement dated December 1, 1996, by and
among Lindstrom, Samuelson & Hardten Ophthalmology
Associates, P.A., Richard L. Lindstrom, M.D., Thomas W.
Samuelson, M.D. and David R. Hardten, M.D. and Vision
Twenty-One, Inc.
10.26** -- Subordinated Promissory Note dated December 1, 1996, from
Vision Twenty-One, Inc. to Lindstrom, Samuelson & Hardten
Ophthalmology Associates, P.A.
10.27** -- Business Management Agreement dated December 1, 1996,
between Vision Twenty-One, Inc. and Lindstrom, Samuelson &
Hardten Ophthalmology Associates, P.A.
10.28+** -- Agreement and Plan of Reorganization dated December 1, 1996,
by and among Dr. Smith & Associates, #6950, P.A., Paul
Smith, O.D. and Vision Twenty-One, Inc.
10.30+** -- Asset Purchase Agreement dated December 1, 1996, by and
among Dr. Smith & Associates, #6958, P.A., Paul Smith, O.D.
and Vision Twenty-One, Inc.
10.31** -- Subordinated Promissory Note dated December 1, 1996, from
Vision Twenty-One, Inc. to Dr. Smith & Associates, #6958,
P.A.
10.33+** -- Asset Purchase Agreement dated December 1, 1996, by and
among Dr. Smith & Associates, #6966, P.A., Paul Smith, O.D.
and Vision Twenty-One, Inc.
10.34** -- Subordinated Promissory Note dated December 1, 1996, from
Vision Twenty-One, Inc. to Dr. Smith & Associates, #6966,
P.A.
10.36+*** -- Managed Care Organization Asset Purchase Agreement dated
December 1, 1996, between Eye Specialists of Arizona
Network, P.C., Daniel B. Feller, M.D. and Vision Twenty-One,
Inc.
10.37** -- Subordinated Promissory Note dated December 1, 1996, from
Vision Twenty-One, Inc. to Eye Specialists of Arizona
Network, P.C.
10.38+*** -- Optical Asset Purchase Agreement dated December 1, 1996, by
and among Sharona Optical, Inc., Millennium Vision, P.C.
Daniel B. Feller, M.D. and Sharona Feller and Vision
Twenty-One, Inc.
10.39** -- Subordinated Promissory Note dated December 1, 1996, from
Vision Twenty-One, Inc. to Sharona Optical, Inc.
10.40+*** -- Agreement and Plan of Reorganization dated December 1, 1996,
by and among Daniel B. Feller, M.D., P.C., Daniel B. Feller,
M.D. and Vision Twenty-One, Inc.
10.41** -- Business Management dated December 1, 1996, between Daniel
B. Feller, M.D., P.C. and Millennium Vision, P.C. (as
assigned to Vision Twenty-One, Inc.)
10.42** -- Stock Purchase Agreement dated May 1997, between David R.
Hardten, M.D., Robert B. Kennedy, O.D., Thomas A. Knox,
Gregory W. Kraupa, O.D., John W. Lahr, O.D., Richard L.
Lindstrom, M.D., Jack W. Moore, Thomas W. Samuelson, M.D.
and Bradley D. Richter, O.D. and Vision Twenty-One, Inc.
10.43** -- Regional Services Agreement dated May 1997, between Vision
Twenty-One, Inc. and Richard L. Lindstrom, M.D.
10.44 -- Asset Purchase Agreement dated May 1, 1997 by and among Drs.
Smith, Porter & Associates, P.A., Paul R. Smith, O.D., and
Vision Twenty-One, Inc.
10.47** -- Form of Contract Provider agreement.
10.48+*** -- Joint Venture Agreement dated May 1, 1996 by and between for
Eyes Managed Care, Inc. and Vision 21 Managed Eye Care of
Tampa Bay, Inc.
11 -- Statement of Computation of Per Share Earnings.
21** -- List of the subsidiaries of Vision Twenty-One, Inc.
23.1* -- Consent of Shumaker, Loop & Kendrick, LLP (included in their
opinion filed as Exhibit 5.1).
23.2 -- Consent of Ernst & Young, LLP, independent certified public
accountants.
</TABLE>
II-6
<PAGE> 204
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- -------------------
<C> <C> <S>
24** -- Power of Attorney (included on signature page).
27.1** -- Financial Data Schedule for year ended December 31, 1996.
(For SEC Use Only).
27.2** -- Financial Data Schedule for three months ended March 31,
1997. (For SEC Use Only).
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed as an Exhibit with the same Exhibit Number identification
in the Company's Registration Statement on Form S-1 filed on June 13, 1997
(File No. 333-29213) and incorporated herein by reference.
*** Previously filed as an Exhibit with the same Exhibit Number identification
in the Company's Amendment No. 1 to Registration Statement on Form S-1 filed
on July 23, 1997 (File No. 333-29213) and incorporated herein by reference.
+ Certain information contained in this exhibit is subject to a request for
confidential treatment. In accordance with Rule 406 promulgated under the
Securities Act of 1933, as amended, such confidential information has been
omitted herefrom and filed separately with the Securities and Exchange
Commission.
(b) Financial Statement Schedules:
SCHEDULE I -- VALUATION AND QUALIFYING ACCOUNTS
All other schedules are omitted because the required information is not
present or is not present in amounts sufficient to require submission of the
schedule or because the information required is included in the financial
statements or notes thereto or the schedule is not required or inapplicable
under the related instructions.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bonafide offering thereof.
II-7
<PAGE> 205
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Largo, State of Florida
on July 30, 1997.
VISION TWENTY-ONE, INC.
By: /s/ THEODORE N. GILLETTE
------------------------------------
Theodore N. Gillette
Chief Executive Officer
(The Principal Executive Officer)
By: /s/ RICHARD T. WELCH
------------------------------------
Richard T. Welch
Chief Financial Officer
(The Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on July 30, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ THEODORE N. GILLETTE Chief Executive Officer
- ------------------------------------
Theodore N. Gillette
/s/ RICHARD T. WELCH Chief Financial Officer
- ------------------------------------
Richard T. Welch
* Director
- ------------------------------------
Richard L. Sanchez
* Director
- ------------------------------------
Peter Fontaine
* Director
- ------------------------------------
Herbert U. Pegues II, M.D.
* Director
- ------------------------------------
Bruce S. Maller
* Director
- ------------------------------------
Richard L. Lindstrom, M.D.
* Director
- ------------------------------------
Jeffrey Katz, M.D.
*By /s/ THEODORE N. GILLETTE as attorneys in fact pursuant to the power
- ------------------------------------ of attorney included in the Registration
Theodore N. Gillette Statement as originally filed on June 13,
1997.
*By /s/ RICHARD T. WELCH
- ------------------------------------
Richard T. Welch
</TABLE>
II-8
<PAGE> 206
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have audited the consolidated financial statements of Vision Twenty-One,
Inc. and Subsidiaries as of December 31, 1995 and 1996, and for each of the
three years in the period ended December 31, 1996, and have issued our report
thereon dated March 22, 1997, except for Note 11, as to which the date is July
29, 1997 (included elsewhere in this Registration Statement). Our audits also
included the financial schedule listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
Tampa, Florida
July 29, 1997
S-1
<PAGE> 207
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
SCHEDULE I -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT -----------------------
BEGINNING CHARGED TO CHARGED TO BALANCE AT
OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful accounts..... $ -- $ -- $ -- $ -- $ --
==== ==== ======== ==== ========
For the year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts..... $ -- $ -- $ -- $ -- $ --
==== ==== ======== ==== ========
For the year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts..... $ -- $ -- $685,000(1) $ -- $685,000
==== ==== ======== ==== ========
</TABLE>
- ---------------
(1) Amount represents allowance for doubtful accounts acquired in connection
with the December 1, 1996 acquisition of substantially all of the assets and
certain liabilities of 10 ophthalmology and optometry practices.
S-2
<PAGE> 208
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- -------------------
<C> <C> <S>
1.1* -- Form of Underwriting Agreement.
3.1** -- Amended and Restated Articles of Incorporation of Vision
Twenty-One, Inc.
3.2** -- Bylaws of Vision Twenty-One, Inc.
4.1** -- Specimen of Vision Twenty-One, Inc. Common Stock
Certificate.
4.2** -- Promissory Note dated June 1996 from Vision Twenty-One, Inc.
to Peter Fontaine.
4.3** -- Promissory Note dated November 1996 from Vision Twenty-One,
Inc. to Peter Fontaine.
4.4** -- Promissory Note dated December 1996 from Vision Twenty-One,
Inc. to Peter Fontaine.
4.5** -- Note Purchase Agreement for 10% Senior Subordinated Notes
Due December 19, 1999 (Detachable Warrants Exchangeable Into
Common Stock) dated December 20, 1996, by and between Vision
Twenty-One, Inc. and certain purchasers.
4.6** -- Amendment No. 1 dated April 18, 1997, to that certain Note
Purchase Agreement dated December 20, 1996, by and between
Vision Twenty-One, Inc. and certain purchasers.
4.7** -- Note Purchase Agreement for 10% Senior Subordinated Series
1997 Notes Due December 19, 1999 (Detachable Warrants
Exchangeable Into Common Stock) dated February 28, 1997
between Vision Twenty-One, Inc. and Piper Jaffray Healthcare
Fund II Limited Partnership.
4.8* -- Amended and Restated Note and Warrant Purchase Agreement
dated June 1997 between Vision Twenty-One, Inc. and
Prudential Securities Group.
(The Company is not filing any instrument with respect to
long-term debt that does not exceed 10% of the total assets
of the Company and the Company agrees to furnish a copy of
such instrument to the Commission upon request.)
5.1* -- Opinion of Shumaker, Loop & Kendrick, LLP as to the Common
Stock being registered.
10.1** -- Employment Agreement dated October 1, 1996 between Vision
Twenty-One, Inc. and Theodore N. Gillette.
10.2** -- Employment Agreement dated October 1, 1996 between Vision
Twenty-One, Inc. and Richard Sanchez.
10.3** -- Employment Agreement dated September 1, 1996 between Vision
Twenty-One, Inc. and Richard T. Welch.
10.4** -- Services Agreement dated September 9, 1996 between Vision
Twenty-One, Inc. and Dr. Richard L. Lindstrom, M.D.
10.5** -- Vision Twenty-One, Inc. 1996 Stock Incentive Plan.
10.6** -- Vision Twenty-One, Inc. Affiliated Professionals Stock Plan.
10.7** -- Agreement dated May 10, 1996 between Vision Twenty-One, Inc.
and Bruce S. Maller.
10.8** -- Advisory Agreement dated October 20, 1996 between Vision
Twenty-One, Inc. and Bruce S. Maller.
10.9** -- Services Agreement dated March 10, 1996 between Vision
Twenty-One, Inc. and The BSM Consulting Group.
10.10** -- Subscription Agreement dated June 4, 1996 between Vision
Twenty-One, Inc. and Peter Fontaine.
10.11** -- Promissory Note dated June 1996 from Vision Twenty-One, Inc.
to Peter Fontaine, filed as Exhibit 4.2 to this Registration
Statement and incorporated herein by reference.
10.12** -- Promissory Note dated November 1996 from Vision Twenty-One,
Inc. to Peter Fontaine, filed as Exhibit 4.3 to this
Registration Statement and incorporated herein by reference.
</TABLE>
<PAGE> 209
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- -------------------
<C> <C> <S>
10.13** -- Promissory Note dated December 1996 from Vision Twenty-One,
Inc. to Peter Fontaine filed as Exhibit 4.4 to this
Registration Statement and incorporated herein by reference.
10.14** -- Note Purchase Agreement for 10% Senior Subordinated Notes
Due December 19, 1999 (Detachable Warrants Exchangeable Into
Common Stock), dated December 20, 1996, by and between
Vision Twenty-One, Inc. and certain purchasers filed as
Exhibit 4.5 to this Registration Statement and incorporated
herein by reference.
10.15** -- Amendment No. 1 dated April 18, 1997, to that certain Note
Purchase Agreement dated December 20, 1996, by and between
Vision Twenty-One, Inc. and certain purchasers filed as
Exhibit 4.6 to this Registration Statement and incorporated
herein by reference.
10.16** -- Note Purchase Agreement for 10% Senior Subordinated Series
1997 Notes Due December 19, 1999 (Detachable Warrants
Exchangeable Into Common Stock), by and between Vision
Twenty-One, Inc. and Piper Jaffray Healthcare Fund II
Limited Partnership, filed as Exhibit 4.7 to this
Registration Statement and incorporated herein by reference.
10.17* -- Amended and Restated Note and Warrant Purchase Agreement
dated June 1997 between Vision Twenty-One, Inc. and
Prudential Securities Group, Inc. filed as Exhibit 4.8 to
this Registration Statement and incorporated herein by
reference.
10.18** -- Form of Indemnification Agreement.
10.19+*** -- Ancillary Provider Participation Agreement and Provider
Amendment among Humana Medical Plan, Inc., Humana Health
Plan of Florida, Inc., Humana Health Insurance of Florida,
Inc., Humana Insurance Company and Vision 21.
10.20+*** -- Asset Purchase Agreement dated December 1, 1996, by and
among Gillette & Associates, #6965, P.A., Theodore N.
Gillette, O.D., Mark Sarno, O.D. and Mark Beiler, O.D. and
Vision Twenty-One, Inc.
10.21** -- Subordinated Promissory Note dated December 1, 1996, from
Vision Twenty-One, Inc. to Gillette & Associates, #6965,
P.A.
10.22*** -- Business Management Agreement dated December 1, 1996,
between Vision Twenty-One, Inc. and Gillette & Associates,
#6965, P.A.
10.23+** -- Agreement and Plan of Reorganization dated December 1, 1996,
by and among Eye Institute of Southern Arizona, P.C.,
Jeffrey I. Katz, M.D. and Barry Kusman, M.D., Vision
Twenty-One, Inc. and Vision 21 of Southern Arizona, Inc.
10.24** -- Business Management Agreement dated December 1, 1996,
between Eye Institute of Southern Arizona, P.C. and
ExcelCare, P.C. (as assigned to Vision Twenty-One, Inc.)
10.25+*** -- Asset Purchase Agreement dated December 1, 1996, by and
among Lindstrom, Samuelson & Hardten Ophthalmology
Associates, P.A., Richard L. Lindstrom, M.D., Thomas W.
Samuelson, M.D. and David R. Hardten, M.D. and Vision
Twenty-One, Inc.
10.26** -- Subordinated Promissory Note dated December 1, 1996, from
Vision Twenty-One, Inc. to Lindstrom, Samuelson & Hardten
Ophthalmology Associates, P.A.
10.27** -- Business Management Agreement dated December 1, 1996,
between Vision Twenty-One, Inc. and Lindstrom, Samuelson &
Hardten Ophthalmology Associates, P.A.
10.28+** -- Agreement and Plan of Reorganization dated December 1, 1996,
by and among Dr. Smith & Associates, #6950, P.A., Paul
Smith, O.D. and Vision Twenty-One, Inc.
10.30+** -- Asset Purchase Agreement dated December 1, 1996, by and
among Dr. Smith & Associates, #6958, P.A., Paul Smith, O.D.
and Vision Twenty-One, Inc.
10.31** -- Subordinated Promissory Note dated December 1, 1996, from
Vision Twenty-One, Inc. to Dr. Smith & Associates, #6958,
P.A.
10.33+** -- Asset Purchase Agreement dated December 1, 1996, by and
among Dr. Smith & Associates, #6966, P.A., Paul Smith, O.D.
and Vision Twenty-One, Inc.
</TABLE>
2
<PAGE> 210
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
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<C> <C> <S>
10.34** -- Subordinated Promissory Note dated December 1, 1996, from
Vision Twenty-One, Inc. to Dr. Smith & Associates, #6966,
P.A.
10.36+*** -- Managed Care Organization Asset Purchase Agreement dated
December 1, 1996, between Eye Specialists of Arizona
Network, P.C., Daniel B. Feller, M.D. and Vision Twenty-One,
Inc.
10.37** -- Subordinated Promissory Note dated December 1, 1996, from
Vision Twenty-One, Inc. to Eye Specialists of Arizona
Network, P.C.
10.38+*** -- Optical Asset Purchase Agreement dated December 1, 1996, by
and among Sharona Optical, Inc., Millennium Vision, P.C.
Daniel B. Feller, M.D. and Sharona Feller and Vision
Twenty-One, Inc.
10.39** -- Subordinated Promissory Note dated December 1, 1996, from
Vision Twenty-One, Inc. to Sharona Optical, Inc.
10.40+*** -- Agreement and Plan of Reorganization dated December 1, 1996,
by and among Daniel B. Feller, M.D., P.C., Daniel B. Feller,
M.D. and Vision Twenty-One, Inc.
10.41** -- Business Management dated December 1, 1996, between Daniel
B. Feller, M.D., P.C. and Millennium Vision, P.C. (as
assigned to Vision Twenty-One, Inc.)
10.42** -- Stock Purchase Agreement dated May 1997, between David R.
Hardten, M.D., Robert B. Kennedy, O.D., Thomas A. Knox,
Gregory W. Kraupa, O.D., John W. Lahr, O.D., Richard L.
Lindstrom, M.D., Jack W. Moore, Thomas W. Samuelson, M.D.
and Bradley D. Richter, O.D. and Vision Twenty-One, Inc.
10.43** -- Regional Services Agreement dated May 1997, between Vision
Twenty-One, Inc. and Richard L. Lindstrom, M.D.
10.44 -- Asset Purchase Agreement dated May 1, 1997 by and among Drs.
Smith, Porter & Associates, P.A., Paul R. Smith, O.D., and
Vision Twenty-One, Inc.
10.47** -- Form of Contract Provider agreement.
10.48+*** -- Joint Venture Agreement dated May 1, 1996 by and between for
Eyes Managed Care, Inc. and Vision 21 Managed Eye Care of
Tampa Bay, Inc.
11 -- Statement of Computation of Per Share Earnings.
21** -- List of the subsidiaries of Vision Twenty-One, Inc.
23.1* -- Consent of Shumaker, Loop & Kendrick, LLP (included in their
opinion filed as Exhibit 5.1).
23.2 -- Consent of Ernst & Young, LLP, independent certified public
accountants.
24** -- Power of Attorney (included on signature page).
27.1** -- Financial Data Schedule for year ended December 31, 1996.
(For SEC Use Only).
27.2** -- Financial Data Schedule for three months ended March 31,
1997. (For SEC Use Only).
</TABLE>
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* To be filed by amendment.
** Previously filed as an Exhibit with the same Exhibit Number identification
in the Company's Registration Statement on Form S-1 filed on June 13, 1997
(File No. 333-29213) and incorporated herein by reference.
*** Previously filed as an Exhibit with the same Exhibit Number identification
in the Company's Amendment No. 1 to Registration Statement on Form S-1 filed
on July 23, 1997 (File No. 333-29213) and incorporated herein by reference.
+ Certain information contained in this exhibit is subject to a request for
confidential treatment. In accordance with Rule 406 promulgated under the
Securities Act of 1933, as amended, such confidential information has been
omitted herefrom and filed separately with the Securities and Exchange
Commission.
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<PAGE> 1
EXHIBIT 10.44
ASSET PURCHASE AGREEMENT
DATED: MAY 1, 1997
<PAGE> 2
Exhibit 10.44
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (this "Agreement"), dated as of May 1,
1997, is by and among SMITH PORTER & ASSOCIATES, P.A., a Florida professional
association (the "Company"), PAUL A. SMITH, O.D., (the "Optometrist"), and
VISION TWENTY-ONE, INC., a Florida corporation ("Vision 21").
R E C I T A L S
A. Optometrist is an optometrist licensed to practice
optometry in the State (as defined herein) and currently conducts an optometry
practice through the Company.
B. Optometrist owns all of the issued and outstanding shares
of capital stock of the Company.
C. Vision 21 provides business management services and
facilities for eye care professionals and related businesses.
D. The Company desires to sell, assign and transfer all of its
assets to the extent permitted by law and Vision 21 desires to purchase, assume
and acquire such assets and assume certain liabilities of the Company in
exchange for capital stock of Vision 21 and other consideration, all as more
specifically provided herein.
NOW, THEREFORE, in consideration of the mutual representations,
warranties and covenants contained herein, and on the terms and subject to the
conditions herein set forth, the parties hereto hereby agree as follows:
1. DEFINITIONS. As used in this Agreement, the following
terms shall have the meanings set forth below:
1.1. AAA. The term "AAA" shall mean the American
Arbitration Association.
1.2. Accountants. The term "Accountants" shall mean
the accounting firm for Vision 21.
1.3. Accounts Receivable. The term "Accounts
Receivable" shall have the meaning set forth in Section 2.1(b).
1.4. Acquisition Proposal. The term "Acquisition
Proposal" shall have the meaning set forth in Section 3.31.
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1.5. Affiliate. The term "Affiliate" with respect to
any person or entity shall mean a person or entity that directly or indirectly
through one or more intermediaries, controls, or is controlled by or is under
common control with, such person or entity.
1.6. Applicable Laws. The term "Applicable Laws"
shall have the meaning set forth in Section 19.8.
1.7. Assumed Contracts. The term "Assumed Contracts"
shall have the meaning set forth in Section 2.1(e).
1.8. Assumed Obligations. The term "Assumed
Obligations" shall have the meaning set forth in Section 2.3.
1.9. Business. The term "Business" shall have the
meaning set forth in Section 19.1(b)(i).
1.10. Business Management Agreement. The term
"Business Management Agreement" shall mean the Business Management Agreement
entered into between the Company and Vision 21 at the Closing.
1.11. Business Records. The term "Business Records"
shall have the meaning set forth in Section 2.1(g).
1.12. Cash Compensation. The term "Cash Compensation"
shall have the meaning set forth in Section 3.8(a).
1.13. Claim Notice. The term "Claim Notice" shall have
the meaning set forth in Section 14.3(a).
1.14. Closing. The term "Closing" shall mean the
consummation of the transactions contemplated by this Agreement.
1.15. Closing Date. The term "Closing Date" shall mean
June ___, 1997, or such other date as mutually agreed upon by the parties.
1.16. Code. The term "Code" shall mean the Internal
Revenue Code of 1986, as amended.
1.17. Commitments. The term "Commitments" shall have
the meaning set forth in Section 3.12(a).
1.18. Common Stock. The term "Common Stock" or "Vision
21 Common Stock" shall mean the common stock, par value $.01 per share, of
Vision 21.
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<PAGE> 4
1.19. Company Balance Sheet. The term "Company Balance
Sheet" shall have the meaning set forth in Section 3.6.
1.20. Company Balance Sheet Date. The term "Company
Balance Sheet Date" shall have the meaning set forth in Section 3.6.
1.21. Compensation Plans. The term "Compensation
Plans" shall have the meaning set forth in Section 3.8(b).
1.22. Competing Business. The term "Competing
Business" shall have the meaning set forth in Section 17.1(b).
1.23. Competitor. The term "Competitor" shall mean any
person or entity which, individually or jointly with others, whether for its
own account or for that of any other person or entity, owns, or holds any
ownership or voting interest in any person or entity engaged in, the practice
of optometry, the operation of out patient eye surgical facilities, the
operation of refractive surgery centers and the operation of optical shops;
provided, however, that such term shall not include any Affiliate of Vision 21
or any entity with which Vision 21 has an agreement similar to the Business
Management Agreement in effect.
1.24. Confidential Information Memorandum. The term
"Confidential Information Memorandum" shall mean that certain disclosure
memorandum distributed by Vision 21 to the Company and Optometrist dated as of
December 1996, as amended by a supplement dated February 28, 1997, and any
further amendments or revisions thereto.
1.25. Controlled Group. The term "Controlled Group"
shall have the meaning set forth in Section 3.9(f).
1.26. Corporation Law. The term "Corporation Law"
shall mean the statutes, regulations and laws governing business corporations
and professional associations in the State.
1.27. Damages. The term "Damages" shall have the
meaning set forth in Section 14.1.
1.28. Election Period. The term "Election Period"
shall have the meaning set forth in Section 16.3(a).
1.29. Employee Benefit Plans. The term "Employee
Benefit Plans" shall have the meaning set forth in Section 3.9(a).
1.30. Employee Policies and Procedures. The term
"Employee Policies and Procedures" shall have the meaning set forth in Section
3.8(d).
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<PAGE> 5
1.31. Employment Agreements. The term "Employment
Agreements" shall have the meaning set forth in Section 3.8(c).
1.32. Environmental Laws. The term "Environmental
Laws" shall have the meaning set forth in Section 3.24(a).
1.33. ERISA. The term "ERISA" shall mean the Employee
Retirement Income Security Act of 1974, as amended.
1.34. Exchange Act. The term "Exchange Act" shall mean
the Securities Exchange Act of 1934, as amended.
1.35. FBCA. The term "FBCA" shall mean the Florida
Business Corporation Act.
1.36. Financial Statements. The term "Financial
Statements" shall have the meaning set forth in Section 3.6.
1.37. GAAP. The term "GAAP" shall mean generally
accepted accounting principles, applied on a consistent basis with prior
periods, set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity or other practices and procedures as
may be approved by a significant segment of the accounting profession, which
are applicable to the circumstances as of the date of the determination.
1.38. Governmental Authority. The term "Governmental
Authority" shall mean any national, state, provincial, local or tribunal
governmental, judicial or administrative authority or agency.
1.39. Indemnified Party. The term "Indemnified Party"
shall have the meaning set forth in Section 14.3(a).
1.40. Indemnifying Party. The term "Indemnifying
Party" shall have the meaning set forth in Section 14.3(a).
1.41. Indemnity Notice. The term "Indemnity Notice"
shall have the meaning set forth in Section 14.3(d).
1.42. Initial Public Offering. The term "Initial
Public Offering" shall mean the potential initial underwritten public offering
of Vision 21 Common Stock contemplated by Vision 21.
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1.43. Insurance Policies. The term "Insurance
Policies" shall have the meaning set forth in Section 3.13.
1.44. Inventory. The term "Inventory" shall have the
meaning set forth in Section 2.1(a).
1.45. Lease Assignments. The term "Lease Assignments"
shall have the meaning set forth in Section 11.3(j).
1.46. Leased Property. The term "Leased Property"
shall have the meaning set forth in Section 2.1(d).
1.47. IRS. The term "IRS" shall mean the Internal
Revenue Service.
1.48. Material Adverse Effect. The term "Material
Adverse Effect" shall mean a material adverse effect on the Non-optometric
Assets and the Company's business, operations, condition (financial or
otherwise) or results of operations, taken as a whole, considering all relevant
facts and circumstances.
1.49. Optometric Assets. The term "Optometric Assets"
shall have the meaning set forth in Section 2.2.
1.50. Non-optometric Assets. The term "Non-optometric
Assets" shall mean all of the assets of the Company except for the Optometric
Assets, as such assets are more fully described in Section 2.1.
1.51. Note. The term "Note" shall mean the
subordinated promissory note, to be delivered to the Optometrist at the
Closing.
1.52. Optometrist Employee. The term "Optometrist
Employee" shall mean those licensed optometrists who are employees of the
Company, but are not shareholders.
1.53. Optometrist Employment Agreement. The term
"Optometrist Employment Agreement" shall mean the Optometrist Employment
Agreement to be executed between Optometrist and the Company, and between any
Optometrist Employee and the Company.
1.54. Payors. The term "Payors" shall have the meaning
set forth in Section 3.27.
1.55. Permitted Encumbrances. The term "Permitted
Encumbrances" shall have the meaning set forth in Section 3.11(b).
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<PAGE> 7
1.56. Personal Property Leases. The term "Personal
Property Leases" shall have the meaning set forth in Section 2.1(c).
1.57. Practice. The term "Practice" shall mean the
optometry and all other vision related health-care practices conducted from
time to time by the Company prior to and after the Closing Date.
1.58. Prepaid Items. The term "Prepaid Items" shall
have the meaning set forth in Section 2.1(m).
1.59. Professional Employee. The term "Professional
Employee" shall mean any Optometrist Employee.
1.60. Proprietary Rights. The term "Proprietary
Rights" shall have the meaning set forth in Section 3.14.
1.61. Purchase Price. The term "Purchase Price" shall
mean the consideration set forth in Section 2.4 of this Agreement.
1.62. Purchase Price Adjustment Amount. The term
"Purchase Price Adjustment Amount" shall have the meaning set forth in Section
2.6(b).
1.63. Real Property Leases. The term "Real Property
Leases" shall have the meaning set forth in Section 2.1(d).
1.64. Recent Acquisitions. The term "Recent
Acquisitions" shall mean the acquisitions by Vision 21 with third parties which
were completed in December 1996 and March and May 1997.
1.65. Registration Statement. The term "Registration
Statement" shall have the meaning set forth in Section 9.1.
1.66. SEC. The term "SEC" shall mean the Securities
and Exchange Commission.
1.67. Securities. The term "Securities" shall mean the
Note and the shares of Vision 21 Common Stock which shall be delivered to the
Company under the terms of the Note.
1.68. Securities Act. The term "Securities Act" shall
mean the Securities Act of 1933, as amended.
1.69. State. The term "State" shall mean the State in
which the Company is incorporated.
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1.70. Tangible Personal Property. The term "Tangible
Personal Property" shall have the meaning set forth in Section 2.1(f).
1.71. Tax Returns. The term "Tax Returns" shall have
the meaning set forth in Section 3.15(a).
1.72. Third Party Claim. The term "Third Party Claim"
shall have the meaning set forth in Section 14.3(a).
1.73. Transaction. The term "Transaction" shall mean
the purchase and sale of the Non-optometric Assets and the assumption of the
Assumed Obligations pursuant to this Agreement.
1.74. Vision 21 Financial Statements. The term "Vision
21 Financial Statements" shall have the meaning set forth in Section 5.8.
2. PURCHASE AND SALE OF NON-OPTOMETRIC ASSETS.
2.1. Purchase and Sale of Non-optometric Assets.
Subject to the terms and conditions herein set forth, and in reliance upon the
representations and warranties set forth herein, the Company agrees to sell,
convey, assign, transfer and deliver to Vision 21, and Vision 21 agrees to
purchase, assume, accept and acquire, the assets consisting of all the assets
(other than the Optometric Assets specified in Section 2.2 hereof) owned by the
Company as of the Closing Date, of every kind, character and description,
whether tangible, real, personal, or mixed, and wheresoever located, whether
carried on the books of the Company or not carried on the books of the Company
due to having been expended, fully depreciated, or otherwise (the
"Non-optometric Assets"), including without limitation the following (except to
the extent that any of the following are specifically enumerated as Optometric
Assets in Section 2.2 hereof) to the extent permitted by applicable law:
(a) All of the inventory owned by the Company ("Inventory");
(b) All of the accounts receivable or other rights to receive
payment owing to the Company ("Accounts Receivable");
(c) All of the Company's rights in, to and under all leases of
supplies, instruments, equipment, furniture, machinery and other items of
tangible personal property ("Personal Property Leases"), including, without
limitation, the Personal Property Leases described on Schedule 2.1(c);
(d) All of the Company's rights as a lessee in, to and under
all real property lease agreements (such real property lease agreements are
hereinafter referred to as "Real Property Leases" and the parcels of real
property in which the Company has a leasehold interest and that are subject to
the Real Property Leases are hereinafter referred to as "Leased Property"),
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<PAGE> 9
including, without limitation, estates created by, and rights conferred under,
the Real Property Leases described on Schedule 2.1(d), and any and all estates,
rights, titles and interests in, to and under all warehouses, storage
facilities, buildings, works, structures, fixtures, landings, constructions in
progress, improvements, betterments, installations, and additions constructed
or located on or affixed to the Leased Property;
(e) All of the Company's rights in, to and under all contracts,
agreements, leases, insurance policies, purchase orders and commitments (the
"Assumed Contracts"), including, without limitation, the Assumed Contracts
described on Schedule 2.1(e);
(f) All tangible personal property (including supplies,
instruments, equipment, furniture and machinery) owned by the Company
("Tangible Personal Property"), including, without limitation, the Tangible
Personal Property described on Schedule 2.1(f);
(g) All books and records of the Company, including, without
limitation, all credit records, payroll records, computer records, computer
programs, contracts, agreements, operating manuals, schedules of assets,
correspondence, books of account, files, papers, books and all other public and
confidential business records (together the "Business Records"), whether such
Business Records are in hard copy form or are electronically or magnetically
stored;
(h) All franchises, licenses, permits, certificates, approvals
and other governmental authorizations necessary to own and operate any of the
other Non-optometric Assets, a complete and correct list of which is set forth
on Schedule 2.1(h);
(i) All (i) United States and foreign patents, patent
applications, trademarks, trademark applications and registrations, service
marks, service mark applications and registrations, copyrights, copyright
applications and registrations and trade names of the Company; (ii) proprietary
data and technical, manufacturing know-how and information (and all materials
embodying such information) of the Company; (iii) developments, discoveries,
inventions, ideas and trade secrets of the Company; and (iv) rights to sue for
past infringement;
(j) All of the Company's right, title and interest in, to and
under all telephone numbers used in connection with the Practice, including all
extensions thereto;
(k) All rights in, to and under all representations,
warranties, covenants and guaranties made or provided by third parties to or
for the benefit of the Company with respect to any of the other Non-optometric
Assets;
(l) All cash in registers or petty cash drawers (which shall on
the Closing Date be at least ninety percent (90%) of the average daily cash
balance held in such locations in the twelve (12) month period preceding the
Closing Date); and
(m) All of the Company's prepaid expenses, prepaid insurance,
deposits and other similar items ("Prepaid Items").
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If and to the extent the assignment of any personal property lease,
real property lease, contract, agreement, purchase order, work order,
commitment, license, permit, certificate or approval listed on the foregoing
Schedules shall require the consent of another party thereto, then (i) such
personal property lease, real property lease, contract, agreement, purchase
order, work order, commitment, license, permit, certificate or approval shall
constitute a Personal Property Lease, Real Property Lease, Assumed Contract or
License, as the case may be, only upon and subject to receipt of such consent;
(ii) such personal property lease, contract, agreement, purchase order, work
order, commitment, license, permit, certificate or approval shall not be a
Personal Property Lease, Real Property Lease, Assumed Contract or License, as
the case may be, if and for so long as the attempted assignment would
constitute a breach thereof; and (iii) the Company shall cooperate fully with
Vision 21 (or Vision 21's successor-in-interest) in seeking such consent or
reasonable arrangement designed to provide to Vision 21 (or such
successor-in-interest) the benefits, claim or rights arising thereunder.
2.2. No Sale of Optometric Assets; Other Excluded
Assets. The Company shall not sell, convey, assign, transfer or deliver to
Vision 21, and Vision 21 shall not be obligated to purchase, accept or acquire
(or make any payments or otherwise discharge any liability or obligation of the
Company with respect to), the Optometric Assets of the Company as set forth on
Schedule 2.2 and those other assets listed on the other Schedules attached
hereto which by law cannot be acquired by Vision 21 which shall also be deemed
to include (a) life insurance policies covering the life of any employee of the
Company, and (b) personal effects listed on Schedule 2.2(b); and (c) cash and
cash equivalents in banks, certificates of deposit, commercial paper and
securities owned by the Company (but excluding cash held in registers or petty
cash drawers on the Closing Date); and (d) those assets of which the entire
costs of maintenance are deemed to be "Practice Expenses" as defined in the
Business Management Agreement.
2.3. Assumption of Obligations and Liabilities. At
the Closing, Vision 21 shall assume and agree to pay or perform, promptly as
they become due, only those obligations and liabilities of the Company
expressly set forth on Schedule 2.3 (the "Assumed Obligations") which shall
exclude the Business Management Agreement. Except for the Assumed Obligations,
Vision 21 shall not assume or be deemed to have assumed and shall not be
responsible for any other obligation or liability of the Company, direct or
indirect, known or unknown, absolute or contingent, including without
limitation (i) any and all obligations regarding any foreign, Federal, state or
local income, sales, use, franchise or other tax liabilities, (ii) any and all
obligations or liabilities relating to any fees or expenses of the Company's or
Optometrists' counsel, accountants or other experts incident to the negotiation
and preparation of any of the documents contemplated herein and consummation of
the transactions contemplated thereby, and (iii) any and all liabilities
relating to or arising from the provision of optometric services (or failure to
provide optometric services) prior to the Closing Date.
2.4. Purchase Price. Vision 21 agrees that, subject
to the terms and conditions of this Agreement, and in full consideration for
the aforesaid sale, transfer, conveyance, assignment and delivery of the Non-
optometric Assets of the Company to Vision
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21, and the acceptance by Vision 21 of such Non-optometric Assets and the
assumption of the Assumed Obligations of the Company by Vision 21, Vision 21
shall deliver to the Company at the Closing the consideration (the "Purchase
Price") set forth in Schedule 2.4A which shall be paid pursuant to a Note in
substantially the form attached hereto and made a part hereof as Exhibit 2.4B.
2.5. The Closing. The Closing shall take place on the
Closing Date at the offices of Shumaker, Loop & Kendrick, LLP, 101 E. Kennedy
Boulevard, Suite 2800, Tampa, Florida 33602 or at such other location in the
State as the parties shall mutually agree.
2.6. Purchase Price Adjustments.
(a) The Purchase Price shall be subject to adjustment to
the extent that Current Assets (as defined herein) or Current Liabilities
Assumed (as defined herein) materially differ from the amounts customarily
arising in the ordinary course of business of the Company as of November 30,
1996. The term "Current Assets" shall mean petty cash, Accounts Receivable,
prepaid expenses, Inventory, supplies and other current assets (excluding cash
in banks, certificates of deposit, other cash equivalents, current portion of
capital leases and prepaid Income Taxes). The term "Current Liabilities
Assumed" shall mean the audited balances as of November 30, 1996 of trade
accounts payable, accrued payroll, accrued payroll taxes, accrued benefits, and
other current liabilities (excluding notes payable, current portion of capital
leases and long-term debt and income and franchise taxes and accrued
shareholder expenses). The adjustment shall be settled in cash (which shall be
set-off from moneys due the Company pursuant to the Business Management
Agreement) or Vision 21 Common Stock at Vision 21's option. The parties also
agree that to the extent the adjustments materially impact the goodwill created
by the transaction, there shall be an adjustment for the related impact of net
income created by the change in amortization of such goodwill and the Purchase
Price shall be increased or reduced to reflect the impact on net income settled
in cash or Vision 21 Common Stock at Vision 21's option.
(b) Within sixty (60) days following the Closing Date,
Vision 21 shall present to the Optometrist its Purchase Price adjustment (the
"Proposed Purchase Price Adjustment") calculated in accordance with Section
2.6(a) hereof. The Optometrist shall, within thirty (30) days after the
delivery by Vision 21 of the Proposed Purchase Price Adjustment, complete his
review thereof. In the event that the Optometrist believes that the Proposed
Purchase Price Adjustment has not been prepared on the basis set forth in
Section 2.6(a) or otherwise contests any item set forth therein, the
Optometrist shall, on or before the last day of such 30 day period, so object
to Vision 21 in writing, setting forth a specific description of the nature of
the objection and the corresponding adjustments the Optometrist believes should
be made. If no objection is received by Vision 21 on or before the last day of
such 30 day period, then the Proposed Purchase Price Adjustment delivered by
Vision 21 shall be final. If an objection has been made and Vision 21 and the
Optometrist are unable to resolve all of their disagreements with respect to
the proposed adjustments within 15 days following the delivery of the
Optometrist's objection, the dispute shall be submitted to arbitration as
provided in Section 18.1
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except that the arbitrator shall be instructed to deliver his determination of
the dispute to the parties no later than 30 days after the arbitration hearing.
Vision 21 shall provide to the Optometrist and his accountants full access to
all relevant books, records and work papers utilized in preparing the Proposed
Purchase Price Adjustment.
2.7. Subsequent Actions. If, at any time after the
Closing Date, Vision 21 shall determine or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in Vision 21 its
right, title or interest in, to or under any of the rights, properties or
assets of the Company acquired or to be acquired by Vision 21 as a result of,
or in connection with, the Transaction, or otherwise to carry out this
Agreement, the officers and directors of Vision 21 shall, at the sole cost and
expense of Vision 21, be authorized to execute and deliver, in the name and on
behalf of the Company, such deeds, bills of sale, assignments and assurances,
and to take and do, in the name and on behalf of the Company, all such other
actions and things as may be necessary or desirable to vest, perfect or confirm
any and all right, title and interest in, to and under such rights, properties
or assets in Vision 21 or otherwise to carry out this Agreement.
2.8. Allocation of Purchase Price. The Purchase Price
shall be allocated among the Non-optometric Assets as set forth on Schedule
2.8. Each of Vision 21, the Company and the Optometrist covenants and agrees
that he or it shall not take a position that is in any way inconsistent with
the terms of this Section 2.8 on any income tax return, before any governmental
agency charged with the collection of any income tax or in any judicial
proceeding.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
OPTOMETRIST. The Company and the Optometrist, jointly and severally, represent
and warrant to Vision 21 that the following are true and correct as of the date
hereof, and shall be true and correct through the Closing Date as if made on
that date; when used in this Section 3, the term "best knowledge" shall mean in
the case of the Company the best knowledge of those individuals listed on
Schedule 3:
3.1. Organization and Good Standing; Qualification.
The Company is a professional association duly organized, validly existing and
in good standing under the laws of the State, with all requisite corporate
power and authority to carry on the business in which it is engaged, to own the
properties it owns, to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The Company is not duly qualified and
licensed to do business in any other jurisdiction. The Company does not have
any assets, employees or offices in any state other than the State. Except as
set forth on Schedule 3.1, neither the Company, the Optometrist nor any
Professional Employee owns, directly or indirectly, any of the capital stock of
any other corporation or any equity, profit sharing, participation or other
interest in any corporation, partnership, joint venture or other entity that is
engaged in a business that is a Competitor.
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3.2. Continuity of Business Enterprise. Except as set
forth on Schedule 3.2, and except as contemplated by this Agreement, there has
not been any sale, distribution or spin-off of significant assets of the
Company or any of its Affiliates other than in the ordinary course of business
within the two (2) year period preceding the date of this Agreement.
3.3. Authorization and Validity. The execution,
delivery and performance by the Company of this Agreement and the other
agreements contemplated hereby, and the consummation of the transactions
contemplated hereby and thereby to be performed by the Company, have been duly
authorized by the Company. This Agreement has been duly executed and delivered
by the Company and constitutes the legal, valid and binding obligation of the
Company enforceable against the Company in accordance with its terms, except as
may be limited by applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally or the availability of equitable remedies. The
Company has obtained, in accordance with applicable law and its Articles or
Certificate of Incorporation and Bylaws, the approval of its stockholders
necessary for the consummation of the transactions contemplated hereby.
3.4. Compliance. Except as disclosed on Schedule 3.4,
the execution and delivery of the documents contemplated hereunder and the
consummation of the transactions contemplated thereby by the Company will not
(i) violate any provision of the Company's organizational documents, (ii)
violate any material provision of or result in the breach of or entitle any
party to accelerate (whether after the giving of notice or lapse of time or
both) any material obligation under, any mortgage, lien, lease, contract,
license, instrument or any other agreement to which the Company is a party,
(iii) result in the creation or imposition of any material lien, charge,
pledge, security interest or other material encumbrance upon any property of
the Company or (iv) violate or conflict with any order, award, judgment or
decree or other material restriction or to the best of the Company's knowledge
violate or conflict with any law, ordinance or regulation to which the Company
or its property is subject.
3.5. Consents. No consent, approval, order or
authorization of or registration, declaration, or filing with, any Governmental
Authority or other person is required in connection with the execution and
delivery of the documents contemplated herein by the Company or the
consummation by such party of the transactions contemplated thereby, except for
those consents or approvals set forth on Schedule 3.5.
3.6. Financial Statements. The Company has furnished
to Vision 21 its unaudited balance sheet and related unaudited statements of
income, retained earnings and cash flows for its prior two (2) full fiscal
years, and its unaudited interim balance sheet for the fiscal period ended
March 31, 1997 (the "Company Balance Sheet", and the date thereof shall be
referred to as the "Company Balance Sheet Date") and related unaudited
statements of income, retained earnings and cash flows for the period then
ended (all collectively, with the related notes thereto, the "Financial
Statements"). The Financial Statements fairly present the financial condition
and results of operations of the Company as of the dates and for the periods
indicated except as otherwise indicated in the Financial Statements.
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3.7. Liabilities and Obligations. Except as set forth
on Schedule 3.7, the Financial Statements reflect all liabilities of the
Company, accrued, contingent or otherwise that would be required to be
reflected thereon, or in the notes thereto, prepared in accordance with GAAP,
except for liabilities and obligations incurred in the ordinary course of
business since the Company Balance Sheet Date. Except as set forth in the
Financial Statements or on Schedule 3.7, the Company is not liable upon or with
respect to, or obligated in any other way to provide funds in respect of or to
guarantee or assume in any manner, any debt, obligation or dividend of any
person, corporation, association, partnership, joint venture, trust or other
entity, and the Company does not know of any valid basis for the assertion of
any other claims or liabilities of any nature or in any amount.
3.8. Employee Matters.
a. Cash Compensation. Schedule 3.8(a) contains a
complete and accurate list of the names, titles and annual cash compensation as
of the Closing Date, including without limitation wages, salaries, bonuses
(discretionary and formula) and other cash compensation (the "Cash
Compensation") of all employees of the Company. In addition, Schedule 3.8(a)
contains a complete and accurate description of (i) all increases in Cash
Compensation of employees of the Company during the current fiscal year and the
immediately preceding fiscal year and (ii) any promised increases in Cash
Compensation of employees of the Company that have not yet been effected.
b. Compensation Plans. Schedule 3.8(b) contains a
complete and accurate list of all compensation plans, arrangements or practices
(the "Compensation Plans") sponsored by the Company or to which the Company
contributes on behalf of its employees, other than Employment Agreements listed
on Schedule 3.8(c) and Employee Benefit Plans listed on Schedule 3.9(a). The
Compensation Plans include without limitation plans, arrangements or practices
that provide for performance awards, and stock ownership or stock options. The
Company has provided or made available to Vision 21 a copy of each written
Compensation Plan and a written description of each unwritten Compensation
Plan. Except as set forth on Schedule 3.8(b), each of the Compensation Plans
can be terminated or amended at will by the Company.
c. Employment Agreements. Except as set forth on
Schedule 3.8(c), the Company is not a party to any employment agreement
("Employment Agreements") with respect to any of its employees. Employment
Agreements include without limitation employee leasing agreements, employee
services agreements and non-competition agreements.
d. Employee Policies and Procedures. Schedule
3.8(d) contains a complete and accurate list of all employee manuals and all
material policies, procedures and work-related rules (the "Employee Policies
and Procedures") that apply to employees of the Company. The Company has
provided or made available to Vision 21 a copy of all written Employee Policies
and Procedures and a written description of all material unwritten Employee
Policies and Procedures.
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<PAGE> 15
e. Unwritten Amendments. Except as described on
Schedule 3.8(b), 3.8(c), or 3.8(d), no material unwritten amendments have been
made, whether by oral communication, pattern of conduct or otherwise, with
respect to any Compensation Plans or Employee Policies and Procedures.
f. Labor Compliance. To the best knowledge of the
Company and the Optometrist, the Company has been and is in compliance with all
applicable laws, rules, regulations and ordinances respecting employment and
employment practices, terms and conditions of employment and wages and hours,
except for any such failures to be in compliance that, individually or in the
aggregate, would not result in a Material Adverse Effect, and the Company is
not liable for any arrearages of wages or penalties for failure to comply with
any of the foregoing. The Company has not, to the best of Optometrist's and
the Company's knowledge, engaged in any unfair labor practices or discriminated
on the basis of race, color, religion, sex, national origin, age, disability or
handicap in its employment conditions or practices that would, individually or
in the aggregate, result in a Material Adverse Effect. Except as set forth on
Schedule 3.10(f), there are no (i) unfair labor practice charges or complaints
or racial, color, religious, sex, national origin, age, disability or handicap
discrimination charges or complaints pending or, to the actual knowledge of the
Company and the Optometrist, threatened against the Company before any federal,
state or local court, board, department, commission or agency (nor, to the best
knowledge of the Company and the Optometrist, does any valid basis therefor
exist) or (ii) existing or, to the actual knowledge of the Company, threatened
labor strikes, disputes, grievances, controversies or other labor troubles
affecting the Company (nor, to the best knowledge of the Company and the
Optometrist, does any valid basis therefor exist).
g. Unions. The Company has never been a party to
any agreement with any union, labor organization or collective bargaining unit.
No employees of the Company are represented by any union, labor organization or
collective bargaining unit. Except as set forth on Schedule 3.8(g), to the
actual knowledge of the Company, none of the employees of the Company has
threatened to organize or join a union, labor organization or collective
bargaining unit.
h. Aliens. All employees of the Company are, to the
best knowledge of the Company, citizens of, or are authorized in accordance
with federal immigration laws to be employed in, the United States.
3.9. Employee Benefit Plans.
a. Identification. Schedule 3.9(a) contains a
complete and accurate list of all employee benefit plans (within the meaning of
Section 3(3) of ERISA sponsored by the Company or to which the Company
contributes on behalf of its employees and all employee benefit plans
previously sponsored or contributed to on behalf of its employees within the
three (3) years preceding the date hereof (the "Employee Benefit Plans"). The
Company has provided or made available to Vision 21 copies of all plan
documents, determination letters, pending
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<PAGE> 16
determination letter applications, trust instruments, insurance contracts,
administrative services contracts, annual reports, actuarial valuations,
summary plan descriptions, summaries of material modifications, administrative
forms and other documents that constitute a part of or are incident to the
administration of the Employee Benefit Plans. In addition, the Company has
provided or made available to Vision 21 a written description of all existing
practices engaged in by the Company that constitute Employee Benefit Plans.
Except as set forth on Schedule 3.9(a) and subject to the requirements of the
Code and ERISA, each of the Employee Benefit Plans can be terminated or amended
at will by the Company. Except as set forth on Schedule 3.9(a), no unwritten
amendment exists with respect to any Employee Benefit Plan. Except as set
forth on Schedule 3.9(b)-(l), each of the following paragraphs is true and
correct.
b. Administration. To the best knowledge of the
Company and the Optometrist, each Employee Benefit Plan has been administered
and maintained in compliance with all applicable laws, rules and regulations,
except where the failure to be in compliance would not, individually or in the
aggregate, result in a Material Adverse Effect. The Company and the
Optometrist have (i) made all necessary filings with respect to such Employee
Benefit Plans, including the timely filing of Form 5500 if applicable, and (ii)
made all necessary filings, reports and disclosures pursuant to and have
complied with all requirements of the IRS Voluntary Compliance Resolution
Program, if applicable, with respect to all profit sharing retirement plans and
pension plans in which employees of the Company participate.
c. Examinations. Except as set forth on Schedule
3.9(c), the Company has not received any notice that any Employee Benefit Plan
is currently the subject of an audit, investigation, enforcement action or
other similar proceeding conducted by any state or federal agency.
d. Prohibited Transactions. To the best knowledge
of the Company and the Optometrist, no prohibited transactions (within the
meaning of Section 4975 of the Code or Sections 406 and 407 of ERISA) have
occurred with respect to any Employee Benefit Plans.
e. Claims and Litigation. No pending or, to the
actual knowledge of the Company and the Optometrist, threatened, claims, suits,
or other proceedings exist with respect to any Employee Benefit Plan other than
normal benefit claims filed by participants or beneficiaries.
f. Qualification. As set forth in more detail on
Schedule 3.9(f), the Company has received a favorable determination letter or
ruling from the IRS for each of the Employee Benefit Plans intended to be
qualified within the meaning of Section 401(a) of the Code and/or tax-exempt
within the meaning of Section 501(a) of the Code. Except as set forth on
Schedule 3.9(e), no proceedings exist or, to the actual knowledge of the
Company have been threatened that could result in the revocation of any such
favorable determination letter or ruling.
g. Funding Status. To the best knowledge of the
Company and the Optometrist, no accumulated funding deficiency (within the
meaning of Section 412 of the
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Code), whether or not waived, exists with respect to any Employee Benefit Plan
or any plan sponsored by any member of a controlled group (within the meaning
of Section 412(n)(6)(B) of the Code) in which the Company is a member
("Controlled Group"). With respect to each Employee Benefit Plan subject to
Title IV of ERISA, the assets of each such plan are at least equal in value to
the present value of accrued benefits determined on an ongoing basis as of the
date hereof. The Company does not sponsor any Employee Benefit Plan described
in Section 501(c)(9) of the Code. None of the Employee Benefit Plans are
subject to actuarial assumptions.
h. Excise Taxes. Neither the Company nor any member
of a Controlled Group has any liability to pay excise taxes with respect to any
Employee Benefit Plan under applicable provisions of the Code or ERISA.
i. Multiemployer Plans. Neither the Company nor any
member of a Controlled Group is or ever has been obligated to contribute to a
multiemployer plan within the meaning of Section 3(37) of ERISA.
j. Pension Benefit Guaranty Corporation. None of
the Employee Benefit Plans are subject to the requirements of Title IV of
ERISA.
k. Retirees. The Company has no obligation or
commitment to provide medical, dental or life insurance benefits to or on
behalf of any of its employees who may retire or any of its former employees
who have retired except as may be required pursuant to the continuation of
coverage provisions of Section 4980B of the Code and Sections 501 through 508
of ERISA.
l. Other Compensation. Except as set forth on
Schedule 3.8(a), 3.8(b), 3.8(c), 3.8(d) and 3.9(a), neither the Company, the
Optometrist nor any Professional Employee is a party to any compensation or
debt arrangement with any person relating to the provision of healthcare
related services other than arrangements with the Company or the Optometrist.
3.10. Absence of Certain Changes. Except as set forth
on Schedule 3.10 or as contemplated by this Agreement, since the Company
Balance Sheet Date, the Company has not:
a. suffered a Material Adverse Effect, whether or
not caused by any deliberate act or omission of the Company or the Optometrist;
b. contracted for the purpose of acquiring any
capital asset having a cost in excess of $5,000 or made any single expenditure
in excess of $5,000;
c. incurred any indebtedness for borrowed money
(other than short-term borrowings in the ordinary course of business), or
issued or sold any debt securities;
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d. incurred or discharged any material liabilities
or obligations except in the ordinary course of business;
e. paid any amount on any indebtedness prior to the
due date, forgiven or cancelled any claims or any debt in excess of $5,000, or
released or waived any rights or claims except in the ordinary course of
business;
f. mortgaged, pledged or subjected to any security
interest, lien, lease or other charge or encumbrance any of its properties or
assets (other than statutory liens arising in the ordinary course of business
or other liens that do not materially detract from the value or interfere with
the use of such properties or assets);
g. suffered any damage or destruction to or loss of
any assets (whether or not covered by insurance) that has, individually or in
the aggregate, resulted in a Material Adverse Effect;
h. acquired or disposed of any assets having an
aggregate value in excess of $5,000, except in the ordinary course of business;
i. written up or written down the carrying value of
any of its assets, other than accounts receivable in the ordinary course of
business;
j. changed the costing system or depreciation
methods of accounting for its assets in any material respect;
k. lost or terminated any employee, patient,
customer or supplier that has, individually or in the aggregate, resulted in a
Material Adverse Effect;
l. increased the compensation of any director,
officer, key employee or consultant, except as disclosed on Schedule 3.8(a);
m. increased the compensation of any employee
(except for increases in the ordinary course of business consistent with past
practice) or hired any new employee who is expected to receive annualized
compensation of at least $15,000;
n. made any payments to or loaned any money to any
person or entity referred to in Section 3.22;
o. formed or acquired or disposed of any interest in
any corporation, partnership, joint venture or other entity;
p. redeemed, purchased or otherwise acquired, or
sold, granted or otherwise disposed of, directly or indirectly, any of its
capital stock or securities, or agreed to change the terms and conditions of
any such capital stock, securities or rights;
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q. entered into any agreement providing for total
payments in excess of $5,000 in any twelve (12) month period with any person or
group, or modified or amended in any material respect the terms of any such
existing agreement, except in the ordinary course of business;
r. entered into, adopted or amended any Employee
Benefit Plan, except as contemplated hereby or the other agreements
contemplated hereby; or
s. entered into any other commitment or transaction
or experienced any other event that would materially interfere with its
performance under this Agreement or any other agreement or document executed or
to be executed pursuant to this Agreement, or otherwise has, individually or in
the aggregate, resulted in a Material Adverse Effect.
3.11. Title; Leased Assets.
a. Real Property. The Company does not own any
interest (other than leasehold interests referred to on Schedule 3.11(c)) in
real property. The leased real property referred to on Schedule 3.11(c)
constitutes the only real property necessary for the conduct of the Company's
business.
b. Personal Property. Except as set forth on
Schedule 3.11(b), the Company and/or the Optometrist has good, valid and
marketable title to all the personal property constituting the Non-optometric
Assets. The personal property constituting the Non-optometric Assets
constitute the only personal property necessary for the conduct of the
Company's business (except for the Optometric Assets). Upon consummation of
the transactions contemplated hereby, such interest in the Non-optometric
Assets shall be free and clear of all security interests, liens, claims and
encumbrances, other than those set forth on Schedule 3.11(b) (the "Permitted
Encumbrances") and statutory liens arising in the ordinary course of business
or other liens that do not materially detract from the value or interfere with
the use of such properties or assets.
c. Leases. A list and brief description of (i) all
leases of real property and (ii) leases of personal property involving rental
payments within any twelve (12) month period in excess of $12,000, in either
case to which the Company is a party, either as lessor or lessee, are set forth
on Schedule 3.11(c). All such leases are valid and, to the knowledge of the
Company, enforceable in accordance with their respective terms except as may be
limited by applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally or the availability of equitable remedies.
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3.12. Commitments.
a. Commitments; Defaults. Except as set forth on
Schedule 3.12 or as otherwise disclosed pursuant to this Agreement, the Company
is not a party to nor bound by, nor are the Non-optometric Assets or the assets
or the business of the Company bound by, whether or not in writing, any of the
following (collectively, "Commitments"):
i) partnership or joint venture
agreement;
ii) guaranty or suretyship,
indemnification or contribution agreement or performance bond;
iii) debt instrument, loan agreement or
other obligation relating to indebtedness for borrowed money or money lent or
to be lent to another;
iv) contract to purchase real property;
v) agreement with dealers or sales or
commission agents, public relations or advertising agencies, accountants or
attorneys (other than in connection with this Agreement and the transactions
contemplated hereby) involving total payments within any twelve (12) month
period in excess of $2,000 and which is not terminable on thirty (30) days'
notice or without penalty;
vi) agreement relating to any material
matter or transaction in which an interest is held by a person or entity that
is an Affiliate of the Company or the Optometrist;
vii) agreement for the acquisition of
services, supplies, equipment, inventory, fixtures or other property involving
more than $2,000 in the aggregate;
viii) powers of attorney;
ix) contracts containing non-competition
covenants;
x) agreement providing for the purchase
from a supplier of all substantially all of the requirements of the Company of
a particular product or services;
xi) agreements regarding clinical
research;
xii) agreements with Payors and contracts
to provide optometric or health care services; or
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<PAGE> 21
xiii) any other agreement or commitment not
made in the ordinary course of business or that is material to the business,
operations, condition (financial or otherwise) or results of operations of the
Company.
True, correct and complete copies of the written Commitments, and true, correct
and complete written descriptions of the oral Commitments, have heretofore been
delivered or made available to Vision 21. Except as set forth on Schedule 3.12
and to the Company's best knowledge, there are no existing or asserted
defaults, events of default or events, occurrences, acts or omissions that,
with the giving of notice or lapse of time or both, would constitute defaults
by the Company or, to the best knowledge of the Company, any other party to a
material Commitment, and no penalties have been incurred nor are amendments
pending, with respect to the material Commitments, except as described on
Schedule 3.12. The Commitments are in full force and effect and are valid and
enforceable obligations of the Company, and to the best knowledge of the
Company, are valid and enforceable obligations of the other parties thereto, in
accordance with their respective terms, and no defenses, off-sets or
counterclaims have been asserted or, to the best knowledge of the Company, may
be made by any party thereto (other than the Company), nor has the Company
waived any rights thereunder, except as described on Schedule 3.12. Except as
set forth on Schedule 3.12, no consents or approvals are required under the
terms of any agreement listed on Schedule 3.12 in connection with the
transactions contemplated herein, including, without limitation, the transfer
of any such agreement pursuant to this Agreement.
b. No Cancellation or Termination of Commitment.
Except as disclosed pursuant to this Agreement or contemplated hereby and
except where such default would not have a Material Adverse Effect on the
Practice, (i) neither the Company nor the Optometrist has received notice of
any plan or intention of any other party to any Commitment to exercise any
right to cancel or terminate any Commitment, and the Company does not know of
any fact that would justify the exercise of such a right; and (ii) neither the
Company nor the Optometrist currently contemplates, or has reason to believe
any other person currently contemplates, any amendment or change to any
Commitment.
3.13. Insurance. The Company, the Optometrist and each
Professional Employee carries property, liability, malpractice, workers'
compensation and such other types of insurance pursuant to the insurance
policies listed and briefly described on Schedule 3.13 (the "Insurance
Policies"). The Insurance Policies are all of the insurance policies of the
Company, the Optometrist and each Professional Employee relating to the
business of the Company and the Non-optometric Assets. All of the Insurance
Policies are issued by insurers of recognized responsibility, and, to the best
knowledge of the Company, are valid and enforceable policies, except as may be
limited by applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally or the availability of equitable remedies. Except
as set forth in Schedule 3.13, no consent or approval is required for, and no
other impediment or restriction exists that will prohibit or limit, the
transfer of any such Insurance Policies included within the Non-optometric
Assets in accordance with the terms of this Agreement. All Insurance Policies
shall be maintained in force without interruption up to and including the
Closing Date. True,
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complete and correct copies of all Insurance Policies have been provided or
made available to Vision 21. Except as set forth on Schedule 3.13, neither the
Company nor the Optometrist has received any notice or other communication from
any issuer of any Insurance Policy cancelling such policy, materially
increasing any deductibles or retained amounts thereunder, and to the actual
knowledge of the Company, no such cancellation or increase of deductibles,
retainages or premiums is threatened. Except as set forth on Schedule 3.13,
neither the Company, the Optometrist nor any Professional Employee has any
outstanding claims, settlements or premiums owed against any Insurance Policy,
and the Company, the Optometrist and each Professional Employee has given all
notices or has presented all potential or actual claims under any Insurance
Policy in due and timely fashion. Except as set forth on Schedule 3.13, since
January 1, 1994, neither the Company, the Optometrist nor any Professional
Employee has filed a written application for any professional liability
insurance coverage which has been denied by an insurance agency or carrier, and
the Company, the Optometrist and each Professional Employee has been
continuously insured for professional malpractice claims for at least the past
seven (7) years (or such shorter periods of time that any Professional Employee
has been licensed to practice optometry). Schedule 3.13 also sets forth a list
of all claims under any Insurance Policy in excess of $10,000 per occurrence
filed by the Company, the Optometrist and each Professional Employee since
January 1, 1994.
3.14. Proprietary Rights and Information. Set forth on
Schedule 3.14 is a true and correct description of the following ("Proprietary
Rights"):
a. all trademarks, trade-names, service marks and
other trade designations, including common law rights, registrations and
applications therefor, and all patents and applications therefor currently
owned, in whole or in part, by the Company, and all licenses, royalties,
assignments and other similar agreements relating to the foregoing to which the
Company is a party (including the expiration date thereof if applicable); and
b. all agreements relating to technology, know-how
or processes that the Company is licensed or authorized to use by others (other
than technology, know-how or processes generally available to other healthcare
providers), or which it licenses or authorizes others to use.
The Company owns or has the legal right to use the Proprietary Rights, and to
the knowledge of the Company, such ownership or use does not conflict,
infringe or violate the rights of any other person. Except as disclosed on
Schedule 3.14, no consent of any person will be required for the use thereof by
Vision 21 upon consummation of the transactions contemplated hereby and the
Proprietary Rights are freely transferable. No claim has been asserted by any
person to the ownership of or for infringement by the Company of the
proprietary right of any other person, and the Company does not know of any
valid basis for any such claim. To the best knowledge of the Company and the
Optometrist, the Company has the right to use, free and clear of any adverse
claims or rights of others, all trade secrets, customer lists and proprietary
information required for the marketing of all merchandise and services formerly
or presently sold or marketed by it.
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3.15. Taxes.
a. Filing of Tax Returns. The Company has duly and
timely filed (in accordance with any extensions duly granted by the appropriate
governmental agency, if applicable) with the appropriate governmental agencies
all federal, state, local or foreign income, excise, corporate, franchise,
property, sales, use, payroll, withholding, provider, value added and other tax
returns and reports (collectively the "Tax Returns") required to be filed by
the United States or any state or any political subdivision thereof or any
foreign jurisdiction. All such Tax Returns or reports are complete and
accurate in all material respects and properly reflect the taxes of the Company
for the periods covered thereby.
b. Payment of Taxes. Except for such items as the
Company may be disputing in good faith by proceedings in compliance with
applicable law, which are described on Schedule 3.15, (i) the Company has paid
all taxes, penalties, assessments and interest that have become due with
respect to any Tax Returns that it has filed and has properly accrued on its
books and records for all of the same that have not yet become due, and (ii)
the Company is not delinquent in the payment of any tax, assessment or
governmental charge.
c. No Pending Deficiencies, Delinquencies,
Assessments or Audits. Except as set forth on Schedule 3.15, the Company has
not received any notice that any tax deficiency or delinquency has been
asserted against the Company. There is no unpaid assessment, proposal for
additional taxes, deficiency or delinquency in the payment of any of the taxes
of the Company that could be asserted by any taxing authority. There is no
taxing authority audit of the Company pending, or to the actual knowledge of
the Company, threatened, and the results of any completed audits are properly
reflected in the Financial Statements. The Company has not, to its best
knowledge, violated any federal, state, local or foreign tax law.
d. No Extension of Limitation Period. The Company
has not granted an extension to any taxing authority of the limitation period
during which any tax liability may be assessed or collected.
e. All Withholding Requirements Satisfied. All
monies required to be withheld by the Company and paid to governmental agencies
for all income, social security, unemployment insurance, sales, excise, use,
and other taxes have been collected or withheld and paid to the respective
governmental agencies.
f. Foreign Person. Neither the Company nor the
Optometrist is a foreign person, as such term is referred to in Section
1445(f)(3) of the Code.
3.16. Compliance with Laws. The Company has not
failed, and neither the Company nor the Optometrist is aware of any failure by
the Optometrist or any Professional Employee to comply with all applicable
laws, regulations and licensing requirements relating to the operation of the
Practice or failure to file with the proper authorities all necessary
statements and reports except where the failure to so comply or file would not,
individually or in the
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aggregate, result in a Material Adverse Effect. There are no existing
violations by the Company, and neither the Company nor the Optometrist is aware
of any existing violations by the Optometrist or any Professional Employee of
any federal, state or local law or regulation that could, individually or in
the aggregate, result in a Material Adverse Effect. The Company, the
Optometrist and each Professional Employee possesses all necessary licenses,
franchises, permits and governmental authorizations for the conduct of the
Company's business as now conducted, all of which are listed (with expiration
dates, if applicable) on Schedule 3.16. Except as set forth on Schedule 3.16,
the transactions contemplated by this Agreement will not result in a default
under or a breach or violation of, or adversely affect the rights and benefits
afforded by any such licenses, franchises, permits or government
authorizations, except for any such default, breach or violation that would
not, individually or in the aggregate, have a Material Adverse Effect. Except
as set forth on Schedule 3.16, since January 1, 1993, neither the Company, the
Optometrist nor, to the knowledge of the Company based on a certificate in
writing obtained from each Professional Employee, any Professional Employee has
received any notice from any federal, state or other governmental authority or
agency having jurisdiction over its, his or her properties or activities, or
any insurance or inspection body, that its, his or her operations or any of
its, his or her properties, facilities, equipment, or business practices fail
to comply with any applicable law, ordinance, regulation, building or zoning
law, or requirement of any public or quasi-public authority or body, except
where failure to so comply would not, individually or in the aggregate, have a
Material Adverse Effect.
3.17. Finder's Fee. Except as set forth on Schedule
3.17, the Company has not incurred any obligation for any finder's, brokers or
agent's fee in connection with the transactions contemplated hereby.
3.18. Litigation. Except as described on Schedule 3.18
or otherwise disclosed pursuant to this Agreement, there are no legal actions
or administrative proceedings or investigations instituted, to the actual
knowledge of the Company or the Optometrist, which affect or could affect the
Practice, the Non-optometric Assets or the operation, business, condition
(financial or otherwise), or results of operations of the Company which (i) if
successful could, individually or in the aggregate, have a Material Adverse
Effect or (ii) could adversely affect the ability of the Company or the
Optometrist to effect the transactions contemplated hereby. Neither the
Company nor the Optometrist is (a) subject to any continuing court or
administrative order, judgment, writ, injunction or decree applicable
specifically to the Non-optometric Assets, the Company or to its business,
assets, operations or employees or (b) in default with respect to any such
order, judgment, writ, injunction or decree. The Company has no knowledge of
any valid basis for any such action, proceeding or investigation. Except as
set forth on Schedule 3.18, all medical malpractice claims asserted, general
liability incidents and incident reports have been submitted to the Company's
insurer therefor. All claims made or threatened against the Company in excess
of its deductible are covered under its Insurance Policies.
3.19. Condition of Fixed Assets. All of the fixtures,
structures and equipment reflected in the Financial Statements and used by the
Company in its business, are
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in good condition and repair, subject to normal wear and tear, and conform in
all material respects with all applicable ordinances, regulations and other
laws, and the Company has no actual knowledge of any latent defects therein.
3.20. Distributions and Repurchases. No distribution,
payment or dividend of any kind has been declared or paid by the Company on any
of its capital stock since the Company Balance Sheet Date. No repurchase of
any of the Company's capital stock has been approved, effected or is pending,
or is contemplated by the Board of Directors of the Company.
3.21. Banking Relations. Set forth on Schedule 3.21 is
a complete and accurate list of all borrowing and investing arrangements that
the Company has with any bank or other financial institution, indicating with
respect to each relationship the type of arrangement maintained (such as
checking account, borrowing arrangements, safe deposit box, etc.) and the
person or persons authorized in respect thereof.
3.22. Ownership Interests of Interested Persons;
Affiliations. Except as set forth on Schedule 3.22, no officer, supervisory
employee or director of the Company, or their respective spouses, children or
Affiliates, owns directly or indirectly, on an individual or joint basis, any
interest in, has a compensation or other financial arrangement with, or serves
as an officer or director of, any customer or supplier of the Company or any
organization that has a material contract or arrangement with the Company.
Except as may be disclosed pursuant to this Agreement, neither the Company, nor
any of its directors, officers, employees or consultants, nor any Affiliate of
such person is, or within the last three (3) years was, a party to any
contract, lease, agreement or arrangement, including, but not limited to, any
joint venture or consulting agreement with any optometrist, hospital, pharmacy,
home health agency or other person which is in a position to make or influence
referrals to, or otherwise generate business for, the Company.
3.23. Investments in Competitors. Except as disclosed
on Schedule 3.23, neither the Company nor the Optometrist owns directly or
indirectly any interests or has any investment in any person that is a
Competitor of the Company.
3.24. Environmental Matters.
a. Environmental Laws. To the best knowledge of the
Company and the Optometrist, neither the Company nor any of the Non-optometric
Assets (including the leased real property described on Schedule 3.11(c)) are
currently in violation of, or subject to any existing, pending or, to the
actual knowledge of the Company threatened, investigation or inquiry by any
governmental authority or to any remedial obligations under, any federal, state
or local laws or regulations pertaining to health or the environment
("Environmental Laws"), except for any such violations, investigations or
inquiries that would not, individually or in the aggregate, result in a
Material Adverse Effect.
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b. Permits. The Company is not required to obtain,
and has no knowledge of any reason Vision 21 will be required to obtain, any
permits, licenses or similar authorizations to occupy, operate or use any
buildings, improvements, fixtures and equipment owned or leased by the Company
by reason of any Environmental Laws.
c. Superfund List. To the best knowledge of the
Company, none of the Non-optometric Assets (including the Company's leased real
property described on Schedule 3.11(c)) are on any federal or state "Superfund"
list or subject to any environmentally related liens, except such liens as
would not, individually or in the aggregate, result in a Material Adverse
Effect.
3.25. Certain Payments. Neither the Company nor any
director, officer or employee of the Company acting for or on behalf of the
Company, has paid or caused to be paid, directly or indirectly, in connection
with the business of the Company:
a. to any government or agency thereof or any agent
of any supplier or customer any bribe, kick-back or other similar payment; or
b. any contribution to any political party or
candidate (other than from personal funds of directors, officers or employees
not reimbursed by their respective employers or as otherwise permitted by
applicable law).
3.26. Medical Waste. With respect to the generation,
transportation, treatment, storage, and disposal, or other handling of medical
waste, to the best knowledge of the Company and the Optometrist, the Company
has complied with all material federal, state or local laws or regulations
pertaining to medical waste.
3.27. Medicare and Medicaid Programs. The Company, the
Optometrist and each Professional Employee is qualified for participation in
the Medicare and Medicare programs and is party to provider agreements for such
programs which are in full force and effect with no events of default having
occurred thereunder. The Company, the Optometrist and each Professional
Employee has timely filed all claims or other reports required to be filed
prior to the Closing Date with respect to the purchase of services by
third-party payors ("Payors"), including but not limited to Medicare and
Medicaid programs, except where the failure to file would not, individually or
in the aggregate, result in a Material Adverse Effect. All such claims or
reports are complete and accurate in all material respects. The Company, the
Optometrist and each Professional Employee has paid or has properly recorded on
the Financial Statements all actually known and undisputed refunds, discounts
or adjustments which have become due pursuant to such claims, and neither the
Company, the Optometrist nor any Professional Employee has any material
liability to any Payor with respect thereto, except as has been reserved for in
the Company Balance Sheet. There are no pending appeals, overpayment
determinations, adjustments, challenges, audits, litigation, or notices of
intent to reopen Medicare and/or Medicaid claims determinations or other
reports required to be filed by the Company, the Optometrist or any
Professional Employee in order to be paid by a Payor for
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services rendered. Neither the Company, nor any of its directors, officers,
employees, consultants or the Optometrist has been convicted of, or pled guilty
or nolo contendere to, patient abuse or neglect, or any other Medicare or
Medicaid program-related offense. Neither the Company, nor its directors,
officers, the Optometrist, or to the best of the Company's knowledge, its
employees or consultants, has committed any offense which may serve as the
basis for suspension or exclusion from the Medicare and Medicaid programs,
including but not limited to, defrauding a government program, loss of a
license to provide health services, and failure to provide quality care.
3.28. Fraud and Abuse. To the best knowledge of the
Company and the Optometrist, the Company, its officers and directors, the
Professional Employees, and the other persons and entities providing
professional services for the Company, have not engaged in any activities which
are prohibited under 42 U.S.C. Sections 1320-7, 7a or 7b or 42 U.S.C.
Section 1395nn (subject to the exceptions set forth in such legislation), or
the regulations promulgated thereunder or pursuant to similar state or local
statutes or regulations, or which are prohibited by rules of professional
conduct, including but not limited to the following:
a. knowingly and willfully making or causing to be
made a false statement or representation of a material fact in any application
for any benefit or payment;
b. knowingly and willfully making or causing to be
made a false statement or representation of a material fact for use in
determining rights to any benefit or payment;
c. failure to disclose knowledge by a Medicare or
Medicaid claimant of the occurrence of any event affecting the initial or
continued right to any benefit or payment on its own behalf or on behalf of
another, with intent to fraudulently secure such benefit or payment;
d. knowingly and willfully offering, paying,
soliciting or receiving any remuneration (including any kickback, bribe, or
rebate), directly or indirectly, overtly or covertly, in cash or in kind (i) in
return for referring an individual to a person for the furnishing or arranging
for the furnishing of any item or service for which payment may be made in
whole or in part by Medicare or Medicaid, or (ii) in return for purchasing,
leasing, or ordering, or arranging for or recommending purchasing, leasing, or
ordering any good, facility, service, or item for which payment may be made in
whole or in part by Medicare or Medicaid; and
e. referring a patient for designated
health services (as defined in 42 U.S.C. Section 1395nn) to or providing
designated health services to a patient upon a referral from an entity or
person with which the Optometrist or the Professional Employee or an immediate
family member has a financial relationship, and to which no exception under 42
U.S.C. Section 1395nn applies.
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3.29. Payors. Schedule 3.29 sets forth a true, correct
and complete list of the names and addresses of each Payor, including any
private pay patient as a single payor, of the Company's services which
accounted for more than 10% of the revenues of the Company in the three (3)
previous fiscal years. Except as set forth on Schedule 3.29, the Company has
good relations with such Payors and none of such Payors has notified the
Company that it intends to discontinue its relationship with the Company or to
deny any claims submitted to such Payor for payment.
3.30. Prohibitions on the Corporate Practice of
Optometry. To the best of the Company's and the Optometrist's knowledge, the
actions, transactions or relationships arising from, and contemplated by this
Agreement, do not violate any law, rule or regulation relating to the corporate
practice of optometry. The Company and the Optometrist accordingly agree that
the Company and the Optometrist will not, in an attempt to void or nullify any
document contemplated herein or any relationship involving Vision 21, the
Company or the Optometrist, sue, claim, aver, allege or assert that any such
document contemplated herein or any such relationship violates any law, rule or
regulation relating to the corporate practice of optometry and expressly
warrant that this Section is valid and enforceable by Vision 21, and recognize
that Vision 21 has relied upon the statements herein in closing this
Transaction.
3.31. Acquisition Proposals. Except for the
negotiations, offers and agreements with Vision 21 and its representatives, the
Company has not received during the twelve (12) month period preceding the date
of this Agreement any proposal or offer (including, without limitation, any
proposal or offer of its stockholders) with respect to a merger, acquisition,
consolidation or similar transaction involving, or any purchase of all or any
significant portion of the assets or any equity securities of, the Company (any
such proposal or offer being hereinafter referred to as an "Acquisition
Proposal") nor has the Company or any of its employees, agents, representatives
or stockholders engaged in any negotiations concerning, or provided any
confidential information or data to, or had any discussions with, any person
relating to an Acquisition Proposal, or otherwise facilitated any effort or
attempted to make or implement an Acquisition Proposal.
3.32. Consistent Treatment of Expenses. The Company
has, in presenting information concerning the Company's expenses to Vision 21
for the purpose of determining the Company's value, separated out those
expenses which shall be borne by the Company in a manner which is consistent
with the treatment of expenses which shall be the responsibility of the Company
pursuant to the Business Management Agreement.
3.33. Accounts Receivable/Payable. The Accounts
Receivable of the Company relating to the ownership and operation of the
Practice reflected on the Company Balance Sheet, to the extent uncollected on
the date hereof, are, and the accounts receivable of the Company relating to
the ownership and operation of the Practice to be reflected on the books of the
Company on the Closing Date will be, valid, existing and collectible within six
months from the Closing Date (taking into consideration the allowance for
doubtful accounts set forth in the Financial Statements) using reasonably
diligent collection methods taking into account the
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size and nature of the receivable, and represent amounts due for goods sold and
delivered or services performed. There are not, and on the date of Closing
there will not be, any refunds, discounts, set-offs, defenses, counterclaims or
other adjustments payable or assessable with respect to the Accounts
Receivable. The Company has collected Accounts Receivable only in the ordinary
course and has not changed collection procedures or methods nor accelerated the
pace of such collection efforts in anticipation of the transactions
contemplated in this Agreement. The Company has paid accounts payable in the
ordinary course and has not changed payment procedures or methods nor delayed
the timing of such payments in anticipation of the transactions contemplated in
this Agreement.
3.34. Projections. There is no fact, development or
threatened development with respect to the markets, products, services,
clients, patients, facilities, personnel, vendors, suppliers, operations,
assets or prospects of the Practice which are known to the Company or the
Optometrist which would materially adversely affect the projected fiscal year
1997 earnings of the Company disclosed to Vision 21 by Optometrist, other than
such conditions as may affect as a whole the economy or the practice of
optometry generally.
3.35. Inventory. Except as set forth on Schedule 3.35,
to the best of the Company's and the Optometrist's knowledge: (i) the
Inventory is in its originally manufactured condition, fit for the use for
which it was intended, free from any known defect and in a quantity and quality
usable in the ordinary course of business; (ii) the Inventory does not contain
material amounts of items that are slow-moving, obsolete or of below-standard
quality; (iii) the qualities and quantities of Inventory are reasonable and
warranted in the present and anticipated circumstances of the Practice; and
(iv) there has been no decrease in the physical Inventory since the Company
Balance Sheet Date other than in the ordinary course of business.
3.36. Tangible Personal Property. Except as set forth
on Schedule 3.36, the Company's Tangible Personal Property is in good operating
condition, working order and repair (normal wear and tear excepted) and is
fully suitable for the uses for which it is employed in the conduct of the
Practice.
3.37. Leases. With respect to each of the Real
Property Leases and Personal Property Leases, except as set forth on Schedule
3.37:
(a) such lease is legal, valid, binding, enforceable
and in full force and effect;
(b) such lease will continue to be legal, valid,
binding, enforceable and in full force and effect on identical terms following
the Closing;
(c) no party to such lease is in material breach or
default, and no event has occurred that, with notice or lapse of time, would
constitute a material breach or default or permit termination, modification or
acceleration thereunder;
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(d) no party to such lease has repudiated in writing
any provision thereof;
(e) there are no disputes, oral agreements or
forbearance programs in effect as to such lease; and
(f) The Company has performed and satisfied in full
each material obligation to be performed by the Company under such lease.
3.38. Contract Rights. Except as set forth on Schedule
3.38, each of the Assumed Contracts is valid and enforceable and is in full
force and effect, and there is no material default or existing condition that,
with the giving of notice or the passage of time, would constitute such a
default by any parties thereto. The Company has performed and satisfied in
full each material obligation required to be performed by the Company under
each Assumed Contract. If services are to be provided to the Company under any
of such Assumed Contracts, such services have been and are being performed
satisfactorily and in a timely manner, substantially in accordance with the
terms of such Assumed Contract.
3.39. Prepaid Items. Except as described on Schedule
3.13, each of the Prepaid Items may be transferred to Vision 21 without the
necessity of obtaining any consent or approval.
3.40. Completeness of Assets. The Non-optometric
Assets, together with the Optometric Assets, include all the properties used to
conduct the Practice as presently conducted.
3.41. Disclosure. To the best of the Company's and the
Optometrist's knowledge, no representation, warranty or statement made by the
Company or the Optometrist in this Agreement or any of the exhibits or
schedules hereto, or any agreements, certificates, documents or instruments
delivered or to be delivered to Vision 21 in accordance with this Agreement or
the other documents contemplated herein, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make the statements contained herein or therein, in light of the
circumstances under which they were made, not misleading. The Company and the
Optometrist do not know of any fact or condition (other than general economic
conditions or legislative or administrative changes in health-care delivery)
which materially adversely affects, or in the future may materially affect, the
condition, properties, assets, liabilities, business, operations or prospects
of the Practice which has not been set forth herein or in the Schedules
provided herewith.
4. REPRESENTATIONS AND WARRANTIES OF THE OPTOMETRIST. The
Optometrist represents and warrants to Vision 21 that the following are true
and correct as of the date hereof, and shall be true and correct through the
Closing Date as if made on that date:
4.1. Validity; Optometrist Capacity. This Agreement,
the Optometrist Employment Agreement, and each other agreement contemplated
hereby or thereby have been, or will be as of the Closing Date, duly executed
and delivered by the Optometrist and constitute
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or will constitute legal, valid and binding obligations of the Optometrist,
enforceable against the Optometrist in accordance with their respective terms,
except as may be limited by applicable bankruptcy, insolvency or similar laws
affecting creditors' rights generally or the availability of equitable
remedies. The Optometrist has legal capacity to enter into and perform this
Agreement and his Optometrist Employment Agreement.
4.2. No Violation. Except as set forth on Schedule
4.2, neither the execution, delivery or performance of this Agreement, other
agreements of the Optometrist contemplated hereby or thereby, nor the
consummation of the transactions contemplated hereby or thereby, will (a)
conflict with, or result in a violation or breach of the terms, conditions or
provisions of, or constitute a default under, any agreement, indenture or other
instrument under which the Optometrist is bound or to which any of his property
or the shares of common stock of the Company are subject, or result in the
creation or imposition of any security interest, lien, charge or encumbrance
upon any of his property or the shares of common stock of the Company or (b) to
the best knowledge of the Optometrist, violate or conflict with any judgment,
decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body.
4.3. Consents. Except as may be required under the
Exchange Act, the Securities Act, the Corporation Law and state securities
laws, or otherwise disclosed pursuant to this Agreement, no consent,
authorization, approval, permit or license of, or filing with, any governmental
or public body or authority, or any other person is required to authorize, or
is required in connection with, the execution, delivery and performance of this
Agreement or the agreements contemplated hereby on the part of the Optometrist.
4.4. Certain Payments. The Optometrist has not paid
or caused to be paid, directly or indirectly, in connection with the business
of the Company:
a. to any government or agency thereof or any agent
of any supplier or customer any bribe, kick-back or other similar payment; or
b. any contribution to any political party or
candidate (other than from personal funds not reimbursed by the Company or as
otherwise permitted by applicable law).
4.5. Finder's Fee. Except as set forth on Schedule
4.5, the Optometrist has not incurred any obligation for any finder's, broker's
or agent's fee in connection with the transactions contemplated hereby.
4.6. Ownership of Interested Persons; Affiliations.
Except as set forth on Schedule 4.6, neither the Optometrist nor his spouse,
children or Affiliates, owns directly or indirectly, on an individual or joint
basis, any interest in, has a compensation or other financial arrangement with,
or serves as an officer or director of, any customer or supplier of the Company
or any organization that has a material contact or arrangement with the
Company. Neither the Optometrist nor any of his Affiliates is, or with the
last three (3) years was, a party
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to any contract, lease, agreement or arrangement, including, but not limited
to, any joint venture or consulting agreement with any optometrist, hospital,
pharmacy, home health agency or other person which is in a position to make or
influence referrals to, or otherwise generate business for, the Company.
4.7. Investments in Competitors. Except as disclosed
on Schedule 4.7, the Optometrist does not own directly or indirectly any
interests or have any investment in any person that is a Competitor of the
Company.
4.8. Litigation. Except as disclosed on Schedule 4.8,
there are no claims, actions, suits, proceedings (arbitration or otherwise) or
investigations pending or, to the Optometrist's knowledge, threatened against
the Optometrist at law or at equity in any court or before or by any
Governmental Authority, and, to the Optometrist's knowledge, there are no, and
have not been any, facts, conditions or incidents that may result in any such
actions, suits, proceedings (arbitration or otherwise) or investigations.
Except as set forth on Schedule 4.10, there have been no disciplinary,
revocation or suspension proceedings or similar types of claims, actions or
proceedings, hearings or investigations against the Optometrist or the Company.
4.9. Permits. To the best of the Optometrist's
knowledge, the Optometrist has all permits, licenses, orders and approvals of
all Governmental Authorities necessary to perform the services performed by the
Optometrist in connection with the conduct of the Practice. All such permits,
licenses, orders and approvals are in full force and effect and no suspension
or cancellation of any of them is pending or threatened. To the best of the
Optometrist's knowledge, none of such permits, licenses, orders or approvals
will be adversely affected by the consummation of the transactions contemplated
herein. The Optometrist is a participating optometrist, as such term is
defined by the Medicare or Medicaid programs, and the Optometrist has not been
disciplined, sanctioned or excluded from either the Medicare or Medicaid
programs and has not been subject to any plan of correction imposed by any
professional review body.
4.10. Staff Privileges. Schedule 4.10 lists all
hospitals at which the Optometrist has full staff privileges. Such staff
privileges have not been revoked, surrendered, suspended or terminated, and to
the Optometrist's knowledge, there are no, and have not been any, facts,
conditions or incidents that may result in any such revocation, surrender,
suspension or termination.
4.11. Intentions. Except as set forth on Schedule
4.11, the Optometrist intends to continue practicing optometry on a full-time
basis for at least the next five (5) years with the Company and does not know
of any fact or condition that materially adversely affects, or in the future
may materially adversely affect, his ability or intention to practice optometry
on a full-time basis for the next five (5) years with the Company.
5. REPRESENTATIONS AND WARRANTIES OF VISION 21. Vision 21
represents and warrants to the Company and the Optometrist that the following
are true and
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correct as of the date hereof and shall be true and correct as of the Closing
Date; when used in this Section 5, the term "best knowledge" shall mean the
best knowledge of those individuals listed on Schedule 5:
5.1. Organization and Good Standing. Vision 21 is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Florida, with all requisite corporation power and
authority to carry on the business in which it is engaged, to own the
properties it owns, to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. At or prior to Closing, Vision 21 will be
qualified to do business as a foreign corporation in the jurisdictions listed
on Schedule 5.1.
5.2. Capitalization. The authorized capital stock of
Vision 21 consists of 50,000,000 shares of Vision 21 Common Stock, of which
8,123,065 shares are issued and outstanding. Immediately prior to the Closing,
the authorized capital stock of Vision 21 will consist of 50,000,000 shares of
Vision 21 Common Stock, of which 8,123,065 shares will be issued and
outstanding.
5.3. Corporate Records. The copies of the Articles of
Incorporation and Bylaws, and all amendments thereto, of Vision 21 that have
been delivered or made available to the Company and the Optometrist are true,
correct and complete copies thereof, as in effect on the date hereof. The
minute books of Vision 21, copies of which have been delivered or made
available to the Company and the Optometrist, contain accurate minutes of all
meetings of, and accurate consents to all actions taken without meetings by,
the Board of Directors (and any committees thereof) and the stockholders of
Vision 21, since its formation.
5.4. Authorization and Validity. The execution,
delivery and performance by Vision 21 of this Agreement and the other
agreements contemplated hereby, and the consummation of the transactions
contemplated hereby and thereby, have been duly authorized by Vision 21. This
Agreement and each other agreement contemplated hereby to be executed by Vision
21 have been or will be as of the Closing Date duly executed and delivered by
Vision 21 and constitute or will constitute legal, valid and binding
obligations of Vision 21, enforceable against Vision 21 in accordance with
their respective terms, except as may be limited by applicable bankruptcy,
insolvency or similar laws affecting creditors' rights generally or the
availability of equitable remedies.
5.5. Compliance. The execution and delivery of the
documents contemplated hereunder and the consummation of the transactions
contemplated thereby by Vision 21 shall not (i) violate any provision of Vision
21's organizational documents, (ii) violate any material provision of or result
in the breach of or entitle any party to accelerate (whether after the giving
of notice or lapse of time or both) any material obligation under, any
mortgage, lien, lease, contract, license, instrument or any other agreement to
which Vision 21 is a party, (iii) result in the creation or imposition of any
material lien, charge, pledge, security interest or other material encumbrance
upon any property of Vision 21 or (iv) violate or conflict with any order,
award, judgment or decree or other material restriction or to the best of
Vision 21's
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knowledge violate or conflict with any law, ordinance or regulation to which
Vision 21 or its property is subject.
5.6. Consents. No consent, approval, order or
authorization of or registration, declaration, or filing with, any Governmental
Authority or other person is required in connection with the execution and
delivery of the documents contemplated herein by Vision 21 or the consummation
by such party of the transactions contemplated thereby, except for those
consents or approvals set forth on Schedule 5.6.
5.7. Finder's Fee. Except as disclosed on Schedule
5.7, Vision 21 has not incurred any obligation for any finder's, broker's or
agent's fee in connection with the transactions contemplated hereby.
5.8. Capital Stock. The issuance and delivery by
Vision 21 of shares of Vision 21 Common Stock in connection with the Note have
been duly and validly authorized by all necessary corporate action on the part
of Vision 21. The shares of Vision 21 Common Stock to be issued in connection
with the Note, when issued in accordance with the terms of this Agreement, will
be validly issued, fully paid and nonassessable and will not have been issued
in violation of any preemptive rights, rights of first refusal or similar
rights of any of Vision 21's stockholders, or any federal or state law,
including, without limitation, the registration requirements of applicable
federal and state securities laws.
5.9. Vision 21 Financial Statements. The audited
consolidated balance sheet and related statements of income and cash flows of
Vision 21 for its prior three (3) full fiscal years, and its unaudited interim
balance sheet for the fiscal quarter ended March 31, 1997 and the related
unaudited statement of income of Vision 21 for the period then ended, including
the costs incurred during such periods associated with any Registration
Statement (collectively, with the related notes thereto, the "Vision 21
Financial Statements"), (a) fairly present the financial condition and results
of operations of Vision 21 as of the dates and for the periods indicated; and
(b) have been prepared in conformity with GAAP (subject to normal year-end
adjustments and the absence of notes for any unaudited interim financial
statement), except as otherwise indicated in the Vision 21 Financial
Statements.
5.10. Liabilities and Obligations. Except as disclosed
on Schedule 5.10, the Vision 21 Financial Statements shall reflect all material
liabilities of Vision 21, accrued, contingent or otherwise, that would be
required to be reflected on a balance sheet, or in the notes thereto, prepared
in accordance with GAAP. Except as set forth on Schedule 5.10 or in the Vision
21 Financial Statements, Vision 21 is not liable upon or with respect to, or
obligated in any other way to provide funds in respect of or to guarantee or
assume in any manner, any debt, obligation or dividend of any person,
corporation, association, partnership, joint venture, trust or other entity,
and Vision 21 does not know of any valid basis for the assertion of any other
claims or liabilities of any nature or in any amount.
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5.11. Compliance with Laws. Vision 21 has not failed
to comply with any applicable laws, regulations and licensing requirements or
failed to file with the proper authorities any necessary statements and reports
except where the failure to so comply or file would not, individually or in the
aggregate, result in a Material Adverse Effect. There are no existing
violations by Vision 21 of any federal, state or local law or regulation that
could, individually or in the aggregate, result in a Material Adverse Effect.
Vision 21 possesses all necessary licenses, franchises, permits and
governmental authorizations for the conduct of Vision 21's business as now
conducted and after the Closing, as contemplated in this Agreement. The
transactions contemplated by this Agreement will not result in a default under
or a breach or violation of, or adversely affect the rights and benefits
afforded by any such licenses, franchises, permits or government
authorizations, except for any such default, breach or violation that would
not, individually or in the aggregate, have a Material Adverse Effect. Since
January 1, 1993, Vision 21 has not received any notice from any federal, state
or other governmental authority or agency having jurisdiction over its
properties or activities, or any insurance or inspection body, that its
operations or any of its properties, facilities, equipment, or business
practices fail to comply with any applicable law, ordinance, regulation,
building or zoning law, or requirement of any public or quasi-public authority
or body, except where failure to so comply would not, individually or in the
aggregate, have a Material Adverse Effect.
5.12. Insolvency Proceedings. Vision 21 is not
currently under the jurisdiction of a Federal or state court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
5.13. Employment of Company's Employees. Vision 21
does not currently intend to change the existing composition or employment
terms of any of the non-professional personnel which have employment
arrangements with the Company on the effective date of this Agreement (except
as is necessary for Vision 21 to employ such individuals pursuant to the
Business Management Agreement). Vision 21 reserves the right, however, to
change the number, composition or employment terms of such non-professional
personnel in the future.
6. SECURITIES LAW MATTERS.
6.1. Investment Representations and Covenants of
Optometrist.
a. Optometrist understands that the Securities will
not be registered under the Securities Act or any state securities laws on the
grounds that the issuance of the Securities is exempt from registration
pursuant to Section 4(2) of the Securities Act under the Securities Act and
applicable state securities laws, and that the reliance of Vision 21 on such
exemptions is predicated in part on the Optometrist's representations,
warranties, covenants and acknowledgements set forth in this Section.
b. Except as disclosed on Schedule 6.1(b) attached
hereto, Optometrist represents and warrants that Optometrist is an "accredited
investor" or "sophisticated investor" as defined under the Securities Act and
state "Blue Sky" laws, or that Optometrist has utilized,
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to the extent necessary to be deemed a sophisticated investor under the
Securities Act and State "Blue Sky" laws, the assistance of a professional
advisor.
c. Optometrist represents and warrants that the
Securities to be acquired by Optometrist upon consummation of the transactions
described in this Agreement will be acquired by Optometrist for Optometrist's
own account, not as a nominee or agent, and without a view to resale or other
distribution within the meaning of the Securities Act and the rules and
regulations thereunder, except as contemplated in this Agreement, and that
Optometrist will not distribute any of the Securities in violation of the
Securities Act. All Securities shall bear a restrictive legend in
substantially the following form:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") AND MAY ONLY BE SOLD OR OTHERWISE
TRANSFERRED IF THE HOLDER HEREOF COMPLIES WITH THE ACT AND APPLICABLE
SECURITIES LAWS."
In addition, the Securities shall bear any legend required by the
securities or "Blue Sky" laws of any state where Optometrist resides as well as
any other legend deemed appropriate by Vision 21 or its counsel.
d. Optometrist represents and warrants that the
address set forth below Optometrist's name on Schedule 6.1(d) is Optometrist's
principal residence.
e. Optometrist (i) acknowledges that the Securities
issued to Optometrist at the Closing must be held indefinitely by Optometrist
unless subsequently registered under the Securities Act or an exemption from
registration is available, (ii) is aware that any routine sales of Securities
made pursuant to Rule 144 under the Securities Act may be made only in limited
amounts and in accordance with the terms and conditions of that Rule and that
in such cases where the Rule is not applicable, compliance with some other
registration exemption will be required, (iii) is aware that Rule 144 is not
currently available for use by Optometrist for resale of any of the Securities
to be acquired by Optometrist upon consummation of the transactions described
in this Agreement, and (iv) acknowledges and agrees that the transfer of the
Securities shall be further restricted by the "lock-up" provisions contained in
the Registration Rights Agreement in the form of Exhibit 12.1(o), whereby
Optometrist shall be treated as an "affiliate" of Vision 21 under Rule 144.
f. Optometrist represents and warrants to Vision 21
that Optometrist, either alone or together with the assistance of Optometrist's
own professional advisor, has such knowledge and experience in financial and
business matters such that Optometrist is capable of evaluating the merits and
risks of Optometrist's investment in any of the Securities to be acquired by
Optometrist upon consummation of the transactions described in this Agreement.
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g. Optometrist confirms that Optometrist has
received and read the Confidential Information Memorandum of Vision 21 dated
December 1996 and the February 28, 1997 supplement thereto. Optometrist also
confirms that Optometrist has had the opportunity to ask questions of and
receive answers from Vision 21 concerning the terms and conditions of
Optometrist's investment in the Securities, and the Optometrist has received to
Optometrist's satisfaction, such additional information, in addition to that
set forth herein, about Vision 21's operations and the terms and conditions of
the offering as Optometrist has requested.
h. In order to ensure compliance with the provisions
of paragraph (c) hereof, Optometrist agrees that after the Closing Optometrist
will not sell or otherwise transfer or dispose of Securities or any interest
therein (unless such shares have been registered under the Securities Act)
without first complying with either of the following conditions, the expenses
and costs of satisfaction of which shall be fully borne and paid for by
Optometrist:
i) Vision 21 shall have received a
written legal opinion from legal counsel, which opinion and counsel shall be
satisfactory to Vision 21 in the exercise of its reasonable judgment, or a copy
of a "no-action" or interpretive letter of the Securities and Exchange
Commission specifying the nature and circumstances of the proposed transfer and
indicating that the proposed transfer will not be in violation of any of the
registration provisions of the Securities Act and the rules and regulations
promulgated thereunder; or
ii) Vision 21 shall have received an
opinion from its own counsel to the effect that the proposed transfer will not
be in violation of any of the registration provisions of the Securities Act and
the rules and regulations promulgated thereunder.
Optometrist also agrees that the certificates or instruments representing the
Securities to be issued to Optometrist pursuant to this Agreement may contain a
restrictive legend noting the restrictions on transfer described in this
Section and required by federal and applicable state securities laws, and that
appropriate "stop-transfer" instructions will be given to Vision 21's transfer
agent, if any, provided that this Section 6.1(h) shall no longer be applicable
to any Securities following their transfer pursuant to a registration statement
effective under the Securities Act or in compliance with Rule 144 or if the
opinion of counsel referred to above is to the further effect that transfer
restrictions and the legend referred to herein are no longer required in order
to establish compliance with any provisions of the Securities Act.
i. Optometrist understands that although an Initial
Public Offering is contemplated by Vision 21, there are no assurances that an
Initial Public Offering will occur or if it does occur that it will be
successful.
j. Optometrist agrees that he shall be considered an
"affiliate" of Vision 21 for purposes of Rule 144 and agrees to the
restrictions and limitations imposed by Rule 144 on affiliates. Optometrist
further agrees that he shall be considered an affiliate of Vision 21 for Rule
144 purposes even if he does not meet the technical definition of "affiliate"
under Rule 144.
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6.2. Current Public Information. At all times
following the registration of any of Vision 21's securities under the
Securities Act or Exchange Act pursuant to which Vision 21 becomes subject to
the reporting requirements of the Exchange Act, Vision 21 shall use
commercially reasonable efforts to comply with the requirements of Rule 144
under the Securities Act, as such Rule may be amended from time to time (or any
similar rule or regulation hereafter adopted by the SEC) regarding the
availability of current public information to the extent required to enable any
holder of shares of Common Stock to sell such shares without registration under
the Securities Act pursuant to Rule 144 (or any similar rule or regulation).
7. COVENANTS OF THE COMPANY AND THE OPTOMETRIST. The Company
and the Optometrist, jointly and severally, agree that between the date hereof
and the Closing (with respect to the Company's covenants, the Optometrist
agrees to use his best efforts to cause the Company to perform):
7.1. Consummation of Agreement. The Company and the
Optometrist shall use their best efforts to cause the consummation of the
transactions contemplated hereby in accordance with their terms and conditions;
provided, however, that this covenant shall not require the Company or the
Optometrist to make any expenditures that are not expressly set forth in this
Agreement or otherwise contemplated herein.
7.2. Business Operations. The Company shall operate
its business in the ordinary course. The Company and the Optometrist shall use
their best efforts to preserve the business of the Company intact. Neither the
Company nor the Optometrist shall take any action that would, individually or
in the aggregate, result in a Material Adverse Effect.
7.3. Access. The Company and the Optometrist shall,
at reasonable times during normal business hours and on reasonable notice,
permit Vision 21 and its authorized representatives, including without
limitation, the Accountants, reasonable access to, and make available for
inspection, all of the assets and business of the Company, including its
employees, customers and suppliers, and permit Vision 21 and its authorized
representatives to inspect and, at Vision 21's sole cost and expense, make
copies of all documents, records (other than patient optometric records) and
information with respect to the affairs of the Company, including, without
limitation, the Financial Statements, as Vision 21 and its representatives may
request, all for the sole purpose of permitting Vision 21 to become familiar
with the business and assets and liabilities of the Company.
7.4. Notification of Certain Matters. The Company and
the Optometrist shall promptly inform Vision 21 in writing of (a) any notice
of, or other communication relating to, a default or event that, with notice or
lapse of time or both, would become a default, received by the Company or the
Optometrist subsequent to the date of this Agreement and prior to the Closing
Date under any Commitment material to the Company's condition (financial or
otherwise), operations, assets, liabilities or business and to which it is
subject; or (b) any
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material adverse change in the Company's condition (financial or otherwise),
operations, assets, liabilities or business.
7.5. Approvals of Third Parties. As soon as
practicable after the date hereof, the Company and the Optometrist shall secure
all necessary approvals and consents of landlords with respect to the real
property described on Schedule 2.1(d) to the consummation of the transactions
contemplated hereby and shall use their best efforts to secure all necessary
approvals and consents of other third parties to the consummation of the
transactions contemplated hereby; provided, however, that this covenant shall
not require the Company or the Optometrist to make any material expenditures
that are not expressly set forth in this Agreement or otherwise contemplated
herein.
7.6. Employee Matters. Except as set forth in
Schedule 3.8(a) or as otherwise contemplated by this Agreement, the Company
shall not, without the prior written approval of Vision 21, except as required
by law:
a. increase the cash compensation of the Optometrist
or any other employees of the Company (other than in the ordinary course of
business and consistent with past practice);
b. adopt, amend or terminate any Compensation Plan;
c. adopt, amend or terminate any Employment
Agreement;
d. adopt, amend or terminate any Employee Policies
and Procedures;
e. adopt, amend or terminate any Employee Benefit
Plan;
f. take any action that could deplete the assets of
any Employee Benefit Plan, other than payment of benefits in the ordinary
course to participants and beneficiaries;
g. fail to pay any premium or contribution due or
with respect to any Employee Benefit Plan;
h. fail to file any return or report with respect to
any Employee Benefit Plan;
i. institute, settle or dismiss any employment
litigation except as could not, individually or in the aggregate, result in a
Material Adverse Effect;
j. enter into, modify, amend or terminate any
agreement with any union, labor organization or collective bargaining unit; or
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k. take or fail to take any action with respect to
any past or present employee of the Company that would, individually or in the
aggregate, result in a Material Adverse Effect.
7.7. Contracts. Except with Vision 21's prior written
consent, the Company shall not assume or enter into any contract, lease,
license, obligation, indebtedness, commitment, purchase or sale except in the
ordinary course of business that is material to the Company's business, nor
will it waive any material right or cancel any material contract, debt or
claim.
7.8. Capital Assets; Payments of Liabilities. The
Company shall not, without the prior written approval of Vision 21 (a) acquire
or dispose of any capital asset having a fair market value of $5,000 or more,
or acquire or dispose of any capital asset outside of the ordinary course of
business or (b) discharge or satisfy any lien or encumbrance or pay or perform
any obligation or liability other than (i) liabilities and obligations
reflected in the Financial Statements or (ii) current liabilities and
obligations incurred in the usual and ordinary course of business since the
Company Balance Sheet Date and, in either case (i) or (ii) above, only as
required by the express terms of the agreement or other instrument pursuant to
which the liability or obligation was incurred.
7.9. Mortgages, Liens and Guaranties. The Company
shall not, without the prior written approval of Vision 21, enter into or
assume any mortgage, pledge, conditional sale or other title retention
agreement, permit any security interest, lien, encumbrance or claim of any kind
to attach to any of its assets (other than statutory liens arising in the
ordinary course of business and other liens that do not materially detract from
the value or interfere with the use of such assets), whether now owned or
hereafter acquired, or guarantee or otherwise become contingently liable for
any obligation of another, except obligations arising by reason of endorsement
for collection and other similar transactions in the ordinary course of
business, or make any capital contribution or investment in any person.
7.10. Acquisition Proposals. The Company and the
Optometrist agree that from the date of this Agreement through the earlier of
the Closing Date or January 1, 1997, (a) neither the Optometrist nor the
Company nor any of its officers and directors shall, and the Optometrist and
the Company shall direct and use their best efforts to cause the Company's
employees, agents, and representatives not to, initiate, solicit or encourage,
directly or indirectly, any inquiries or the making or implementation of any
Acquisition Proposal or engage in any negotiations concerning, or provide any
confidential information or data to, or have any discussions with, any person
relating to an Acquisition Proposal, or otherwise facilitate any effort or
attempt to make or implement an Acquisition Proposal; (b) the Optometrist and
the Company will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing and each will take the necessary steps to
inform the individuals or entities referred to in the first sentence hereof of
the obligations undertaken in this Section 7.10; and (c) the Optometrist and
the Company will notify Vision 21 immediately if any such inquiries or
proposals are received
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by, any such information is requested from, or any such negotiations or
discussions are sought to be initiated or continued with, the Company or the
Optometrist.
7.11. Distributions and Repurchases. No distribution,
payment or dividend of any kind will be declared or paid by the Company with
respect of its capital stock, nor will any repurchase of any of the Company's
capital stock be approved or effected.
7.12. Requirements to Effect the Transaction. The
Company and the Optometrist shall use their best efforts to take, or cause to
be taken, all actions necessary to effect the Transaction under applicable law.
7.13. Optometrist Accounts Payable and Optometrist
Retained Equity. The Company shall, and the Optometrist shall cause the
Company, to pay in a timely manner the accounts payable of the Optometrist.
Except as contemplated herein, the Company shall not, and the Optometrist shall
not permit the Company to, make payment of all or any portion of any retained
equity of the Company at any time prior to Closing.
7.14. Optometrist Employment Agreements. The Company
and the Optometrist shall cause, at or immediately prior to Closing, each
Optometrist Employee (except for those non-shareholder Optometrist Employees
identified on Schedule 7.14) who is then an employee of the Company and
Optometrist agrees at or immediately prior to Closing (i) to terminate his
employment agreement, if any, with the Company by mutual consent without any
liability therefor on the part of the Company and (ii) to enter into a new
Optometrist Employment Agreement with the Company in accordance with the terms
of the Business Management Agreement.
7.15. Optometrist Employment Agreements. The Company
and the Optometrist shall cause, at or immediately prior to Closing, each
Optometrist Employee who is then an employee of the Company (i) to terminate
his existing employment agreement, if any, with the Company by mutual consent
without any liability therefor on the part of the Company and (ii) to enter
into a new Optometrist Employment Agreement with the Company in accordance with
the terms of the Business Management Agreement.
7.16. Termination of Retirement Plans. Prior to
Closing, the Optometrist shall cause the Company to take all steps necessary to
discontinue benefits accruals under any Employee Benefit Plan that is intended
to be a qualified employee retirement plan under Section 401(a) of the Code (a
"Retirement Plan") effective as of Closing or as soon thereafter as may be
practical.
Subsequent to Closing, the Company and Vision 21 shall
review the extent to which the Company can resume contributions to the
Retirement Plan without violating the qualification requirements of Sections
410(b) and 401(a)(4) of the Code, taking into account any employees of Vision
21 who would be "leased employees" of the Company under Section 414(n) of the
Code. If Vision 21 and the Company mutually agree that such qualification
requirements
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can be satisfied, the Company may elect to continue the Retirement Plan and
make contributions in accordance with its terms, provided that the Company
shall agree to cover at its own expense any Vision 21 employees who are leased
employees if such coverage is required to maintain the tax-qualified status of
the Retirement Plan.
7.17. Delivery of Schedules. The Company and the
Optometrist shall deliver to Vision 21 all schedules required to be delivered
by them prior to the Closing.
7.18. Assignment of Fees for Optometry Services. On or
prior to the Closing Date, the Company shall obtain an irrevocable assignment
from all Professional Employees of any and all of their rights to receive
payment for the provision of optometry services which are part of the Accounts
Receivable to Vision 21 existing on the Closing Date, except for those fees
specified and set forth on Schedule 7.18. Each Professional Employee shall
undertake to endorse any payments received on account of such services to the
order of Vision 21 and to take such other action as may be necessary to confirm
to Vision 21 the rights to collect and retain for its own account such Accounts
Receivable. The Company shall cause its Professional Employees to agree that
such security interest of such lender(s) is intended to be a first priority
security interest and is superior to any right, title or interest which may be
asserted by such Professional Employees with respect to the Accounts Receivable
or the proceeds thereof. In the event that the assignment of rights described
in this Section shall be deemed, for any reason, to be ineffective as an
outright assignment, the Company shall cause each Professional Employee to
agree that such Professional Employee shall be deemed, effective as of the
Closing Date, to have granted to Vision 21 a first priority lien on and
security interest in and to any and all interests of such Professional Employee
in any of the Accounts Receivable, and all proceeds with respect thereto, to
secure the collection by Vision 21 of all Accounts Receivable, and this
Agreement shall be deemed to be a security agreement to the extent necessary to
give effect to the foregoing. The Company shall cause each Professional
Employee to execute and deliver, all such financing statements as the Company
or Vision 21 may request in order to perfect such security interest. The
Company shall not suffer any Professional Employee to grant any other lien on
or security interest in or to such Accounts Receivable or any proceeds thereof.
8. COVENANTS OF VISION 21. Vision 21 agrees that between the
date hereof and the Closing:
8.1. Consummation of Agreement. Vision 21 shall use
its best efforts to cause the consummation of the transactions contemplated
hereby in accordance with their terms and conditions and take all corporate and
other actions necessary to approve the Transaction; provided, however, that
this covenant shall not require Vision 21 to make any expenditures that are not
expressly set forth in this Agreement or otherwise contemplated herein.
8.2. Notification of Certain Matters. Vision 21 shall
promptly inform the Company and the Optometrist in writing of (a) any notice
of, or other communication relating to, a default or event that, with notice or
lapse of time or both, would become a default,
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received by Vision 21 subsequent to the date of this Agreement and prior to the
Closing Date under any agreement or commitment entered into by Vision 21
material to Vision 21's condition (financial or otherwise), operations, assets,
liabilities or business and to which it is subject; or (b) any material adverse
change in Vision 21's condition (financial or otherwise), operations, assets,
liabilities or business.
8.3. Licenses and Permits. Vision 21 shall use its
best efforts to obtain all licenses, permits, approvals or other authorizations
required under any law, statute, rule, regulation or ordinance, or otherwise
necessary or desirable to consummate the Transaction or provide the services
contemplated by the Business Management Agreement and to conduct the intended
business of Vision 21.
8.4. Release of Optometrist From Practice Liabilities.
Vision 21 shall use its best efforts to obtain from third party creditors the
release of Optometrist from any personal liabilities relating to the Practice
which are identified on Schedule 8.4 and assumed by Vision 21 pursuant to the
terms of this Agreement.
9. COVENANTS OF VISION 21, THE COMPANY AND THE OPTOMETRIST.
Vision 21, the Company and the Optometrist agree as follows:
9.1. Filings; Other Action.
a. Vision 21, the Company and the Optometrist shall
cooperate to promptly prepare and file at Vision 21's expense with the SEC, a
Registration Statement on Form S-1 (or other appropriate form) to be filed by
Vision 21 in connection with any Initial Public Offering of Vision 21
(including the prospectus constituting a part thereof, the "Registration
Statement"). Vision 21 shall obtain all necessary state securities law or
"Blue Sky" permits and approvals required to carry out the transactions
contemplated by this Agreement, and the Company and the Optometrist shall
furnish all information concerning the Company, the Non-optometric Assets and
the Optometrist as may be reasonably requested in connection with any such
action.
b. Each of the Company, the Optometrist and Vision
21 represents and warrants that none of the information or documents supplied
or to be supplied by it specifically for inclusion in a Registration Statement,
by exhibit or otherwise, will, at the time the Registration Statement and each
amendment and supplement thereof, if any, becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The Company, the Optometrist, and Vision 21 shall agree
as to the information and documents supplied by the Company and the Optometrist
for inclusion in the Registration Statement and shall indicate such information
and documents in a letter to be delivered at least ten (10) days prior to the
initial filing of the Registration Statement with the SEC. The Company and the
Optometrist shall be
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entitled to review the Registration Statement and each amendment thereto, if
any, prior to the time each becomes effective under the Securities Act.
c. The Optometrist and the Company shall, upon
request, furnish Vision 21 with all information concerning himself, itself,
their respective partners, the Company's subsidiaries, directors, officers, and
stockholders, and including financial statements with respect to the same, any
consents (and information necessary to obtain such consents) and such other
matters as may be reasonably requested by Vision 21 in connection with the
preparation of the Registration Statement and each amendment or supplement
thereto, or any other statement, filing, notice or application made by or on
behalf of each such party or any of the Company's subsidiaries to any
governmental entity in connection with the Transaction, any Initial Public
Offering and the other transactions contemplated by this Agreement.
9.2. Amendment of Schedules. Each party hereto agrees
that, with respect to the representations and warranties of such party
contained in this Agreement, such party shall have the continuing obligation
until the Closing to attach, supplement or amend promptly the Schedules with
respect to any matter that would have been or would be required to be set forth
or described in the Schedules in order to not materially breach any
representation, warranty or covenant of such party contained herein; provided
that no amendment or supplement to a Schedule that constitutes or reflects a
material adverse change to the Company or the Non-optometric Assets may be made
unless Vision 21 consents to such amendment or supplement, and no amendment or
supplement to a Schedule that constitutes or reflects a material adverse change
to Vision 21 may be made unless the Company and the Optometrist consent to such
amendment or supplement. For all purposes of this Agreement, including without
limitation for purposes of determining whether the conditions set forth in
Sections 10.1 and 11.1 have been fulfilled, the Schedules hereto shall be
deemed to be the Schedules as amended or supplemented pursuant to this Section
9.2. In the event that the Company is required to amend or supplement a
Schedule in accordance with this Section 9.2 and Vision 21 does not consent to
such amendment or supplement, or Vision 21 is required to amend or supplement a
Schedule in accordance with this Section 9.2 and the Company and the
Optometrist do not consent, this Agreement shall be deemed terminated by mutual
consent as set forth in Section 15.1(d) or Section 15.1(e) as appropriate.
9.3. Fees and Expenses.
a. Each of the Company and Vision 21 shall pay the
costs and expenses of their own legal counsel with respect to legal services
rendered in connection with the preparation and negotiation of this Agreement
and the transactions contemplated hereby.
b. In the event that an Initial Public Offering does
not take place for any reason whatsoever, Vision 21 (but not the Company or the
Optometrist) shall have sole responsibility for the payment of all legal fees
(except as set forth in Section 9.3(c)), accounting fees (except as set forth
in Section 9.3(c)), underwriters' expenses and other fees, costs and
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expenses associated solely in connection with the preparation of any
Registration Statement relating to such Initial Public Offering.
c. If any Initial Public Offering is consummated as
contemplated by this Agreement, all legal fees, audit fees, printing costs,
filing fees, blue sky fees and underwriters' discounts and fees associated
solely with the Initial Public Offering shall be paid by Vision 21 from the
proceeds of the Initial Public Offering, except for those expenses, fees and
underwriters' discounts related to any shares sold by the Optometrist.
9.4. Release of Optometrist From Practice Liabilities.
Vision 21 shall use its best efforts to obtain the release of the Optometrist
from any liabilities relating to the Practice of which the Optometrist and the
Company are jointly obligated which are set forth on Schedule 9.4.
10. CONDITIONS PRECEDENT OF VISION 21. Except as may be waived
in writing by Vision 21, the obligations of Vision 21 hereunder are subject to
the fulfillment at or prior to the Closing Date of each of the following
conditions precedent:
10.1. Representations and Warranties. The
representations and warranties of the Company and the Optometrist contained
herein shall have been true and correct in all material respects when initially
made and shall be true and correct in all material respects as of the Closing
Date.
10.2. Covenants. The Company and the Optometrist shall
have performed and complied in all material respects with all covenants
required by this Agreement to be performed and complied with by the Company or
the Optometrist prior to the Closing Date.
10.3. Legal Opinion. Counsel to the Company and the
Optometrist shall have delivered to Vision 21 their opinions, dated as of the
Closing Date, in form and substance substantially similar to Exhibit 10.3 which
Vision 21, Vision 21's counsel, the underwriters of the Initial Public Offering
and their counsel shall be permitted to rely upon.
10.4. Proceedings. No action, proceeding or order by
any court or governmental body or agency shall have been threatened orally or
in writing, asserted, instituted or entered to restrain or prohibit the
carrying out of the transactions contemplated hereby.
10.5. No Material Adverse Change. No material adverse
change in the condition (financial or otherwise), operations, assets,
liabilities or business of the Company shall have occurred since the Company
Balance Sheet Date, whether or not such change shall have been caused by the
deliberate act or omission of the Company or the Optometrist.
10.6. Government Approvals and Required Consents. The
Company, the Optometrist and Vision 21 shall have obtained all necessary
government and other third-party approvals and consents (other than consents
technically required as a result of the transactions
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contemplated hereby under the terms of managed care contracts to which the
Company or any of its employees are a party).
10.7. Certification. Neither the Company nor the
Optometrist shall have received any notice of or been made a party to any
judicial or administrative proceeding, or threatened to so be made a party, in
any action or proceeding that seeks to deny the continued use or receipt of any
necessary permit, license, authorization, certification or approval under the
Medicare and Medicaid programs to provide optometry services.
10.8. Closing Deliveries. Vision 21 shall have
received all documents and agreements, duly executed and delivered in form
reasonably satisfactory to Vision 21, referred to in Section 14.1.
10.9. Due Diligence. Vision 21 shall have completed to
its satisfaction a due diligence review of the Company and the Optometrist.
10.10. Exemption Under State Securities Laws. The
transfer of Vision 21's Securities to the Optometrist as contemplated in this
Agreement shall qualify for one or more exemptions from registration under the
State's securities laws. Vision 21 shall pay all filing fees in connection
with any filing required to qualify the transfer of the Securities for such
exemption(s).
10.11. Assignment of Professional Employees' Rights in
Accounts Receivable. The Company shall have caused the Professional Employees
to assign any and all of their rights with respect to Accounts Receivable to
Vision 21 and shall cause such Professional Employees to execute such other
agreements and instruments as contemplated in Section 7.18.
11. CONDITIONS PRECEDENT OF THE COMPANY AND THE OPTOMETRIST.
Except as may be waived in writing by the Company and the Optometrist, the
obligations of the Company and the Optometrist hereunder are subject to
fulfillment at or prior to the Closing Date of each of the following conditions
precedent:
11.1. Representations and Warranties. The
representations and warranties of Vision 21 contained herein shall be true and
correct in all respects when initially made and shall be true and correct in
all material respects as of the Closing Date.
11.2. Covenants. Vision 21 shall have performed and
complied in all material respects with all covenants and conditions required by
this Agreement to be performed and complied with by it prior to the Closing
Date.
11.3. Legal Opinions. Counsel to Vision 21 shall have
delivered to the Company and the Optometrist their opinion, dated as of the
Closing Date, in form and substance substantially similar to Exhibit 11.3.
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11.4. Proceedings. No action, proceeding or order by
any court or governmental body or agency shall have been threatened in writing,
asserted, instituted or entered to restrain or prohibit the carrying out of the
transactions contemplated hereby.
11.5. Government Approvals and Required Consents. The
Company, the Optometrist and Vision 21 shall have obtained all necessary
government and other third-party approvals and consents (other than consents
technically required as a result of the transactions contemplated hereby under
the terms of managed care contracts to which the Company or any of its
employees are a party).
11.6. Closing Deliveries. The Company and the
Optometrist shall have received all documents, instruments and agreements, duly
executed and delivered in form reasonably satisfactory to the Company, referred
to in Section 12.2.
11.7. No Change in Voting or Ownership Control. There
shall have been no changes in the voting or ownership control of Vision 21 from
the date first above written to the Closing Date.
11.8. No Material Adverse Change. No material adverse
change in the condition (financial or otherwise), operations, assets,
liabilities or business of Vision 21 shall have occurred since the end of the
last fiscal period reported in the Vision 21 Financial Statements, whether or
not such change shall have been caused by the deliberate act or omission of
Vision 21.
12. CLOSING DELIVERIES; ESCROW OF DOCUMENTS.
12.1. Deliveries of the Company and the Optometrist.
At or prior to ______, 1997, the Company and the Optometrist shall deliver to
Vision 21, c/o Shumaker, Loop & Kendrick, LLP, counsel to Vision 21, the
following, all of which shall be in a form reasonably satisfactory to Vision 21
and shall be held by Shumaker, Loop & Kendrick, LLP in escrow pending Closing,
pursuant to an escrow agreement or letter in form and substance mutually
acceptable to the parties hereto:
a. a copy of resolutions of the Board of Directors
of the Company authorizing (i) the execution, delivery and performance of this
Agreement and all related documents and agreements, and (ii) the consummation
of the Transaction, certified by the Secretary of the Company as being true and
correct copies of the originals thereof subject to no modifications or
amendments;
b. a certificate of the President of the Company,
and of the Optometrist, dated the Closing Date, as to the truth and correctness
of the representations and warranties of the Company and the Optometrist
contained herein, on and as of the Closing Date;
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c. a certificate of the President of the Company,
and of the Optometrist, dated the Closing Date, (i) as to the performance of
and compliance in all material respects by the Company and the Optometrist with
all covenants contained herein on and as of the Closing Date and (ii)
certifying that all conditions precedent of the Company and the Optometrist to
the Closing have been satisfied;
d. a certificate of the Secretary of the Company
certifying as to the incumbency of the directors and officers of each such
corporation and as to the signatures of such directors and officers who have
executed documents delivered pursuant to the Agreement on behalf of each such
corporation;
e. a certificate, dated within ten (10) days prior
to the Closing Date, of the Secretary of State of the state of incorporation
for the Company establishing that the Company is in existence, has paid all
franchise or similar taxes, if any, and, if applicable, otherwise is in good
standing to transact business in its state of organization;
f. certificates, dated within ten (10) days prior to
the Closing Date, of the Secretary of State of the states in which the Company
is qualified to do business, to the effect that the Company is qualified to do
business and, if applicable, is in good standing as a foreign corporation in
each of such states;
g. an opinion of counsel to the Company and
Optometrists dated as of the Closing Date, in form and substance satisfactory
to Vision 21, which Vision 21, Vision 21's counsel and the underwriters of any
Initial Public Offering and their counsel are permitted to rely upon and which
shall include an opinion, subject to normal and customary exceptions that to
the best of their knowledge the transactions and arrangements contemplated by
this Agreement are in conformity with State laws, rules and regulations
governing the practice of optometry.
h. such appropriate documents of transfer, including
bills of sale, endorsements, assignments, drafts, checks or other instruments,
as to all of the Non-optometric Assets, and any other appropriate instruments
in such reasonable or customary form as shall be requested by Vision 21 and its
counsel;
i. such instruments satisfactory to Vision 21 that
all liens, claims, pledges, security interests and other encumbrances on all of
the Non-optometric Assets have been released;
j. all authorizations, consents, permits and
licenses referenced in Section 3.5;
k. the executed Business Management Agreement in
substantially the form attached hereto as Exhibit 12.1 (k), as revised in
accordance with changes reasonably deemed necessary or advisable by legal
counsel retained by Vision 21 in the State to address regulatory and compliance
issues;
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l. an executed Optometrist Employment Agreement
between the Company and the Optometrist in substantially the form attached
hereto as Exhibit 12.1 (l);
m. an executed Optometrist Employment Agreement
between the Company and each Optometrist Employee who is then an employee of
the Company in substantially the form attached hereto as Exhibit 12.1 (m);
n. an executed Optometrist Employment Agreement
between the Company and each Optometrist Employee who is then an employee of
the Company in substantially the form attached hereto as Exhibit 12.1 (n);
o. an executed Registration Rights Agreement between
Vision 21 and the Optometrist in substantially the form attached hereto as
Exhibit 12.1 (o) (the "Registration Rights Agreement");
p. a non-foreign affidavit, as such affidavit is
referred to in Section 1445 (b) (2) of the Code, of the Optometrist, signed
under a penalty of perjury and dated as of the Closing Date, to the effect that
the Optometrist is a United States citizen or a resident alien (and thus not a
foreign person) and providing the Optometrist's United States taxpayer
identification number;
q. an assignment to Vision 21 of each lease for real
property described on Schedule 2.1(d) (the "Lease Assignments"), or if desired
by Vision 21, a new lease or leases between the landlords under such leases and
Vision 21 in form and substance reasonably satisfactory to Vision 21;
r. an executed Agreement to Continue Practice After
Transfer Event and Stock Pledge Agreement substantially in the form of Exhibit
12.1(r); and
s. such other instrument or instruments of transfer
prepared by Vision 21 as shall be necessary or appropriate, as Vision 21 or its
counsel shall reasonably request, to carry out and effect the purpose and
intent of this Agreement.
12.2. Deliveries of Vision 21. At or prior to ______,
1997, Vision 21 shall deliver to the Company and the Optometrist, c/o Shumaker,
Loop & Kendrick, LLP, counsel to Vision 21, the following, all of which shall
be in a form reasonably satisfactory to the Company and the Optometrist and
shall be held by Shumaker, Loop & Kendrick, LLP in escrow pending Closing,
pursuant to an escrow agreement or letter in form and substance mutually
acceptable to the parties hereto:
a. a copy of the resolutions of the Board of
Directors of Vision 21 authorizing (i) the execution, delivery and performance
of this Agreement, and all related documents and agreements, and (ii) the
consummation of the Transaction, certified by Vision
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21's Secretary as being true and correct copies of the originals thereof
subject to no modifications or amendments;
b. a certificate of an officer of Vision 21 dated
the Closing Date as to the truth and correctness of the representations and
warranties of Vision 21 contained herein, on and as of the Closing Date;
c. a certificate of an officer of Vision 21 dated
the Closing Date, (i) as to the performance and compliance of Vision 21 with
all covenants contained herein on and as of the Closing Date and (ii)
certifying that all conditions precedent of Vision 21 to the Closing have been
satisfied;
d. a certificate, dated within ten (10) days prior
to the Closing Date, of the Secretary of State of the State of Florida
establishing that Vision 21 is in existence, has paid all franchise or similar
taxes, if any, and, if applicable, otherwise is in good standing to transact
business in such state;
e. certificates (or photocopies thereof), dated
within ten (10) days prior to the Closing Date, of the Secretary of State of
each state in which Vision 21 is qualified to do business, to the effect that
Vision 21 is qualified to do business and, if applicable, is in good standing
as a foreign corporation in each of such states;
f. an opinion of Shumaker, Loop & Kendrick, LLP,
counsel to Vision 21, dated as of the Closing Date, pursuant to Section 11.3;
g. the executed Registration Rights Agreement;
h. the executed Lease Assignments;
i. the Note in the original principal amount set
forth in this Agreement;
j. the Agreement to Continue Practice After Transfer
Event and Stock Pledge; and
k. such other instrument or instruments of transfer,
prepared by the Company or the Optometrist as shall be necessary or
appropriate, as the Company, the Optometrist or their counsel shall reasonable
request, to carry out and effect the purpose and intent of this Agreement.
12.3. Release of Escrow Materials. Shumaker, Loop &
Kendrick, LLP shall release the agreements, certificates, instruments,
documents and other materials described in Sections 12.1 and 12.2 to the
appropriate parties to effectuate the transactions contemplated in this
Agreement only after all such materials have been delivered by all applicable
parties (or the parties receiving such documents have waived in writing such
delivery requirement). In the
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event that all of the Optometrist, the Company and Vision 21 have not notified
the Escrow Agent in writing that they are satisfied with or have waived all of
the foregoing documents and issues by 5:00 p.m. on June __, 1997, the Escrow
Agent shall immediately return any consideration by Vision 21 held by it to
Vision 21 and shall destroy all of the other Escrowed Materials held by it.
13. POST CLOSING MATTERS.
13.1. Further Instruments of Transfer. From and after
the Closing Date, at the request of Vision 21 and at Vision 21's sole cost and
expense, the Optometrist and the Company shall deliver any further instruments
of transfer and take all reasonable action as may be necessary or appropriate
to carry out the purpose and intent of this Agreement.
13.2. Practice Advisory Council; Local Advisory
Council; National Appeals Council. Vision 21 and the Company shall establish a
practice advisory council composed of delegates from Vision 21 and the Company
which shall advise Vision 21 and the Company and determine certain issues as
more fully described in the Business Management Agreement. Vision 21 shall
also establish a local advisory council composed of delegates from certain
practice groups acquired by Vision 21 in connection with the Recent
Acquisitions. Such delegates shall be appointed from practice groups which are
located in a market area to be identified by Vision 21 and in which the Company
is located. The local advisory council board shall advise Vision 21 and the
practice groups within the market area as to policy and strategy issues and
shall determine certain types of issues and disputes between Vision 21 and such
practice groups which issues and disputes are identified in the Business
Management Agreement and other management agreements entered into between
Vision 21 and practice groups. The Company shall have the right to appoint one
(1) member to a local advisory council who shall serve an initial two (2) year
term. After the initial two-year term, election of members to the local
advisory council shall be in accordance with by-laws which shall be adopted and
amended by the local advisory council. Vision 21 shall also establish a
national appeals council which shall have, among other duties and
responsibilities, the power to adopt and amend its by-laws, to review and
approve as limited herein certain decisions of the local advisory councils, and
to resolve deadlocks among the members of such local advisory councils.
14. REMEDIES.
14.1. Indemnification by the Company and Optometrist.
Subject to the terms and conditions of this Agreement, the Company and the
Optometrist, jointly and severally, agree to indemnify, defend and hold Vision
21 and its directors, officers, members, managers, employees, agents, attorneys
and affiliates harmless from and against all losses, claims, obligations,
demands, assessments, penalties, liabilities, costs, damages, reasonable
attorneys' fees and expenses (collectively, "Damages") asserted against or
incurred by such entities and individuals (including, but not limited to, any
reduction in payments to or revenues of the Company) arising out of or
resulting from:
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a. a breach of any representation, warranty or
covenant of the Company or the Optometrist contained herein or in any schedule
or certificate delivered hereunder;
b. any liability under the Securities Act, the
Exchange Act or any other federal or state "Blue Sky" or securities law or
regulation, at common law or otherwise, (i) arising out of or based upon any
untrue statement or alleged untrue statement of a material fact relating to the
Optometrist or the Company (including its subsidiaries, if any), and provided
to Vision 21 or its counsel by the Company or the Optometrist, specifically for
inclusion in a Registration Statement or any prospectus forming a part thereof,
or any amendment thereof or supplement thereto, (ii) arising out of or based
upon any omission or alleged omission to state therein a material fact relating
to the Optometrist or the Company (including its subsidiaries, if any) required
to be stated therein or necessary to make the statements therein not
misleading, and not provided to Vision 21 or its counsel by the Company or the
Optometrist, provided, however, that such indemnity shall not inure to the
benefit of Vision 21 to the extent that such untrue statement (or alleged
untrue statement) was made, in, or omission (or alleged omission) occurred in,
any preliminary prospectus, and such information was not so included by Vision
21 and properly delivered to shareholders of Vision 21 who acquire Vision 21
Common Stock in any Initial Public Offering;
c. any filings, reports or disclosures made pursuant
to the IRS Voluntary Compliance Resolution Program, if applicable;
d. any liability arising from any alleged unlawful
sale or offer to sell or transfer any of the Common Stock by Optometrist; and
e. any liability of Optometrist or the Company of
any nature whatsoever not disclosed in this Agreement and expressly assumed by
Vision 21.
14.2. Indemnification by Vision 21. Subject to the
terms and conditions of this Agreement, Vision 21 hereby agrees to indemnify,
defend and hold the Company and the Optometrist harmless from and against all
damages asserted against or incurred by it or him arising out of or resulting
from:
a. a breach by Vision 21 of any representation,
warranty or covenant of Vision 21 contained therein or in any schedule or
certificate delivered hereunder;
b. any liability under the Securities Act, the
Exchange Act or any other federal or state "Blue Sky" or securities law or
regulation, at common law or otherwise, arising out of or based upon any untrue
statement or alleged untrue statement of a material fact relating to Vision 21,
contained in any preliminary prospectus, Registration Statement or any
prospectus forming a part thereof, or any amendment thereof or supplement
thereto, arising out of or based upon any omission or alleged omission to state
therein a material fact relating to Vision 21 (including its subsidiaries),
required to be stated therein or necessary to make the statements therein not
misleading; and
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c. any filings, reports or disclosures made pursuant
to the IRS Voluntary Compliance Resolution Program, if applicable.
Notwithstanding anything in this Section 14.2, Vision 21 shall not be
liable for any Damages resulting from any matter not disclosed to Vision 21 by
any of the third parties to be acquired by Vision 21 in connection with the
Recent Acquisitions.
14.3. Conditions of Indemnification. All claims for
indemnification under this Agreement shall be asserted and resolved as follows:
a. A party claiming indemnification under this
Agreement (an "Indemnified Party") shall promptly (and, in any event, at least
ten (10) days prior to the due date for any responsive pleadings, filings or
other documents) (i) notify the party from whom indemnification is sought (the
"Indemnifying Party") of any third-party claim or claims asserted against the
Indemnified Party ("Third Party Claim") that could give rise to a right of
indemnification under this Agreement and (ii) transmit to the Indemnifying
Party a written notice ("Claim Notice") describing in reasonable detail the
nature of the Third Party Claim, a copy of all papers served with respect to
such claim (if any), an estimate of the amount of damages attributable to the
Third Party Claim and the basis of the Indemnified Party's request for
indemnification under this Agreement. Except as set forth in Section 14.6, the
failure to promptly deliver a Claim Notice shall not relieve the Indemnifying
Party of its obligations to the Indemnified Party with respect to the related
Third Party Claim except to the extent that the resulting delay is materially
prejudicial to the defense of such claim. Within thirty (30) days after
receipt of any Claim Notice (the "Election Period"), the Indemnifying Party
shall notify the Indemnified Party (i) whether the Indemnifying Party disputes
its potential liability to the Indemnified Party under this Article 14 with
respect to such Third Party Claim and (ii) whether the Indemnifying Party
desires, at the sole cost and expense of the Indemnifying Party, to defend the
Indemnified Party against such Third Party Claim.
b. If the Indemnifying Party notifies the
Indemnified Party within the Election Period that the Indemnifying Party elects
to assume the defense of the Third Party Claim, then the Indemnifying Party
shall have the right to defend, at its sole cost and expense, such Third Party
Claim by all appropriate proceedings, which proceedings shall be prosecuted
diligently by the Indemnifying Party to a final conclusion or settled at the
discretion of the Indemnifying Party in accordance with this Section 14.3(b).
The Indemnifying Party shall have full control of such defense and proceedings,
including any compromise or settlement thereof. The Indemnified Party is
hereby authorized, at the sole cost and expense of the Indemnifying Party (but
only if the Indemnified Party is entitled to indemnification hereunder), to
file, during the Election Period, any motion, answer or other pleadings that
the Indemnified Party shall deem necessary or appropriate to protect its
interests or those of the Indemnifying Party and not prejudicial to the
Indemnifying Party (it being understood and agreed that if an Indemnified Party
takes any such action that is prejudicial and causes a final adjudication that
is adverse to the Indemnifying Party, the Indemnifying Party shall be relieved
of its obligations hereunder with respect to such Third Party Claim). If
requested by the Indemnifying Party, the
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Indemnified Party agrees, at the sole cost and expense of the Indemnifying
Party, to cooperate with the Indemnifying Party and its counsel in contesting
any Third Party Claim that the Indemnifying Party elects to contest, including,
without limitation, the making of any related counterclaim against the person
asserting the Third Party Claim or any cross-complaint against any person. The
Indemnified Party may participate in, but not control, any defense or
settlement of any Third Party Claim controlled by the Indemnifying Party
pursuant to Section 14.3(b) and shall bear its own costs and expenses with
respect to such participation; provided, however, that if the named parties to
any such action (including any impleaded parties) include both the Indemnifying
Party and the Indemnified Party, and the Indemnified Party has been advised by
counsel that there may be one or more legal defenses available to it that are
different from or additional to those available to the Indemnifying Party, then
the Indemnified Party may employ separate counsel at the expense of the
Indemnifying Party, and upon written notification thereof, the Indemnifying
Party shall not have the right to assume the defense of such action on behalf
of the Indemnified Party; provided further that the Indemnifying Party shall
not, in connection with any one such action or separate but substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys at any time for the
Indemnified Party, which firm shall be designated in writing by the Indemnified
Party.
c. If the Indemnifying Party fails to notify the
Indemnified Party within the Election Period that the Indemnifying Party elects
to defend the Indemnified Party pursuant to Section 14.3(b), or if the
Indemnifying Party elects to defend the Indemnified Party pursuant to Section
14.3(b) but fails diligently and promptly to prosecute or settle the Third
Party Claim, then the Indemnified Party shall have the right to defend, at the
sole cost and expense of the Indemnifying Party (if the Indemnified Party is
entitled to indemnification hereunder), the Third Party Claim by all
appropriate proceedings, which proceedings shall be promptly and vigorously
prosecuted by the Indemnified Party to a final conclusion or settled. The
Indemnified Party shall have full control of such defense and proceedings,
provided, however, that the Indemnified Party may not enter into, without the
Indemnifying Party's consent, which shall not be unreasonably withheld, any
compromise or settlement of such Third Party Claim. Notwithstanding the
foregoing, if the Indemnifying Party has delivered a written notice to the
Indemnified Party to the effect that the Indemnifying Party disputes its
potential liability to the Indemnified Party under this Article 14 and if such
dispute is resolved in favor of the Indemnifying Party, the Indemnifying Party
shall not be required to bear the costs and expenses of the Indemnifying
Party's defense pursuant to this Section or of the Indemnifying Party's
participation therein at the Indemnified Party's request, and the Indemnified
Party shall reimburse the Indemnifying Party in full for all costs and expenses
of such litigation. The Indemnifying Party may participate in, but not control
any defense or settlement controlled by the Indemnified Party pursuant to this
Section 14.3(c), and the Indemnifying Party shall bear its own costs and
expenses with respect to such participation; provided, however, that if the
named parties to any such action (including any impleaded parties) include both
the Indemnifying Party and the Indemnified Party, and the Indemnifying Party
has been advised by counsel that there may be one or more legal defenses
available to the Indemnified Party, then the Indemnifying Party may
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employ separate counsel and upon written notification thereof, the Indemnified
Party shall not have the right to assume the defense of such action on behalf
of the Indemnifying Party.
d. In the event any Indemnified Party should have a
claim against any Indemnifying Party hereunder that does not involve a Third
Party Claim, the Indemnified Party shall transmit to the Indemnifying Party a
written notice (the "Indemnity Notice") describing in reasonable detail the
nature of the claim, an estimate of the amount of damages attributable to such
claim and the basis of the Indemnified Party's request for indemnification
under this Agreement. If the Indemnifying Party does not notify the
Indemnified Party within sixty (60) days from its receipt of the Indemnity
Notice that the Indemnifying Party disputes such claim, the claim specified by
the Indemnified Party in the Indemnity Notice shall be deemed a liability of
the Indemnifying Party hereunder. If the Indemnifying Party has timely
disputed such claim, as provided above, such dispute shall be resolved by
mediation or arbitration as provided in Section 18.1 if the parties do not
reach a settlement of such dispute within thirty (30) days after notice of a
dispute is given.
e. Payments of all amounts owing by an Indemnifying
Party pursuant to this Article 14 relating to a Third Party Claim shall be made
within thirty (30) days after the latest of (i) the settlement of such Third
Party Claim, (ii) the expiration of the period for appeal of a final
adjudication of such Third Party Claim or (iii) the expiration of the period
for appeal of a final adjudication of the Indemnifying Party's liability to the
Indemnified Party under this Agreement. Payments of all amounts owing by an
Indemnifying Party pursuant to Section 14.3(d) shall be made within thirty (30)
days after the later of (i) the expiration of the sixty (60) day Indemnity
Notice period or (ii) the expiration of the period for appeal, if any, of a
final adjudication or arbitration of the Indemnifying Party's liability to the
Indemnified Party under this Agreement.
14.4. Remedies Not Exclusive. The remedies provided in
this Agreement shall not be exclusive of any other rights or remedies available
to one party against the other, either at law or in equity. This Article 14
regarding indemnification shall survive Closing.
14.5. Costs, Expenses and Legal Fees. Each party
hereto agrees to pay the costs and expenses (including attorneys' fees and
expenses) incurred by the other parties in successfully (a) enforcing any of
the terms of this Agreement, or (b) proving that another party breached any of
the terms of this Agreement.
14.6. Indemnification Limitations. Notwithstanding the
provisions of Sections 14.1 and 14.2, (a) no party shall be required to
indemnify another party with respect to a breach of a representation, warranty
or covenant unless the claim for indemnification is brought within two (2)
years after the Closing Date, except that a claim for indemnification for a
breach of the representations and warranties contained in Sections 3.1, 3.2.,
3.3, 3.11, 3.14, 3.20, 4.3, 4.5, 4.8, 5.1, 5.2, 5.3, 5.4 and 6.1 may be made at
any time, and a claim for indemnification for a breach of the representations
and warranties contained in Sections 3.9, 3.15, 3.17, 3.18, 3.24, 3.25, 3.26,
3.27, 3.28, 3.30, 4.1, 4.4, 4.6, 5.6 and 5.7 may be made
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at any time within the applicable statute of limitations; (b) indemnification
based upon Sections 14.1(b) through (d) and 14.2(b) may be made at any time
within the applicable statute of limitations; and (c) the Optometrist shall not
be required to indemnify Vision 21 pursuant to Section 16.1 unless, and to the
extent that, the aggregate amount of Damages incurred by Vision 21 shall exceed
an amount equal to two percent (2%) of the total Purchase Price; and (c) the
Optometrist shall not be required to indemnify Vision 21 with respect to a
breach of a representation, warranty or covenant for Damages in excess of the
aggregate Purchase Price received by the Optometrist (other than pursuant to a
requirement to indemnify Vision 21 under Sections 3.27 or 3.28, or unless the
breach involves an intentional breach or fraud by the Optometrist or the
Company which shall be unlimited).
14.7. Tax Benefits; Insurance Proceeds. The total
amount of any indemnity payments owed by one party to another party to this
Agreement shall be reduced by any correlative tax benefit received by the party
to be indemnified or the net proceeds received by the party to be indemnified
with respect to recovery from third parties or insurance proceeds and such
correlative insurance benefit shall be net of the insurance premium, if any,
that becomes due as a result of such claim.
14.8. Payment of Indemnification Obligation. In the
event that the Optometrist has an indemnification obligation to Vision 21
hereunder, subject to Vision 21's approval as set forth below, the Optometrist
may satisfy such obligation by transferring to Vision 21 such number of shares
of Vision 21 Common Stock owned by the Optometrist having an aggregate fair
market value (which is prior to any Initial Public Offering based upon the
valuation given at Closing hereof or after an Initial Public Offering the fair
market value at such time based on the last reported sale price of Vision 21
Common Stock on a principal national securities exchange or other exchange on
which the Vision 21 Common Stock is then listed or the last quoted ask price on
any over-the-counter market through which the Vision 21 Common Stock is then
quoted on the last trading day immediately preceding the day on which the
Optometrist transfers shares of Vision 21 Common Stock to Vision 21 hereunder)
equal to the indemnification obligation, provided that each of the following
conditions are satisfied:
a. The Optometrist shall transfer to Vision 21 good,
valid and marketable title to the shares of Vision 21 Common Stock, free and
clear of all adverse claims, security interests, liens, claims, proxies,
options, stockholders' agreements and encumbrances;
b. The Optometrist shall make such representation
and warranties as to title to the stock, absences of security interests, liens,
claims, proxies, stockholders' agreements and other encumbrances and other
matters as reasonably requested by Vision 21; and
c. The other terms and conditions of any transaction
contemplated pursuant to this Section and the effects thereof, including any
legal or tax consequences, shall be reasonably satisfactory to Vision 21.
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15. TERMINATION.
15.1. Termination. This Agreement may be terminated
and the Transaction may be abandoned:
a. at any time prior to the Closing Date by mutual
agreement of all parties;
b. at any time prior to the Closing Date by Vision
21 if any representation or warranty of the Company or the Optometrist
contained in this Agreement or in any certificate or other document executed
and delivered by the Company or the Optometrist pursuant to this Agreement is
or becomes untrue or breached in any material respect or if the Company or the
Optometrist fails to comply in any material respect with any covenant or
agreement contained herein, and any such misrepresentation, noncompliance or
breach is not cured, waived or eliminated within twenty (20) days after receipt
of written notice thereof;
c. at any time prior to the Closing Date by the
Company if any representation or warranty of Vision 21 contained in this
Agreement is or becomes untrue in any material respect or if Vision 21 fails to
comply in any material respect with any covenant or agreement contained herein,
and any such misrepresentation, noncompliance or breach is not cured, waived or
eliminated within twenty (20) days after receipt or written notice thereof;
d. at any time prior to the Closing Date by the
Company in the event of the failure of any of the conditions precedent set
forth in Article 13 of this Agreement;
e. at any time prior to the Closing Date by Vision
21 in the event of the failure of any of the conditions precedent set forth in
Article 12 of this Agreement;
f. by Vision 21 if at any time prior to the Closing
Date, Vision 21 deems termination to be advisable, provided, however, that if
Vision 21 exercises its right to terminate this Agreement under this
subsection, Vision 21 shall reimburse the Company and the Optometrist for all
reasonable attorneys' and accountants' fees incurred by the Company and the
Optometrist in connection with this Agreement; provided that Vision 21 shall
only reimburse the Company and the Optometrist up to an aggregate maximum
amount of One Hundred Thousand and No/100 Dollars ($100,000.00) for such fees;
or
g. by Vision 21 or the Company if the Transaction
shall not have been consummated by June __, 1997.
15.2. Effect of Termination. In the event this
Agreement is terminated pursuant to Section 15.1, Vision 21, the Company and
the Optometrist, shall each be entitled to pursue, exercise and enforce any and
all remedies, rights, powers and privileges available at law or in equity,
subject to the limitations set forth in Section 15.1. In the event of a
termination of this Agreement under the provisions of this Article 15, a party
not then in
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material breach of this Agreement shall stand fully released and discharged of
any and all obligations under this Agreement.
16. OPTOMETRIST EMPLOYMENT AGREEMENT.
16.1. Optometrist Employment Agreement. The parties
acknowledge that in accordance with the terms of this Agreement, Optometrist,
as employee, and the Company, as employer, have entered into the Optometrist
Employment Agreement and that Vision 21 is entitled to enforce such Optometrist
Employment Agreement as an intended third party beneficiary. Additionally, the
Company, the Optometrist and Vision 21 acknowledge that Vision 21 would suffer
severe harm in the event of Optometrist's resignation prior to the expiration
of the five (5) year term of such Optometrist Employment Agreement (without
first obtaining the written consent of Vision 21) or a breach or default of
Optometrist's obligations under such Optometrist Employment Agreement, and the
Company and Vision 21 agree that Vision 21 shall be entitled to recover from
Optometrist any and all damages incurred by Vision 21 caused by such
resignation, breach or default. Notwithstanding the foregoing, Vision 21 shall
not be entitled to recover its damages caused by such resignation, breach or
default if such resignation, breach or default was caused by: (i) the death or
disability of Optometrist, (ii) circumstances not caused by an act or omission
of Optometrist and which circumstances are beyond his control, or (iii) loss of
Optometrist's license to practice as an optometrist, unless such loss of
license is due to an act or omission of Optometrist. Notwithstanding the
foregoing, Optometrist shall have no obligation to pay the damages contemplated
in this Section 16.1 if (a) the Business Management Agreement has been
terminated pursuant to a material breach by Vision 21, or (b) Optometrist cures
any such breach or default of the Optometrist Employment Agreement within a
period of thirty (30) days after notice from Vision 21 of such breach or
default.
16.2. Survival. The parties acknowledge and agree that
this Article 16 shall survive the Closing of the transactions contemplated
herein.
17. NON-COMPETITION AND CONFIDENTIALITY COVENANTS.
17.1. Optometrist and Company Non-Competition Covenant.
a. The Optometrist and the Company recognize that
the covenants of the Optometrist and the Company contained in this Section 17.1
are an essential part of this Agreement and that, but for the agreement of the
Optometrist and the Company to comply with such covenants, Vision 21 would not
have entered into this Agreement. The Optometrist and the Company acknowledge
and agree that the Optometrist's and the Company's covenants not to compete are
necessary to ensure the continuation of the Management Business (as defined
below) and are necessary to protect the reputation of Vision 21, and that
irreparable and irrevocable harm and damage will be done to Vision 21 if the
Optometrist or the Company compete with the Management Business or Vision 21.
The Optometrist and the Company accordingly agree that for the periods set
forth in the Business Management Agreement the Optometrist and the Company
shall not:
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<PAGE> 59
i) directly or indirectly, either as
principal, agent, independent contractor, consultant, director, officer,
employee, employer, advisor, stockholder, partner or in any other individual or
representative capacity whatsoever, either for the Optometrist's or the
Company's own benefit or for the benefit of any other person or entity
knowingly (A) hire, attempt to hire, contact or solicit with respect to hiring
any employee of Vision 21 (or of any of its direct or indirect subsidiaries) or
(B) induce or otherwise counsel, advise or encourage any employee of Vision 21
(or of any of its direct or indirect subsidiaries) to leave the employment of
Vision 21;
ii) act or serve, directly or indirectly,
as a principal, agent, independent contractor, consultant, director, officer,
employee, employer or advisor or in any other position or capacity with or for,
or acquire a direct or indirect ownership interest in or otherwise conduct
(whether as stockholder, partner, investor, joint venturer, or as owner of any
other type of interest), any Competing Management Business as such term is
defined herein; provided, however, that this clause (ii) shall not prohibit the
Optometrist or the Company from being the owner of up to 1% of any class of
outstanding securities of any company or entity if such class of securities is
publicly traded; or
iii) directly or indirectly, either as
principal, agent, independent, contractor, consultant, director, officer,
employee, employer, advisor, stockholder, partner or in any other individual or
representative capacity whatsoever, either for the Optometrist's or the
Company's own benefit or for the benefit of any other person or entity, call
upon or solicit any customers or clients of the Management Business; provided
however, that the Optometrist may send out a general notice to the customers or
clients of the Management Business announcing the termination of his
arrangement with Vision 21 and may advertise in a general manner without
violating this covenant. The parties hereto acknowledge and agree that for
purposes of this Section, patients which have in the past received optometric
care from the Company and/or shall in the future receive optometric care from
the Company are not deemed to be customers or clients of the Management
Business.
b. For the purposes of this Section 17.1, the
following terms shall have the meaning set forth below:
i) "Management Business" shall mean
management and administration of the non-optometric and non-medical aspects of
medical, ophthalmology and optometry practices.
ii) "Competing Management Business" shall
mean an individual, business, corporation, association, firm, undertaking,
company, partnership, joint venture, organization or other entity that either
(A) conducts a business substantially similar to the Management Business within
the State, or (B) provides or sells a service which is the same or
substantially similar to, or otherwise competitive with the services provided
by the Management Business within the State; provided, however, that "Competing
Management Business" shall not include Vision 21, or the Optometrist's internal
management and administration of the
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<PAGE> 60
Optometrist's or the Company's optometric practice or participation in the
management and administration of a optometrist group in which the Optometrist
or the Company devote a significant amount of time to the practice of
optometry.
c. Should any portion of this Section 17.1 be deemed
unenforceable because of the scope, duration or territory encompassed by the
undertakings of the Optometrist or the Company hereunder, and only in such
event, then the Optometrist, the Company and Vision 21 consent and agree to
such limitation on scope, duration or territory as may be finally adjudicated
as enforceable by a court of competent jurisdiction after the exhaustion of all
appeals.
d. This covenant shall be construed as an agreement
ancillary to the other provisions of this Agreement, and the existence of any
claim or cause of action of the Optometrist or the Company against Vision 21,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by Vision 21 of this covenant; provided, however,
that the Optometrist and the Company shall not be bound by this covenant and
shall not be obligated to pay the liquidated damages contemplated in this
Section 17.1 if at the time of a breach of this covenant the Business
Management Agreement has already been terminated pursuant to Section 6.2(a)
thereof. Without limiting other possible remedies to Vision 21 for breach of
this covenant, the Optometrist and the Company agree that injunctive or other
equitable relief will be available to enforce the covenants of this provision,
such relief to be without the necessity of posting a bond, cash or otherwise.
The Optometrist, the Company and Vision 21 further expressly acknowledge that
the damages that would result from a violation of this non-competition covenant
would be impossible to predict with any degree of certainty, and agree that
liquidated damages in the amount of the aggregate consideration received by the
Optometrist pursuant to this Agreement is reasonable in light of the severe
harm to the Management Business and Vision 21 which would result in the event
that a violation of this non-competition covenant were to occur. For purposes
of calculating the liquidated damages contemplated in this Section and for
purposes of calculating the liquidated damages contemplated in the Business
Management Agreement and the Optometrist Employment Agreement between the
Optometrist and the Company, the aggregate consideration received by
Optometrist pursuant to this Agreement shall be in those amounts and in such
form as set forth in Schedule 17.1. If the Optometrist violates this
non-competition covenant, Vision 21 shall, in addition to all other rights and
remedies available at law or equity, be entitled to (a) cancel the number of
shares of Common Stock held by the Optometrist or the Company or, with respect
to shares of Common Stock entitled to be received by the Optometrist or the
Company, terminate its obligation to deliver such number of shares of Common
Stock, valued as set forth in Section 6.6(a) of the Business Management
Agreement, (b) set off all or any of such liquidated damages sum against
amounts payable under the Note held by the Optometrist or the Company, and (c)
repayment by Optometrist to Vision 21 of the fair market value as described
above, of Vision 21 Common Stock sold by Optometrist; but in no event shall
Vision 21 be entitled to offset amounts in excess of the liquidated damages sum
pursuant to this Section 17.1. The Optometrist and the Company agree to
deliver to Vision 21 the certificates representing any such shares canceled by
Vision 21 or the Note. Payment and satisfaction by Optometrist shall be made
within sixty (60) days of
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<PAGE> 61
notification to Optometrist by Vision 21 that Optometrist has violated this
non-competition covenant.
e. Notwithstanding anything contained herein, this
Section 17.1 shall not be construed to (i) limit the freedom of any patient of
the Optometrist or the Company to choose the facility or optometrist from whom
such patient shall receive health-care services or (ii) limit or interfere with
the Optometrist's ability to exercise his professional judgment in treating his
patients or his ability to provide optometric services to his patients.
17.2. Optometrist and Company Confidentiality Covenant.
From the date hereof, the Optometrist and the Company shall not, directly or
indirectly, use for any purpose, other than in connection with the performance
of the Optometrist's duties under the Optometrist Employment Agreement with the
Company, or disclose to any third party, any information of Vision 21 or the
Company, as appropriate (whether written or oral), including any business
management or economic studies, patient lists, proprietary forms, proprietary
business or management methods, marketing data, fee schedules, or trade secrets
of Vision 21 or of the Company, as applicable, and including the terms and
provisions of this Agreement and any transaction or document executed by the
parties pursuant to this Agreement. Notwithstanding the foregoing, the
Optometrist and the Company may disclose information that the Optometrist or
the Company can establish (a) is or becomes generally available to and known by
the public or optometric community (other than as a result of an unpermitted
disclosure directly or indirectly by the Optometrist or the Company or their
respective Affiliates, advisors, or representatives); (b) is or becomes
available to the Optometrist or the Company on a nonconfidential basis from a
source other than Vision 21 or its Affiliates, advisors or representatives,
provided that such source is not and was not bound by a confidentiality
agreement with or other obligation of secrecy to Vision 21 or its Affiliates,
advisors or representatives of which the Optometrist or the Company has
knowledge; or (c) has already been or is hereafter independently acquired or
developed by the Optometrist or the Company without violating any
confidentiality agreement with or other obligation of secrecy to Vision 21, the
Company or their respective Affiliates, advisors or representatives. Without
limiting the other possible remedies to Vision 21 for the breach of this
covenant, the Optometrist and the Company agree that injunctive or other
equitable relief shall be available to enforce this covenant, such relief to be
without the necessity of posting a bond, cash or otherwise. The Optometrist
and the Company further agree that if any restriction contained in this Section
17.2 is held by any court to be unenforceable or unreasonable, a lesser
restriction shall be enforced in its place and the remaining restrictions
contained herein shall be enforced independently of each other.
17.3. Survival. The parties acknowledge and agree that
this Article 17 shall survive the Closing of the transactions contemplated
herein.
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<PAGE> 62
18. DISPUTES.
18.1. Mediation and Arbitration. Any dispute,
controversy or claim (excluding claims arising out of an alleged breach of
Article 17 of this Agreement) arising out of this Agreement, or the breach
thereof, that cannot be settled through negotiation shall be settled (a) first,
by the parties trying in good faith to settle the dispute by mediation under
the Commercial Mediation Rules of the AAA (such mediation session to be held in
Tampa, Florida, and to commence within 15 days of the appointment of the
mediator by the AAA), and (b) if the controversy, claim or dispute cannot be
settled by mediation, then by arbitration administered by the AAA under its
Commercial Arbitration Rules (such arbitration to be held in Tampa, Florida,
before a single arbitrator and to commence within 15 days of the appointment of
the arbitrator by the AAA), and judgment on the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof.
19. MISCELLANEOUS
19.1. Taxes. Optometrist and the Company shall pay all
transfer taxes, sales and other taxes and charges, imposed by the State, if
any, which may become payable in connection with the transactions and documents
contemplated hereunder (excluding any of such taxes which may be attributable
to services to be provided by Vision 21 under the Business Management
Agreement). Vision 21 shall pay all transfer taxes, sales and other taxes and
charges imposed by the State of Florida, if any, which may become payable in
connection with the transactions and documents contemplated hereunder
(excluding any of such taxes which may be attributable to services to be
provided by Vision 21 under the Business Management Agreement).
19.2. Remedies Not Exclusive. No remedy conferred by
any of the specific provisions of this Agreement or any document contemplated
by this Agreement is intended to be exclusive of any other remedy, and each and
every remedy shall be cumulative and shall be in addition to every other remedy
given hereunder or now or hereafter existing at law or in equity or by statute
or otherwise. The election of any one or more remedies by any party hereto
shall not constitute a waiver of the right to pursue other available remedies.
19.3. Parties Bound. Except to the extent otherwise
expressly provided herein, this Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, representatives,
administrators, guardians, successors and assigns; and no other person shall
have any right, benefit or obligation hereunder.
19.4. Notices. All notices, reports, records or other
communications that are required or permitted to be given to the parties under
this Agreement shall be sufficient in all respects if given in writing and
delivered in person, by telecopy, by overnight courier or by registered or
certified mail, postage prepaid, return receipt requested, to the receiving
party at the following address:
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If to Vision 21 addressed to:
Vision 21, Inc.
7209 Bryan Dairy Road
Largo, Florida 34777
Attn: Richard T. Welch, Chief Financial Officer
With copies to:
Shumaker, Loop & Kendrick
101 E. Kennedy Boulevard, Suite 2800
Tampa, Florida 33602
Facsimile No. (813) 229-1660
Attn: Darrell C. Smith, Esquire
If to the Company and the Optometrist addressed to:
Smith Porter & Associates, P.A.
7209 Bryan Dairy Road
Largo, Florida 34777
Attn: Paul Smith, O.D.
With copies to:
MacFarlane, Ausley, Ferguson & McMullen
400 North Cleveland Street
9th Floor
Clearwater, Florida 34617-1669
Attn: Paul J. Raymond, Esquire
or to such other address as such party may have given to the other parties by
notice pursuant to this Section 19.4. Notice shall be deemed given on the date
of delivery, in the case of personal delivery or telecopy, or on the delivery
or refusal date, as specified on the return receipt, in the case of overnight
courier or registered or certified mail.
19.5. Choice of Law. This Agreement shall be
construed, interpreted, and the rights of the parties determined in accordance
with, the laws of the State of Florida except with respect to matters of law
concerning the internal affairs of any corporate or partnership entity which is
a party to or the subject of this Agreement, and as to those matters the law of
the state of incorporation or organization of the respective entity shall
govern.
19.6. Entire Agreement; Amendments and Waivers. This
Agreement, together with the documents contemplated by this Agreement and all
Exhibits and Schedules hereto and thereto, constitutes the entire agreement
between the parties pertaining to the subject
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<PAGE> 64
matter hereof and supersedes all prior and contemporaneous agreements,
understandings, negotiations and discussions, whether oral or written, of the
parties, and there are no warranties, representations or other agreements
between the parties in connection with the subject matter hereof. No
supplement, modification or waiver of any of the provisions of this Agreement
shall be binding unless it shall be specifically designated to be a supplement,
modification or waiver of this Agreement and shall be executed in writing by
the party to be bound thereby. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provision
hereof (whether or not similar), nor shall such waiver constitute a continuing
waiver unless otherwise expressly provided.
19.7. Confidentiality Agreements. The provisions of
any prior confidentiality agreements and letters of intent between or among
Vision 21, the Company and the Optometrist, as amended, shall terminate and
cease to be of any force or effect at and upon the Closing.
19.8. Reformation Clause. It is the intention of the
parties hereto to conform strictly to applicable laws regarding the practice
and regulation of optometry, whether such laws are now or hereafter in effect,
including the laws of the United States of America, the State or any other
applicable jurisdiction, and including any subsequent revisions to, or judicial
interpretations of, those laws, in each case to the extent they are applicable
to this Agreement (the "Applicable Laws"). Accordingly, if the ownership of
any Non-optometric Asset by Vision 21 violates any Applicable Law, then the
parties hereto agree as follows: (a) the provisions of this section 19.8 shall
govern and control; (b) if none of the parties hereto are materially
economically disadvantaged, then any Non-optometric Asset, the ownership of
which violates any Applicable Law, shall be deemed to have never been owned by
Vision 21; (c) if one or more of the parties hereto is materially economically
disadvantaged, then the parties hereto agree to negotiate in good faith such
changes to the structure and terms of the transactions provided for in this
Agreement as may be necessary to make these transactions, as restructured,
lawful under applicable laws and regulations, without materially disadvantaging
either party; (d) this Agreement shall be deemed reformed; and (e) the parties
to this Agreement shall execute and deliver all documents or instruments
necessary to effect or evidence the provisions of this Section 19.8.
19.9. Assignment. The Agreement may not be assigned by
operation of law or otherwise except that Vision 21 shall have the right to
assign this Agreement, at any time, to any Affiliate or direct or indirect
wholly-owned subsidiary. In the event of such assignment, Vision 21 shall
remain liable hereunder.
19.10. Attorneys' Fees. Except as otherwise
specifically provided herein, if any action or proceeding is brought by any
party with respect to this Agreement or the other documents contemplated with
respect to the interpretation, enforcement or breach hereof, the prevailing
party in such action shall be entitled to an award of all reasonable costs of
litigation or arbitration, including, without limitation, attorneys' fees, to
be paid by the losing party, in
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<PAGE> 65
such amounts as may be determined by the court having jurisdiction of such
action or proceeding or by the arbitrators deciding such action or proceeding.
19.11. Further Assurances. From time to time hereafter
and without further consideration, each of the parties hereto shall execute and
deliver such additional or further instruments of conveyance, assignment and
transfer and take such other actions as any of the other parties hereto may
reasonably request in order to more effectively consummate the transactions
contemplated hereunder or as shall be reasonably necessary or appropriate in
connection with the carrying out of the parties' respective obligations
hereunder for the purposes of this Agreement.
19.12. Announcements and Press Releases. Any press
releases or any other public announcements concerning this Agreement or the
transactions contemplated hereunder shall be approved in advance by Vision 21
and the Company; provided, however, that such approval shall not be
unreasonably withheld and if any party reasonably believes that it has a legal
obligation to make a press release and the consent of the other party cannot be
obtained, then the release may be made without such approval.
19.13. No Tax Representations. Each party acknowledges
that it is relying solely on its advisors to determine the tax consequences of
the transactions contemplated hereunder and that no representation or warranty
has been made by any party as to the tax consequences of such transactions
except as otherwise specifically set forth in this Agreement.
19.14. No Rights as Stockholder. The Optometrist shall
have no rights as a stockholder with respect to any shares of Common Stock
until the issuance of a stock certificate evidencing such shares. Except as
otherwise provided in the Agreement, no adjustment shall be made for dividends
or distributions or other rights for which the record date is prior to such
date any stock certificate is issued.
19.15. Multiple Counterparts. This Agreement may be
executed in one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
19.16. Headings. The headings of the several articles
and sections herein are inserted for convenience of reference only and are not
intended to be part of or to affect the meaning or interpretation of this
Agreement.
19.17. Severability. Each article, section and
subsection of this Agreement constitutes a separate and distinct undertaking,
covenant or provision of this Agreement. If any such provision shall finally
be determined to be unlawful, such provision shall be deemed severed from this
Agreement, but every other provision of this Agreement shall remain in full
force and effect.
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19.18. Form of Transaction. If after the execution
hereof, Vision 21 determines that the sale of the Non-optometric Assets of the
Company can be better achieved through a different form of transaction without
economic injury to the Company or the Optometrist, or delay of the consummation
of the transaction, the Company and the Optometrist shall cooperate in revising
the structure of the transaction and shall negotiate in good faith to so amend
this Agreement; provided, that Vision 21 shall reimburse the Company and the
Optometrist at Closing for all reasonable additional expenses incurred by the
Company and the Optometrist as a result of such change in form.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first written above.
"COMPANY"
SMITH PORTER & ASSOCIATES, P.A.
/s/ By: /s/ Paul A. Smith
- --------------------------- ---------------------------
Witness Paul A. Smith, O.D., President
/s/
- ---------------------------
Witness
"OPTOMETRIST"
/s/ /s/ Paul A. Smith
- --------------------------- ------------------------------
Witness Paul A. Smith, O.D.
/s/
- ---------------------------
Witness
"VISION 21"
VISION TWENTY-ONE, INC.
/s/ By: /s/ Theodore N. Gillette
- --------------------------- ------------------------------
Witness Theodore N. Gillette, President
/s/
- ---------------------------
Witness
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Schedule 2.1(c)
to Asset Purchase Agreement among Smith Porter & Associates, P.A.
(the "Company"), Paul R. Smith, O.D. (the "Optometrist")
and Vision Twenty-One, Inc. ("Vision 21")
Pursuant to that certain Escrow Agreement dated May 1, 1997, by and
among the Company, the Optometrist, Vision 21 and Darrell C. Smith, as Escrow
Agent, subsequent to the Closing Date Schedules 2.1(c) through 17.1 and
Exhibits 2.4B through 12.1(r) of the Asset Purchase Agreement shall be
delivered to the Escrow Agent.
<PAGE> 1
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year ended Three-month period ended
December 31 March 31
----------------------------------------------------------------------------
1994 1995 1996 1996 1997
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PRIMARY
Average shares outstanding 5,282,365 5,282,365 5,282,365 5,282,365 5,282,365
Net effect of anti-dilutive stock
options and deferred
compensation arrangements
based on the treasury stock
method using the estimated
initial public offering price 426,346 426,346 426,346 426,346 426,346
Net effect of anti-dilutive
warrants based on the
treasury stock method using
the estimated initial public
offering price 270,832 270,832 270,832 270,832 270,832
----------------------------------------------------------------------------
Total 5,979,543 5,979,543 5,979,543 5,979,543 5,979,543
============================================================================
Net loss $ (152,576) $(1,226,436) $(6,119,637) $ (824,798) $ (469,322)
============================================================================
Per share loss $(0.03) $(0.21) $(1.02) $(0.14) $(0.08)
============================================================================
FULLY DILUTED
Average shares outstanding 5,282,365 5,282,365 5,282,365 5,282,365 5,282,365
Assumed issuance of
contingent shares 79,805 79,805 79,805 79,805 79,805
Net effect of anti-dilutive stock
options and deferred
compensation arrangements
based on the treasury stock
method using the estimated
initial public offering price 426,346 426,346 426,346 426,346 426,346
Net effect of anti-dilutive
warrants based on the
treasury stock method using
the estimated initial public
offering price 270,832 270,832 270,832 270,832 270,832
----------------------------------------------------------------------------
Total 6,059,348 6,059,348 6,059,348 6,059,348 6,059,348
============================================================================
Net loss $ (152,576) $(1,226,436) $(6,119,637) $ (824,798) $ (469,322)
============================================================================
$(0.03) $(0.20) $(1.01) $(0.14) $(0.08)
Per share loss ============================================================================
</TABLE>
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Certified Public Accountants
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our reports as follows in Amendment
No. 2 to the Registration Statement (Form S-1 No. 333-29213) and the related
Prospectus of Vision Twenty-One, Inc. dated July 30, 1997.
<TABLE>
<CAPTION>
REPORT ON REPORT
FINANCIAL STATEMENTS DATE
- ------------------------------------------------------------- -------------------------------------------
<S> <C>
Vision Twenty-One, Inc. and Subsidiaries March 22, 1997, except for Note 11, as
to which the date is July 29, 1997
Schedule I--Valuation and Qualifying Accounts June 6, 1997
Gillette, Beiler & Associates, P.A. March 22, 1997
Northwest Eye Specialists, P.L.L.C. January 15, 1997
Cambridge Eye Clinic, P.A.--John W. Lahr, Optometrist, P.A. and
Eyeglass Express Optical Lab, Inc. January 10, 1997
J & R Kennedy, O.D., P.A. and Roseville
Opticians, Inc. March 21, 1997
Lindstrom, Samuelson & Hardten Ophthalmology Associates, P.A.
and Vision Correction Centers, Inc. January 14, 1997
Jerald B. Turner, M.D., P.A. February 26, 1997
Eye Institute of Southern Arizona, P.C. January 15, 1997
Optometric Eye Care Centers, P.A. January 17, 1997
Dr. Smith and Associates, P.A. #6950, Dr. Smith and Associates,
P.A. #6958, and Dr. Smith and Associates, P.A. #6966 January 17, 1997
Daniel B. Feller, M.D., P.C., d/b/a Paradise Valley Eye
Specialists; Eye Specialists of Arizona Network, P.C.; and
Sharona Optical, Inc. January 17, 1997
</TABLE>
Tampa, Florida /s/ Ernst & Young LLP
July 29, 1997
