<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
Date of Report (Date of earliest event reported): March 31, 1998
VISION TWENTY-ONE, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
FLORIDA 0-22977 59-3384581
- ---------------------------------------- -------------------------------- -------------------------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
7209 BRYAN DAIRY ROAD
LARGO, FLORIDA 33777
- ------------------------------------------------------------------------------ -------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code: 813-545-4300
<PAGE> 2
ITEM 5. OTHER MATTERS.
On April 30, 1998, the Company filed a registration statement on Form
S-1 (No.333-51437) which included supplemental consolidated financial statements
of the Company. The supplemental consolidated financial statements resulted from
the Company's merger with EyeCare One Corp. ("EyeCare One") and Vision Insurance
Plan of America, Inc. ("VIPA") on March 31, 1998, which was accounted for under
pooling of interests accounting. Following the Company's publication of the
operating results of the combined businesses, the supplemental consolidated
financial statements have become the Company's historical financial statements.
The report of the independent certified public accountants and the restated
historical consolidated financial statements and notes thereto, which give
retroactive effective to the Company's merger with EyeCare One and VIPA under
pooling of interests accounting are set forth below.
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.............................3
Consolidated Balance Sheets as of December 31, 1996 and 1997...................4
Consolidated Statements of Operations for the Years Ended December 31, 1995,
1996 and 1997...............................................................5
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1995, 1996 and 1997......................................6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995,
1996 and 1997...............................................................7
Notes to Consolidated Financial Statements.....................................8
</TABLE>
2
<PAGE> 3
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, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. 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 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 consolidated financial position of Vision
Twenty-One, Inc. and Subsidiaries at December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Tampa, Florida
March 11, 1998, except for Note 16,
as to which the date is March 31, 1998
3
<PAGE> 4
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 251,832 $ 4,048,358
Accounts receivable due from:
Buying group members, net of allowances for doubtful
accounts of $33,000 at December 31, 1997............... -- 5,427,592
Patients, net of allowances for uncollectible accounts
and contractual adjustments of $685,000 and $3,446,000
at December 31, 1996 and 1997, respectively............ 1,638,703 5,502,110
Managed Professional Associations....................... 424,271 4,950,067
Managed health benefits payors.......................... -- 1,276,790
Other................................................... 199,999 165,292
Notes receivable, officers and shareholders............... 163,489 --
Inventories............................................... 936,739 936,242
Prepaid expenses and other current assets................. 227,370 2,016,036
----------- ------------
Total current assets................................ 3,842,403 24,322,487
Fixed assets, net........................................... 3,737,964 8,626,964
Intangible assets, net of accumulated amortization of
$29,125 and $1,131,501 at December 31, 1996 and 1997,
respectively.............................................. 11,022,396 84,164,341
Cash surrender value of life insurance, net of policy loans
of $558,179 and $624,464 at December 31, 1996 and 1997,
respectively.............................................. 166,822 205,596
Deferred offering costs..................................... 287,792 --
Deferred tax asset.......................................... 1,468,000 1,882,000
Other assets................................................ 50,592 1,155,359
----------- ------------
Total assets........................................ $20,575,969 $120,356,747
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 745,207 $ 5,319,654
Accrued expenses.......................................... 1,595,571 2,708,741
Medical claims payable.................................... 1,793,861 3,555,195
Accrued compensation...................................... 546,740 1,381,497
Accrued acquisition and offering costs.................... 1,362,012 1,045,905
Due to Managed Professional Associations.................. -- 1,938,309
Due to selling shareholders............................... -- 2,811,809
Current portion of deferred leasehold incentive........... 9,568 23,046
Current portion of long-term debt......................... 48,249 104,371
Current portion of obligations under capital leases....... 43,849 566,084
----------- ------------
Total current liabilities........................... 6,145,057 19,454,611
Deferred rent payable....................................... 263,006 261,117
Obligations under capital leases............................ 71,870 632,850
Long-term debt, less current portion ($5,983,098 to related
parties in 1996).......................................... 8,922,974 25,980,253
Deferred leasehold incentive................................ 81,330 186,323
Deferred income taxes....................................... 1,468,000 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; 4,825,431 (1996) and 13,529,892 (1997)
shares issued and outstanding........................... 4,825 13,530
Additional paid-in capital................................ 5,987,335 76,416,476
Common stock to be issued (1,491,397 shares in 1996)...... 5,905,965 --
Deferred compensation..................................... (517,035) (408,735)
Notes receivable from officer............................. (164,075) (175,484)
Accumulated deficit....................................... (7,593,283) (8,115,194)
----------- ------------
Total stockholders' equity.......................... 3,623,732 67,730,593
----------- ------------
Total liabilities and stockholders' equity.......... $20,575,969 $120,356,747
=========== ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Practice management fees ($423,890, and $479,004 from
a related party in 1995 and 1996, respectively).... $ 423,890 $ 1,942,843 $30,951,922
Managed care.......................................... 3,017,384 7,886,802 18,154,205
Buying group.......................................... -- -- 7,260,797
Sale of optical goods................................. 11,212,385 11,718,979 12,569,321
Other revenue......................................... 211,746 305,654 607,953
----------- ----------- -----------
14,865,405 21,854,278 69,544,198
Operating expenses:
Practice management expenses.......................... -- 1,244,173 25,294,565
Medical claims........................................ 3,349,791 9,475,395 14,090,250
Buying group.......................................... -- -- 6,882,199
Cost of optical goods sold............................ 2,683,633 2,807,621 3,113,851
Salaries, wages and benefits.......................... 5,588,098 6,852,726 10,431,103
Business development.................................. -- 1,926,895 --
General and administrative............................ 3,523,664 4,446,681 5,879,074
Depreciation and amortization......................... 389,527 487,360 2,195,668
----------- ----------- -----------
15,534,713 27,240,851 67,886,710
----------- ----------- -----------
Income (loss) from operations........................... (669,308) (5,386,573) 1,657,488
Amortization of loan fees............................... -- -- 178,677
Interest expense........................................ 146,509 260,597 1,072,589
----------- ----------- -----------
Income (loss) before income taxes....................... (815,817) (5,647,170) 406,222
Income taxes............................................ -- -- --
----------- ----------- -----------
Income (loss) before extraordinary charge............... (815,817) (5,647,170) 406,222
Extraordinary charge -- early extinguishment of debt.... -- -- 323,346
----------- ----------- -----------
Net income (loss)....................................... $ (815,817) $(5,647,170) $ 82,876
=========== =========== ===========
Earnings (loss) per common share:
Income (loss) before extraordinary charge............. $ (0.24) $ (1.42) $ 0.05
Extraordinary charge.................................. -- -- (0.04)
----------- ----------- -----------
Net income (loss) per common share...................... $ (0.24) $ (1.42) $ 0.01
=========== =========== ===========
Earnings (loss) per common share -- assuming dilution:
Income (loss) before extraordinary charge............. $ (0.24) $ (1.42) $ 0.05
Extraordinary charge.................................. -- -- (0.04)
----------- ----------- -----------
Net income (loss) per common share -- assuming
dilution.............................................. $ (0.24) $ (1.42) $ 0.01
=========== =========== ===========
</TABLE>
See accompanying notes.
5
<PAGE> 6
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON NOTES
COMMON STOCK ADDITIONAL STOCK RECEIVABLE
-------------------- PAID-IN TO BE DEFERRED FROM ACCUMULATED
SHARES AMOUNT CAPITAL ISSUED COMPENSATION OFFICERS DEFICIT
---------- ------- ----------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995, as
previously reported.................... 2,324,876 $ 2,325 $ 32,271 $ -- $ -- $ -- $(1,473,646)
Adjustments for EyeCare One Corp. and
Vision Insurance Plan of America,
Inc. pooling of interests............ 1,109,806 1,109 1,304,899 -- -- (164,075) --
---------- ------- ----------- ---------- --------- --------- -----------
Balance at December 31, 1995, as
restated............................... 3,434,682 3,434 1,337,170 -- -- (164,075) (1,473,646)
Sale of common stock................... 360,442 360 999,640 -- -- -- --
Issuance of shares of common stock for
1996 Acquisitions consummated
effective December 1, 1996........... 651,842 652 2,580,645 -- -- -- --
1,491,397 shares of common stock to be
issued in 1997 for 1996 Acquisitions
consummated effective December 1,
1996................................. -- -- -- 5,905,965 -- -- --
Issuance of detachable stock purchase
warrants............................. -- -- 125,000 -- -- -- --
Issuance of shares of common stock for
prior service........................ 144,705 145 401,410 -- -- -- --
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) -- --
Amortization of deferred
compensation......................... -- -- -- -- 11,620 -- --
Net loss............................... -- -- -- -- -- -- (5,647,170)
Reclassify undistributed earnings in S
Corporation to additional paid-in
capital.............................. 472,467 (472,467)
Capital distribution................... -- -- (577,445) -- -- -- --
---------- ------- ----------- ---------- --------- --------- -----------
Balance at December 31, 1996............ 4,825,431 4,825 5,987,335 5,905,965 (517,035) (164,075) (7,593,283)
Initial and second public offering of
common shares........................ 4,400,000 4,400 37,618,793 -- -- -- --
Issuance of shares of common stock for
business combinations................ 4,298,740 4,299 31,826,620 (5,905,965) -- -- --
Issuance of detachable stock purchase
warrants............................. -- -- 301,500 -- -- -- --
Sale of detachable stock purchase
warrants............................. -- -- 548,021 -- -- -- --
Compensatory stock options accounted
for under SFAS 123................... -- -- 124,949 -- -- -- --
Exercise of warrants and options....... 5,721 6 2,751 -- -- -- --
Amortization of deferred
compensation......................... -- -- -- -- 108,300 -- --
Issuance of note receivable............ -- -- -- -- -- (11,409) --
Net income............................. -- -- -- -- -- -- 82,876
Reclassify undistributed earnings in S
Corporation to additional paid-in
capital.............................. 604,787 (604,787)
Capital distribution................... -- -- (598,280) -- -- -- --
---------- ------- ----------- ---------- --------- --------- -----------
Balance at December 31, 1997............ 13,529,892 $13,530 $76,416,476 $ -- $(408,735) $(175,484) $(8,115,194)
========== ======= =========== ========== ========= ========= ===========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at December 31, 1995, as
previously reported.................... $(1,439,050)
Adjustments for EyeCare One Corp. and
Vision Insurance Plan of America,
Inc. pooling of interests............ 1,141,933
-----------
Balance at December 31, 1995, as
restated............................... (297,117)
Sale of common stock................... 1,000,000
Issuance of shares of common stock for
1996 Acquisitions consummated
effective December 1, 1996........... 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
Issuance of detachable stock purchase
warrants............................. 125,000
Issuance of shares of common stock for
prior service........................ 401,555
Issuance of shares of common stock for
advisory agreement................... --
Issuance of shares of common stock for
services agreement................... 120,027
Amortization of deferred
compensation......................... 11,620
Net loss............................... (5,647,170)
Reclassify undistributed earnings in S
Corporation to additional paid-in
capital.............................. --
Capital distribution................... (577,445)
-----------
Balance at December 31, 1996............ 3,623,732
Initial and second public offering of
common shares........................ 37,623,193
Issuance of shares of common stock for
business combinations................ 25,924,954
Issuance of detachable stock purchase
warrants............................. 301,500
Sale of detachable stock purchase
warrants............................. 548,021
Compensatory stock options accounted
for under SFAS 123................... 124,949
Exercise of warrants and options....... 2,757
Amortization of deferred
compensation......................... 108,300
Issuance of note receivable............ (11,409)
Net income............................. 82,876
Reclassify undistributed earnings in S
Corporation to additional paid-in
capital.............................. --
Capital distribution................... (598,280)
-----------
Balance at December 31, 1997............ $67,730,593
===========
</TABLE>
See accompanying notes.
6
<PAGE> 7
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
--------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $(815,817) $(5,647,170) $ 82,876
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Extraordinary charge -- early extinguishment of debt...... -- -- 323,346
Depreciation and amortization............................. 389,527 492,144 2,211,975
Amortization of deferred leasehold incentive.............. -- (4,784) (16,307)
Amortization of loan fees................................. -- -- 178,677
Noncash compensation expense.............................. -- 521,582 124,949
Amortization of deferred compensation..................... -- 11,620 --
Interest accretion........................................ -- -- 50,260
Loss on disposal of fixed assets.......................... -- 18,458 --
Changes in operating assets and liabilities, net of
effects from business combinations:
Accounts receivable, net................................ 84,378 (512,811) (5,522,779)
Prepaid expenses and other current assets............... 71,715 (132,865) (173,620)
Other assets............................................ -- (32,984) (521,371)
Accounts payable........................................ 23,320 432,665 (2,651,604)
Accrued expenses........................................ (71,216) 176,659 690,617
Accrued acquisition and offering costs.................. -- 522,963 (522,963)
Accrued compensation.................................... 43,138 48,342 834,759
Deferred rent payable................................... -- -- (1,889)
Medical claims payable.................................. 928,602 737,720 (552,064)
Due to Managed Professional Associations................ 10,184 (27,741) 1,938,309
--------- ----------- ------------
Net cash provided by (used in) operating activities......... 663,831 (3,396,202) (3,526,829)
INVESTING ACTIVITIES
Purchases of furniture and equipment........................ (184,778) (1,221,626) (1,965,105)
Payments for acquisitions, net of cash acquired............. -- -- (35,452,640)
Increase in cash surrender value of life insurance.......... (72,930) (68,979) (74,644)
Payments for capitalized acquisition costs.................. (20,240) (1,138,829) (6,170,767)
Other....................................................... -- (3,800) (396,603)
--------- ----------- ------------
Net cash used in investing activities....................... (277,948) (2,433,234) (44,059,759)
FINANCING ACTIVITIES
Net proceeds from sale of common stock...................... -- 750,000 42,850,000
Payments for offering costs................................. -- -- (4,385,413)
Proceeds from long term debt................................ 310,413 4,950,000 33,094,128
Payments on long term debt.................................. (352,694) (61,695) (19,866,349)
Net proceeds from line of credit............................ -- 184,264 --
Proceeds from credit facility............................... -- -- 4,922,182
Payments on credit facility................................. -- -- (4,874,000)
Payments for financing fees................................. -- -- (717,882)
Proceeds from leaseholds incentives......................... -- 175,000 220,000
Sale of detachable stock purchase warrants and exercise of
options................................................... -- -- 550,778
Additional borrowings on cash surrender value of life
insurance................................................. 44,279 33,585 35,870
(Increase) decrease in notes receivable, officers and
shareholders.............................................. (127,444) 429,430 152,080
Capital distribution........................................ (157,950) (577,445) (598,280)
--------- ----------- ------------
Net cash provided by (used in) financing activities......... (283,396) 5,883,139 51,383,114
--------- ----------- ------------
Increase in cash and cash equivalents....................... 102,487 53,703 3,796,526
Cash and cash equivalents at beginning of year.............. 95,642 198,129 251,832
--------- ----------- ------------
Cash and cash equivalents at end of year.................... $ 198,129 $ 251,832 $ 4,048,358
========= =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest.................... $ 141,069 $ 107,776 $ 1,039,606
========= =========== ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Common stock issued upon conversion of a note payable....... $ -- $ 250,000 $ --
========= =========== ============
Issuance of detachable stock purchase warrants.............. $ -- $ 125,000 $ 301,500
========= =========== ============
Assets purchased under capital leases....................... $ -- $ -- $ 41,000
========= =========== ============
See Note 2 regarding affiliations with practices financed
through the issuance of common stock and notes payable.
</TABLE>
See accompanying notes.
7
<PAGE> 8
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 94%, 79%
and 31% of managed care revenues and 75%, 60% and 10% of total revenues for the
years ended December 31, 1995, 1996 and 1997, respectively.
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.
In 1997, significant business acquisitions include BBG-COA, Inc., MEC
Health Care, Inc. and LSI Acquisition, Inc., now subsidiaries of the Company
(see Note 4).
2. AFFILIATIONS WITH MANAGED PROFESSIONAL ASSOCIATIONS
As part of its business strategy, the Company acquires substantially all of
the assets and assumes certain liabilities of ophthalmology and optometry
practices (Managed Professional Associations). In connection with these
acquisition, the Company enters into business management agreements (Management
Agreements) with the Managed Professional Associations and the Managed
Professional Associations stockholders.
Effective December 1, 1996, the Company acquired substantially all of the
assets and assumed certain liabilities of 10 ophthalmology and optometry
practices located in Minnesota, Arizona and Florida. In conjunction with these
acquisitions, the Company entered into Management Agreements with the Managed
Professional Associations and the Managed Professional Associations'
stockholders (collectively referred to as the 1996 Acquisitions).
8
<PAGE> 9
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the 1996 Acquisition, Vision Twenty-One issued 651,842
shares of Common Stock in 1996 and 1,491,397 shares of Common Stock in 1997 and
issued long-term notes payable to stockholders of approximately $1,925,000. The
shares which were issued in 1997 were reported as Common Stock to be issued as
of December 31, 1996. All 2,143,239 shares of Common Stock were valued at $3.96
per share based on an independent valuation.
During 1996, the Company incurred approximately $1,710,000 of acquisition
costs which were capitalized and allocated to the assets acquired and Management
Agreements entered into, including approximately $839,000 which is included in
accrued acquisition and offering costs in the accompanying consolidated balance
sheets at December 31, 1996.
During 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of 11 ophthalmology and optometry practices, a
managed care company, a medical consulting company and an ambulatory surgical
center. In conjunction with these acquisitions, the Company entered into various
Management Agreements with the Managed Professional Associations and the Managed
Professional Associations' stockholders (collectively referred to as the 1997
Acquisitions). In connection with the 1997 Acquisitions, the Company holds in
escrow approximately 196,000 shares of Common Stock valued at approximately
$1,887,000, and $395,000 in cash. Such shares and cash held in escrow, along
with additional contingent consideration of approximately $426,000 in cash and
approximately $244,000 in shares of Common Stock, will be due the owners of
certain of the eye care practices if certain financial goals are met during the
eighteen-month period following the effective date of the transactions
(generally at several dates through February 1999). Such financial goals were
established to resolve certain differences between the Company and the owners of
the eye care practices regarding the purchase price valuations of the respective
practices. The contingent consideration which is ultimately issued by the
Company is such financial goals are met will be treated as an increase in the
purchase price of the assets acquired from the respective practices. Based upon
information to date, management of the Company believes that the ultimate
issuance of any such shares held in escrow will not have a material adverse
effect on the results of operations, financial condition or liquidity of the
Company.
In connection with the 1997 Acquisitions, the Company paid cash of
approximately $4,152,000, issued 1,480,122 shares of Common Stock valued at
approximately $13,151,000 and $2,812,000 due to selling shareholders. The shares
of Common Stock were valued from $8.22 to $13.20 per share.
During 1997, the owners of an ophthalmology practice included within the
1996 Acquisitions met certain financial goals which were established to the
resolve differences between the owners and the Company regarding the purchase
price valuations of the practice. The Company issued to the owners of the
ophthalmology practice 56,356 shares valued at approximately $223,000, which
were previously held in escrow as contingent consideration for this 1996
Acquisition. The Company accounted for the additional consideration issued as an
increase in the purchase price of the assets acquired from this practice.
During 1997, the Company incurred approximately $4,911,000 of acquisition
costs which were capitalized and allocated to the assets acquired and Management
Agreements entered into, including approximately $462,000 which is included in
accrued acquisition and offering costs in the accompanying consolidated balance
sheets at December 31, 1997.
The 1996 and 1997 Acquisitions were accounted for by recording the assets
and liabilities at fair value and allocating the remaining cost to the related
Management Agreements. The Management Agreements are being amortized on a
straight-line method over 25 years. 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 40-year terms 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.
9
<PAGE> 10
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
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. Management is currently assessing the impact of this Standard.
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 $423,890 and $479,004 for
the years ended December 31, 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 expense of $31,123 and
$491,743 for the years ended December 31, 1996 and 1997, respectively. In
addition, the
10
<PAGE> 11
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company generally receives a percentage (ranging from 24% to 37%) of the Managed
Professional Associations' net earnings before interest, taxes, and
shareholder-physician expenses, as determined under the related Management
Agreements. For the years ended December 31, 1996 and 1997, this revenue was as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- -----------
<S> <C> <C>
Medical service revenues of Managed Professional
Associations.............................................. $1,667,025 $36,949,565
Less amounts retained by physician shareholders of Managed
Professional Associations................................. (203,186) (5,997,643)
---------- -----------
Management fees under Management Agreements with Managed
Professional Associations................................. $1,463,839 $30,951,922
========== ===========
</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 $1,275,296 and $25,786,309 for the years ended
December 31, 1996 and 1997, respectively.
Buying Group
The buying group business provides billing and collection services to
suppliers of optical products, whereby providers receive merchandise from
suppliers for direct shipment to the providers. The Company pays the supplier
and likewise bills the providers for such products. The Company receives a
commission of approximately 5% of the total receivables collected. This
commission revenue is included in buying group revenue in the accompanying
consolidated statements of operations and is recognized upon shipment of
merchandise by the suppliers.
Sale of Optical Goods
Revenues from the sale of optical goods are recognized on the accrual basis
in the period that the related sales occur.
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
managed health benefits payors, the Company is responsible for payment of
providers' claims. Medical claims payable represent provider claims reported to
the Company 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 $299,000, and $249,000 for the years ended December 31,
1995 and 1996, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents approximates its fair
value.
11
<PAGE> 12
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of long-term debt approximates its carrying amount 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.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out basis) or
market.
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 ten years. Leasehold improvements are
amortized using the straight-line method over the shorter of the term of lease
or the 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 initial public offering. These costs were charged against the
offering proceeds when the initial public offering was completed in August 1997.
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 excess of the purchase price over the fair
values of the net assets acquired from the business acquisitions, which is being
amortized on a straight-line method over 25 years, and 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 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.
Amortization expense with respect to intangible assets was approximately
$29,000 and $1,098,000 for the year ended December 31, 1996 and 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
12
<PAGE> 13
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 acquired companies' or 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 has accounts receivable from patients of the Managed
Professional Associations. 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
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 does not believe that there
are any substantial credit risks associated with receivables due from buying
group members or from any of the Managed Professional Associations.
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 EARNINGS (LOSS) PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share (SFAS 128). SFAS 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented and, where appropriate, restated to conform to the SFAS 128
requirements.
CONTINGENT CONSIDERATION
As part of its business strategy, the Company enters into various
transactions to acquire substantially all of the assets of various eye care
practices and enters into business management agreements with the eye care
practices. The Company also enters into strategic business acquisitions with
other companies from time to time. In connection with certain of the
acquisitions, the Company will hold shares of its common stock in escrow as
contingent consideration. Such shares of common stock held in escrow are due to
the owners of the certain eye care practices or other companies if certain
financial goals are met in the future, generally within twelve to eighteen
months of the effective date of the acquisition. The financial goals are
established on an acquisition by acquisition basis and are generally established
to resolve differences between the Company and the applicable eye care practices
or other companies regarding the purchase price valuation.
Depending on the relevant facts and circumstances of each acquisition and
the business reason for issuing contingent consideration, the Company accounts
for the issuance of common stock held in escrow as either additional purchase
consideration or compensation to the owners of the applicable eye care practices
or other companies utilizing the provisions of Emerging Issues Task Force Issue
No. 95-8 (EITF 95-8). Under EITF 95-8, the factors to be considered in making
the aforementioned accounting determination include, but are not limited to,
terms of continuing employment, components of the shareholder group, reasons for
contingent payment provisions, formulas for determining contingent consideration
and other agreements and issues.
13
<PAGE> 14
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 nonemployees 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.
INCOME TAXES
Vision Twenty-One 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.
EyeCare One Corp. and Vision Insurance Plan of America, Inc. have elected
to have their income taxed as an S corporation for income tax purposes. As a
result, in lieu of corporate income tax, EyeCare One and VIPA's taxable income
is passed through to the stockholders of EyeCare One and VIPA at the individual
level.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified in order to conform with
the 1997 presentation.
4. BUSINESS COMBINATIONS
BBG-COA, INC. ACQUISITION
During November 1997, the Company acquired all of the outstanding stock of
BBG-COA, Inc. and all related subsidiaries and affiliated companies (Block
Vision) from Block Vision stockholders. Block Vision provides billing and
collection services to suppliers of optical products through its buying group
division and provides vision benefit management services to health management
organizations preferred provider organizations and other managed care entities
through its managed care division. The purchase price for Block Vision included
458,365 shares of the Company's common stock valued at approximately $6,050,000,
cash of approximately $25,651,000 and the assumption of approximately $3,243,000
in long-term debt. The acquisition was accounted for by the purchase method of
accounting, with the purchase price allocated to the fair value of the assets
acquired and liabilities assumed, subject to the final determination of certain
items in connection with the acquisition. The excess of the purchase price over
the fair values of the net assets amounted to approximately $34 million and is
being amortized on a straight-line method over 25 years. The
14
<PAGE> 15
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operating results of Block Vision are included in the Company's consolidated
financial statements since November 1, 1997. In connection with the Block Vision
acquisition, the Company holds in escrow approximately 220,000 shares of Common
Stock. Such shares held in escrow will be due the owners of Block Vision if
certain financial goals are met during the twelve-month period ending December
31, 1998. Such financial goals were established to resolve certain differences
between the Company and the owners of Block Vision regarding the purchase price
valuations of Block Vision. Any shares of Common Stock held in escrow which are
ultimately issued by the Company if such financial goals are met will be valued
at $13.20 per share and will be treated as an increase in the purchase price of
the net assets acquired from Block Vision. Based upon information to date,
management of the Company believes that the ultimate issuance of any such shares
held in escrow will not have a material adverse effect on the results of
operations, financial condition or liquidity of the Company.
ACQUISITION FROM LASERSIGHT, INCORPORATED
During December 1997, the Company acquired all of the outstanding stock of
MEC Health Care, Inc. (MEC) and LSI Acquisition, Inc. (LSIA) from LaserSight,
Incorporated. MEC provides vision benefit management services to health
maintenance organizations, preferred provider organizations and other managed
care entities. LSIA provides practice management services to an ophthalmology
practice in New Jersey. The purchase price for MEC and LSIA included 812,500
shares of the Company's common stock valued at $6,500,000 and cash of
$6,500,000. The acquisition was accounted for by the purchase method of
accounting, with the purchase price allocated to the fair value of the assets
acquired and liabilities assumed, subject to the final determination of certain
items in connection with the acquisition. The excess of the purchase price over
the fair values of the net assets amounted to approximately $13 million and is
being amortized on a straight-line method over 25 years. The operating results
of MEC and LSIA are included in the Company's consolidated financial statements
since December 1, 1997.
The following unaudited pro forma results of operations for the years ended
December 31 assume the acquisitions described above and the affiliations with
Managed Professional Associations described in Note 2 had occurred at the
beginning of the year prior to their acquisition, and do not purport to be
indicative of the results that actually would have occurred if the acquisitions
and affiliations had been made as of those dates or of results which may occur
in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Pro forma information (unaudited):
Total revenues...................................... $30,767,000 $142,760,000 $151,956,000
=========== ============ ============
Income (loss) before extraordinary charge........... $ 1,247,000 $ (2,443,000) $ 976,000
=========== ============ ============
Net income (loss)................................... $ 1,247,000 $ (2,443,000) $ 652,000
=========== ============ ============
Net income (loss) per common share.................. $ 0.22 $ (0.32) $ 0.05
=========== ============ ============
Net income (loss) per common share -- assuming
dilution......................................... $ 0.22 $ (0.32) $ 0.05
=========== ============ ============
</TABLE>
5. NOTES RECEIVABLE
At December 31, 1996 and 1997, the Company had promissory notes with an
officer/shareholder with balances of $164,075 and $175,484, respectively. The
notes mature from December 31, 2001 through April 30, 2002, with interest
payable annually at a rate of 7.5%.
The Company had other notes with certain officers and shareholders that
were due on demand and carried interest rates ranging from 6% to 9%. During
1996, the remaining principal was paid by the officers and
15
<PAGE> 16
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shareholders. The balance outstanding at December 31, 1996 of $163,489 related
to outstanding interest which was collected in 1997.
6. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
DESCRIPTION 1996 1997
- ----------- ----------- -----------
<S> <C> <C>
Office furniture and equipment.............................. $ 4,493,473 $ 8,351,180
Leased equipment............................................ 119,825 1,179,376
Leasehold improvements...................................... 2,160,910 3,047,287
----------- -----------
6,774,208 12,577,843
Less accumulated depreciation and amortization.............. (3,036,244) (3,950,879)
----------- -----------
$ 3,737,964 $ 8,626,964
=========== ===========
</TABLE>
Depreciation and amortization of fixed assets totaled approximately
$390,000, $463,000 and $1,114,000 in 1995, 1996 and 1997, respectively.
Amortization expense related to capital leases is included in depreciation and
amortization in the consolidated statements of operations.
7. DEFERRED LEASEHOLD INCENTIVES
During 1997, EyeCare One Corp. was requested by a lessor to move its
location within a particular mall. The lessor made a payment of $220,000 to
EyeCare One Corp. as an incentive. EyeCare One Corp. offset the remaining
unamortized balance ($85,222) of leasehold improvements at the abandoned
location against the amount received and will amortize the excess ($134,778)
against rent expense over the remaining term of the lease. The amortization in
1997 was $6,739.
During 1996, EyeCare One Corp. was requested by a different lessor to move
its location within a particular mall. The lessor made a payment of $175,000 to
EyeCare One Corp. as an incentive. EyeCare One Corp. offset the remaining
unamortized balance ($79,317) of leasehold improvements at the abandoned
location against the amount received and will amortize the excess ($95,683)
against rent expense over the remaining term of the lease. The amortization in
1996 and 1997 was $4,784 and $9,568, respectively.
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- -----------
<S> <C> <C>
Unsecured notes payable to a stockholder, interest and
principal due on January 1, 1998, with interest at 8.5%
per annum. The notes were repaid in 1997.................. $ 700,000 $ --
Notes payable under $300,000 line of credit, due on demand,
bearing interest at prime plus 1% (9.25% at December 31,
1996). Interest due monthly. The notes were collateralized
by accounts receivable and were repaid in 1997............ 252,124 --
Unsecured note payable to a stockholder, due on demand, with
interest at 9% per annum. Interest due monthly. The note
was repaid in 1997........................................ 293,262 --
</TABLE>
16
<PAGE> 17
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- -----------
<S> <C> <C>
Unsecured note payable to a stockholder with interest at 8%
per annum. Interest and principal due upon completion of
an initial public offering The note was repaid in 1997.... 3,000,000 --
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. The notes were repaid in 1997....................... 1,924,959 --
10% senior subordinated note, interest due semiannually at
an effective rate of 13.5%. The note is unsecured and
matures on the earlier of a first liquidity event (initial
public offering) or December 19, 1999. The note was repaid
in 1997................................................... 1,125,000 --
Note payable under a $37 million credit facility, due on the
earlier of May 4, 1998 or upon completion of an offering,
bearing interest at a rate equal to the three-month London
Interbank Offered Rate plus 4.0% (9.8% at December 31,
1997). The note is collateralized by substantially all
assets of the Company. The note was refinanced with a bank
in 1998 (Note 15)......................................... -- $24,422,807
Note payable, due April 1, 2000, with interest due monthly
at prime less .25% (8.25% at December 31, 1996 and 1997).
The note is collateralized by certain assets of the
Company and is guaranteed to the extent of $500,000 by
certain of the Company's shareholders..................... 1,352,000 1,400,182
Notes payable due in monthly installments through 2001, with
interest rates ranging from 8% to 10% per annum. The notes
are collateralized by certain equipment................... 323,878 261,635
---------- -----------
8,971,223 26,084,624
Less current portion........................................ (48,249) (104,371)
---------- -----------
$8,922,974 $25,980,253
========== ===========
</TABLE>
As of December 31, 1997, the aggregate principal maturities of long-term
debt, giving effect to the refinancing on January 30, 1998 (Note 15), are as
follows:
<TABLE>
<S> <C>
1998........................................................ $ 104,371
1999........................................................ 84,771
2000........................................................ 3,888,129
2001........................................................ 2,469,108
2002........................................................ 2,442,281
Thereafter.................................................. 17,095,964
-----------
$26,084,624
===========
</TABLE>
17
<PAGE> 18
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. 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>
1998...................................................... $ 570,855
1999...................................................... 525,871
2000...................................................... 270,694
2001...................................................... 6,830
2002...................................................... --
----------
Total minimum lease payments................................ 1,374,250
Less amount representing interest........................... 175,316
----------
Present value of minimum lease payments (including current
portion of $566,084)...................................... $1,198,934
==========
</TABLE>
10. 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, 1997,
future minimum lease payments under noncancelable operating leases with original
terms of more than one year are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 3,055,000
1999........................................................ 2,885,000
2000........................................................ 2,435,000
2001........................................................ 2,210,000
2002........................................................ 2,074,000
Thereafter.................................................. 10,092,000
-----------
Total............................................. $22,751,000
===========
</TABLE>
Rent expense in 1995, 1996 and 1997 was approximately $984,000, $1,185,000
and $3,343,000, respectively. Rent expense related to locations leased from
stockholders of the Managed Professional Associations was approximately $53,000
and $1,284,000 during 1996 and 1997, respectively. Rent expense paid to an
officer/shareholder by EyeCare One was approximately $291,000, $331,000 and
$276,000 in 1995, 1996 and 1997, respectively.
MALPRACTICE
The Company and the Managed Professional Associations are insured with
respect to medical malpractice risks primarily on a claims-made basis.
Management is not aware of any reported claims pending against the Company or a
Managed Professional Association.
Losses resulting from unreported claims cannot be estimated by management
and, therefore, are not included in the accompanying consolidated financial
statements.
18
<PAGE> 19
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER
Laws and regulations governing the Medicare, Medicaid and other programs
are complex and subject to interpretation. In the opinion of management, the
Company and its Managed Professional Associations are in compliance with all
applicable laws and regulations. The Company is not aware of any pending or
threatened investigations involving allegations of potential wrongdoing at the
Company or any of its Managed Professional Associations. 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, Medicaid and other programs.
11. STOCKHOLDERS' EQUITY -- STATUTORY REQUIREMENTS
Dividends paid by VIPA are restricted by regulations of the Officer of the
Commissioner of Insurance (OCI). The payment of cash dividends is limited to
available stockholders' equity derived from realized net profits. Based upon the
regulatory formula, no amount is available for dividends in 1997 without
regulatory approval.
VIPA is subject to regulation by the OCI, which requires, among other
matters, the maintenance of a minimum shareholders' equity. At December 31,
1997, $128,747 of available letters of credit were outstanding to satisfy VIPA's
minimum shareholders' equity requirements.
12. INCOME TAXES
Vision Twenty-One did not have a current or deferred tax provision or
benefit for the years ended December 31, 1995, 1996 and 1997 due to its net
losses.
At December 31, 1996 and 1997, Vision Twenty-One 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 Vision Twenty-One's deferred tax assets and
liabilities as of December 31 are as follows:
<TABLE>
<CAPTION>
DEFERRED TAX
ASSET (LIABILITY)
------------------------
DECEMBER 31,
------------------------
TEMPORARY DIFFERENCES/CARRYFORWARDS 1996 1997
- ----------------------------------- ---------- -----------
<S> <C> <C>
Net operating losses........................................ $1,736,000 $ 1,586,000
Accrual to cash conversions................................. 470,000 --
Book: tax differences in leases............................. -- 228,000
Other....................................................... 220,000 149,000
Valuation allowance......................................... (958,000) (81,000)
---------- -----------
Total deferred tax assets......................... 1,468,000 1,882,000
---------- -----------
Identifiable intangible assets not deductible for tax
purposes.................................................. (1,190,000) (5,705,000)
Accrual to cash conversions................................. -- (37,000)
Difference in book: tax amortization........................ -- (98,000)
Other deferred tax liabilities.............................. (278,000) (271,000)
---------- -----------
Total deferred tax liabilities.................... 1,468,000 6,111,000
---------- -----------
Net deferred taxes.......................................... $ -- $(4,229,000)
========== ===========
</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
19
<PAGE> 20
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
realized. After consideration of all the evidence, both positive and negative,
management has determined that a $81,000 valuation allowance at December 31,
1997 is necessary to reduce the deferred tax asset to the amount that will more
likely than not be realized. The decrease in the valuation allowance for 1997 is
$877,000.
Income taxes are different from the amount computed by applying the United
States statutory rate to income (loss) before income taxes for the following
reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
--------- ----------- ---------
<S> <C> <C> <C>
Income tax expense (benefit) at the statutory
rate............................................. $(277,377) $(1,920,037) $ 27,166
Permanent differences.............................. 78,078 7,888 101,139
Effect of purchase price allocation................ -- -- 877,000
S-Corporation (income) loss........................ 108,575 763,564 (198,243)
State taxes, net of federal benefit................ (9,686) (122,628) (7,467)
Other.............................................. 77,405
Change in valuation allowance...................... 100,410 1,271,213 (877,000)
--------- ----------- ---------
Income taxes....................................... $ -- $ -- $ --
========= =========== =========
</TABLE>
Vision Twenty-One has net operating loss carryforwards of approximately
$4,215,000 at December 31, 1997 that expire in various amounts from 2009 to
2012. These net operating loss carryforwards will be subject to the "ownership
change" rules of Section 382 of the Internal Revenue Code of 1986 and, as a
result, the future use of these losses may be limited.
No pro forma provision for income tax expense has been included in the
accompanying consolidated financial statements because the amount would not have
a material effect on the Company's financial position at December 31, 1997 or
its results of operations for the year ended December 31, 1997.
13. STOCKHOLDERS' EQUITY
PUBLIC OFFERINGS
During 1997, the Company completed its initial public offering and a second
offering (collectively referred to as the Offerings) of 2,100,000 and 2,300,000
shares of Common Stock, respectively. The Offerings resulted in gross proceeds
of $42,850,000 and net proceeds to the Company, net of underwriters' discounts
and other offering expenses, of approximately $37,623,000. The net proceeds of
the offerings were used to repay outstanding indebtedness, finance the Block
Vision acquisition and for other general corporate uses. In connection with the
early extinguishment of certain indebtedness repaid from the net proceeds of the
initial public offering, the Company incurred an extraordinary charge of
$323,346 during the year ended December 31, 1997.
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
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 reserved for issuance related to the
Incentive Plan and the Professionals Plan is 1,000,000 shares and 600,000
shares, respectively. Compensation expense under SFAS No. 123 for the options
issued to
20
<PAGE> 21
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
nonemployees was immaterial for the year ended December 31, 1996 and
approximately $125,000 for the year ended December 31, 1997. The options vest
over three to four-year periods.
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 and 1997, respectively:
risk-free interest rates of 6.00% and 6.06%; a dividend yield of zero;
volatility factors of the expected market price of the Company's common stock
based on industry trends of .645 and .605; and a weighted-average expected life
of the options of 3 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 basic and diluted
net loss per common share for the year ended December 31, 1996 and 1997 would be
approximately $(5,762,000) and $(1.45) and $(387,000) and $(0.05), respectively.
A summary of the Company's stock option activity and related information is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1997
------------------ ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding -- beginning of the year.............. -- -- 562,000 $ 4.48
Granted......................................... 562,000 $4.48 381,465 $10.33
Exercised....................................... (888) $ 3.11
Forfeited....................................... (1,778) $ 3.11
------- ----- ------- ------
Outstanding -- end of year........................ 562,000 $4.48 940,779 $ 6.90
======= ===== ======= ======
Exercisable at end of year........................ -- -- 107,999 $ 3.21
======= ===== ======= ======
Weighted-average fair value of options granted
during the year................................. $ 1.91 $ 4.90
======= =======
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged from
$3.11 to $13.20. The weighted-average remaining contractual life of those
options is approximately 9 years.
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. For the year ended December 31, 1997,
the Company amortized approximately $108,000 of deferred compensation under the
Agreements. Such amount was capitalized and included in acquisition costs.
WARRANTS
From time to time, the Company has issued detachable stock purchase
warrants ("warrants"). Each warrant enables the holder to purchase one share of
the Company's Common Stock. The warrants generally are issued in connection with
debt financings or as advisory fees. Certain of the warrants are sold and others
are issued for no consideration. Warrants issued for no consideration are
recorded at their fair value at the time of issuance. Fair value is determined
by the Company in consultation with its investment bankers based on
21
<PAGE> 22
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
certain facts and circumstances at the time of issuance. A summary of warrants
outstanding at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF PRICE
WARRANTS GRANT DATE EXPIRATION DATE PER SHARE
- --------- ---------------------- ---------------------- -------------
<C> <S> <C> <C>
200,000 December 1996 December 2003 $6.00
333,333 February 1997 December 2003 $6.00
210,000 August 1997 August 2002 $10.00
35,000 October 1997 October 2002 $13.25-$13.63
50,000 November 1997 November 2002 $11.50
100,722 November-December 1997 November-December 2002 $8.25-$12.38
</TABLE>
OTHER
On June 6, 1997, the Company's Board of Directors approved a l-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 consolidated
financial statements have been restated to retroactively reflect the reverse
split.
14. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted loss
per share for income (loss) from continuing operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
---------- ----------- ----------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted earnings (loss)
per share-income (loss) available to common
stockholders.................................... $ (815,817) $(5,647,170) $ 406,222
Denominator:
Denominator for basic earnings (loss) per share-
weighted average shares......................... 3,434,682 3,977,537 7,975,671
---------- ----------- ----------
Effect of dilutive securities:
Stock options................................... -- -- 215,164
Warrants........................................ -- -- 246,551
Nonvested stock................................. -- -- 134,349
---------- ----------- ----------
Dilutive potential common shares.................. -- -- 596,064
---------- ----------- ----------
Denominator for diluted earnings (loss) per share-
adjusted weighted-average shares and assumed
conversions..................................... 3,434,682 3,977,537 8,571,735
========== =========== ==========
Basic earnings (loss) per common share............ $ (0.24) $ (1.42) $ 0.05
========== =========== ==========
Diluted earnings (loss) per common share.......... $ (0.24) $ (1.42) $ 0.05
========== =========== ==========
</TABLE>
Options and warrants to purchase approximately 186,000 shares of common
stock were outstanding at December 31, 1997, but were not included in the
computation of diluted loss per share because the exercise prices were greater
than the average market price of the common shares and, therefore, the effect
would be antidilutive. The Company has issued contingent stock consideration
which would entitle the stockholders of Block Vision and certain Managed
Professional Associations to receive approximately 416,000 of additional
22
<PAGE> 23
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of Common Stock. The additional shares were not included in the
computation of basic and diluted earnings per share for 1997 since certain
financial goals were not attained as of December 31, 1997.
15. SUBSEQUENT EVENTS
On January 30, 1998, the Company entered into a $50 million credit facility
with a bank. The interest rate on the credit facility 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. The loan will be due on January 30, 2003.
Principal repayments will commence March 31, 2000. The loan will be
collateralized by substantially all assets of the Company. The credit facility
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.
On March 10, 1998, the Company repurchased approximately 168,000 shares of
its Common Stock from LaserSight, Incorporated for approximately $1,548,000.
16. EYECARE ONE CORP. AND VISION INSURANCE PLAN OF AMERICA, INC. MERGER
ACCOUNTED FOR UNDER POOLING OF INTERESTS ACCOUNTING
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 Corp. and its
provider network under a master provider agreement with began in 1997. The
Company issued 1,109,806 shares of common stock for all of the outstanding
common stock of EyeCare One Corp. and VIPA. The merger was accounted for as a
pooling of interests and accordingly, the Company's financial statements have
been restated.
Combined and separate results of the Company, EyeCare One and VIPA since
January 1, 1995 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1995
-------------------------------------------------------
Vision
Twenty-One EyeCare One VIPA Combined
---------- ----------- ---- ---------
<S> <C> <C> <C> <C>
Revenue $ 3,081,646 $11,212,385 $571,374 $14,865,405
Extraordinary charge -- -- -- --
Net income (loss) $(1,226,436) $ 259,169 $151,450 $ (815,817)
<CAPTION>
Year Ended December 31, 1996
-------------------------------------------------------
Vision
Twenty-One EyeCare One VIPA Combined
---------- ----------- ---- ---------
<S> <C> <C> <C> <C>
Revenue $ 9,563,693 $11,718,979 $571,606 $21,854,278
Extraordinary charge -- -- -- --
Net income (loss) $(6,119,637) $ 273,132 $199,335 $(5,647,170)
<CAPTION>
Year Ended December 31, 1997
-------------------------------------------------------
Vision
Twenty-One EyeCare One VIPA Combined
---------- ----------- ---- ---------
<S> <C> <C> <C> <C>
Revenue $56,266,779 $12,569,321 $708,098 $69,544,198
Extraordinary charge $ (323,346) -- -- $ (323,346)
Net income (loss) $ (521,911) $ 437,201 $167,586 $ 82,876
</TABLE>
17. OTHER TRANSACTIONS (UNAUDITED)
Through April 27, 1998, the Company acquired six eye care practices, one
managed care company and one optical company and has also entered into binding
letters of intent to acquire two eye care practices. The fair value of the net
assets and business management agreements associated with these entities is
expected to approximate $19.7 million (subject to certain adjustments), and will
be paid through the issuance of approximately 808,000 shares of the Company's
common stock and approximately $11.5 million in cash from the Company's $50
million credit facility.
23
<PAGE> 24
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
The Exhibits to this Report are listed in the Exhibit Index set forth
elsewhere herein.
24
<PAGE> 25
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 hereunto duly authorized.
VISION TWENTY-ONE, INC.
By: /s/ Richard T. Welch
----------------------------
Richard T. Welch
Its: Chief Financial Officer
Dated: August 19, 1998
25
<PAGE> 26
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- -------- -------
23.1 Consent of Ernst & Young, LLP, independent certified public
accountants.
26
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-38285) pertaining to Vision Twenty-One, Inc. 1996 Stock
Incentive Plan of our report dated March 11, 1998 (except Note 16, as to which
the date is March 31, 1998), with respect to the consolidated financial
statements of Vision Twenty-One, Inc. and Subsidiaries at December 31, 1996 and
1997 and for the three years in the period ended December 31, 1997 included in
the Form 8-K dated August 19, 1998, filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
---------------------------------
Ernst & Young LLP
Tampa, Florida
August 19, 1998
