<PAGE> 1
FORM 10Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ________________________
Commission file number: 0-22977
VISION TWENTY-ONE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
FLORIDA 59-3384581
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
7360 BRYAN DAIRY ROAD
LARGO, FLORIDA 33777
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (727) 545-4300
NOT APPLICABLE
-----------------------------------------------------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
The registrant had 15,032,438 Shares outstanding as of October 31,
1998.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIODS ENDED NINE-MONTH PERIODS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ----------------------------
1997 1998 1997 1998
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
LADS operations, net revenues.................... $ 11,697,616 $ 31,359,382 $ 29,212,021 $ 74,592,434
Managed care..................................... 3,865,133 14,379,291 10,072,468 41,199,585
Buying group..................................... -- 16,301,282 -- 45,630,108
------------ ----------- ------------ -------------
15,562,749 62,039,955 39,284,489 161,422,127
------------ ----------- ------------ -------------
Operating expenses:
LADS operating expenses.......................... 9,734,673 27,525,200 24,741,998 62,229,689
Medical claims................................... 3,081,461 10,342,666 8,123,846 29,933,959
Cost of buying group sales....................... -- 15,515,651 -- 42,955,721
General and administrative....................... 1,759,623 4,167,624 4,744,622 12,100,166
Depreciation and amortization.................... 475,337 1,976,331 1,225,756 4,857,607
Merger costs..................................... -- -- -- 508,443
------------ ------------ ------------- -------------
15,051,094 59,527,472 38,836,222 152,585,585
------------ ------------ ------------- -------------
Income from operations............................. 511,655 2,512,483 448,267 8,836,542
Interest expense................................... 247,627 1,755,995 842,027 3,491,176
------------ ------------ ------------- -------------
Income (loss) before income taxes.................. 264,028 756,488 (393,760) 5,345,366
Income taxes....................................... -- -- -- 1,720,000
------------ ------------ ------------- -------------
Income (loss) before extraordinary charge.......... 264,028 756,488 (393,760) 3,625,366
Extraordinary charge - early extinguishment
Of debt, net of income taxes of $238,000 for 1998 323,346 1,250,322 323,346 1,647,512
------------ ------------ ------------- -------------
Net income (loss).................................. $ (59,318) $ (493,834) $ (717,106) $ 1,977,854
============ ============ ============= =============
Earnings (loss) per common share:
Income (loss) before extraordinary charge $ 0.03 $ 0.05 $ (0.06) $ 0.25
Extraordinary charge............................. (0.04) (0.08) (0.04) (0.11)
------------ ------------ ------------- -------------
Net income (loss) per common share................. $ (0.01) $ (0.03) $ (0.10) $ 0.14
============ ============ ============= =============
Earnings (loss) per common share - assuming
dilution: $ 0.03 $ 0.05 $ (0.06) $ 0.25
Income (loss) before extraordinary charge (0.04) (0.08) (0.04) (0.11)
------------ ------------ ------------- -------------
Extraordinary charge.............................
Net income (loss) per common share -
Assuming dilution................................ $ (0.01) $ (0.03) $ (0.10) $ 0.14
============ ============ ============= =============
See accompanying notes to the condensed consolidated financial statements
</TABLE>
2
<PAGE> 3
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<CAPTION>
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1997 1998
--------------- ---------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,048,358 $ 10,671,985
Accounts receivable due from:
Buying group members, net of allowance for doubtful accounts of $33,000 and
$48,000 at December 31, 1997 and September 30, 1998, respectively 5,427,592 7,685,726
Patients, net of allowances for uncollectible accounts and contractual adjustments
of 5,502,110 9,364,575
$3,446,000 and $3,379,000 at December 31, 1997 and September 30, 1998,
respectively......................................................................
Managed Professional Associations.................................................. 4,950,067 10,619,335
Managed health benefits payors..................................................... 1,276,790 2,152,324
Other ............................................................................ 165,292 104,973
Inventory............................................................................. 936,242 3,415,719
Prepaid expenses and other current assets............................................. 2,016,036 3,722,197
-------------- --------------
Total current assets........................................................... 24,322,487 47,736,834
Fixed assets, net....................................................................... 8,626,964 14,788,922
Intangible assets, net of accumulated amortization of $1,131,501 and $4,138,245 at
December 31, 84,164,341 129,751,255
1997 and September 30,1998, respectively.............................................
Cash surrender value of life insurance, net policy loans of $624,464 at December 205,596 --
31,1997 ..............................................................................
Deferred tax assets..................................................................... 1,882,000 1,882,000
Other assets............................................................................ 1,155,359 3,340,169
-------------- --------------
Total assets $ 120,356,747 $ 197,499,180
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 5,319,654 $ 9,478,649
Accrued expenses...................................................................... 2,708,741 7,452,917
Medical claims payable................................................................ 3,555,195 3,808,936
Accrued compensation.................................................................. 1,381,497 3,339,534
Accrued acquisition and offering costs................................................ 1,045,905 103,835
Due to Managed Professional Associations.............................................. 1,938,309 3,262,768
Due to selling shareholders........................................................... 2,811,809 245,440
Current portion of deferred leasehold incentive....................................... 23,046 23,046
Current portion of long-term debt..................................................... 104,371 2,406,716
Current portion of obligations under capital leases................................... 566,084 412,503
-------------- --------------
Total current liabilities...................................................... 19,454,611 30,534,344
Deferred rent payable................................................................... 261,117 261,117
Obligations under capital leases........................................................ 632,850 573,230
Long-term debt, less current portion.................................................... 25,980,253 78,915,273
Deferred leasehold incentive............................................................ 186,323 173,657
Deferred income taxes................................................................... 6,111,000 6,111,000
Stockholders' equity:
Preferred stock, $.001 par value; 10,000,000 shares authorized: no shares issued.... -- --
Common stock, $.001 par value; 50,000,000 shares authorized; 13,529,892 (December
31, 1997) 13,530 14,797
and 14,797,072 (September 30, 1998) shares issued and outstanding.................
Additional paid in capital............................................................ 76,416,476 87,759,624
Deferred compensation................................................................. (408,735) (327,510)
Notes receivable from stockholder..................................................... (175,484) (172,984)
Treasury stock........................................................................ --
Accumulated deficit................................................................... (8,115,194) (6,343,368)
-------------- --------------
Total stockholders' equity..................................................... 67,730,593 80,930,559
-------------- --------------
Total liabilities and stockholders' equity..................................... $ 120,356,747 $ 197,499,180
============== ==============
See accompanying notes to the condensed consolidated financial statements
</TABLE>
3
<PAGE> 4
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<CAPTION>
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE-MONTH PERIODS ENDED
SEPTEMBER 30,
-------------------------------
1997 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................................. $ (717,106) $ 1,977,854
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Extraordinary charge - early extinguishment of debt........................ 323,346 1,885,512
Depreciation and amortization.............................................. 1,225,756 4,857,607
Amortization of loan fees.................................................. 14,765 133,978
Amortization of deferred leasehold (10,546) (12,666)
incentives
Non-cash compensation expense.............................................. 71,250 120,249
Amortization of deferred compensation...................................... 81,225 --
Interest accretion......................................................... 41,477 --
Changes in operating assets and liabilities, net of effects from business
combinations:
Accounts receivable, net................................................. (4,344,299) (8,750,513)
Inventory................................................................ (424,368) (1,842,832)
Prepaid expenses and other current assets................................ (639,918) (1,159,262)
Other assets............................................................. (110,697) (841,957)
Accounts payable......................................................... 141,702 3,473,978
Accrued expenses......................................................... (116,694) 5,143,810
Accrued acquisition and offering costs................................... -- --
Accrued compensation..................................................... 436,289 1,498,207
Medical claims payable................................................... (335,995) 260,332
Due to Managed Professional Associations................................. 1,814,691 1,324,459
------------ ------------
Net cash provided by (used in) operating activities................. (2,549,122) 8,068,756
INVESTING ACTIVITIES
Purchases of furniture and equipment, net..................................... (1,114,802) (7,444,320)
Loans made.................................................................... -- (209,882)
Payments for acquisitions, net of cash acquired............................... (727,000) (40,140,381)
Payments for capitalized acquisition costs.................................... (3,928,495) (3,389,266)
------------ -----------
Net cash used in investing activities............................... (5,770,297) (51,183,849)
FINANCING ACTIVITIES
Proceeds from sale of common stock............................................ 19,530,000 --
Payments for offering costs................................................... (1,473,539) --
Proceeds from long term debt.................................................. 2,532,000 81,231,457
Payments on long term debt.................................................... (9,806,381) (27,176,397)
Net proceeds from credit facilities........................................... 4,874,000 --
Payments on credit facility................................................... (4,874,000) --
Net proceeds from issuance of senior notes and warrants....................... -- --
Payments for financing fees................................................... -- (2,649,248)
Proceeds from leasehold incentives............................................ 220,000 --
Payments to acquire treasury stock............................................ -- (1,548,084)
Sale of detachable stock purchase warrants and exercise of options............ 126,000 124,040
Decrease in notes receivable, officers and shareholders....................... -- 2,500
Capital distributions......................................................... (461,650) (245,548)
------------ ------------
Net cash provided by financing activities........................... 10,666,430 49,738,720
------------ ------------
Increase in cash and cash equivalents......................................... 2,347,011 6,623,627
Cash and cash equivalents at beginning of period.............................. 251,832 4,048,358
------------ ------------
Cash and cash equivalents at end of period.................................... $ 2,598,843 $ 10,671,985
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest...................................... $ 984,250 $ 2,771,884
============ ============
See accompanying notes to the condensed consolidated financial statements
</TABLE>
4
<PAGE> 5
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary to present fairly the
information set forth therein have been included. The accompanying condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and footnotes included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
Operating results for the nine-month period ended September 30, 1998
are not necessarily an indication of the results that may be expected for the
year ending December 31, 1998.
RECLASSIFICATION
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. EYECARE ONE CORP. AND VISION INSURANCE PLAN OF AMERICA, INC. MERGER
On March 31, 1998, the Company completed a merger with EyeCare One
Corp. (EyeCare One) and Vision Insurance Plan of America, Inc. (VIPA). EyeCare
One Corp. is an optical retailer, selling frames, lenses and contact lenses,
with optometric services by licensed Doctors of Optometry in each of its 16
locations in the Milwaukee, Wisconsin area. VIPA provides subscriber group
member enrollees with covered vision care services through EyeCare One and its
provider network under a master provider agreement which began in 1997. The
Company issued 1,109,806 shares of common stock for all of the outstanding
common stock of EyeCare One and VIPA. The merger was accounted for as a pooling
of interests and accordingly, the Company's financial statements have been
restated to include the results of EyeCare One and VIPA for all periods
presented.
Combined and separate results of the Company, EyeCare One and VIPA
during the periods preceding the merger were as follows:
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1997
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<CAPTION>
VISION EYECARE ONE VIPA COMBINED
------------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Revenue $29,443,761 $9,318,482 $522,246 $39,284,489
Extraordinary charge $ (323,346) -- -- $ (323,346)
Net income (loss) $(1,349,625) $ 587,490 $ 45,029 $ (717,106)
</TABLE>
5
<PAGE> 6
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(CONTINUED)
THREE-MONTH PERIOD ENDED MARCH 31, 1998
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<CAPTION>
VISION EYECARE ONE VIPA COMBINED
----------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Revenue $44,431,577 $3,305,219 $215,396 $47,952,192
Extraordinary charge $ 397,190 -- -- $ 397,190
Net income $ 583,641 $ 153,917 $ 52,113 $ 789,671
</TABLE>
The Company recorded merger costs of $508,000 ($318,000 net of tax) in
the nine-month period ended September 30, 1998, or approximately $0.03 per
diluted common share. The merger costs include professional fees and
nonrecurring costs associated with executing the merger of operations.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (SFAS 131), which supersedes Statement of
Financial Accounting Standards No. 14. SFAS 131 uses a management approach to
report financial and descriptive information about a company's operating
segments. Operating segments are revenue-producing components of the enterprise
for which separate financial information is produced internally for the
company's management. SFAS 131 is effective for fiscal years beginning after
December 15, 1997. Management is currently assessing the impact of this
Standard.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130). SFAS 130 requires that total comprehensive income and comprehensive income
per share be disclosed and be given equal prominence with net income and
earnings per share. Comprehensive income is defined as changes in stockholders'
equity exclusive of transactions with owners such as capital contributions and
dividends. SFAS 130 is effective for fiscal years beginning after December 15,
1997.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. The Statement
permits early adoption as of the beginning of any fiscal quarter after its
issuance. The Company's expected date of adoption is not yet known. The
Statement will require the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company has not yet determined what the effect of Statement 133
will be on the earnings and financial position of the Company.
6
<PAGE> 7
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(CONTINUED)
4. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share for income (loss) from continuing operations:
<TABLE>
<CAPTION>
THREE-MONTH PERIODS ENDED NINE-MONTH PERIODS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -------------------------------
1997 1998 1997 1998
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted earnings
(loss)
Per share-income (loss) available to common $ 264,028 $ 756,488 $ (393,760) $ 3,625,366
Stockholders.................................
Denominator:
Denominator for basic earnings (loss) per
share-weighted average shares................ 8,053,858 14,592,694 6,920,835 14,218,838
----------- ------------ ------------ --------------
Effect of dilutive securities:
Stock options................................ 239,228 98,849 -- 150,132
Warrants..................................... 276,150 9,602 -- 125,403
Nonvested stock.............................. 139,127 60,372 -- 80,399
----------- ------------ ------------ --------------
Dilutive potential common shares................ 654,505 168,823 -- 355,934
----------- ------------ ------------ --------------
Denominator for diluted earnings (loss) per
share-adjusted weighted-average shares and
assumed conversions.......................... 8,708,363 14,761,517 6,920,835 14,574,772
=========== ============ ============ ==============
Basic earnings (loss) per common share.......... $ 0.03 $ 0.05 $ (0.06) $ 0.25
=========== ============ ============ ==============
Diluted earnings (loss) common share............ $ 0.03 $ 0.05 $ (0.06) $ 0.25
=========== ============ ============ ==============
</TABLE>
5. EXTRAORDINARY CHARGE
On July 1, 1998 the Company entered into a new $100.0 million bank
credit agreement with the Bank of Montreal as agent for a consortium of banks.
The $100 million credit facility was used for early extinguishment of the
Company's outstanding balance of approximately $48.3 million under its prior $50
million credit facility. In connection with the early extinguishment of the
prior credit facility, the Company incurred an extraordinary charge of
approximately $1.25 million for this early extinguishment of debt during the
three month period ended September 30, 1998.
7
<PAGE> 8
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
GENERAL
The Company provides a wide range of services to local area delivery
systems ("LADS") established by the Company. LADS are developed to provide for
integrated networks of optometrists, ophthalmologists, ASCs and retail optical
centers which offer the full continuum of eye care services in local markets.
The Company began operations in 1984, providing services to seven optometrists
practicing at eight clinic locations. The Company currently provides its
services to 40 LADS located in 27 states through which 5,800 Affiliated
Providers deliver eye care services. Of these Affiliated Providers, 220 are
Managed Providers, consisting of 172 optometrists and 48 ophthalmologists
practicing at 183 clinic locations, 16 ambulatory surgical centers ("ASCs") and
5 refractive surgery centers. In addition, the Company has approximately 6,200
eye care professionals available for potential managed care business in future
markets. The Company's Affiliated Providers, in conjunction with select national
retail optical chains, deliver eye care services under the Company's 102 managed
care contracts and 12 discount fee-for-service plans covering approximately 5.1
million exclusively contracted patient lives
RECENT DEVELOPMENTS
For the past 18 months, the Company's primary focus has been on
aggressively developing LADS and expanding LADS to new markets through
acquisitions in order to provide for a complete continuum of easily accessible,
high quality and affordable eye care services. This strategy of growth through
acquisitions has successfully positioned the Company in its principal markets
and the Company is now the largest full service eye care company in the United
States. While the pipeline for acquisitions continues to be strong, the Company
believes that there are significant internal growth and development
opportunities available within existing LADS and as a result, the Company plans
to slow down its acquisition pace and shift its primary focus. Among other
things, the Company plans to focus on opening new de novo clinics and surgery
centers, expanding managed care initiatives and expanding its refractive surgery
programs to take advantage of the increased demand for refractive surgery and
the higher margins associated with refractive surgery. Furthermore, the Company
will focus on completing the integration of systems, processes and management to
promote cost efficiencies within the Company and the LADS which is expected to
provide the Company with significant costs savings in the future.
In connection with its shift in focus towards internal growth, the
Company recently announced its plan to sell the Buying Group Division, the
expected near term addition of significant managed vision care contracts and the
implementation of cost reduction strategies. The sale of the Buying Group
Division is expected to close before year end, be mildly accretive to 1999
earnings and improve the Company's operating margins. The managed care contracts
are expected to start up in 1999 and add in excess of 1 million lives to the
Company with the potential for increasing gross profit by $1.5 - 2.0 million on
an annual basis. Finally, an external consulting group has been hired to assist
management in reviewing and implementing significant cost reduction
opportunities through further streamlining and integration of systems, processes
and resources of acquired business units. The Company expects to begin
recognizing a portion of the benefits from the estimated $2.0 million in
annualized cost savings in the fourth quarter of 1998 and to take a one time, as
yet undetermined charge in that quarter.
As recently announced, after experiencing delays the Company completed
the installation of its new state of the art accounting management information
systems in all of its clinic locations in early November which is designed to
provide management with timely access to financial and operational data.
The Company expects to complete the implementation of the new systems in the
remaining of its business units in January 1999. The delays in implementing the
new information systems resulted in unexpected changes in estimates leading to
management agreement accounting adjustments as well as unforeseen margin
contractions in the Company's LADS operations. With respect to the margin
contractions, the Company's acquisitions of a significant number of retail
optical locations and primary eye care locations in those LADS the Company does
not have affiliations with large retail optical companies, has resulted in a
larger mix of retail optical and primary eye care business. Since those
businesses tend to have lower margins, the Company experienced a decrease in its
overall profit margins. The combination of the shift in business mix and change
in accounting estimates resulted in lower overall LADS operating margins, but
the Company currently believes that the effect of these margin pressures will
not be as significant in the future as it was in the third quarter. The Company
believes however, that the addition of these retail options and primary eye care
locations will ultimately benefit the Company by serving as an important access
point to its LADS for fee-for-service and refractive surgery patients and better
positioning of the Company to attract managed care business.
8
<PAGE> 9
1998 ACQUISITIONS
To date in 1998 and in addition to the other acquisitions finalized or
pending and described below, the Company completed the acquisition of the
business assets of 54 optometry clinics, 9 ophthalmology clinics, 1 ambulatory
surgical center, 2 refractive centers and 40 optical dispensaries located in
Texas, Arizona, New Jersey, Florida, Nevada, Minnesota and Wisconsin. 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 these acquisitions, the Company entered
into long-term management agreements ("Management Agreements") with the related
professional associations employing 65 optometrists and 5 ophthalmologists.
These acquisitions were accounted for by recording assets and liabilities at
fair value and allocating the remaining costs to the related Management
Agreements. Additionally, the Company closed the acquisition of all of the
outstanding stock of The Complete Optical Laboratory, Ltd., Corp., located in
New Jersey which services the New Jersey optometry clinics acquired by the
Company and the Company closed the acquisition of substantially all of the
business assets of a managed care company located in Florida servicing more than
82,700 patient lives. These acquisitions were accounted for under the purchase
method of accounting. Such acquisitions are collectively referred to herein as
the "1998 Acquisitions." In connection with these acquisitions, the Company
provided aggregate consideration of approximately $37.5 million, consisting of
approximately 1.6 million shares of Common Stock and approximately $21.9 million
in cash and promissory notes in the aggregate principal amount of $1.3 million,
subject to closing adjustments. In addition, the Company is required to provide
additional contingent consideration consisting of 301,583 shares of Common Stock
and up to $2.1 million in cash, to be paid to certain sellers if certain
post-acquisition performance targets are met. On a pro forma basis, had the 1998
Acquisitions occurred at the beginning of 1997, the Company would have recorded
$55.8 million and $41.8 million in revenue for 1997 and the nine
months ended September 30, 1998.
The Company completed the acquisition of American SurgiSite Centers,
Inc., an ambulatory surgery center developer, management and consulting company
located in New Jersey, effective September 1, 1998. American SurgiSite manages
eight ambulatory surgery facilities. In connection with this transaction, the
Company paid $1.65 million in cash and 235,366 shares. In addition, the Company
is required to provide additional contingent consideration of up to $3,070,000
if certain post acquisition performance targets are met. On a pro forma basis,
had the 1998 Acquisitions occurred at the beginning of 1997, the Company would
have recorded $4.8 million and $3.6 million in revenue for 1997 and the nine
months ended September 30, 1998.
The Company completed the acquisition of Vision World, a retail optical
chain located in Minneapolis, Minnesota, effective June 30, 1998. Vision World
consists of 38 retail clinics and 30 optometrists. In connection with this
transaction, the Company paid $15.6 million in cash, net of cash acquired. In
addition, the Company is required to provide additional contingent consideration
of up to $600,000 in cash if certain post-acquisition performance targets are
met. On a pro forma basis, had the 1998 Acquisitions occurred at the beginning
of 1997, the Company would have recorded $27.4 million and $20.6 million in
revenue for 1997 and the nine months ended September 30, 1998.
In March 1998, the Company completed a transaction with EyeCare One
Corp. ("EyeCare One") and Vision Insurance Plan of America, Inc. ("VIPA").
EyeCare One was the parent company of Stein Optical which operates 16 optometric
retail locations in Milwaukee, Wisconsin. VIPA holds a single service insurance
license and delivers vision care benefits to approximately 19,000 patient lives
in Wisconsin. These transactions were accounted for by the
9
<PAGE> 10
Company as a pooling of interests. The costs of approximately $508,000 incurred
in connection with these transactions were charged to expense. In connection
with these transactions, the Company issued 1,109,806 shares of Common Stock,
subject to closing adjustments, valued at approximately $10.5 million.
ADDITIONAL OVERVIEW
The Company enters into long-term Management Agreements with the
professional associations or corporations ("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,
equipment, accounting services, purchasing, assistance in managed care, contract
negotiations, management and clinical personnel information systems, training,
and billing and collection services. Under substantially all of the Company's
Management Agreements, management fees utilized in management relationships (i)
with ophthalmology practices range from 20% 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, and (ii) with optometrists range from 50% to 87% of gross revenues
of a practice and the Company is required to pay generally all of the expenses
at the clinic with the exception of professional salaries and benefits. The
practice management fees earned by the Company pursuant to these Management
Agreements fluctuate depending on variances in clinic revenues and expenses of
the Managed Professional Association. The Managed Professional Associations
derive their revenues from fees received for the use of ASCs and sales of
optical goods. The Managed Professional Associations currently receive revenues
from a combination of sources, including capitation payments from managed care
companies and government funded reimbursements (Medicare and Medicaid).
At the time the Company consummates an acquisition, the Company
generally receives a flat fee for the initial steps required to commence the
integration of the acquisition.
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. 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. Although the terms
and conditions of the Company's managed care contracts vary considerably, they
are typically over a one-year term.
1997 ACQUISITIONS
Effective December 1, 1997, the Company acquired all of the issued and
outstanding stock of LSI Acquisition, Inc. ("LSI") and MEC Health Care, Inc.
("MEC"), both of which were wholly-owned subsidiaries of LaserSight,
Incorporated (the "LaserSight Acquisitions"). LSI has a twenty-five year service
agreement with Northern New Jersey Eye Institute, an ophthalmology practice
located in South Orange, New Jersey, with four locations including an ambulatory
surgery center. The LSI acquisition allows the Company to further expand its
LADS in the state of New Jersey. MEC is a managed care company located in
Baltimore, Maryland. MEC operates an Administrative Service Center and holds
eleven managed eye care contracts covering over 650,000 capitated optometry and
ophthalmology lives which are serviced through a provider panel consisting of
over 400 contracted eye care physicians, principally located in the greater
Baltimore, Washington, D.C. and Virginia metropolitan areas. With the
substantial increase in covered lives, the MEC acquisition continues the
Company's strategy of capturing managed care business. The LaserSight
Acquisitions were accounted for under the purchase
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<PAGE> 11
method of accounting. The aggregate consideration paid by the Company for the
LaserSight Acquisitions was approximately $13.0 million consisting of $6.5
million in cash and 820,085 shares of Company common stock, subject to certain
post-closing adjustments. The cash portion of the consideration paid by the
Company for the LaserSight Acquisitions was financed through a letter amendment
to the Company's credit facility with Prudential Securities Credit Corporation.
In addition, LaserSight, Incorporated and the Company entered into a Stock
Distribution Agreement for the liquidation of the shares of Company common stock
received by LaserSight, Incorporated by May 29, 1998 through, at the Company's
option, the filing of a shelf registration statement, a private placement, a
direct redemption by the Company, or other method acceptable to the Company and
LaserSight, Incorporated. Under the Stock Distribution Agreement, LaserSight,
Incorporated is entitled to receive a minimum of $6.5 million and a maximum of
$7.475 million from the liquidation subject to certain post-closing adjustments
and subsequent redemptions by the Company. On March 10, 1998 the Company
redeemed 168,270 shares of its Common Stock from LaserSight Incorporated at
$9.20 per share for an aggregate amount of $1,548,084.
Effective October 31, 1997, the Company acquired all of the issued and
outstanding stock of BBG-COA, Inc. ("Block Vision") (the "Block Acquisition").
Block Vision provides administration services on behalf of managed vision care
plans for a nationwide network of 5,171 Contract Providers who provide eye care
services pursuant to 58 capitated and five discount fee-for-service managed care
contracts covering over 2.1 million exclusively contracted patient lives. The
Block Acquisition has enabled the Company to establish 28 new LADS for future
development. Furthermore, Block Vision has established a network of
approximately 4,500 additional credentialed Contract Providers, and another
1,400 Contract Providers in the process of being credentialed, to provide eye
care services to capture future managed care business in anticipated new local
markets. In addition, Block Vision operates a Buying Group Division which
provides billing and collection services to suppliers of optical products. The
Block Acquisition was accounted for under the purchase method of accounting. The
aggregate consideration paid by the Company was approximately $35.0 million,
consisting of $25.6 million in cash, 458,365 shares of Common Stock, subject to
certain post-closing adjustments, and 219,633 shares of Common Stock to be held
in escrow as contingent consideration, of which 109,816 shares of Common Stock
are to be delivered by the Company to the sellers if earnings before interest,
taxes, depreciation and amortization ("EBITDA") of Block Vision reaches $4.5
million for the year ended December 31, 1998. The remaining 109,817 shares will
be deliverable on a pro rata escalating basis if Block Vision reaches $4.5
million of EBITDA for 1998 with the full contingent consideration deliverable
upon Block Vision attaining $4.9 million of EBITDA for 1998.
During 1997, the Company also completed the acquisition of the business
assets of one optometry clinic, 19 ophthalmology clinics, nine optical
dispensaries and five ASCs. Concurrently with these acquisitions, the Company
entered into long-term Management Agreements with the related professional
associations employing nine optometrists and 29 ophthalmologists. These
acquisitions were accounted for by recording assets and liabilities at fair
value and allocating the remaining costs to the related Management Agreements.
Additionally, the Company completed the acquisition of substantially all the
business assets of a managed care company servicing two capitated managed care
contracts covering over 134,000 patient lives. Such acquisitions (excluding the
Block and LaserSight Acquisitions) are collectively referred to herein as the
"1997 Acquisitions." In connection with the 1997 Acquisitions, the Company
provided aggregate consideration of $20.1 million, consisting of 1,480,122
shares of Common Stock, $6.7 million in cash and $364,000 in promissory notes.
Additionally, the Company is required to provide additional contingent
consideration, consisting of approximately 174,021 shares of Common Stock and
approximately $821,000 in cash, and
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<PAGE> 12
approximately $467,000 in shares of Common Stock, to be paid to certain sellers
if post-acquisition performance targets are met.
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
which give effect to the EyeCare One and VIPA Merger accounted for as a pooling
of interests.
<TABLE>
<CAPTION>
THREE-MONTH PERIODS ENDED NINE-MONTH PERIODS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1997 1998 1997 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
LADS operations, net revenues.......... 75.2 % 50.5 % 74.4 % 46.2 %
Managed care........................... 24.8 23.2 25.6 25.5
Buying group........................... 0.0 26.3 0.0 28.3
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating expenses:
LADS operating expenses................ 62.6 44.4 63.0 38.6
Medical claims......................... 19.8 16.7 20.7 18.5
Cost of buying group sales............. 0.0 25.0 0.0 26.6
General and administrative............. 11.3 6.7 12.1 7.5
Depreciation and amortization.......... 3.0 3.1 3.1 3.0
Merger costs........................... 0.0 0.0 0.0 0.3
----- ----- ----- -----
Total operating expenses 96.7 95.9 98.9 94.5
----- ----- ----- -----
Income from operations................... 3.3 4.1 1.1 5.5
Interest expense......................... 1.6 2.9 2.1 2.2
----- ----- ----- -----
Income (loss) before income taxes 1.7 1.2 (1.0) 3.3
Income taxes............................. 0.0 0.0 0.0 1.1
----- ----- ----- -----
Income (loss) before extraordinary charge 1.7 1.2 (1.0) 2.2
Extraordinary charge - early
extinguishment of debt, net of income
taxes of $238,000 for 1998............... 2.1 2.0 0.8 1.0
----- ----- ----- -----
Net income (loss)............... (0.4)% (0.8) % (1.8)% 1.2 %
===== ===== ====== =====
Medical claims ratio..................... 79.7 % 71.9 % 80.7 % 72.7 %
===== ===== ====== =====
</TABLE>
Three-Month Period Ended September 30, 1998 Compared to Three-Month Period
Ended September 30, 1997
Revenues. Revenues increased 298.7% from $15.6 million for the three
months ended September 30, 1997 to $62.0 million for the three months ended
September 30, 1998. This increase was caused primarily by an increase in LADS
operations net revenues attributable to the 1997 Acquisitions, the LaserSight
Acquisition, the 1998 Acquisitions and the Vision World acquisition, which
accounted for $19.7 million of the increase; an increase in buying group
revenues attributable to the Block Acquisition which accounted for $16.3 million
of the increase; an increase in managed care revenues attributable to the Block
Acquisition, the MEC Acquisition; and the addition of three capitated contracts
and the expansion of an existing contract which accounted for $10.5 million of
the increase. Comparable clinic revenues increased 7% over 1997 levels for
practices managed by the Company for the entire year. Managed care revenues on a
comparable basis increased 41% over 1997 levels for business units operated by
the Company for the entire year.
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<PAGE> 13
LADS Operating Expenses. LADS operating expenses increased 182.8% from
$9.7 million for the three months ended September 30, 1997 to $27.5 million for
the three months ended September 30, 1998. LADS operating 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. This increase
was caused primarily by the 1997 Acquisitions, the LaserSight Acquisition and
the 1998 Acquisitions. As a percentage of LADS operations net revenues, LADS
operating expenses increased from 83.2% for the three months ended September 30,
1997 to 87.8% for the three months ended September 30, 1998. This increase was
caused primarily by the 1997 Acquisitions, the LaserSight Acquisition and the
1998 Acquisitions.
Medical Claims. Medical claims expense increased 235.6% from $3.1
million for the three months ended September 30, 1997 to $10.3 million for the
three months ended September 30, 1998. The Company's medical claims ratio
decreased from 79.7% for the three months ended September 30, 1997 to 71.9% for
the three months ended September 30, 1998. This decrease was caused primarily by
the increase in vision care wellness service contracts from medical, surgical
and facility eye care service contracts. As a percentage of managed care
revenues, vision care wellness service contracts increased from 11.7% for the
three months ended September 30, 1997 to 52.0% for the three months ended
September 30, 1998. Medical claims expense consists of payments by the Company
to its Affiliated Providers for vision care wellness 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 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 37.1% and
fee-for-service claims represented 62.9% of total medical claims expense for the
three-month period ended September 30, 1998
Cost of Buying Group Sales. Cost of buying group sales were incurred by
the Company as a result of its acquisition of Block Vision. The cost of buying
group sales consists of the costs of various optical products which are shipped
directly to the providers of eye care services.
General and Administrative Expenses. General and administrative
expenses increased 136.8% from $1.8 million for the three months ended September
30, 1997 to $4.2 million for the three months ended September 30, 1998. This
increase was caused primarily by an increase in corporate staff necessary to
support the Company's expanded practice management and managed care business and
increases in travel expenses, professional fees and occupancy costs. Salaries,
wages and benefits expense consist of expenses related to management and
administrative staff located at the Company's corporate headquarters and
regional offices. As a percentage of revenues, general and administrative
expenses decreased from 11.3% for the three months ended September 30, 1997 to
6.7% for the three months ended September 30, 1998. 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 $475,000 for the three months ended September 30, 1997 to $2.0
million for the three months ended September 30, 1998. As a percentage of
revenues, depreciation and amortization expense increased from 3.0% for the
three months ended September 30, 1997 to 3.1% for the three months ended
September 30, 1998. This increase was caused primarily by the amortization of
intangibles attributable to the 1997 Acquisitions, the 1998 Acquisitions, the
Vision World acquisition, the LaserSight Acquisition and the Block Acquisition.
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<PAGE> 14
Interest Expense. Interest expense increased 609.1% from $248,000 for
the three months ended September 30, 1997 to $1.8 million for the three months
ended September 30, 1998. The increase was caused by an increase in the debt
outstanding from $26.1 million at September 30, 1997 to $82.3 million at
September 30, 1998.
Nine-Month Period Ended September 30, 1998 Compared to Nine-Month Period
Ended September 30, 1997
Revenues. Revenues increased 310.9% from $39.3 million for the nine
months ended September 30, 1997 to $161.4 million for the nine months ended
September 30, 1998. This increase was caused primarily by an increase in LADS
operations net revenues attributable to the 1997 Acquisitions, the LaserSight
Acquisition, the 1998 Acquisition and the Vision World acquisition, which
accounted for $45.4 million of the increase; an increase in buying group
revenues attributable to the Block Acquisition which accounted for $45.6 million
of the increase; an increase in managed care revenues attributable to the Block
Acquisition, MEC acquisition; and the addition of three capitated contracts and
the expansion of an existing contract which accounted for $31.1 million of the
increase. Comparable clinic revenues increased approximately 11% over 1997
levels for practices managed by the Company for the entire year. Managed care
revenues on a comparable basis increased 43.1% over 1997 levels for business
units operated by the Company for the entire year.
LADS Operating Expenses. LADS operating expenses increased 151.5% from
$24.7 million for the nine months ended September 30, 1997 to $62.2 for the nine
months ended September 30, 1998. LADS operating 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. This increase was caused
primarily by the 1997 Acquisitions, the LaserSight Acquisition and the 1998
Acquisitions. As a percentage of LADS operations net revenues, LADS operating
expenses decreased from 84.7% for the nine months ended September 30, 1997 to
83.4% for the nine months ended September 30, 1998. This decrease was caused
primarily by the 1997 Acquisitions, the LaserSight Acquisition and the 1998
Acquisitions.
Medical Claims. Medical claims expense increased 268.5% from $8.1
million for the nine months ended September 30, 1997 to $29.9 million for the
nine months ended September 30, 1998. The Company's medical claims ratio
decreased from 80.7% for the nine months ended September 30, 1997 to 72.7% for
the nine months ended September 30, 1998. This decrease was caused primarily by
the increase in vision care wellness service contracts from medical, surgical
and facility eye care service contracts. As a percentage of managed care
revenues, vision care wellness service contracts increased from 11.8% for the
nine months ended September 30, 1997 to 50.9% for the nine months ended
September 30, 1998. Medical claims expense consists of payments by the Company
to its Affiliated Providers for vision care wellness 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 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 36.6% and
fee-for-service claims represented 63.4% of total medical claims expense for the
nine-month period ended September 30, 1998.
Cost of Buying Group Sales. Cost of buying group sales were incurred by
the Company as a result of its acquisition of Block Vision. The cost of buying
group sales consists of the costs of various optical products which are shipped
directly to the providers of eye care services.
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<PAGE> 15
General and Administrative Expenses. General and administrative
expenses increased 155.1% from $4.7 million for the nine months ended September
30, 1997 to $12.1 million for the nine months ended September 30, 1998. This
increase was caused primarily by an increase in corporate staff necessary to
support the Company's expanded practice management and managed care business and
increases in travel expenses, professional fees and occupancy costs. Salaries,
wages and benefits expense consist of expenses related to management and
administrative staff located at the Company's corporate headquarters and
regional offices. As a percentage of revenues, general and administrative
expenses decreased from 12.1% for the nine months ended September 30, 1997 to
7.5% for the nine months ended September 30, 1998. 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 $1.2 million for the nine months ended September 30, 1997 to $4.9
million for the nine months ended September 30, 1998. As a percentage of
revenues, depreciation and amortization expense decreased from 3.1% for the nine
months ended September 30, 1997 to 3.0% for the nine months ended September 30,
1998. This decrease was caused primarily by the amortization of intangibles
attributable to the 1997 Acquisitions, the 1998 Acquisitions, the LaserSight
Acquisition and the Block Acquisition.
Merger Costs. Merger costs were incurred as a result of the
EyeCare One and VIPA pooling of interests and consist primarily of
professional fees.
Interest Expense. Interest expense increased 314.3% from $842,000 for
the nine months ended September 30, 1997 to $3.5 million for the nine months
ended September 30, 1998. The increase was caused by an increase in the debt
outstanding from $26.1 million at September 30, 1997 to $82.3 million at
September 30, 1998.
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 used in operating activities for the nine
months ended September 30, 1997 was $2.5 million as compared to net cash
provided by operating activities of $8.1 million for the nine months ended
September 30, 1998. Net cash provided from operating activities for the nine
months ended September 30, 1998 resulted primarily from an increase in operating
income for the period.
Net cash used in investing activities for the nine months ended
September 30, 1997 and 1998 was $5.8 million and $51.0 million, respectively,
and resulted from payments for acquisitions, furniture and equipment and
capitalized acquisition costs.
Net cash provided by financing activities for the nine months ended
September 30, 1997 and 1998 was $10.7 million and $49.7 million, respectively.
The amounts for 1997 and 1998 were attributable to debt and equity financings
and higher levels of institutional borrowings to support the Company's internal
expansion and acquisition activities.
On January 30, 1998 the Company entered into a five year, $50.0 million
bank credit agreement (the "Credit Agreement") with the Bank of Montreal as
agent (the "Agent") for a consortium of banks. The Credit Agreement, which
matures in January, 2003, provided the Company with a revolving credit facility
component in an aggregate amount of up to $10.0 million and a term loan
component in an aggregate amount of up to $40.0 million. The Credit Agreement is
secured by a pledge of the stock of substantially all of the Company's
subsidiaries
15
<PAGE> 16
and the assets of the Company and certain of its subsidiaries and is guaranteed
by certain of the Company's subsidiaries. The Credit Agreement contains negative
and affirmative covenants and agreements which place restrictions on the Company
regarding disposition of assets, capital expenditures, additional indebtedness,
permitted liens and payment of dividends, as well as requiring the maintenance
of certain financial ratios. The interest rate on the Credit Agreement is, at
the option of the Company, either (i) the London InterBank Offered Rate plus an
applicable margin rate, (ii) the greater of (a) the Agent's prime commercial
rate or (b) the "federal funds" rate plus 0.5%, or (iii) a fixed rate loan as
determined by the Agent at each time of borrowing. At the closing of the Credit
Agreement the Company used approximately $26.9 million of its available
borrowing to repay the outstanding balance under the Company's Bridge Credit
Facility with Prudential Credit and related accrued interest and transaction
costs. The Company had used approximately $48.3 million of its available
borrowings under the Credit Agreement which was repaid with proceeds for the
Credit Facility.
On July 1, 1998 the Company entered into a restated $100.0 million bank
credit agreement with the Bank of Montreal as agent for a consortium of banks.
Credit Facility was used in part to early extinguish the Company's outstanding
balance of approximately $48.3 million under its prior Credit Agreement. The
remaining balance under the new Credit Facility shall be principally utilized
for acquisitions, as well as working capital and general corporate purposes. The
facility includes a seven year term loan for $70 million and a $30 million five
year revolving and acquisition facility. Other terms and conditions were
substantially the same as the prior agreement with a slightly higher margin
spread on the seven year term portion of the Credit Facility. As of September
30, 1998 the Company had used approximately $79.6 million of its available
borrowings under the Credit Facility and had an available balance of
approximately $20.4 million.
On November 20, 1997, the Company completed the sale of 2,300,000
shares of its common stock at a price of $9.50 in a secondary public offering
(the "Secondary Offering"). The net proceeds of $20.5 million from the Secondary
Offering were used to fund a portion of the consideration for the Block
Acquisition.
In October 1997, the Company received a commitment from Prudential
Securities Credit Corporation ("Prudential Credit") for a credit facility in the
aggregate amount of $37.0 million pursuant to a Note Purchase Agreement (the
"Bridge Credit Facility"). Approximately $27.0 million of the Bridge Credit
Facility was available, if needed, to fund the cash portion of the Block
Acquisition to the extent the net proceeds from the Company's Secondary Offering
were insufficient for such purpose. The remaining balance of approximately $10.0
million of the Bridge Credit Facility was available for optometry and
ophthalmology practice acquisitions. The Company borrowed $5.6 million and $6.5
million for use in funding the cash portions of the Block Acquisition and
LaserSight Acquisitions, respectively. Additionally, the Company borrowed
approximately $3.5 million for use in the funding of certain optometry and
ophthalmology practice acquisitions. Amounts borrowed pursuant to the Bridge
Credit Facility were secured by a first security interest in all of the
Company's assets. The Bridge Credit Facility was required to be repaid at the
earlier of six months from the date of any borrowing from the Bridge Credit
Facility or upon the closing of any future debt or equity offering by the
Company. The Bridge Credit Facility contained negative and affirmative covenants
and agreements which included covenants requiring the maintenance of certain
financial ratios. The Company repaid its Bridge Credit Facility borrowings in
full from available proceeds under its Credit Agreement.
On August 18, 1997, the Company completed the sale of 2,100,000 shares
of its common stock at a price of $10.00 per share in an initial public offering
(the "Initial Public Offering").
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<PAGE> 17
The net proceeds from the Initial Public Offering were used to repay
substantially all of the Company's outstanding indebtedness and to provide
funding to continue acquisitions of optometry and ophthalmology clinics and
ASCs.
In April 1997, the Company entered into a credit facility in the
aggregate amount of $4.9 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 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 accrued interest at 10% per annum with a maturity of the earlier
of January 1, 1998 or upon completion of the Initial Public Offering. In
addition, the Note and Warrant Purchase Agreement included a detachable warrant
to purchase 210,000 shares of Common Stock at an exercise price equal to $10.00
per share, the price of the Common Stock in the Initial Public Offering. The
Prudential Note was repaid by the Company from the net proceeds of the Initial
Public 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
bearing interest at 10% per annum (the "1997 Subordinated Notes"). The 1997
Subordinated Notes included a detachable warrant to purchase an aggregate of
333,333 shares of Common Stock which have an exercise price of $6.00 per share.
The 1997 Subordinated Notes were repaid by the Company from the net proceeds of
the Initial Public 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 bearing interest at 10% per annum (the "1996
Subordinated Notes"). The 1996 Subordinated Notes included detachable warrants
to purchase an aggregate of 208,333 shares of Common Stock at an exercise price
of $6.00 per share. The 1996 Subordinated Notes were repaid by the Company from
the net proceeds of the Initial Public Offering.
To date in 1998, the Company completed the 1998 Acquisitions and, in
connection with the 1998 Acquisitions, the Company provided aggregate
consideration of approximately $37.5 million consisting of 1.6 million shares of
Common Stock, $21.9 million in cash and promissory notes in the aggregate
principal amount of approximately $1.3 million, subject to post-closing
adjustments. In addition the Company is required to provide additional
contingent consideration, consisting of 301,583 shares of Common Stock and up to
$2.1 million in cash, to be paid to certain sellers if certain post-acquisition
performance targets are met.
Effective September 1, 1998, the Company completed the acquisition of
American SurgiSite Centers, Inc., an ambulatory surgery center developer,
management and consulting company located in New Jersey. In connection with this
transaction, the Company paid $1.65 million in cash and 235,366 shares. In
addition, the Company is required to provide additional contingent consideration
of up to $3,070,000 if certain post acquisition performance targets are met.
Effective June 30, 1998, the Company completed the acquisition of
Vision World, a retail optical chain located in Minneapolis, Minnesota,
effective June 30, 1998. In connection with this transaction, the Company paid
$15.6 million in cash, net of cash acquired. In addition, the Company is
required to provide additional contingent consideration of up to $600,000 in
cash if certain post-acquisition performance targets are met.
17
<PAGE> 18
In March 1998, the Company completed a pooling of interests transaction
with EyeCare One and VIPA. In connection with the pooling transaction, the
Company issued 1,109,806 shares of Common Stock, subject to post-closing
adjustments, valued at approximately $10.5 million.
Effective December 1, 1997, the Company completed the LaserSight
Acquisition in exchange for aggregate consideration paid to the seller of
approximately $13.0 million, consisting of $6.5 million in cash and 812,500
shares of Common Stock, subject to certain post-closing adjustments. The cash
portion of the consideration paid by the Company for the LaserSight Acquisition
was financed through a letter amendment to the Company's credit facility with
Prudential Securities Credit Corporation. On March 11, 1998 the Company redeemed
168,270 shares of its Common Stock pursuant to the Stock Distribution Agreement
from LaserSight, Inc. for an aggregate purchase price of approximately $1.5
million. Such shares were subsequently reissued by the Company in connection
with the EyeCare One acquisition.
Effective October 31, 1997, the Company completed the Block Acquisition
in exchange for aggregate consideration paid to the sellers of approximately
$35.0 million, consisting of $25.6 million in cash, 458,365 shares of Common
Stock, subject to certain post-closing adjustments and 219, 633 shares of Common
Stock to be held in escrow as contingent consideration, of which 109,816 shares
are to be delivered by the Company to the sellers if EBITDA of Block Vision
reaches $4.5 million for the year ended December 31, 1998. The remaining 109,817
shares will be deliverable on a pro rata escalating basis if Block Vision
reaches $4.5 million of EBITDA for 1998 with the full contingent consideration
deliverable upon Block Vision attaining $4.9 million of EBITDA for 1998.
Approximately $2.4 million in net indebtedness of Block Vision was assumed in
connection with the Block Acquisition.
During 1997, the Company also completed the 1997 Acquisitions, and in
connection with the 1997 Acquisitions, the Company provided aggregate
consideration of $20.1 million, consisting of 1,480,122 shares of Common Stock,
$6.7 million in cash and $364,000 in promissory notes. Additionally, the Company
is required to provide additional contingent consideration, consisting of
approximately 174,021 shares of Common Stock, approximately $821,000 in cash,
and approximately $467,000 in shares of Common Stock, to be paid to certain
sellers if post-acquisition performance targets are met.
The Company has grown significantly with acquisitions funded with stock
of the Company. The Company's credit facility requires that 40% of the Company's
stock is to be used in acquisitions. The Company expects to continue to use its
Common Stock as consideration for future acquisitions in conjunction with its
expansion strategy where it believes the transaction will be accretive, which
will be a factor in the Company's future acquisitions, financial position and
performance. The number of shares of Common Stock the Company is ultimately
required to provide in connection with its acquisitions and the Company's
continued ability to use stock in acquisitions will be affected by the market
price for its Common stock and the number of shares so provided will affect the
Company's earnings per share.
The Company believes the effects of inflation have not had a material
adverse impact on its operations or financial condition to date. Substantial
increases in prices in the future, however, could have a material adverse effect
on the Company's results of operations.
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
18
<PAGE> 19
from the Company's operations, sale of the Block Buying Group, Credit Agreement,
supplemental borrowings to the extent available, seller financing and the use of
Common Stock in acquisitions (to the degree accretiveness is likely) will be
sufficient to meet the Company's funding requirements to conduct its operations
and for further implementation of its business plan for a period of
approximately twelve months. While the Company currently expects to slow down
its acquisition pace for the immediate future, the Company will continue to
offer Common Stock, notes or combinations thereof as consideration for certain
future mergers and acquisitions related to the growth of its LADS. 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 to the extent
available and/or the net proceeds, if feasible, from the offering of debt or
equity securities.
YEAR 2000 READINESS DISCLOSURE
Currently many computer systems in use today were designed and
developed using two digits, rather than four, to specify the calendar year and
as a result, such systems are unable to recognize the year "2000". The inability
of a computer system to recognize the year "2000" could cause many computer
applications to fail or create erroneous results unless corrective measures are
taken. The Company utilizes software and related computer technologies essential
to its operations that could be affected by the year "2000" computer system
problem.
The Company has implemented a plan of action which it believes will
make its other computer systems year "2000" compliant and the expense associated
with such action is not expected to have a material effect on the Company's
future financial condition and results of operations.
The Company also expects to initiate communications with significant
suppliers, customers and other third parties with which the Company does
business, to minimize disruptions to the Company's operations resulting from the
year "2000" problem and to ensure that any significant year "2000" issues are
satisfactorily resolved. There can be no assurances that the failure of computer
systems of third parties as a result of the year "2000" problem will not have an
adverse effect on the Company's operations. The Company expects to work with
such parties to resolve or minimize year "2000" problems. The Company believes
it currently has no material exposure to contingencies related to the year
"2000" issue.
19
<PAGE> 20
SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This 10-Q and certain information provided periodically in writing and
orally by the Company's designated officers and agents contain statements which
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
The words "expect," "believe," "goal," "plan," "intend," "estimate," and similar
expressions and variations thereof used in this Prospectus are intended to
specifically identify forward-looking statements. Those statements appear in a
number of places in this Prospectus, particularly "Management's Discussion and
Analysis of Financial Condition and Results of Operations," 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 Company's financing plans including the Company's ability to
raise additional debt and equity capital; (v) trends affecting the Company's
financial condition or results of operations including the company's stock price
and its potential impact on the number of shares utilized in acquisitions and on
future earnings per share; (vi) the Company's growth strategy and operating
strategy, (vii) the Company's current and future managed care contracts; (viii)
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; (ix) the Company's relationships with affiliated retail
optical companies; (x) the Company's timing of the sale of Buying Group Division
and the impact thereof on the Company's earnings; (xi) the Company's revenue run
rate and the impact thereon of acquisitions by the Company and (xii) the
Company's cost savings and reduction plans. 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 factors that might cause such differences
include, among others, the following: (i) the Company experiencing future
operating and net losses; (ii) any material inability of the Company to
successfully integrate and profitably operate Block Vision and other
acquisitions; (iii) any material inability of the Company to identify,
consummate and integrate suitable acquisitions in conjunction with its growth
strategy or to ultimately close pending and identified acquisitions; (iv) any
material inability of the Company to acquire sufficient capital and financing to
fund its growth strategy, (v) the inability of the Company to expand its managed
care business, renew existing managed care contracts and maintain and expand its
Contract Provider Network (vi) the Company's inability to negotiate managed care
contracts with HMOs; (vii) the inability of the Company to successfully and
profitably operate its managed care business; (viii) the managed practices'
inability to operate profitably, (ix) changes in state and/or federal
governmental regulations which could materially affect the Company's ability to
operate or materially affect the Company's profitability, (x) the inability of
the Company to maintain or obtain required licensure in the states in which it
operates and in the states in which it may seek to operate in the future, (xi)
the inability of the Company to successfully obtain public and/or private
investment capital to expand its operations; (xii) the Company's inability to
meet its financing covenants and commitments; (xiii) consolidation of the
Company's competitors, poor operating results by its competitors, or adverse
governmental or judicial rulings against its competitors; (xiv) any failure by
the Company to meet analysts expectations; (xv) the inability of the Company to
realize any significant benefits from cost savings or achieve cost reductions;
(xvi) the non-compliance or readiness of third parties with respect to year
"2000" issues; (xvii) the inability of the Company to consummate the sale of the
Buying Group Division; and (xviii) any adverse change in the Company's medical
claims to managed care revenue ratio and other factors including those
identified in the Company's previous filings with the SEC. The Company
undertakes no obligation to publicly update or revise forward looking statements
to
20
<PAGE> 21
reflect events or circumstances after the date of this 10-Q or to reflect the
occurrence of unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
Not applicable.
PART II -OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) Sales of Unregistered Securities. The Company issued the
following unregistered securities during the quarterly period ended September
30, 1998 in transactions exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) because they did not involve any public
offering.
In August 1998, the Company issued 49,653 shares of Common Stock in
connection with the acquisition of New Prague Vision Clinic, P.A.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. See Exhibit Index attached hereto.
(b) Reports on Form 8-K
During the quarterly period ended September 30, 1998, the Company filed
reports on Form 8-K on (i) July 10, 1998 to report the Bank of Montreal $100.0
million credit agreement; (ii) August 10, 1998 to report the closing of the
Vision World acquisition; and (iii) August 20, 1998 to report the restated
financial statements resulting from the Company's pooling of interests
transaction.
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
<S> <C>
4.1* Amended and Restated Credit Agreement dated as of July 1,
1998 among Vision Twenty-One, Inc. the Banks Party Hereto and
Bank of Montreal as Agent. (1)
(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.)
10.1* Amended and Restated Credit Agreement dated as of July 1,
1998 among Vision Twenty-One, Inc. the Banks Party Hereto
and Bank of Montreal as Agent, filed as Exhibit 4.1 to this
Form 10-Q and incorporated herein by reference.
27.1 Financial Data Schedule for nine months ended September 30,
1998 (for SEC use only).
27.2 Restated Financial Data Schedule for the nine months ended
September 30, 1997 (for SEC use only).
</TABLE>
- - - ---------------
[FN]
*Previously filed as an Exhibit in the Company filing identified in the
footnote following the Exhibit Description and incorporated herein by
reference.
</FN>
[1] Form 8-K filed July 10 1998
22
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, in the city of Largo, State of Florida on
November 16, 1998.
VISION TWENTY-ONE, INC.
Registrant
By: /s/ Richard T. Welch
------------------------------------------------
Richard T. Welch, Chief Financial
Officer (The Principal Accounting
Officer and Duly Authorized Officer)
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS OF VISION TWENTY-ONE, INC. AND SUBSIDIARIES FOR THE NINE
MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,671,985
<SECURITIES> 0
<RECEIVABLES> 29,926,933
<ALLOWANCES> 3,427,000
<INVENTORY> 3,415,719
<CURRENT-ASSETS> 47,736,834
<PP&E> 20,590,664
<DEPRECIATION> 5,801,742
<TOTAL-ASSETS> 197,499,180
<CURRENT-LIABILITIES> 30,534,344
<BONDS> 0
0
0
<COMMON> 14,797
<OTHER-SE> 80,915,762
<TOTAL-LIABILITY-AND-EQUITY> 197,499,180
<SALES> 28,668,681
<TOTAL-REVENUES> 161,422,127
<CGS> 10,419,396
<TOTAL-COSTS> 135,119,369
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,491,176
<INCOME-PRETAX> 5,345,366
<INCOME-TAX> 1,720,000
<INCOME-CONTINUING> 3,625,366
<DISCONTINUED> 0
<EXTRAORDINARY> 1,647,512
<CHANGES> 0
<NET-INCOME> 1,977,854
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED FINANCIAL STATEMENTS OF VISION TWENTY-ONE, INC. AND SUBSIDIARIES
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,598,843
<SECURITIES> 0
<RECEIVABLES> 11,723,777
<ALLOWANCES> 2,620,000
<INVENTORY> 1,361,107
<CURRENT-ASSETS> 14,166,953
<PP&E> 9,280,505
<DEPRECIATION> 3,745,611
<TOTAL-ASSETS> 48,104,866
<CURRENT-LIABILITIES> 11,715,341
<BONDS> 2,061,310
0
0
<COMMON> 9,701
<OTHER-SE> 32,148,053
<TOTAL-LIABILITY-AND-EQUITY> 48,104,866
<SALES> 9,632,615
<TOTAL-REVENUES> 39,284,489
<CGS> 2,344,004
<TOTAL-COSTS> 32,865,844
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 842,027
<INCOME-PRETAX> (393,760)
<INCOME-TAX> 0
<INCOME-CONTINUING> (393,760)
<DISCONTINUED> 0
<EXTRAORDINARY> (323,346)
<CHANGES> 0
<NET-INCOME> (717,106)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
