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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER: 000-22977
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VISION TWENTY-ONE, INC.
(Exact name of Registrant as specified in its charter)
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FLORIDA 59-3384581
(State or jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
7360 BRYAN DAIRY ROAD
SUITE 200
LARGO, FLORIDA 33777
(Address of principal executive offices) (Zip code)
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Registrant's telephone number, including area code: (727) 545-4300
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001
(Title of Class)
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 [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant on May 31, 1999, was $30,063,904 based upon the closing price of
such shares on such date on the Nasdaq Stock Market's National Market. As of May
31, 1999, there were 15,147,588 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be used in
connection with the Registrant's 1999 Annual Meeting of Shareholders, which was
filed with the Commission on April 30, 1999, are incorporated by reference in
Part III, Items 10-13 of this Form 10-K. Except with respect to information
specifically incorporated by reference in this Form 10-K, the Proxy Statement is
not deemed to be filed as a part hereof.
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VISION TWENTY-ONE, INC.
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 7
ITEM 3. LEGAL PROCEEDINGS........................................... 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 8
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 9
ITEM 6. SELECTED FINANCIAL DATA..................................... 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND DISCLOSURE.............................................. 54
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 54
ITEM 11. EXECUTIVE COMPENSATION...................................... 54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 54
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 54
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K.................................................... 55
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PART I
ITEM 1. BUSINESS
GENERAL.
Vision Twenty-One, Inc. (the "Company") develops and manages local area eye
care delivery systems ("LADS(SM)") in 40 markets. LADS involve contractual
affiliations with local optometrists and ophthalmologists (the "Affiliated
Providers") to provide primarily vision care and refractive surgery at
independent or company-owned clinics and surgery centers. Additionally, the
Company develops retail distribution channels for its LADS through owning or
affiliating with retail optical chains, and develops managed care distribution
channels for its LADS through contracting with local health plans and other
third party payors.
The Company's LADS operation revenue is primarily derived through a wide
range of services earned at and through ownership interests in, or strategic
affiliations at eye care clinics, refractive surgery centers ("RSCs"), retail
optical locations and ambulatory surgical centers ("ASCs") and or management
agreements with select Affiliated Providers ("Managed Providers"). The Company
also earns revenue by entering into capitated managed care contracts with
third-party insurers and payors and by administering indemnity fee-for-service
plans. As of March 31, 1999, the Company had managed care contracts and discount
fee-for-service plans covering approximately 5.2 million exclusively contracted
patient lives.
The Company initially grew in establishing its local delivery systems with
primary focus on integration of optometry and ophthalmology practices into the
system with correlated practice management services. While the Company continues
to provide these services and considers its management relationships key to its
delivery systems, the Company is now focused on leveraging the benefits of its
delivery system in order to take advantage of the rapidly growing vision care
sector, principally through its refractive care programs and development of
surgery centers.
Vision Twenty-One, Inc. was incorporated in Florida on May 9, 1996. Its
principal operating subsidiaries consist of Vision 21 Managed Eye Care of Tampa
Bay, Inc. ("Vision 21 MCO"), Vision 21 Physician Practice Management Company,
Inc. ("Vision 21 PPMC") and BBG-COA, Inc. and its subsidiaries ("Block Vision").
Vision 21 PPMC and Vision 21 MCO were merged with the Company in November 1996.
In the merger, all of the outstanding shares of stock of Vision 21 PPMC and
Vision 21 MCO which were owned by certain executive officers and directors of
the Company, were exchanged for Common Stock of the Company. The principal
executive office of the Company is located at 7360 Bryan Dairy Road, Suite 200,
Largo, Florida 33777, and its telephone number is (727) 545-4300.
THE VISION TWENTY-ONE LOCAL AREA DELIVERY SYSTEM ("LADS")
The Company's goal is to enable each of its LADS to capture the leading
market share of fee-for-service patients and managed care members. To achieve
its goal, the Company is focused on the following strategies: (i) developing
LADS in order to provide for a complete continuum of easily accessible, high
quality and affordable eye care services; (ii) leveraging its LADS delivery
system to increase patient revenue and cost efficiencies for each LADS through
refractive care, managed care and other related vision care development
initiatives; and (iii) expanding into select new markets to create regional
networks of LADS.
The Company's primary focus is in vision care with a particular emphasis on
refractive initiatives. This continuum of eye care services begins with primary
eye care services provided by optometrists practicing at free-standing clinics,
optometrists located in retail optical locations and primary care
ophthalmologists. In order to provide greater access for patients seeking
primary eye care, the Company affiliates with both optometrists and retail
optical centers.
Once patients have initially accessed a LADS to obtain primary eye care
services, they are positioned to move within the LADS to the next appropriate
level of eye care. Refractive care and related vision care will be important
elements of these services. The Company affiliates with ophthalmologists that
provide refractive surgery, cataract surgery and medical surgical care, with
subspecialty ophthalmologists that provide tertiary eye care, with ASCs and with
RSCs providing facility services. LADS are attractive to managed care
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companies because the Company's Affiliated Providers are able to deliver all
levels of eye care to the managed care plan's members.
The Company's refractive surgery program will be key in the Company
strategy to increase patient revenues. Thus far, the Company has instituted its
refractive program in only four of its forty markets. The introduction has been
successful and the Company goal is to accelerate the roll-out of this program.
Additionally, managed care initiatives are implemented for each LADS to enable
the Affiliated Providers to gain incremental market share and increased patient
visits. In conjunction with its affiliated retail optical centers and affiliated
optometrists, the Company jointly markets regional primary eye care networks to
manage vision plans. In addition, the Company markets regional networks of
affiliated ophthalmologists, ASCs and RSCs to managed care plans for the
provision of medical and surgical eye care. More importantly, the Company is
able to market each of its LADS to managed care plans seeking to contract with
integrated networks of optometrists, ophthalmologists, retail optical centers
and ASCs that can offer all primary, secondary and tertiary eye care services
pursuant to comprehensive "carve out" eye care plans.
The Company intends to continue expanding its LADS model to new markets.
The Company seeks to enter select markets where the Company will be in a
position to leverage its future network to successfully roll-out in that market
its vision care initiatives including the Company's refractive surgery program,
and/or (i) the Company has a strategic affiliation with a leading corporate
retail optical provider and/or (ii) there is an existing network of optometrists
and ophthalmologists that the Company can affiliate with, and/or (iii) the
Company is able to obtain a managed care contract that provides an initial
patient base. Other considerations include an analysis of the competitive
environment, the legal and regulatory environment as it pertains to the delivery
of eye care services and the level of managed care penetration. The Company also
intends to leverage existing managed care relationships to expand into new
markets where such managed care providers have established a significant
presence.
LADS LOCATIONS
The Company has grown its LADS to forty markets in various stages of
development located throughout the United States.
STRATEGIC DEVELOPMENTS
The Company has concentrated on developing its LADS since late 1997. It is
currently analyzing its mix of business units within such LADS and assessing the
long-term strategic value of each existing component. The Company is also
rapidly increasing its overall business mix with an emphasis on high growth
opportunities existing in the eye care sector such as refractive surgery in
which to add additional complementary business to its LADS. The Company sold its
buying group division (which provided billing and collection services to
suppliers of optical goods) in June 1999. The Company seeks to focus its future
investments and efforts on businesses that are able to complement and leverage
the benefits of its LADS, in particular its vision care initiatives including
the Company's refractive surgery programs.
MANAGEMENT AGREEMENTS
In certain select markets where the Company cannot by law employ the
professional, the Company enters into long-term management agreements
("Management Agreements") with professional associations or corporations (the
"Managed Professional Associations") pursuant to which the Company is the sole
provider of comprehensive management, business and administrative services for
the non-professional aspects of the professional practices. Each Managed
Provider maintains full authority, control and responsibility over the provision
of professional care and services to its patients. The Company does not provide
professional care to patients nor does the Company employ any of the
ophthalmologists or optometrists, or any other professional health care provider
personnel, of the Managed Professional Association. Additionally, as health care
governmental regulations and their interpretations change in the future, the
Company may have to revise terms in its Management Agreements to comply with the
regulatory changes.
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The Company enters into Management Agreements with professional
associations managed by the Company, the initial term of which is typically 40
years. Under the majority of the Company's Management Agreements, the management
fee ranges from 20% to 37% of the Managed Professional Associations' net
revenues after deducting from such revenues all expenses of the clinic other
than those related to shareholders of the Managed Professional Associations.
This type of arrangement is usually utilized in management relationships with
ophthalmology practices. Additionally, the Company has Management Agreements
with management fees ranging from 50% to 87% of net revenues of a practice and
the Company is required to pay generally all the expenses at the clinic with the
exception of professional salaries and benefits. Such arrangements are typically
utilized in management relationships with optometrists. The practice management
fees earned by the Company pursuant to these Management Agreements fluctuate
depending on variances in revenues and expenses of the Managed Professional
Associations.
The Management Agreements are terminable by either party if the other party
materially defaults in the performance of any of its obligations under the
Management Agreement and such default continues for a certain period of time
after notice, if the other party files a petition for bankruptcy or upon the
occurrence of other similar events. The Management Agreements may also be
terminated by mutual agreement in writing.
MANAGED CARE
As an increasing percentage of the population is covered by managed care
organizations, the Company believes that its success will be, in part, dependent
upon its ability to negotiate managed care contracts with HMOs, health insurance
companies and other third-party payors pursuant to which services will be
provided on a risk-sharing or capitated basis. The Company also has contracts
for the provision of certain financial and administrative services related to
its indemnity insurance and fee-for-service plans. Managed care contracts are
typically for one year terms that renew automatically and the contracts are
terminable by either party on sixty days notice.
The Company's typical contracts with third-party health benefits payors
(insurance companies and HMOs) provide that the Company will arrange and pay for
eye care services that are needed by the payor's members in exchange for a fixed
amount per patient per month or a percentage of the premiums paid on behalf of
the patient, without regard to the volume of services that the patient requires.
Under these arrangements, the Company accepts the risk that the cost and
utilization of services may exceed expectations in exchange for its ability to
profit if cost and utilization are kept below expected levels. The Company can
directly benefit by effectively managing costs and utilizing its relationships
with its Affiliated Providers. Because the Company assures the credentials of
the providers, establishes quality and utilization control systems and
implements payment arrangements with the providers, third-party payors are able
to use their limited resources in other areas where they have greater expertise.
RETAIL OPTICAL LOCATIONS AND AFFILIATIONS
In some states, the Company owns retail optical locations. In other states,
the Company has utilized strategic affiliations and/or management agreements in
connection with retail optical for its LADS. The Company believes relationships
with select leading retail optical chains within a LADS are important because of
the retail chains' market position, name recognition, quality of service,
accessibility through extended hours, geographic distribution, and compatibility
of management and facilities with the Company's primary eye care objectives.
BUYING GROUP
The Company's buying group division provided billing and collection
services to suppliers of optical goods. The business arrangements are terminable
at any time by the Company or its customers. As recently disclosed the Company
sold this division in June 1999 in order to focus more on business units which
complement its LADS operations.
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1998 TRANSACTIONS
During 1998, the Company completed the acquisition of the business assets
of 54 optometry clinics, nine ophthalmology clinics, 40 optical dispensaries,
two RSCs and one ASC located in Arizona, Florida, Minnesota, New Jersey, Nevada,
Texas, 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 with the
related professional associations employing 65 optometrists and five
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.
In September 1998, the Company completed the acquisition of American
SurgiSite Centers, Inc., ("American SurgiSite") an ambulatory surgery center
developer, management and consulting company located in New Jersey. American
SurgiSite manages eight ambulatory surgery facilities. In June 1998, the Company
completed the acquisition of Vision World, Inc., a retail optical chain located
in Minneapolis, Minnesota. Vision World, Inc. consists of 38 retail clinics and
30 optometrists.
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 Company as a pooling of
interests.
GOVERNMENTAL AND STATE REGULATIONS
General Overview
The health care industry is highly regulated, and there can be no assurance
that the regulatory environment in which the Company operates will not change
significantly and adversely in the future. In general, regulation of health care
providers and companies is increasing.
There are currently several federal and state initiatives designed to amend
regulations relating to the provision of health care services, the access to
health care, the costs of health care and the manner in which health care
providers are reimbursed for their services. However, it is not possible to
predict whether any such initiatives will be enacted as legislation or, if
enacted, what their form, effective dates or impact on the Company will be.
Every state imposes licensing requirements on ophthalmologists,
optometrists and opticians ("Practitioners") and on their facilities and
services. In addition, many states require regulatory approval, including
certificates of need, before establishing certain types of health care
facilities, offering certain services or making expenditures in excess of
statutory thresholds for health care equipment, facilities or programs.
Much of the Company's revenue is derived from payments made by
government-sponsored health care programs (principally Medicare). These programs
are subject to substantial regulation. Any change in reimbursement regulations,
policies, practices, interpretations or statutes that places material
limitations on reimbursement amounts or practices could adversely affect the
operations of the Company. Increasing budgetary pressures at both the federal
and state level and the rapidly escalating costs of health care and
reimbursement programs have led, and may continue to lead, to significant
reductions in government reimbursements for certain medical charges and
elimination of coverage for certain individuals under these programs. Federal
legislation could result in a reduction of Medicare funding. The Company cannot
predict at this time whether or when any of such proposals will be adopted or,
if adopted and implemented, what effect such proposals would have on the
Company.
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The following is a description of some of the various laws that affect the
Company's business.
Corporate Practice of Optometry and Ophthalmology. The laws of many states
prohibit corporations that are not owned entirely by eye care professionals from
employing eye care professionals, having control over clinical decision-making,
or engaging in other activities that are deemed to constitute the practice of
optometry and ophthalmology. The Company contracts with professional
associations (which are owned by one or more licensed optometrists or
ophthalmologists), which in turn employ or contract with other licensed
optometrists or ophthalmologists to provide professional services. The Company
performs only non-professional services, does not represent to the public or its
customers that it provides professional eye care services, and is not exercising
influence or control over the practices of the eye care practitioners employed
by the professional associations.
Fee-Splitting and Anti-kickback Laws
Most states have anti-kickback laws prohibiting paying or receiving any
remuneration, direct or indirect, that is intended to induce referrals for
health care products or services. In addition, federal law prohibits a physician
or optometrist from referring Medicare or Medicaid patients to an entity
providing "designated health services" in which they have a financial interest.
Many states also prohibit "fee-splitting" by eye care professionals with any
party except other eye care professionals in the same professional corporation
or practice association. In most cases, these laws apply to the paying of a fee
to another person for referring a patient or otherwise generating business, and
do not prohibit payment of reasonable compensation for facilities and services
(other than the generation of business), even if the payment is based on a
percentage of the practice's revenues.
In Florida, the Florida Board of Medicine has issued an order determining
that a management fee charged by a publicly held national management company
based upon a percentage of revenue constitutes illegal fee-splitting which has
been stayed and is currently on appeal to a Florida district court of appeals.
The case before the Board involved arrangements that are different from the
Company's arrangements in certain respects, including the fact the management
fee was based on a percentage of the increase in net revenues of the practice
after the management arrangement commenced. If the Board's order is allowed to
stand without clarification, there is a risk that the Company's arrangements
with physicians in the State of Florida could be determined to be in violation
of the fee-splitting statute which could have a material adverse effect on the
Company's results of operations if they cannot be restructured to obtain
substantially similar financial benefits. Since the same statute applies to
optometrists, the same risk exists with respect to the Company's arrangements
with optometrists.
The federal anti-kickback law prohibits the offer, payment, solicitation or
receipt of any form of remuneration in return for the referral of patients
covered by federally funded health care programs such as Medicare and Medicaid,
or in return for purchasing, leasing, ordering or arranging for the purchase,
lease or order of any item or service that is covered by a federal program.
False Claims Laws. Federal and state laws prohibit any person from
knowingly and willfully making any false statement or misrepresentation of a
material fact in seeking payment for items or services. Federal laws impose
civil monetary penalties for filing claims that the filing party "should know"
are not appropriate under rules applicable to federally funded health care
programs. The federal False Claims Act allows a private person, as well as the
government, to bring a civil action (in the name of the government) for
violation of its provisions. While the Company believes that its procedures are
in compliance with such laws, there can be no assurance that the Company will
not be deemed to be in violation.
Certificate of Need and Facilities Licensing. Some states require a
certificate of need ("CON") to be obtained prior to the construction or
expansion of an ambulatory surgical center, the acquisition of major equipment
or the introduction of certain new services. There can be no assurance that the
Company will be able to obtain CONs which could affect our ability to develop
ASCs. In addition, some states may require us to obtain certain licenses to
operate facilities including refractive surgical centers. While the Company has
no reason to believe that it will be unable to obtain necessary facilities
licenses without unreasonable expense or delay, there can be no assurance that
it will be able to obtain any required license.
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Insurance Licensure. Most states impose strict licensure requirements on
health insurance companies, HMOs, and other companies that engage in the
business of insurance. In the event that the Company is required to become
licensed under these laws, the licensure process can be lengthy and time
consuming and, unless the regulatory authority permits the Company to continue
to operate while the licensure process is progressing, the Company could
experience a material adverse change in its business while the licensure process
is pending. In addition, many of the licensing requirements mandate strict
financial and other requirements which the Company may not immediately be able
to meet. Once licensed, the Company would be subject to continuing oversight by
and reporting to the respective regulatory agency.
Limited Health Service Plans and Third Party Administration
Licensing. Some states permit managed care networks that assume insurance risk,
but only as to a limited class of health services, to be licensed as limited
health service plans, and thereby avoid the need to be licensed as an insurer or
HMO even if its arrangements are with individual subscribers or self-insured
employers. Additionally, some states require licensing for companies providing
administrative services in connection with managed care business. The Company
intends to seek such licenses in those states where it is available for eye care
networks. However, the Company may not be able to meet such requirements in all
cases and should this result in the loss of any material business (individually
or in the aggregate) it could have a material adverse effect on the Company's
business and operating results.
Physician Incentive Plans. Medicare regulations impose certain disclosure
requirements on managed care networks that compensate eye care providers in a
manner that is related to the volume of services provided to Medicare patients
(other than services personally provided by the provider). If such incentive
payments exceed 25 percent of the provider's potential payments, the network is
also required to show that the providers have certain "stop loss" financial
projections and to conduct certain Medicare enrollee surveys.
"Any Willing Provider" Laws. Some states have adopted, and others are
considering, legislation that requires managed care networks to include any
provider who is willing to abide by the terms of the network's contracts and/or
prohibit termination of providers without cause. Such laws would limit the
ability of the Company to develop effective managed care networks in such
states.
Antitrust Laws. The Company's business is also subject to a range of
antitrust laws that prohibit anti-competitive conduct, including price fixing,
concerted refusals to deal and divisions of markets. Among other things, these
laws limit the ability of the Company to enter into business arrangements with
separate practice groups that compete in the same geographic market.
The several laws described above have civil, criminal and administrative
penalties and have been subject to limited judicial and regulatory
interpretation. They are enforced by regulatory agencies that are vested with
broad discretion in interpreting their meaning. While the Company believes that
its agreements and activities are in compliance with these laws, the Company's
agreements and activities have not been examined by federal or state authorities
under these laws and regulations. For these reasons, there can be no assurance
that review of the Company's business arrangements will not result in
determinations that adversely affect the Company's operations or that certain
agreements between the Company and eye care providers or third party payors will
not be held invalid and unenforceable. In addition, these laws and their
interpretation vary from state to state. The regulatory framework of certain
jurisdictions may limit the Company's expansion into, or ability to continue
operations within, such jurisdictions if the Company is unable to modify its
operational structure to conform with such regulatory framework. Any limitation
on the Company's ability to expand could have an adverse effect on the Company.
COMPETITION
General
The health care industry is highly competitive and subject to continual
changes in the method in which services are provided and the manner in which
health care providers are selected and compensated. The Company believes that
the economies of private and public reforms in the health care industry
emphasizing cost containment and accountability will result in an increasing
shift of eye care from highly fragmented, small
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providers to larger providers or other eye care delivery services. Companies in
other health care industry segments, some of which have financial and other
resources greater than those of the Company, may become competitors. Increased
competition could have a material adverse effect on the Company's financial
condition and results of operations. The basis for competition includes service,
price, strength of the Company's delivery network (where applicable),
experience, reputation, strength of operational systems, strength of
informational systems, the degree of cost efficiencies and synergies, marketing
strength, managed care expertise, patient access and quality assessments and
assurances programs. The future success of the Company will be directly related
to its ability to expand the managed eye care delivery network geographically,
attract reputable providers, expand the scope of services offered by associated
practices, and dedicate resources to an active sales team focused exclusively on
the Company's sales effort.
Refractive Surgery
The market for providing access to refractive surgery through utilization
of excimer lasers is highly competitive. The Company competes with laser centers
operated by local operators and eye surgeons who have purchased their own laser.
The Company also competes with several other companies, including at least two
manufacturers of laser equipment, in providing access to excimer lasers in the
U.S. Other companies are currently in the process of gaining FDA approval for
their lasers, and these companies may elect to enter the laser center business.
Other companies which have indicated they intend to operate or already operate
laser centers in the U.S. are Clear Vision Laser Centers, Inc., LCA Vision,
Inc., NovaMed Eyecare Management, LLC, Omega Health Systems, Inc., Physicians
Resource Group, Inc., TLC The Laser Center, Inc. and Laser Vision Centers, Inc.
The services and equipment we offer also compete with other forms of treatment
for refractive disorders, including eyeglasses, contact lenses, radial
keratotomy, corneal rings and other technologies currently under development.
SEASONALITY
The Company does not experience significant seasonal fluctuations in its
business.
SERVICE MARKS
The Company believes that its trademarks and service marks are important
and accordingly it has registered "Vision 21," Vision Twenty-One" with its
design logo, "Eye Care for the 21st Century," "A Different Point of View," and
"LADS," with the United States Patent and Trademark Office and has acquired
through its Vision World Acquisition several state registrations, "Vision
World", "Amalfi Ochialli" and "Polythin."
EMPLOYEES
At May 31, 1999, the Company had approximately 2,250 employees, of which
121 were employed at the Company's headquarters, 63 were employed at Block
Vision's office and 2,066 were employed by the Company at Managed Provider
practices. The Company believes that its relationship with its employees is
good.
ITEM 2. PROPERTIES
The Company recently relocated its corporate headquarters to new office
space in Largo, Florida consisting of approximately 25,700 square feet. The
lease on the former location expired and the new lease is for a term through
September 15, 2004. The Company believes that such facility is adequate for its
current needs.
The Company leases 10,586 square feet of office space in Boca Raton,
Florida for Block Vision's corporate office under a lease expiring May 31, 2001.
The Company believes that the facility is adequate for Block Vision's current
needs.
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The Company leases or subleases the clinic locations it manages pursuant to
the Management Agreements with the Managed Professional Associations. The
Company anticipates that expanded facilities will be needed as the Managed
Professional Associations grow. The Company also expects to enter into leases
and subleases in the future as it acquires the allowable assets of certain
Affiliated Providers and enters into Management Agreements.
The Company also leases and subleases the ASC and RSC facilities it
manages. The Company does not expect that the current ASCs and RSCs will need to
be expanded. However, the Company does anticipate that it will enter into leases
and subleases as it acquires additional ASC and RSC facilities.
The Company also leases minimal but adequate facilities in certain business
regions for regional support.
ITEM 3. LEGAL PROCEEDINGS
Except as described below, the Company is not a party to any material
litigation and is not aware of any threatened material litigation:
The Company, certain of its executive officers who are also directors
and a former officer are named as defendants in several purported class
action lawsuits filed in the United States District Court for the middle
District of Florida, Tampa Division. The complaints allege, principally,
that the Company and the other defendants issued materially false and
misleading statements related to the Company's integration of its
acquisitions, in violation of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The plaintiffs
seek to certify their complaints as class actions on behalf of all
purchasers of the Company's common stock in the period between December 5,
1997 and November 5, 1998, and seek and award of an unspecified amount of
monetary damages to all of the members of the purported class. The
purported class action lawsuit were as follows: (i) Tad McBride against
Vision Twenty-One, Inc., Theodore N. Gillette, Richard T. Welch, and
Michael P. Block (filed on January 22, 1999); (ii) Robert Rosen v. Vision
Twenty-One, Inc., Theodore N. Gillette and Richard T. Welch (filed on
January 27, 1999); (iii) Charles Murray against Vision Twenty-One, Inc.,
Theodore N. Gillette, Richard T. Welch and Michael P. Block (filed on
January 29, 1999); and (iv) Sam Cipriano, on behalf of himself and all
others similarly situated v. Vision Twenty-One, Inc., Theodore N. Gillette,
Richard T. Welch and Michael P. Block.
On April 20, 1999, pursuant to a motion and order, these complaints
were consolidated into one case captioned: Tad McBride, Plaintiff, v.
Vision Twenty-One, Inc., Theodore N. Gillette, Richard T. Welch and Michael
Block and the lead plaintiff's group is required to file and serve an
amended complaint within forty-five days from May 31, 1999. The case is
still uncertified and as of June 11, 1999 the Company had not been served
with an amended complaint. While it is impossible to predict the outcome or
impact of such litigation, management believes this litigation is without
merit and intends to vigorously defend the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
<PAGE> 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Common Stock of the Company has been trading publicly under the symbol
"EYES" on the Nasdaq National Market since the Company's initial public offering
on August 18, 1997. Prior to the Company's initial public offering, there was no
active trading market for the Company's Common Stock. The following table sets
forth the high and low closing sale price of the Company's Common Stock as
reported in the Nasdaq National Market (rounded up to the nearest whole cent)
for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
1997
Third Quarter (beginning August 18, 1997)................... $14.63 $9.00
Fourth Quarter.............................................. 14.38 7.25
1998
First Quarter............................................... 11.75 8.25
Second Quarter.............................................. 11.63 6.38
Third Quarter............................................... 7.00 4.63
Fourth Quarter.............................................. 7.13 3.63
</TABLE>
HOLDERS
On May 31, 1999, the last reported sales price of the Company's Common
Stock as reported by the Nasdaq National Market was $3.44 per share and there
were 245 stockholders of record. The number of record holders was determined
from the records of the Company's transfer agent and does not include beneficial
owners of Common Stock whose shares are held in the names of various securities
brokers, dealers and registered clearing agencies.
DIVIDENDS
The Company has never paid cash dividends on its Common Stock. The Company
presently intends to retain all cash for use in the operation and expansion of
the Company's business and does not anticipate paying any cash dividends in the
near future. In addition, the Company's existing bank credit agreement restricts
the declaration or payment of cash dividends on its Common Stock.
SALES OF UNREGISTERED SECURITIES
The Company issued equity securities during 1998 in the following private
transactions not previously included in a quarterly report which were exempt
from the registration requirements of the Securities Act pursuant to Section
4(2).
In October 1998, the Company issued 15,217 shares and 10,870 shares of its
Common Stock to Charles J. Crane and Bernard C. Spier in connection with an
amended and restated Management Agreement with Northern New Jersey Eye
Institute.
In October 1998, the Company issued 235,366 shares of Common Stock in
connection with the acquisition of American SurgiSite, Inc.
9
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Revenues:
LADS operations, net.......................... $11,306 $11,636 $13,662 $43,521 $109,478
Managed care.................................. 1,224 3,229 8,192 18,762 54,980
Buying group.................................. -- -- -- 7,261 58,959
------- ------- ------- ------- --------
Total revenue......................... 12,530 14,865 21,854 69,544 223,417
------- ------- ------- ------- --------
Operating expenses:
LADS operating expenses....................... 8,309 9,163 10,476 35,139 86,277
Medical claims................................ 863 3,350 9,475 14,090 42,159
Cost of buying group sales.................... -- -- -- 6,883 55,926
General & administrative...................... 2,610 2,632 4,876 9,579 27,665
Depreciation & amortization................... 387 390 487 2,196 6,984
Special items:................................
Restructuring and other charges............ -- -- -- -- 6,463
Start-up and software development costs.... -- -- -- -- 932
Merger costs............................... -- -- -- -- 718
Business development....................... -- -- 1,927 -- --
------- ------- ------- ------- --------
Total operating expenses.............. 12,169 15,535 27,241 67,887 227,124
------- ------- ------- ------- --------
Income (loss) from operations................... 361 (670) (5,387) 1,657 (3,707)
Amortization of loan fees....................... -- -- -- 178 314
Interest expense................................ 4 146 260 1,073 5,065
------- ------- ------- ------- --------
Income (loss) before income taxes............... 357 (816) (5,647) 406 (9,086)
Income taxes.................................... -- -- -- -- (2,450)
------- ------- ------- ------- --------
Income (loss) before extraordinary charge....... 357 (816) (5,647) 406 (6,636)
Extraordinary charge -- early extinguishment of
debt.......................................... -- -- -- 323 1,319
------- ------- ------- ------- --------
Net income (loss)............................... $ 357 $ (816) $(5,647) $ 83 $ (7,955)
======= ======= ======= ======= ========
Loss before extraordinary charge per common
share......................................... $ (0.24) $ (1.42) $ 0.05 $ (0.46)
Extraordinary charge per common share........... -- -- $ (0.04) (0.09)
------- ------- ------- --------
Net earnings (loss) per common share............ $ (0.24) $ (1.42) $ 0.01 $ (0.55)
======= ======= ======= ========
Weighted average number of common shares
outstanding................................... 3,434 3,978 8,571 14,385
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1994 1995 1996 1997 1998
------ ------- ------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (1):
Working capital (deficit)....................... $ (131) $(1,237) $(2,303) $ 4,868 $ 7,134
Total assets.................................... 3,690 3,485 20,576 119,380 191,677
Long-term debt and capital lease obligations,
including current maturities.................. 1,612 1,690 9,097 27,283 84,374
Total stockholders' equity (deficit)............ 697 (289) 3,624 67,731 73,722
</TABLE>
- ---------------
(1) Data has been restated for the acquisitions of EyeCare One Corp. and Vision
Insurance Plan of America, Inc. on March 31, 1998 which was accounted for as
a pooling of interests.
10
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL OVERVIEW
Vision Twenty-One, Inc. (the "Company") develops and manages local area eye
care delivery systems ("LADS(SM)") in 40 markets. LADS involve contractual
affiliations with local optometrists and ophthalmologists (the "Affiliated
Providers") to provide primarily vision care and refractive surgery at
independent or company-owned clinics and surgery centers. Additionally, the
Company develops retail distribution channels for its LADS through owning or
affiliating with retail optical chains, and develops managed care distribution
channels for its LADS through contracting with local health plans and other
third party payors.
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
approximately 5,800 Affiliated Providers deliver eye care services. Of these
Affiliated Providers, 218 are Managed Providers, consisting of 170 optometrists
and 48 ophthalmologists practicing at 175 clinic locations, 12 ASCs and six
RSCs. In addition, the Company has over 7,000 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 103 managed care contracts and 12 discount
fee-for-service plans covering approximately 5.2 million exclusively contracted
patient lives.
Through the third quarter of 1998, the Company's primary focus had 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 positioned the Company in its principal markets and the Company is
now the largest full service eye care company in the United States. The Company
now believes that there are significant internal growth and development
opportunities available within existing LADS and as a result, in the last
quarter of 1998 and thus far in 1999, the Company has slowed down its
acquisition pace. Among other things, the Company plans to focus on vision care
including opening new de novo clinics and surgery centers and expanding managed
care initiatives with a primary focus on expanding its refractive surgery
programs to take advantage of the significantly increased demand for refractive
surgery. Furthermore, the Company will focus on completing the integration of
systems, processes and management with the goal of achieving significant cost
savings in the future.
The Company has concentrated on developing its LADs since late 1997. It is
currently analyzing certain business units within such LADS and assessing the
long-term strategic value of each existing component. The Company is also
evaluating high growth opportunities existing in the vision care sector with
special emphasis on refractive surgery in which to add additional complementary
business to its LADs. In connection with these strategies, the Company recently
sold its Buying Group Division, the proceeds of which were used for repayment of
a portion of its bank debt.
ADDITIONAL OVERVIEW
The Company enters into long-term management agreements ("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 net 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 net 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 Association derive their
revenues from fees received for the use of ASCs, RSCs and sales of optical
goods. The Managed Professional Associations currently receive
11
<PAGE> 14
revenues from a combination of sources, including capitation payments from
managed care companies and government funded reimbursements (Medicare and
Medicaid).
The Company recognizes as managed care revenue certain fixed payments
received pursuant to its managed care contracts on a capitated or risk-sharing
basis. The Company also recognizes fees received for the provision of certain
financial and administrative services related to its indemnity fee-for-service
plans. The Company manages risk of capitated managed care contracts by
monitoring utilization of each Affiliated Provider and comparing their
utilization to national averages, expected utilization at the time the contract
was bid, utilization of other providers and historical utilization of the
Affiliated Provider. Abnormal utilization of an Affiliated Provider results in a
medical chart review by the Company and further counseling on appropriate
clinical protocols. To further manage the risk of capitated managed care
contracts, the Company, in certain instances enters into agreements to pay
Affiliated Providers a fixed per member per month fee for eye care services
rendered or a pro rata share of managed care capitated payments received (as
determined by the number of eye care procedures performed relative to other
Affiliated Providers). The Company targets these payments at a range of 80% to
90% of total payments received pursuant to the Company's capitated managed care
contracts. Pursuant to its capitated managed care contracts, the Company
receives a fixed payment per member month for a predetermined benefit level of
eye care services, as negotiated between the Company and the payor.
Profitability of the Company's capitated managed care contracts is directly
related to the specific terms negotiated, utilization of eye care services by
member patients and the effectiveness of administering the contracts. The
Company receives a percentage of collected medical billings for administering
indemnity fee-for-service plans for its Affiliated Providers. Although the terms
and conditions of the Company's managed care contracts vary considerably, they
are typically over a one-year term.
In June 1999, the Company completed the sale of its Buying Group division.
The Company applied the cash portion of the purchase price primarily to repay a
portion of outstanding borrowings under its credit facility. The sale of the
Buying Group will reduce the Company's revenues, but will be beneficial to the
Company's overall operating margins.
1998 ACQUISITIONS
In addition to the acquisitions described below, the Company completed the
acquisition of the business assets of 54 optometry clinics, nine ophthalmology
clinics, one ambulatory surgical center, two refractive centers and 21 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 five
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 acquisitions 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 $20.1 million,
consisting of approximately 1.0 million shares of Common Stock and approximately
$13.5 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 282,185
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 $35.7 million and $16.1 million in additional revenue for
1997 and 1998, respectively.
The Company completed the acquisition of American SurgiSite Centers, Inc.,
("American SurgiSite") 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
12
<PAGE> 15
with this transaction, the Company paid $1.5 million in cash and issued 235,366
shares of Common Stock. In addition, the Company is required to provide
additional contingent consideration of up to $3.1 million if certain post
acquisition performance targets are met. On a pro forma basis, had this
acquisition occurred at the beginning of 1997, the Company would have recorded
$4.8 million and $3.2 million in additional revenue for 1997 and 1998,
respectively.
The Company completed the acquisition of Vision World, Inc. ("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 $16.1 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 this acquisition occurred
at the beginning of 1997, the Company would have recorded $27.0 million and
$13.5 million in additional revenue for 1997 and 1998, respectively.
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 Company as a pooling of
interests. The costs of approximately $718,000 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, valued at approximately $10.5
million.
In January 1998, the Company completed the acquisition of The Eye DRx, a
retail optical chain of 19 retail clinics located in Bloomfield, New Jersey. In
connection with this transaction, the Company paid $7.2 million in cash and
issued 522,600 shares of Common Stock. In addition, the Company is required to
provide additional contingent consideration of 19,398 shares of Common Stock if
certain post acquisition performance targets are met. In conjunction with this
acquisition, the Company entered into Management Agreements with the Managed
Professional Associations' stockholders. On a pro forma basis, had this
transaction occurred at the beginning of 1997, the Company would have recorded
$19.1 million in additional revenue for 1997.
1997 ACQUISITIONS
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 acquired all of the issued and outstanding stock of
BBG-COA, Inc. ("Block Vision") (the "Block Acquisition"), LSI Acquisition, Inc.
("LSI") and MEC Health Care, Inc. ("MEC"), (LSI and MEC are collectively
referred to herein as the "LaserSight Acquisitions"). The Company also 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. Excluding the Block and LaserSight Acquisitions, such
acquisitions are collectively referred to herein as the "1997 Acquisitions." In
connection with the 1997, Block and LaserSight Acquisitions, the Company
provided aggregate consideration of $68.1 million, consisting of 2,758,572
shares of Common Stock, $38.8 million in cash and $364,000 in promissory notes.
Additionally, the Company is required to provide additional contingent
consideration, consisting of approximately 393,654 shares of Common Stock and
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. In connection with the 1997 and 1998 Acquisitions, the Company expects to
issue approximately 105,000 additional shares of Common Stock and approximately
$463,000 in cash in 1999.
1996 ACQUISITIONS
In December 1996, the Company completed the acquisition of the business
assets of 22 optometry clinics, nine ophthalmology clinics, 15 optical
dispensaries and one ASC. Concurrently, the Company entered into
13
<PAGE> 16
Management Agreements with the related professional associations employing 34
optometrists and 13 ophthalmologists (the "1996 Acquisitions"). These
acquisitions were accounted for by recording the assets and liabilities at fair
value and allocating the remaining costs to the related Management Agreements.
Additionally, the Company acquired substantially all the business assets of a
managed care company servicing four capitated managed care contracts covering
over 100,000 patient lives, which was accounted for under the purchase method of
accounting. In connection with the 1996 Acquisitions, the Company provided
aggregate consideration of $11.2 million, consisting of 2.1 million shares of
Common Stock, promissory notes in the aggregate principal amount of $1.9 million
and $800,000 in assumed debt. Additionally, the Company agreed to provide
aggregate contingent consideration of $316,000, consisting of 79,805 shares of
Common Stock in connection with the 1996 Acquisitions if certain
post-acquisition performance targets were met. As a result of certain of the
post-acquisition targets being met, the Company issued contingent consideration
in the aggregate of 56,356 shares of common stock in 1997 and 6,209 shares of
common stock in 1998. The Company does not expect any of the remaining
contingent consideration in connection with the 1996 Acquisitions to be paid.
The Company recorded a one-time charge in the fourth quarter of 1996 for
expenses associated with the planned acquisition of the business assets of
certain Affiliated Providers at the time of the 1996 acquisitions which the
Company chose not to continue to pursue.
RESTRUCTURING PLAN AND CERTAIN ACCOUNTING MATTERS
The Company recognized various accounting impacts in the fourth quarter of
1998 relative to a restructuring plan announced in 1998 (the "Restructuring
Plan"). The Restructuring Plan initiatives, which are comprised of a number of
specific projects, are designed to position the Company to take full operational
and economic advantage of various key acquisitions, allow the Company to
complete the consolidation and deployment of necessary infrastructure for the
future, and optimize and integrate certain acquired assets. The Company expects
to achieve savings up to $8.0 million annually in connection with such
restructuring program once it is fully implemented, which is expected to be
accomplished by the end of 1999. The total restructuring and other charges and
business integration costs recorded in 1998 were $8.9 million. (See Note 15 --
Restructuring Plan to the Consolidated Financial Statements). The Restructuring
Plan resulted in the accrual of a reserve for restructuring costs at December
31, 1998 in the amount of approximately $2.8 million. These initiatives include:
a) the integration of managed care service centers and business lines, b) the
consolidation of retail back office functions, and c) the consolidation of
certain corporate functions. As provided for in the Restructuring Plan, the
Company also expensed other charges and related business integration costs
related to the Restructuring Plan that were incurred during the fourth quarter
of 1998. These costs represent incremental or redundant costs as well as
internal costs that resulted directly from the development and initial
implementation of the Restructuring Plan, but are required to be expensed as
incurred. All other charges and business integration costs that were expensed as
incurred during 1998 were approximately $6.1 million. These other charges and
business integration costs consist primarily of: a) charge offs related to
exiting certain markets, b) charge offs of capitalized costs that will not be
realized as a result of the Restructuring Plan, and c) redundant employee costs
and expenses for severed employees through the date of severance. In addition,
these costs include training costs, rebranding costs, relocation costs,
retention payments, and lease costs for facilities that have been planned for
closure. The Company expects to record approximately $3.1 million during fiscal
1999 for business integration costs expected to be incurred, until such time as
the Restructuring Plan has been fully implemented.
Several unusual accounting items occurred in 1998 (which specific costs
related thereto are not expected to occur again in the future). These unusual
items consisted of restructuring and other charges and business integration
costs of $8.9 million related to the previously announced Restructuring Plan
discussed above, merger costs of $0.7 million, start-up and software development
costs of $0.9 million, an extraordinary charge of $1.3 million related to early
extinguishment of debt and expenses for the Company's previously disclosed
intercompany reconciliation and other items totaling $3.6 million. The $3.6
million consisted of $1.6 million of expenses related to the results of the
Company's previously announced unreconciled item and $2.0 million of one time
items related to revenue recognition of acquisition integration fees and
receivable write offs. As a result of the Company's reconciliation of
intercompany accounts, change in accounting for start-up costs and software
development costs, and the change in accounting treatment for revenue
recognition regarding
14
<PAGE> 17
acquisition integration fees in 1998, the Company will restate, to the extent
material, its previously reported 1998 Quarterly Financial Results, by filing
Amended Form 10-Qs for 1998.
As previously announced, the unreconciled items referenced above required
extensive analysis of the financial statements from fiscal years 1996, 1997 and
1998 for many of the Company's acquired entities, resulting in a delay in filing
the Company's 10-K. The identified items substantially resulted from the
different accounting systems used for each entity during the prior periods.
Currently, these entities are operating on a single accounting management
information system using thin client server technology to connect them to
corporate headquarters over a private intranet network.
Revenues for the first quarter ended March 31, 1999 increased over 30% to
$65.9 million while EBITDA, before business integration costs of $1.3 million,
increased over 20% to $5.4 million. Excluding the impact of business integration
costs in 1999 as a result of the Company's previously disclosed Restructuring
Plan, net income was $1.3 million, or $0.09 per share on a diluted basis or
inclusive of business integration costs, $16,175. The Company did not have a tax
provision in the first quarter of 1999. These business integration costs are
expected to continue to be incurred by the Company through 1999 on a diminishing
basis.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total revenues, certain
items in the Company's statement of operations for the periods indicated. As a
result of the 1996 Acquisitions, the 1997 Acquisitions and the 1998
Acquisitions, the Company does not believe that the historical percentage
relationships for 1996, 1997 and 1998 reflect the Company's expected future
operations.
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Revenues:
LADS operations, net...................................... 62.5% 62.6% 49.0%
Managed care.............................................. 37.5 27.0 24.6
Buying group.............................................. -- 10.4 26.4
----- ----- -----
Total revenue..................................... 100.0 100.0 100.0
----- ----- -----
Operating expenses:
LADS operating expenses................................... 47.9 50.5 38.6
Medical claims............................................ 43.4 20.3 18.9
Cost of buying group sales................................ -- 9.9 25.0
General & administrative.................................. 22.3 13.8 12.4
Depreciation & amortization............................... 2.2 3.1 3.2
Special items:
Restructuring and other charges........................ -- -- 2.9
Start-up and software development costs................ -- -- 0.4
Merger costs........................................... -- -- 0.3
Business development................................... 8.8 -- --
----- ----- -----
Total operating expenses.......................... 124.6 97.6 101.7
----- ----- -----
Income (loss) from operations............................... (24.6) 2.4 (1.7)
Amortization of loan fees................................. -- 0.3 0.1
Interest expense.......................................... 1.2 1.5 2.3
----- ----- -----
Income (loss) before income taxes......................... (25.8) 0.6 (4.1)
Income taxes.............................................. -- -- (1.1)
----- ----- -----
Income (loss) before extraordinary charge................. (25.8) 0.6 (3.0)
Extraordinary charge -- early extinguishment of debt...... -- 0.5 0.6
----- ----- -----
NET INCOME (LOSS)......................................... (25.8)% 0.1% (3.6)%
===== ===== =====
Medical Claims Ratio...................................... 115.7% 75.1% 76.7%
</TABLE>
15
<PAGE> 18
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues increased 221% from $69.5 million for the year ended
December 31, 1997 to $223.4 million for the year ended December 31, 1998. The
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 $70.2 million
of the increase; an increase in buying group revenues attributable to the Block
Acquisition which accounted for $51.7 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 $32.0 million of the increase. Comparable clinic
revenues increased approximately 12% over 1997 levels for practices managed by
the Company for the entire year. Managed care revenues on a comparable basis
increased 35% over 1997 levels for business units operated by the Company for
the entire year. The Company's revenue mix has changed from 1997 to 1998, as a
full year of revenue was recognized for the Company's buying group in 1998
compared to three months in 1997.
LADS Operating Expenses. LADS operating expenses increased 146% from $35.1
million for the year ended December 31, 1997 to $86.3 million for the year ended
December 31, 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 80.7% for the year ended December 31, 1997 to 78.8% for
the year ended December 31, 1998. This trend is not expected to continue as it
will be adversely impacted by increased LADS operations expenses in the future.
Medical Claims. Medical claims expense increased 199% from $14.1 million
for the year ended December 31, 1997 to $42.2 million for the year ended
December 31, 1998. The Company's medical claims ratio increased/decreased from
75.1% for the year ended December 31,1997 to 76.7% for the year ended December
31, 1998. This increase was primarily attributed to higher utilization in basic
vision care plans. As a percentage of managed care revenues, vision care
wellness service contracts increased to 45% of managed care revenues for the
year ended December 31, 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 received (as determined by the number of eye care procedures
performed relative to other Affiliated Providers) or negotiated fee-for-service
schedules.
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 189% from $9.6 million for the year ended December 31, 1997 to $27.7
million for the year ended December 31, 1998. This increase was caused primarily
by the 1998 Acquisitions, staff necessary to support the Company's retail
optical division, practice management and managed care business and increases in
travel expenses, professional fees and occupancy costs. General and
administrative expenses primarily consist of salaries, wages and benefits
related to management and administrative staff located at the Company's
corporate headquarters, retail chains back offices, and its managed care service
centers. As a percentage of revenues, general and administrative expenses
decreased from 13.8% for the year ended December 31, 1997 to 12.4% for the year
ended December 31, 1998. This decrease was caused primarily by increased
economies of scale resulting from the Company's expanding business. General and
administrative expenses for the year ended December 31, 1998 include
approximately $2.5 million of business integration costs discussed above, which
are expected to be eliminated throughout 1999. General and administrative
expenses for the year ended December 31, 1998 includes approximately $0.5
million in intercompany amounts which remained unreconciled at December 31, 1998
and was written off in 1998.
Depreciation and Amortization. Depreciation and amortization expense
increased from $2.2 million for the year ended December 31, 1997 to $7.0 million
for the year ended December 31, 1998. As a percentage of
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<PAGE> 19
revenues, depreciation and amortization expense remained relatively constant at
3.1% and 3.2% for the year ended December 31, 1997 and 1998, respectively.
Restructuring and Other Charges. Restructuring and other charges were
incurred as a result of the Company's Restructuring Plan discussed above.
Start-up and Software Development Costs. Start-up costs were incurred due
to the Company's early adoption of the provisions of AICPA Statement of Position
98-5 ("SOP 98-5"), "Reporting on the Costs of Start-up Activities" and AICPA
Statement of Position 98-1 ("SOP 98-1") "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." Start-up costs relate to
start-up activities associated primarily with refractive surgery centers and
initiatives in 1998, and software development costs are associated with the
Company's implementation of the Great Plains accounting software system in 1998.
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 372% from $1.1 million for
the year ended December 31, 1997 to $5.1 million for the year ended December 31,
1998. The increase was caused by an increase in the debt outstanding from $27.3
million at December 31, 1997 to $84.4 million at December 31, 1998.
Extraordinary Charges. The Company incurred extraordinary charges of $1.3
million for the year ended December 31, 1998 in connection with amendments to
its credit facility. These extraordinary charges represent the write-off of
unamortized deferred loan costs.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues increased 218% from $21.9 million for the year ended
December 31, 1996 to $69.5 million for the year ended December 31, 1997. This
increase was caused primarily by an increase in practice management fees
attributable to the 1996 Acquisitions, the 1997 Acquisitions and the Block
Acquisition, which accounted for $29.1 million of the increase, and an increase
in buying group revenues attributable to the Block Acquisition, which accounted
for $7.3 million of the increase, and an increase in managed care revenues
attributable to the 1997 Acquisitions, the Block Acquisition, the addition of
three capitated contracts and the expansion of an existing contract which
accounted for $10.3 million of the increase. Comparable clinic revenues
increased 12% over 1996 levels for practices managed by the Company for the
entire year. Managed care revenues on a comparable basis increased 45% over 1996
levels for business units operated by the Company for the entire year.
LADS Operating Expenses. LADS operating expenses increased 235% from $10.5
million for the year ended December 31, 1996 to $35.1 million for the year ended
December 31, 1997. 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 as a result of the 1996 and the 1997 Acquisitions. Prior to the 1996
Acquisitions, the Company recognized no practice management expenses related to
management services because the Company was not liable for such expenses.
Medical Claims. Medical claims expense increased 49% from $9.5 million for
the year ended December 31, 1997 to $14.1 million for the year ended December
31, 1997. The Company's medical claims ratio decreased from 115.7% for the year
ended December 31, 1996 to 75.1% for the year ended December 31, 1997. This
decrease was caused primarily by the Company's Block Acquisition and the
renegotiated agreement to pay its ophthalmology and ASC providers a per member
per month fee for surgical eye care services provided under the Company's
largest capitated managed care contract. Medical claims expense consists of
payments by the Company to its Affiliated Providers for primary eye care
services, medical and surgical eye care services and facility services. These
payments are based on fixed payments per member per month, a pro rata share of
managed 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 16.2% and fee-for-service claims represented 83.8%
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of total medical claims expense for the year ended December 31, 1997. Medical
claims for the year ended December 31, 1996 were based entirely on negotiated
fee-for-service schedules.
Cost of Buying Group Sales. Buying group cost of sales were incurred by
the Company as a result of it acquisition of Block Vision. The cost of buying
group sales represents two months of expenses attributable to Block Vision's
buying group business. These expenses represent the costs of various optical
products which are shipped directly to providers of eye care services.
General and Administrative Expenses. General and administrative expenses
increased 96% from $4.9 million for the year ended December 31, 1996 to $9.6
million for the year ended December 31, 1997. This increase was caused primarily
by the 1997 Acquisitions, and an increase in corporate staff necessary to
support the Company's expanded practice management and managed care business.
General and administrative expenses primarily consist of salaries, wages and
benefits related to management and administrative staff located at the Company's
corporate headquarters and managed care service centers. As a percentage of
revenues, general and administrative expenses decreased from 22.3% for the year
ended December 31, 1996 to 13.8% for the year ended December 31, 1997. This
decrease was caused primarily by increased economies of scale resulting from the
Company's expanding business.
Depreciation and Amortization. Depreciation and amortization expense
increased from $0.5 million for the year ended December 31, 1996 to $2.2 million
for the year ended December 31, 1997. As a percentage of revenues, depreciation
and amortization expense increased from 2.2% for the year ended December 31,
1996 to 3.1% for the year ended December 31, 1997. These increases were caused
primarily by the amortization of intangibles attributable to the 1996
Acquisitions, the 1997 Acquisitions and the Block Acquisition.
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 year
ended December 31, 1997 was $3.5 million as compared to net cash provided by
operating activities of $1.0 million for the year ended December 31, 1998. The
Company experiences changes in certain balance sheet accounts which result
primarily from normal working capital needs.
Net cash used in investing activities for the years ended December 31, 1997
and 1998 was $44.1 million and $50.0 million, respectively, and resulted from
payments for acquisitions, medical equipment and office furniture and
capitalized acquisition costs.
Net cash provided by financing activities for the years ended December 31,
1997 and 1998 was $51.4 million and $51.0 million, respectively. The amounts for
1997 were primarily attributable to debt and equity financings, and the amounts
attributable for 1998 were primarily attributable to debt financings.
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 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.
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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
(the "Restated Credit Agreement"). The Restated Credit Agreement 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
Restated Credit Agreement has been accessed in the past for working capital and
general corporate purposes, and for acquisitions. The Restated Credit Agreement
included a seven-year term loan of $70.0 million and a $30.0 million five-year
revolving and acquisition facility. Other terms and conditions were
substantially the same as the prior Credit Agreement with a slightly higher
margin spread on the seven-year term portion.
On February 23, 1999, the Company entered into an amendment to the Restated
Credit Agreement (the "First Amendment"). The First Amendment provided a $50.0
million term loan maturing in June 2005 with quarterly principal payments of one
percent beginning in June 1999, a $20.0 million term loan maturing in June 2003
with quarterly principal payments of approximately $1.3 million beginning in
September 2000, a $12.5 million term loan which was to be utilized for
acquisitions and capital expenditures maturing in June 2003, and a $7.5 million
revolving facility maturing in June 2003. The First Amendment also revised
certain of the covenants and included a slightly higher margin spread on the
seven-year term portion. Other terms and conditions were substantially the same
as the Restated Credit Agreement. On June 11, 1999, the Company entered into a
second amendment to the Restated Credit Agreement (the "Second Amendment" and
together with the Restated Credit Agreement and the First Amendment, the
"Amended Credit Agreement"). The Second Amendment principally revised certain
financial covenants in connection with the credit facility which the Company was
previously unable to meet and resulted in the early termination of the Company's
unused portion of its borrowing capacity relative to the acquisition component
of the credit facility, which was scheduled to expire June 30, 1999. Of the $7.5
million of borrowings under the revolving facility, the Company currently has
limited availability of $1.7 million. As of June 10, 1999, the Company had used
approximately $78.0 million of its available borrowings under the Amended Credit
Agreement. The Company is currently evaluating its capital structure and various
financing alternatives as it considers its working capital needs over the
foreseeable future.
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"). 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 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
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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.
For the year ended December 31, 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 $1.47 million in cash and 235,366 shares. In
addition, the Company is required to provide additional contingent consideration
of up to $3.1 million 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 $16.1 million in
cash, net of cash acquired. In addition, the Company is required to provide
additional contingent consideration of up to $0.6 million in cash if certain
post-acquisition performance targets are met.
In March 1998, the Company completed a pooling of interests transaction
with EyeCare One and VIPA, Inc. 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 820,085
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
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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. There were no contingent shares issued for the year ended December 31,
1998, as EBITDA of Block Vision did not reach the required level.
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 treated as deferred compensation the issuance of shares of
restricted stock in September and October 1996 for future services related to
various business development initiatives and management incentives. In September
1996, the Company entered into a five-year services agreement with its Chief
Medical Officer and current director of the Company and issued 108,133 shares of
restricted Common Stock. These shares were valued at $2.77 per share or
$300,000. Of these shares, 40% vested immediate and the Company recorded a
business development charge of $120,000. The remaining 60% of the shares were
recorded as an offset in stockholders' equity as deferred compensation for
$180,000. In October 1996, the Company entered into a five-year advisory
agreement with an industry consultant and issued 125,627 shares of restricted
Common Stock, which vest over the life of the advisory agreement. These shares
were valued at $2.77 per share or $349,000. The Company recorded the issuance of
these shares as an offset in stockholders' equity as deferred compensation. This
deferred compensation is being amortized as the shares vest on a pro rata basis.
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 or 30 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. Intangible assets represented approximately 70% of the Company's total
assets at December 31, 1998. In determining the useful life of a Management
Agreement, the Company considers the operating history and other characteristics
of each practice. A principal consideration is the degree to which the practice
has demonstrated its ability to extend its existence indefinitely. The carrying
value of intangible assets is evaluated for recoverability whenever adverse
effects or changes in circumstances indicate that the carrying amount may not be
recoverable. Among other factors, the Company considers in making the valuation
are changes in the Managed Professional Associations market position,
reputation, profitability, and geographic penetration.
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.
The Company has grown significantly with acquisitions funded with stock of
the Company. The Company may 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 ability to use stock in acquisitions will be
affected by the market price for its Common Stock and the number or shares so
provided will affect the Company's earnings per share.
In 1999, thus far, the Company has operated and grown principally through
the use of positive operating capital cash flows and with a total sale of $1.1
million in company stock in two private transactions. As a result of the Second
Amendment, certain limited borrowings are now available to the Company.
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In connection with the Company's business integration plan described above,
the Company expects to spend approximately $4.9 million for severance and other
employee termination benefits in fiscal 1999. Additionally, the Company
currently expects to spend approximately $3.0 million for capital expenditures
and $3.0 million for new operating leases of equipment in fiscal 1999 which
includes costs to open new ASCs and new refractive surgery centers. Based upon
the Company's short-term anticipated capital needs for operation of its
business, general corporate purposes, along with furtherance of certain growth
objectives, management believes that the combination of the funds expected to be
provided from the Company's operations, limited accessibility under the credit
facility, accessibility to operating leases for certain new equipment and
currently anticipated future sources, will be sufficient for the short term. In
order to fully implement its vision care initiatives, including full
implementation of its refractive surgery program throughout its LADS markets,
the Company will seek additional working capital in the very near future and is
currently analyzing its options relative to the same. Additionally, to the
extent additional capital resources are currently needed for acquisitions or
other significant matters, 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 problem.
The Company has implemented a plan of action which it believes will make
its computer systems year "2000 compliant." The Company is actively addressing
operational concerns regarding the year "2000" and is reviewing its systems to
identify those that may be affected by the year "2000."
The Company divides its information technology software into the following
four general categories: (i) Financial (general ledger, financial and management
reporting, accounts payable, payroll and fixed assets), (ii) Retail Chains
(integrated-Point of Sale, Purchase Order Management, and Inventory Control
Systems), (iii) Practice Management (including billing, collection, accounts
receivables and third party billing) and (iv) Managed Care. The Company is in
various stages of readiness with respect to its information technology within
each category. The Company's Financial Category has been certified Year 2000
compliant by the third party software vendor providing the software to the
Company. The Company has selected the Delta Optical Computer System (the "Delta
System") as its integrated system for Retail Chains category. The Delta System
has been implemented in its Stein Optical Division. As part of the Company's
Restructuring Plan, the Delta System will be implemented in the remaining two
retail chain divisions. The Company has received certification that the Delta
System is Year 2000 compliant. Historically, the Company's philosophy with
respect to the Practice Management category of software is to utilize the third
party software legacy systems in place as long as they capably served a
practices needs. Currently, the Company has been advised that the third party
software suppliers it utilizes for the Practice Management category have either
installed or have scheduled to install over the next several months, Year 2000
upgrades. The Managed Care category generally has custom software that has been
upgraded for Year 2000 compliance and final testing is scheduled over the next
several months.
The Company has initiated 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" 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 does not
expect the cost associated with its year "2000" compliance efforts to have a
material effect on the Company's future financial condition and results of
operation. The Company believes it currently has no material exposure to
contingencies related to the year "2000" issue and accordingly has not developed
a contingency plan. However, there can be no assurances that events outside the
control of the Company will not occur as a result of the year "2000" problem and
that such events would not have a material adverse effect on the Company.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily as a result
of borrowing activities, under its Amended Credit Agreement, which is used to
maintain liquidity and fund the Company's business operations. The nature and
amount of the Company's debt may vary as a result of future business
requirements, market conditions and other factors. The extent of the Company's
interest rate risk is not quantifiable or predictable because of the variability
of future interest rates and business financing requirements, but the Company
does not believe such risk is material. The Company did not use derivative
instruments to adjust the Company's interest rate risk profile in 1998.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Form 10-K, the annual report and certain information provided
periodically in writing and orally by the Company's designated officers and
agents including the annual report contain certain 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 terms
"Vision Twenty-One," "company," "we," "our" and "us" refer to Vision Twenty-One,
Inc. The words "expect," "believe," "goal," "plan," "intend," "estimate," and
similar expressions and variations thereof are intended to specifically identify
forward-looking statements. Those statements appear in this Form 10K, the annual
report and the documents incorporated herein by reference, 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) our financial prospects;
(ii) the successful integration of both completed and any future
acquisitions;
(iii) our ability to efficiently and effectively manage the Managed
Providers;
(iv) our financing plans including our ability to obtain satisfactory
working capital through additional offerings of debt or equity;
(v) trends affecting our financial condition or results of operations
including our stock price and its potential impact on the number of shares
utilized in acquisitions and on future earnings per share;
(vi) our growth strategy and operating strategy including the shift in
focus to internal growth and opening new de novo clinics and surgery
centers, expanding managed care initiatives, vision care and refractive
surgery programs;
(vii) the impact on us of current and future governmental regulations;
(viii) our current and future managed care contracts and the impact
such contracts have on gross profit;
(ix) our ability to continue to recruit Affiliated Providers, to
convert certain of the Affiliated Providers to Managed Providers, and to
maintain our relationships with Affiliated Providers;
(x) our ability to continue the strategic relationships with
affiliated retail optical companies;
(xi) our strategic initiatives in vision care and refractive surgery;
(xii) our ability to operate the managed care business efficiently,
profitably and effectively;
(xiii) our integration of systems and implementation of cost savings
and reduction plans;
(xiv) the future LADS overall operating margins;
(xv) our year 2000 readiness and the readiness of third parties;
(xvi) our expected savings from the restructuring programs;
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(xvii) our current and expected future revenue and the impact of any
acquisition and the consolidation of infrastructure may have on our future
performance;
(xviii) our current run rate for laser vision correction procedures
and the expected growth of such procedures and return on invested capital;
(xviv) our late filing of the 10-Q and 10-K; and
(xx) the purported class action complaints filed against the company.
You 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) in the event the company experiences future operating and net
losses;
(ii) any material inability to successfully integrate and profitably
operate our acquisitions or to successfully open integrate and profitably
operate de novo clinics, refractive surgery centers and ASCs;
(iii) any material inability to acquire additional sufficient capital
and financing at a reasonable cost to fund our long-term growth strategy or
to maintain compliance with our credit facility;
(iv) the inability to expand our managed care business, renew existing
managed care contracts or maintain and expand our Contract Provider
Network;
(v) our inability to negotiate managed care contracts with HMOs;
(vi) our inability to successfully and profitably operate our managed
care business or for existing managed care contracts to positively impact
gross profit;
(vii) our ability to maintain our relationships with our managed
clinics and the managed clinics inability to operate profitably;
(viii) changes in state and/or federal governmental regulations which
could materially affect our ability to operate or materially affect our
profitability;
(ix) the inability to maintain or obtain required licensure in the
states in which we operate and in the states in which we may seek to
operate in the future,
(x) the degree current shortages in refractive surgery equipment
adversely impacts the Company's access to same;
(xi) consolidation of our competitors, poor operating results by our
competitors, or adverse governmental or judicial rulings against our
competitors;
(xii) any failure by us to meet analysts expectations;
(xiii) our stock price;
(xiv) any adverse change in our medical claims to managed care revenue
ratio;
(xv) the effect of any future stock overhang in the market place
(where the available stock for sale would be in excess of demand) and any
negative impact on our stock price as a result of the overhang;
(xvi) our inability to realize any significant benefits, cost savings
or reductions from our restructuring program;
(xvii) the non-compliance or readiness of the company or third parties
with respect to year "2000" issues;
(xviii) our inability to successfully increase and expand vision care
and refractive surgery programs and other desired initiatives complementary
to our LADS business;
24
<PAGE> 27
(xix) unexpected cost increases,
(xx) our inability to successfully defend against the class action
lawsuits or any additional litigation that may arise;
(xxi) any reduction in coverage of and ratings by analysts following
us and other factors including those identified in our filings from
time-to-time with the SEC.
The Company undertakes no obligation to publicly update or revise forward
looking statements to reflect events or circumstances after the date of this
Form 10-K and annual report or to reflect the occurrence of unanticipated
events.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(A) FINANCIAL STATEMENTS
(1) Financial Statements. The Company's Financial Statements included in
Item 8 hereof, as required, including the report of the Independent Certified
Public Accountants are as follows:
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.......... 26
Consolidated Balance Sheets -- December 31, 1997 and 1998... 27
Consolidated Statements of Operations -- Years Ended
December 31, 1996, 1997 and 1998.......................... 28
Consolidated Statements of Stockholders' Equity -- Years
Ended December 31, 1996, 1997 and 1998.................... 29
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1996, 1997 and 1998.......................... 30
Notes to Consolidated Financial Statements.................. 31-53
</TABLE>
25
<PAGE> 28
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, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1998
the Company changed its method of accounting for start-up costs and software
development costs.
/s/ ERNST & YOUNG LLP
Tampa, Florida
June 11, 1999
26
<PAGE> 29
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,048,358 $ 6,052,423
Accounts receivable due from:
Buying group members, net of allowances for doubtful
accounts of approximately $33,000 and $30,000 at
December 31, 1997 and 1998, respectively............... 5,427,592 6,288,923
Patients, net of allowances for uncollectible accounts
and contractual adjustments of approximately $3,446,000
and $4,106,000 at December 31, 1997 and 1998,
respectively........................................... 5,502,110 10,806,173
Managed Professional Associations....................... 3,973,221 4,115,662
Managed health benefits payors.......................... 1,276,790 1,573,799
Other................................................... 165,292 48,165
Current portion of note receivable........................ -- 35,508
Inventories............................................... 936,242 3,308,813
Prepaid expenses and other current assets................. 2,016,036 3,131,328
------------ ------------
Total current assets................................ 23,345,641 35,360,794
Fixed assets, net........................................... 8,626,964 15,222,586
Excess of purchase price, net of accumulated amortization of
$278,982 and $2,099,693 at December 31, 1997 and 1998,
respectively.............................................. 47,182,934 62,860,749
Management Agreements, net of accumulated amortization of
$852,519 and $3,312,532 at December 31, 1997 and 1998,
respectively.............................................. 36,981,407 69,371,278
Cash surrender value of life insurance, net of policy loans
of $624,464 at December 31, 1997.......................... 205,596 --
Deferred income taxes....................................... 1,882,000 6,300,000
Note receivable, net of current portion..................... -- 160,568
Other assets................................................ 1,155,359 2,401,149
------------ ------------
Total assets........................................ $119,379,901 $191,677,124
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,319,654 $ 6,951,099
Accrued expenses.......................................... 2,708,741 6,069,593
Medical claims payable.................................... 3,555,195 4,713,995
Accrued compensation...................................... 1,381,497 3,716,787
Accrued restructuring charge.............................. -- 2,796,000
Accrued acquisition costs................................. 1,045,905 165,752
Due to Managed Professional Associations.................. 961,463 1,087,545
Due to selling stockholders............................... 2,811,809 --
Current portion of deferred leasehold incentive........... 23,046 43,868
Current portion of long-term debt......................... 104,371 2,143,149
Current portion of obligations under capital leases....... 566,084 538,820
------------ ------------
Total current liabilities........................... 18,477,765 28,226,608
Deferred rent payable....................................... 261,117 253,258
Obligations under capital leases............................ 632,850 474,891
Long-term debt, less current portion........................ 25,980,253 81,217,396
Deferred leasehold incentive................................ 186,323 271,358
Deferred income taxes....................................... 6,111,000 7,512,000
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 (1997) and 15,067,025 (1998) shares issued and
outstanding............................................... 13,530 15,067
Additional paid-in capital.................................. 76,416,476 89,196,292
Common stock to be issued (105,164 shares at December 31,
1998)..................................................... -- 1,053,664
Deferred compensation....................................... (408,735) (300,435)
Note receivable from officer................................ (175,484) (172,984)
Accumulated deficit......................................... (8,115,194) (16,069,991)
------------ ------------
Total stockholders' equity.................................. 67,730,593 73,721,613
------------ ------------
Total liabilities and stockholders' equity.................. $119,379,901 $191,677,124
============ ============
</TABLE>
See accompanying notes.
27
<PAGE> 30
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
REVENUES:
LADS operations, net................................. $13,661,822 $43,521,243 $109,477,913
Managed care......................................... 8,192,456 18,762,158 54,980,006
Buying group......................................... -- 7,260,797 58,959,195
----------- ----------- ------------
21,854,278 69,544,198 223,417,114
Operating expenses:
LADS operating expenses.............................. 10,474,994 35,139,668 86,277,417
Medical claims....................................... 9,475,395 14,090,250 42,159,210
Cost of buying group sales........................... -- 6,882,199 55,926,173
General and administrative........................... 4,876,207 9,578,925 27,664,447
Depreciation and amortization........................ 487,360 2,195,668 6,984,129
Special items:.......................................
Restructuring and other charges................... -- -- 6,462,595
Start-up and software development costs........... -- -- 932,494
Merger costs...................................... -- -- 717,835
Business development costs........................ 1,926,895 -- --
----------- ----------- ------------
27,240,851 67,886,710 227,124,300
----------- ----------- ------------
Income (loss) from operations.......................... (5,386,573) 1,657,488 (3,707,186)
Amortization of loan fees.............................. -- 178,677 314,208
Interest expense....................................... 260,597 1,072,589 5,064,891
----------- ----------- ------------
Income (loss) before income taxes...................... (5,647,170) 406,222 (9,086,285)
Income taxes........................................... -- -- (2,450,000)
----------- ----------- ------------
Income (loss) before extraordinary charge.............. (5,647,170) 406,222 (6,636,285)
Extraordinary charge--early extinguishment of debt..... -- 323,346 1,318,512
----------- ----------- ------------
Net income (loss)...................................... $(5,647,170) $ 82,876 $ (7,954,797)
=========== =========== ============
Basic and diluted earnings (loss) per common share:
Income (loss) before extraordinary charge............ $ (1.42) $ 0.05 $ (0.46)
Extraordinary charge................................. -- (0.04) (0.09)
=========== =========== ============
Net earnings (loss) per common share................... $ (1.42) $ 0.01 $ (0.55)
=========== =========== ============
</TABLE>
See accompanying notes.
28
<PAGE> 31
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON NOTE
COMMON STOCK ADDITIONAL STOCK RECEIVABLE
-------------------- PAID-IN TO BE DEFERRED FROM ACCUMULATED
SHARES AMOUNT CAPITAL ISSUED COMPENSATION OFFICER DEFICIT
---------- ------- ----------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995..... 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)
Issuance of shares of common
stock for business
combinations.................. 1,666,351 1,666 14,109,907 -- -- -- --
105,164 shares of common stock
to be issued in 1999 as
additional consideration for
acquisitions consummated in
1997 and 1998................. -- -- -- 1,053,664 -- -- --
Sale and issuance of detachable
stock purchase warrants....... -- -- 128,109 -- -- -- --
Purchase of common stock........ (168,270) (168) (1,547,916) -- -- -- --
Compensatory stock options
accounted for under SFAS 123.. -- -- 202,479 -- -- -- --
Exercise of options............. 39,052 39 132,784 -- -- -- --
Amortization of deferred
compensation.................. -- -- -- -- 108,300 -- --
Collection of note receivable... -- -- -- -- -- 2,500 --
Net loss........................ -- -- -- -- -- -- (7,954,797)
Capital distribution............ -- -- (245,547) -- -- -- --
---------- ------- ----------- ----------- --------- --------- ------------
Balance at December 31, 1998..... 15,067,025 $15,067 $89,196,292 $ 1,053,664 $(300,435) $(172,984) $(16,069,991)
========== ======= =========== =========== ========= ========= ============
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at December 31, 1995..... $ (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
Issuance of shares of common
stock for business
combinations.................. 14,111,573
105,164 shares of common stock
to be issued in 1999 as
additional consideration for
acquisitions consummated in
1997 and 1998................. 1,053,664
Sale and issuance of detachable
stock purchase warrants....... 128,109
Purchase of common stock........ (1,548,084)
Compensatory stock options
accounted for under SFAS 123.. 202,479
Exercise of options............. 132,823
Amortization of deferred
compensation.................. 108,300
Collection of note receivable... 2,500
Net loss........................ (7,954,797)
Capital distribution............ (245,547)
-----------
Balance at December 31, 1998..... $73,721,613
===========
</TABLE>
See accompanying notes.
29
<PAGE> 32
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $(5,647,170) $ 82,876 $ (7,954,797)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary charge -- early extinguishment of debt........ -- 323,346 1,318,512
Deferred income taxes....................................... -- -- (2,450,000)
Depreciation and amortization............................... 492,144 2,211,975 6,984,129
Amortization of deferred leasehold incentive................ (4,784) (16,307) (25,443)
Amortization of loan fees................................... -- 178,677 314,208
Other amortization.......................................... -- -- 662,391
Noncash compensation expense................................ 521,582 124,949 202,479
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................................... (512,811) (572,712) (4,529,919)
Inventories................................................ (112,712) 497 (94,117)
Prepaid expenses and other current assets.................. (20,153) (174,117) (494,368)
Other assets............................................... (32,984) (521,371) (485,531)
Accounts payable........................................... 432,665 (2,651,604) (26,975)
Accrued expenses........................................... 176,659 690,617 1,500,606
Accrued acquisition costs.................................. 522,963 (522,963) --
Accrued compensation....................................... 48,342 834,759 2,335,290
Accrued restructuring charge............................... -- -- 2,796,000
Deferred rent payable...................................... -- (1,889) (7,859)
Medical claims payable..................................... 737,720 (552,064) 1,158,800
Due to Managed Professional Associations................... (27,741) (3,011,758) (207,178)
----------- ------------ ------------
Net cash provided by (used in) operating activities......... (3,396,202) (3,526,829) 996,228
INVESTING ACTIVITIES
Payments for fixed assets, net.............................. (1,221,626) (1,965,105) (5,014,278)
Payments for acquisitions, net of cash acquired............. -- (35,452,640) (41,491,787)
(Increase) decrease in cash surrender value of life
insurance.................................................. (68,979) (74,644) 205,596
Payments for capitalized acquisition costs.................. (1,138,829) (6,170,767) (3,445,854)
Other....................................................... (3,800) (396,603) (209,882)
----------- ------------ ------------
Net cash used in investing activities....................... (2,433,234) (44,059,759) (49,956,205)
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................................ 4,950,000 33,094,128 124,709,305
Payments on long term debt and capital lease obligations.... (61,695) (19,866,349) (69,462,503)
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) (2,771,822)
Proceeds from leasehold incentives.......................... 175,000 220,000 131,300
Payments to acquire treasury stock.......................... -- -- (1,548,084)
Sale of detachable stock purchase warrants and exercise of
options.................................................... -- 550,778 148,893
Additional borrowings on cash surrender value of life
insurance.................................................. 33,585 35,870 --
Decrease in notes receivable, officers and shareholders..... 429,430 152,080 2,500
Capital distribution........................................ (577,445) (598,280) (245,547)
----------- ------------ ------------
Net cash provided by financing activities................... 5,883,139 51,383,114 50,964,042
----------- ------------ ------------
Increase in cash and cash equivalents....................... 53,703 3,796,526 2,004,065
Cash and cash equivalents at beginning of year.............. 198,129 251,832 4,048,358
----------- ------------ ------------
Cash and cash equivalents at end of year.................... $ 251,832 $ 4,048,358 $ 6,052,423
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest...................... $ 107,776 $ 1,039,606 $ 5,490,964
=========== ============ ============
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 $ --
=========== ============ ============
</TABLE>
See Note 3 regarding affiliations with practices financed through the issuance
of Common Stock and notes payable.
See accompanying notes.
30
<PAGE> 33
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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
initial subsidiaries were Vision 21 Physician Practice Management Company (MSO)
and Vision 21 Managed EyeCare of Tampa Bay, Inc. (MCO).
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
consolidated 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.
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.
The Company develops and manages local area eye care delivery systems
("LADS") in 40 markets. LADS involve contractual affiliations with local
optometrists and ophthalmologists (the "Affiliated Providers") to provide
primarily vision care and refractive surgery at independent or company-owned
clinics and surgery centers. Additionally, the Company develops retail
distribution channels for its LADS through owning or affiliating with retail
optical chains, and develops managed care distribution channels for its LADS
through contracting with local health plans and other third party payors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned. All significant
intercompany accounts and transactions have been eliminated in consolidation.
RECENTLY ISSUED ACCOUNTING STANDARDS
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. For the year ended December 31, 1998, the Company did not have any
elements of comprehensive income.
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, and has been implemented for the year ended December 31,
1998.
31
<PAGE> 34
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 requires the
capitalization of certain costs incurred in connection with developing or
obtaining internal use software, and is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company has chosen to early
adopt the provisions of SOP 98-1, and expensed approximately $70,000 of software
development costs during 1998. These costs primarily relate to the Company's
implementation of the Great Plains accounting software system in 1998.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities
(SOP 98-5). SOP 98-5 requires that costs of start-up activities and organization
costs be expensed as incurred, and is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company has chosen to early
adopt the provisions of SOP 98-5, and expensed approximately $862,000 of
start-up costs incurred during 1998 and previously capitalized as incurred in
1998. These costs primarily relate to start-up activities associated primarily
with refractive surgery center initiatives.
In June 1998, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133) which is required to be adopted in years
beginning after June 15, 2000. SFAS 133 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. SFAS 133 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. At December 31, 1998 and 1997, the Company had no
derivatives; accordingly, the Company has not determined the potential impact of
SFAS 133 on the future earnings and financial position of the Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
LADS Operations -- 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 $479,004 for the year ended
December 31, 1996.
32
<PAGE> 35
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to December 1, 1996, practice management fee revenue was earned
through management of Managed Professional Associations under Management
Agreements (See Note 3). This revenue represents reimbursement of practice
management expenses incurred by the Company under certain of the Management
Agreements, including depreciation expense of $31,123, $491,743 and $960,750 for
the years ended December 31, 1996, 1997 and 1998, respectively. In addition, the
Company generally receives a percentage (ranging from 20% to 37%) of the Managed
Professional Associations' net earnings before interest, taxes, and
shareholder-physician expenses, as determined under certain of the related
Management Agreements. Certain of the Management Agreements set the Company's
management fee at a pre-determined percentage of the Managed Professional
Associations' net revenues. Under those Management Agreements, the Company is
responsible for the payment of practice management expenses, generally excluding
shareholder-physician expenses. For the years ended December 31, 1996, 1997 and
1998, practice management fee revenue was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Medical service revenues of Managed Professional
Associations................................... $1,667,025 $36,949,565 $73,087,157
Less amounts retained by physician shareholders
of Managed Professional Associations........... (203,186) (5,997,643) (8,384,848)
---------- ----------- -----------
Management fees under Management Agreements with
Managed Professional Associations.............. $1,463,839 $30,951,922 $64,702,309
========== =========== ===========
</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, $25,786,309 and $54,970,282 for the
years ended December 31, 1996, 1997 and 1998, respectively.
LADS Operations -- 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.
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 on the accrual basis at
contractually agreed-upon rates.
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 79%, 31% and 9%
of managed care revenues and 60%, 10% and 2% of total revenues for the years
ended December 31, 1996, 1997 and 1998, 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.
33
<PAGE> 36
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 estimates 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 $249,000 for the year ended December 31, 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents approximates its fair
value.
The fair value of substantially all of the Company's long-term debt
approximates its carrying amount as the interest rates on substantially all of
the Company's long-term debt change with market interest rates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments 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, and primarily consist of eyeglass frames and lenses, sunglasses and
contact lenses.
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 the
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.
TRANSACTION 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 are
expensed. 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 or 30 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
34
<PAGE> 37
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, $1,098,000 and $4,344,000 for the years ended December 31, 1996, 1997
and 1998, respectively.
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of (SFAS 121). In accordance with SFAS
121, the Company reviews the carrying value of its intangible assets at least
quarterly on an entity-by-entity basis to determine if facts and circumstances
exist which would suggest that the intangible assets may be impaired or that the
amortization period needs to be modified. Among the factors the Company
considers in making the evaluation are changes in the specific 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 entity 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
substantial 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 LOSS PER COMMON SHARE
During 1997, the Company adopted Financial Accounting Standards Board
Statement No. 128, Earnings Per Share (SFAS 128). SFAS 128 requires the
presentation of both basic and diluted earnings per share. Basic net income
(loss) per share is calculated by dividing net income (loss) by the weighted
average number of common shares outstanding during the period. Diluted net
income (loss) per share is calculated by dividing net income (loss) by the
weighted average number of common and potential common shares outstanding during
the period. Potential common shares consist of the dilutive effect of
outstanding options and warrants calculated using the treasury stock method.
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
35
<PAGE> 38
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
COMMON STOCK TO BE ISSUED
Common stock to be issued represents stock to be issued during the year
ending December 31, 1999 in connection with certain of the 1997 and 1998
Acquisitions. Approximately 76,600 and 14,300 shares were issued in April and
June 1999, respectively.
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 pro forma disclosures required by SFAS
123 are provided for all stock-based compensation which are accounted for under
APB 25.
INCOME TAXES
The Company has applied the provisions of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (SFAS 109), which requires an
asset and liability approach for financial accounting and reporting. Deferred
income tax assets and liabilities are determined based upon differences between
the financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and lives that will be in effect when the
differences are expected to reverse.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified in order to conform to
the 1998 presentation.
3. 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
acquisitions, the Company enters into business management agreements (Management
Agreements) with the Managed Professional Associations and the Managed
Professional Associations' stockholders. 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.
36
<PAGE> 39
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998 ACQUISITIONS AND AFFILIATIONS
Effective January 1, 1998, the Company acquired substantially all of the
assets and assumed certain liabilities of The Eye DRx, a retail optical chain of
19 retail clinics located in Bloomfield, New Jersey. In connection with this
transaction, the Company paid $7.2 million in cash and issued 522,600 shares of
Common Stock. In addition, the Company is required to provide additional
contingent consideration of 19,398 shares of Common Stock if certain post
acquisition performance targets are met. In conjunction with this acquisition,
the Company entered into a Management Agreement with the Managed Professional
Associations' stockholders.
The Company also acquired substantially all of the assets and assumed
certain liabilities of 54 optometry clinics, 9 ophthalmology clinics, 1
ambulatory surgical center, 2 refractive centers and 21 optical dispensaries,
located in Texas, Arizona, New Jersey, Florida, Nevada, Minnesota and Wisconsin.
In conjunction with these acquisitions, the Company entered into various
Management Agreements with the Managed Professional Associations and the Managed
Professional Associations' stockholders. In connection with these acquisitions,
the Company provided aggregate consideration of approximately $20.1 million,
consisting of approximately 1.0 million shares of Common Stock and approximately
$13.5 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 282,185
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. 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 if 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.
During 1998, the Company incurred approximately $2,530,000 of acquisition
costs which were capitalized and allocated to the Management Agreements entered
into.
1997 ACQUISITIONS AND AFFILIATIONS
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 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 if 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.
37
<PAGE> 40
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 stockholders. 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 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 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.
1996 ACQUISITIONS AND AFFILIATIONS
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).
In connection with the 1996 Acquisitions, 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.
The 1998, 1997 and 1996 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, optometrists and certain other patient care related
specialists. The Managed Professional Associations provide all eye care services
to patients and make all medical and patient care related decisions.
During 1996, the Company incurred approximately $1,710,000 of acquisition
costs which were capitalized and allocated to the Management Agreements entered
into. During 1996, the Company incurred approximately $1,927,000 in costs
associated with unsuccessful acquisitions. Such amount has been classified as
business development costs in the consolidated statements of operations.
As part of the purchase price allocation for 1998, 1997 and 1996, 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.
4. BUSINESS COMBINATIONS
EYECARE ONE CORP. AND VISION INSURANCE PLAN OF AMERICA, INC.
In March 1998, the Company completed a merger with EyeCare One Corp.
(EyeCare One) and Vision Insurance Plan of America, Inc. (VIPA). EyeCare One is
an optical retailer, selling frames, lenses and
38
<PAGE> 41
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 its 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. Merger costs of approximately $718,000 incurred
in connection with these transactions were charged to expense in 1998.
Combined and separate results of the Company, EyeCare One and VIPA during
the periods preceding the merger were as follows:
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED MARCH 31, 1998
--------------------------------------------------
VISION
TWENTY-ONE 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 (loss)...................... $ 583,641 $ 153,917 $ 52,113 $ 789,671
</TABLE>
<TABLE>
<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>
<TABLE>
<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)
</TABLE>
VISION WORLD, INC.
In June 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of Vision World, Inc., (Vision World) a retail
optical chain of 38 retail clinics with 30 optometrists, located in Minneapolis,
Minnesota. In connection with this transaction, the Company paid approximately
$16,100,000 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. The acquisition was
accounted for by recording the assets and liabilities at fair value. The excess
of the purchase price over the fair values of the net assets acquired amounted
to approximately $12,900,000 and is being amortized on a straight-line method
over 30 years. The operating results of Vision World are included in the
Company's consolidated financial statements since July 5, 1998.
AMERICAN SURGISITE CENTERS, INC.
In September 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of American SurgiSite Centers, Inc., (American
SurgiSite), an ambulatory surgical center developer, management and consulting
company located in New Jersey with eight ambulatory surgical facilities. In
connection with this transaction, the Company paid $1,466,000 in cash, net of
cash acquired, and issued 235,366 shares of its Common Stock. In addition, the
Company is required to provide additional consideration of up to $3,100,000 if
certain post acquisition performance targets are met. The acquisition was
accounted for by
39
<PAGE> 42
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recording the assets and liabilities at fair value. The excess of the purchase
price over the fair values of the net assets amounted to approximately
$3,000,000 and is being amortized on a straight-line method over 25 years. The
operating results of American SurgiSite are included in the Company's
consolidated financial statements since September 1, 1998.
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 (BBG) from
BBG stockholders. BBG provides billing and collection services to suppliers of
optical products through its buying group division (Block Buying Group) and
provides vision benefit management services to health management organizations,
preferred provider organizations and other managed care entities through its
managed care division (Block Vision). The purchase price for BBG 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. The excess of the purchase price over the fair
values of the net assets amounted to approximately $34,000,000 and is being
amortized on a straight-line method over 30 years. The operating results of BBG
are included in the Company's consolidated financial statements since November
1, 1997. In connection with the BBG acquisition, the Company holds in escrow
approximately 220,000 shares of Common Stock. Such shares held in escrow were
due the owners of BBG if certain financial goals were met during the
twelve-month period ended December 31, 1998. Such financial goals were
established to resolve certain differences between the Company and the owners of
BBG regarding the purchase price valuations of BBG. The contingent shares will
not be issued to the owners of BBG, as these financial goals were not attained.
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 (LaserSight). 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 820,085 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 $13,000,000 million
and is being amortized on a straight-line method over 30 years. The operating
results of MEC and LSIA are included in the Company's consolidated financial
statements since December 1, 1997.
40
<PAGE> 43
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 3 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,
------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Pro forma information (unaudited):
Total revenues..................................... $142,760,000 $251,956,000 $256,238,000
============ ============ ============
Income (loss) before extraordinary charge.......... $ (2,443,000) $ 4,348,000 $ (5,700,000)
============ ============ ============
Net income (loss).................................. $ (2,443,000) $ 4,024,000 $ (7,019,000)
============ ============ ============
Net earnings (loss) per common share............... $ (0.62) $ 0.50 $ (0.49)
============ ============ ============
Net earnings (loss) per common share -- assuming
dilution........................................ $ (0.62) $ 0.47 $ (0.49)
============ ============ ============
</TABLE>
5. NOTE RECEIVABLE FROM OFFICER
At December 31, 1997 and 1998, EyeCare One Corp. had a promissory note with
an officer/shareholder with a balance of $172,984. The note matures on December
31, 2001, with interest payable annually at a rate of 7.5%.
6. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
DESCRIPTION 1997 1998
- ----------- ---------- -----------
<S> <C> <C>
Medical equipment and office furniture...................... $8,351,180 $16,437,829
Leased equipment............................................ 1,179,376 1,469,959
Leasehold improvements...................................... 3,047,287 3,905,677
---------- -----------
12,577,843 21,813,465
Less accumulated depreciation and amortization.............. (3,950,879) (6,590,879)
---------- -----------
$8,626,964 $15,222,586
========== ===========
</TABLE>
Depreciation and amortization of fixed assets totaled approximately $463,000,
$1,114,000 and $2,640,000 in 1996, 1997 and 1998, respectively. Amortization
expense related to capital leases is included in depreciation and amortization
in the consolidated statements of operations.
7. DEFERRED LEASEHOLD INCENTIVES
During 1998, EyeCare One Corp. received approximately $131,000 as
incentives from the lessors of three locations. These amounts will be amortized
to rent expense over the remaining terms of the leases, which have a weighted
average life of 7 years.
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
41
<PAGE> 44
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amount received and will amortize the excess ($134,778) against rent expense
over the remaining 9 years of the lease.
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 8 years of the lease.
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Note payable under a $37 million credit facility which was
repaid January 1998....................................... $24,422,807 --
Revolving line of credit (limited to $7.5 million) due June
2003, bearing interest at a rate equal to LIBOR plus 3.0%
(9.25% at December 31, 1998).............................. -- $ 5,593,413
Term loans (limited to $82.5 million), $50.0 million due
June 2005, $32.5 million due June 2003, bearing interest
at a rate equal to LIBOR plus 5.0% (ranging from 8.45% to
9.24% at December 31, 1998)............................... -- 75,970,272
Note payable due April 1, 2000, with interest due in monthly
installments at 8.25% which was repaid in 1998............ 1,400,182 --
Notes payable due through 2001, with interest at 8.50% at
December 31, 1998......................................... 261,635 1,796,860
----------- -----------
26,084,624 83,360,545
Less current portion........................................ (104,371) (2,143,149)
----------- -----------
$25,980,253 $81,217,396
=========== ===========
</TABLE>
On January 30, 1998, the Company entered into a five-year, $50,000,000 bank
credit agreement (the "Credit Agreement") with the Bank of Montreal as agent
(the "Agent") for a consortium of banks. The Credit Agreement provided the
Company with a revolving credit facility component in an aggregate amount of up
to $10,000,000 and a term loan component in an aggregate amount of up to
$40,000,000. The Company had used approximately $48,300,000 of its available
borrowings under the Credit Agreement through June 30, 1998.
On July 1, 1998, the Company entered into a $100,000,000 bank credit
agreement (the "Amended and Restated Credit Agreement") with a seven-year term
loan of $70,000,000 and a five-year revolving and acquisition facility of
$30,000,000 with the Bank of Montreal as Agent for a consortium of banks.
Certain proceeds from the Amended and Restated Credit Agreement were used to
early extinguish the Company's outstanding balance of approximately $48,300,000
under the Credit Agreement. As of December 31, 1998, the Company had borrowed
approximately $81,600,000 of its available borrowings under the Amended and
Restated Credit Agreement. The Amended and Restated 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 Amended and Restated Credit
Agreement also contains certain periodic reporting covenants which require the
Company to provide certain periodic financial information to
42
<PAGE> 45
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Agent as the representative for the consortium of banks under the Amended
and Restated Credit Agreement.
On February 23, 1999, the Company amended the Amended and Restated Credit
Agreement through the execution of the First Amendment to Credit Agreement (the
"First Amendment"). The First Amendment resulted in the total borrowing capacity
of the Company being reduced to $90,000,000 under the credit facility. The term
loans under the First Amendment were amended to include a $50,000,000 term loan
maturing in June 2005, a $20,000,000 term loan maturing in June 2003 and a
$12,500,000 term loan maturing in June 2003 to be utilized for acquisitions and
capital expenditures. The First Amendment also amended the definition of certain
terms included in the previously executed Amended and Restated Credit Agreement.
On June 10, 1999, the Company amended the Amended and Restated Credit
Agreement through the execution of the Second Amendment to Credit Agreement (the
"Second Amendment"). The Second Amendment waived certain financial covenants and
financial reporting covenants contained in the Amended and Restated Credit
Agreement, with which the Company was in violation prior to the Second
Amendment. The Second Amendment also revised the definition of certain terms
included in the Amended and Restated Credit Agreement, instituted certain new
covenants and revised certain previously existing covenants. The Company is in
compliance with all covenants included in the Amended and Restated Credit
Agreement, as amended by the Second Amendment, and, in the opinion of
management, will remain in compliance with such covenants during the remainder
of 1999.
Both the revolving line of credit and the term loans under the Amended and
Restated Credit Agreement are secured by a pledge of the stock of substantially
all of the Company's subsidiaries and the assets of the Company and certain of
its subsidiaries, and are guaranteed by certain of the Company's subsidiaries.
As of December 31, 1998, the aggregate principal maturities of long-term
debt, after giving effect to the revised terms included in the First Amendment
and the Second Amendment, are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 2,143,149
2000........................................................ 5,167,563
2001........................................................ 7,217,568
2002........................................................ 6,992,568
2003........................................................ 14,339,697
Thereafter.................................................. 47,500,000
-----------
$83,360,545
===========
</TABLE>
In connection with the 1998 amendments to the Company's Credit Agreement,
the Company incurred extraordinary charges of $1,318,512 (net of $567,000 of
income taxes) for the year ended December 31, 1998. These extraordinary charges
represent the write-off of unamortized deferred loan costs.
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>
<S> <C>
Year ending December 31:
1999........................................................ $ 624,790
2000........................................................ 344,042
2001........................................................ 109,848
2002........................................................ 90,194
----------
Total minimum lease payments................................ 1,168,874
Less amount representing interest........................... (155,163)
----------
Present value of minimum lease payments (including current
portion of $538,820)...................................... $1,013,711
==========
</TABLE>
43
<PAGE> 46
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and EyeCare One Corp. As
of December 31, 1998, future minimum lease payments under noncancelable
operating leases with original terms of more than one year are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 9,084,457
2000........................................................ 8,184,226
2001........................................................ 6,596,256
2002........................................................ 5,232,647
2003........................................................ 4,219,241
Thereafter.................................................. 14,303,472
-----------
Total............................................. $47,620,299
===========
</TABLE>
Rent expense in 1996, 1997 and 1998 was approximately $1,181,000,
$3,347,000 and $9,427,000, respectively. Rent expense related to locations
leased from stockholders of the Managed Professional Associations was
approximately $53,000, $1,284,000 and $1,916,000 in 1996, 1997 and 1998,
respectively. Rent expense paid to an officer/shareholder of EyeCare One Corp.
was approximately $331,000, $276,000 and $438,000 in 1996, 1997 and 1998,
respectively.
PROFESSIONAL LIABILITY
The Company and the Managed Professional Associations are insured with
respect to medical malpractice risks primarily on a claims-made basis.
Management anticipates that the claims-made coverage currently in place will be
renewed or replaced with equivalent insurance as the term of such coverage
expires. 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.
LITIGATION
In January and February 1999, four purported class action lawsuits were
filed against the Company and certain of its directors and officers. The
lawsuits were filed in United States District Court for the Middle District of
Florida, Tampa Division. The four plaintiffs generally sought to certify their
complaints as class actions on behalf of all purchasers of the Company's common
stock in the period between December 5, 1997 and November 5, 1998, and seek an
award of an unspecified amount of monetary damages to all of the members of the
purported class.
On April 21, 1999, the cases were consolidated and one plaintiffs group was
appointed lead plaintiff by judicial order on May 6, 1999. This uncertified
consolidated class action seeks to hold the Company and two of its officers who
are also directors as well as a former officer liable for alleged federal
securities law violations. The lead plaintiffs group purports to represent a
class of plaintiffs who were allegedly defrauded by alleged misstatements and
omissions in analyst reports, trade journal articles, press releases and filings
with the Securities and Exchange Commission.
Pursuant to the judicial order, the lead plaintiffs group must file an
amended consolidated complaint within forty-five days from May 31, 1999. As of
June 11, 1999, such amended consolidated complaint has not
44
<PAGE> 47
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
been filed. The Company is not required to respond until such amended
consolidated complaint is filed and served. The Company believes that it has
substantial defenses to this matter and intends to assert then vigorously.
Management of the Company is unable to determine the impact, if any, that the
resolution of the aforementioned uncertified class action lawsuit will have on
the financial position or results of operations of the Company.
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. INCOME TAXES
The components of the income tax provision (benefit) on continuing
operations are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Current........................................... -- -- $(2,450,000)
Deferred.......................................... -- -- --
---------- ---------- -----------
Total................................... -- -- $(2,450,000)
========== ========== ===========
</TABLE>
At December 31, 1997 and 1998, the Company had temporary differences
between amounts of assets and liabilities for financial reporting purposes and
such amounts measured by income tax reporting purposes. The Company also has net
operating loss (NOL) carryforwards available to offset future taxable income.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
DEFERRED TAX
ASSET (LIABILITY)
-------------------------
DECEMBER 31,
-------------------------
TEMPORARY DIFFERENCES/CARRYFORWARDS 1997 1998
----------------------------------- ----------- -----------
<S> <C> <C>
Net operating losses........................................ $ 1,586,000 $ 5,274,000
Restructuring charge........................................ -- 1,116,000
Reserve on investment....................................... -- 301,000
Accrued vacation............................................ -- 147,000
Book: tax differences in leases............................. 228,000 220,000
Other....................................................... 149,000 101,000
Valuation allowance......................................... (81,000) (859,000)
----------- -----------
Total deferred tax assets......................... 1,882,000 6,300,000
----------- -----------
Identifiable intangible assets not deductible for tax
purposes.................................................. 5,705,000 5,369,000
Merger costs................................................ -- 1,003,000
Accrual to cash conversions................................. 37,000 73,000
Difference in book: tax amortization........................ 98,000 628,000
Other deferred tax liabilities.............................. 271,000 439,000
----------- -----------
Total deferred tax liabilities.................... 6,111,000 7,512,000
----------- -----------
Net deferred taxes.......................................... $(4,229,000) $(1,212,000)
=========== ===========
</TABLE>
45
<PAGE> 48
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management believes, considering all available information, including the
Company's history of earnings from continuing operations (after adjustments for
nonrecurring items, restructuring charges, permanent differences and other
appropriate adjustments) and after considering appropriate tax planning
strategies, that it is more likely than not that the Company will not generate
sufficient taxable income in the appropriate carryforward periods to realize the
$7,159,000 in deferred tax assets. The total net deferred tax assets (both
current and noncurrent) have been reduced to the amount management considers
realizable by establishing valuation allowances aggregating $859,000 at December
31, 1998. The valuation allowances have been established due to the uncertainty
associated with forecasting future income. The increase in the valuation
allowance for 1998 is $778,000.
Income taxes are different from the amount computed by applying the United
States statutory rate to income before income taxes for the following reasons:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1997 1998
----------- --------- -----------
<S> <C> <C> <C>
Income tax expense (benefit) at the statutory
rate........................................... $(1,920,037) $ 27,166 $(3,089,000)
Permanent differences............................ 7,888 101,139 288,000
Effect of purchase price allocation.............. -- 877,000 --
S corporation (income) loss...................... 763,564 (198,243) --
State taxes, net of federal benefit.............. (122,628) (7,467) (330,000)
Other............................................ -- 77,405 (97,000)
Change in valuation allowance.................... 1,271,213 (877,000) 778,000
----------- --------- -----------
Income taxes..................................... $ -- $ -- $(2,450,000)
=========== ========= ===========
</TABLE>
The Company has net operating loss carryforwards of approximately $14,016,000 at
December 31, 1998 that expire in various amounts from 2009 to 2018.
12. 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 1,400,000 shares and 700,000
shares, respectively. Compensation expense under SFAS No. 123 for the options
issued to nonemployees was immaterial for the year ended December 31, 1996 and
approximately $125,000
46
<PAGE> 49
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and $202,000 for the years ended December 31, 1997 and 1998, respectively. 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 1997 and 1998, respectively:
risk-free interest rates of 6.06% and 5.50%; 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 .947; and a weighted-average expected life
of the options of 3 to 4 years. In addition, for pro forma purposes, the
estimated fair value of the options is amortized to expense over the options'
vesting period. Based on these assumptions, the pro forma net loss and basic and
diluted net loss per common share for the year ended December 31, 1997 and 1998
would be approximately ($387,000) and ($0.05) and ($8,931,000) and ($0.62),
respectively. For pro forma purposes, the Company has determined that the
amortized portion of the estimated fair value of options would have had an
insignificant effect on pro forma net loss and basic and diluted net loss per
common share for the year ended December 31, 1996.
A summary of the Company's stock option activity and related information is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1998
------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
-------- -------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding -- beginning of the year.......... 562,000 $ 4.48 940,799 $ 6.90
Granted..................................... 381,465 $10.33 313,865 $ 8.46
Exercised................................... (888) $ 3.11 (39,052) $ 3.44
Forfeited................................... (1,778) $ 3.11 (61,777) $10.85
-------- ------ ---------- ------
Outstanding -- end of year.................... 940,799 $ 6.90 1,153,835 $ 7.12
======== ====== ========== ======
Exercisable at end of year.................... 107,999 $ 3.21 399,723 $ 6.16
======== ====== ========== ======
Weighted-average fair value of options granted
during the year............................. $ 4.90 $ 5.30
======== ==========
</TABLE>
Significant option groups outstanding at December 31, 1998 and related
price and life information are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- ------------------------ ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$3.11 - $5.25......... 405,811 $ 3.55 8.01 183,546 $ 3.36
$6.00 - $9.87......... 513,926 8.26 8.68 168,933 7.71
$10.00 - $12.00....... 204,098 10.93 9.14 32,244 10.43
$13.20................ 30,000 13.20 9.00 15,000 13.20
--------- ------ ---- ------- ------
1,153,835 $ 7.12 399,723 $ 6.12
========= ====== ======= ======
</TABLE>
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
47
<PAGE> 50
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 years ended December 31, 1997
and 1998, 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 certain
facts and circumstances at the time of issuance. A summary of warrants
outstanding at December 31, 1998 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
45,753 January 1998 January 2003 $8.75-$9.19
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In 1998, the Company adopted the Vision Twenty-One, Inc. Employee Stock
Purchase Plan (ESPP), under which 200,000 shares of the Company's Common Stock
are available for purchase by employees. Eligible employees may elect to
withhold up to 10 percent of their salary to purchase shares of the Company's
Common Stock equal to the lesser of: (a) 85 percent of the closing market price
on the first day of each fiscal quarter; or (b) 85 percent of the closing market
price on the purchase date. A resolution to approve the ESPP is being put forth
at the Company's 1999 Annual Shareholder Meeting. Should such approval not be
given, the Plan will terminate and all deductions returned to those employees
who elected to participate in the Plan. For the year ended December 31, 1998,
there were no shares issued under the Plan.
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 shareholders' equity derived from realized net profits. Based upon the
regulatory formula, no amount is available for dividends in 1998 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,
1998, approximately $75,000 of available letters of credit were outstanding to
satisfy VIPA's minimum shareholders' equity requirements.
48
<PAGE> 51
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
As required in the purchase agreement with LaserSight, the Company
repurchased approximately 168,000 shares of its Common Stock from LaserSight on
March 10, 1998 for approximately $1,548,000. These shares were reissued as part
of the consideration for the acquisition of certain assets of The Eye DRx, as
previously described in Note 3.
13. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share for earnings (loss) from continuing operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
----------- ---------- -----------
<S> <C> <C> <C>
Numerator for basic and diluted earnings (loss)
per share-earnings (loss) available to common
stockholders................................... $(5,647,170) $ 406,222 $(9,086,285)
Denominator for basic earnings (loss) per share-
weighted-average shares........................ 3,977,537 7,975,671 14,385,359
----------- ---------- -----------
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-weighted-average shares.................. 3,977,537 8,571,735 14,385,359
----------- ---------- -----------
Basic earnings (loss) per share.................. $ (1.42) $ 0.05 $ (0.63)
=========== ========== ===========
Diluted earnings (loss) per share................ $ (1.42) $ 0.05 $ (0.63)
=========== ========== ===========
</TABLE>
Options and warrants to purchase approximately 1,800,000 shares of common
stock were outstanding at December 31, 1998, but were not included in the
computation of diluted loss per share because the effect would be antidilutive.
The Company has issued contingent stock consideration which would entitle the
stockholders of BBG and certain Managed Professional Associations to receive
approximately 430,000 of additional shares of Common Stock. The additional
shares were not included in the computation of basic and diluted loss per share
for 1998 since certain financial goals were not attained as of December 31, 1998
and the inclusion of the shares would be antidilutive.
14. EMPLOYEE BENEFIT PLAN
The Company sponsors the Vision-Twenty One Retirement Savings Plan, a
defined contribution plan established under Section 401(k) of the U.S. Internal
Revenue Code (the Plan). Employees are eligible to contribute voluntarily to the
Plan after one-year of continued service and attaining age 21. At its
discretion, the Company may contribute 25% of the first 6% of the employee's
contribution. Employees are always vested in their contributed balance and vest
ratably in the Company's contribution over five years. For the year ended
December 31, 1998, the expense related to the Plan was approximately $159,000.
The expense to the Company related to the Plan in 1997 and 1996 was not
material.
49
<PAGE> 52
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. RESTRUCTURING PLAN
During the fourth quarter of 1998, management of the Company committed to
and commenced the implementation of a restructuring plan (the "Restructuring
Plan") that was designed to facilitate the transformation of the Company into an
integrated eye care company. The Restructuring Plan initiatives, which are
comprised of a number of specific projects, are expected to position the Company
to take full operational and economic advantage of recent acquisitions. The
Restructuring Plan will enable the Company to complete the consolidation and
deployment of necessary infrastructure for the future, optimize and integrate
certain assets and exit certain markets. The Restructuring Plan initiatives are
expected to result in the elimination of approximately 110 positions throughout
the Company and are expected to be completed by December 31, 1999. The
initiatives to be undertaken as part of the Restructuring Plan include the
integration of managed care service centers and business lines, the
consolidation of retail optical back office functions and the consolidation of
certain corporate functions.
The Restructuring Plan resulted in a restructuring charge of approximately
$2,796,000 for the year ended December 31, 1998. The restructuring charge is
comprised of severance costs of approximately $1,914,000 and facility and lease
termination costs of approximately $882,000. The restructuring charge is
included in restructuring and other charges in the consolidated statements of
operations.
Other charges included in restructuring and other charges in the
consolidated statements of operations for the year ended December 31, 1998
totaling approximately $3,667,000, include the write-off of certain amounts due
from Managed Professional Associations related to markets which have been exited
under the Restructuring Plan (approximately $1,911,000), a valuation charge
related to one Management Agreement (approximately $662,000), professional fees
associated with the development of the Restructuring Plan (approximately
$521,000) and other charges to write-off or write-down assets that will not be
realized as a result of the Restructuring Plan (approximately $573,000).
Prior to implementing the initiatives developed in the Restructuring Plan,
the Company expensed other business integration costs of approximately
$2,501,000 that were incurred during the fourth quarter of 1998. Such amount is
included in general and administrative expenses in the consolidated statements
of operations. These business integration costs represent incremental or
redundant costs as well as internal costs that resulted directly from the
development and initial implementation of the Restructuring Plan, but that are
required to be expensed as incurred. These business integration costs consist
primarily of redundant employee costs and expenses for severed employees through
the date of severance, training costs, rebranding costs, relocation costs,
retention payments and lease costs for facilities that have been planned for
future closure.
16. SEGMENT REPORTING
The Company identifies reportable segments based on management
responsibility for the strategic business units that offer different products
and services. The segments are managed separately based on the fundamental
differences in their operations. The Company's operations have been classified
into four segments: clinical and surgery centers, retail optical, managed care
and buying group. The clinical and surgery centers segment includes all activity
related to managing optometry and ophthalmology practices, refractive surgery
centers and ambulatory surgical centers. The retail optical segment includes the
operations of three retail optical chains located in Minnesota, New Jersey and
Wisconsin. The managed care segment includes the operations consisting primarily
of Block Vision, MEC and the MCO. The buying group segment includes the
operations of Block Buying Group. The corporate category includes general and
administrative expenses associated with the operations of the Company's
corporate and regional offices and expenses not allocated to reportable
segments.
50
<PAGE> 53
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The accounting policies of the reportable segments are the same as those
described in Note 2. The Company evaluates the performance of its operating
segments based on income before income taxes, depreciation and amortization,
accounting changes, unusual items and interest expense. Summarized financial
information concerning the Company's reportable segments for 1996, 1997 and 1998
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Clinical and surgery centers......................... $ 1,942,843 $30,951,922 $ 66,544,857
Retail optical....................................... 11,718,979 12,569,321 42,933,056
Managed care......................................... 8,192,456 18,762,158 54,980,006
Buying group......................................... -- 7,260,797 58,959,195
----------- ----------- ------------
Total segments............................... 21,854,278 69,544,198 223,417,114
Corporate............................................ -- -- --
----------- ----------- ------------
Total revenues............................... $21,854,278 $69,544,198 $223,417,114
=========== =========== ============
Segment profit:
Clinical and surgery centers......................... $ 698,670 $ 5,657,357 $ 9,862,974
Retail optical....................................... 726,282 952,426 3,990,019
Managed care (a)..................................... (1,604,851) 1,516,837 2,794,837
Buying group (b)..................................... -- 378,598 3,033,022
----------- ----------- ------------
Total segments............................... (179,899) 8,505,218 19,680,852
Corporate............................................ (2,792,419) (4,652,062) (8,290,985)
----------- ----------- ------------
Total segment profit......................... $(2,972,318) $ 3,853,156 $ 11,389,867
=========== =========== ============
</TABLE>
- ---------------
(a) Managed care segment profit includes general and administrative expenses
related to the Buying Group which the Company is unable to separately
identify from the general and administrative expenses of Block Vision.
(b) Buying group profit represents the gross profit from the sale optical
products.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Depreciation and amortization:
Clinical and surgery centers........................ -- $ 491,743 $ 971,817
Retail optical...................................... $ 357,445 393,133 921,191
Managed care........................................ 3,378 67,509 319,154
Buying group........................................ -- -- --
----------- ------------ ------------
Total segments.............................. 360,823 952,385 2,212,162
Corporate........................................... 126,537 1,243,283 4,771,967
----------- ------------ ------------
Total depreciation and amortization......... $ 487,360 $ 2,195,668 $ 6,984,129
=========== ============ ============
Interest expense:
Clinical and surgery centers........................ -- -- --
Retail optical...................................... $ 100,489 $ 138,399 --
Managed care........................................ -- 21,375 $ 4,445
Buying group........................................ -- -- --
----------- ------------ ------------
Total segments.............................. 100,489 159,774 4,445
Corporate........................................... 160,108 912,815 5,060,446
----------- ------------ ------------
Total interest expense...................... $ 260,597 $ 1,072,589 $ 5,064,891
=========== ============ ============
</TABLE>
51
<PAGE> 54
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Restructuring and other charges:
Clinical and surgery centers........................ -- -- --
Retail optical...................................... -- -- --
Managed care........................................ -- -- --
Buying group........................................ -- -- --
----------- ------------ ------------
Total segments.............................. -- -- --
Corporate........................................... -- -- $ 6,462,595
----------- ------------ ------------
Total restructuring and other charges....... -- -- $ 6,462,595
=========== ============ ============
Merger costs:
Clinical and surgery centers........................ -- -- --
Retail optical...................................... -- -- --
Managed care........................................ -- -- --
Buying group........................................ -- -- --
----------- ------------ ------------
Total segments.............................. -- -- --
Corporate........................................... -- -- $ 717,835
----------- ------------ ------------
Total merger costs.......................... -- -- $ 717,835
=========== ============ ============
Business development:
Clinical and surgery centers........................ -- -- --
Retail optical...................................... -- -- --
Managed care........................................ -- -- --
Buying group........................................ -- -- --
----------- ------------ ------------
Total segments.............................. -- -- --
Corporate........................................... $ 1,926,895 -- --
----------- ------------ ------------
Total business development.................. $ 1,926,895 -- --
=========== ============ ============
Extraordinary item:
Clinical and surgery centers........................ -- -- --
Retail optical...................................... -- -- --
Managed care........................................ -- -- --
Buying group........................................ -- -- --
----------- ------------ ------------
Total segments.............................. -- --
Corporate........................................... -- $ 323,346 $ 1,318,512
----------- ------------ ------------
Total extraordinary item.................... -- $ 323,346 $ 1,318,512
=========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1998
------------ ------------
<S> <C> <C>
Total assets:
Clinical and surgery centers.............................. $ 17,590,402 $ 24,721,869
Retail optical............................................ 3,704,893 11,871,486
Managed care.............................................. 6,996,744 6,141,893
Buying group.............................................. 5,427,592 6,288,923
------------ ------------
Total segments.................................... 33,719,631 49,024,171
------------ ------------
Corporate................................................. 85,660,270 142,652,953
------------ ------------
Total assets...................................... $119,379,901 $191,677,124
============ ============
</TABLE>
52
<PAGE> 55
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. OTHER RELATED PARTY TRANSACTION
In 1995, the Company entered into a five-year services agreement with a
consulting company which assists the Company with its operational and management
development. One of the Company's directors is an employee and sole owner of the
consulting company. For the years ended December 31, 1996, 1997 and 1998, the
Company paid approximately $333,000, $600,000 and $720,000, respectively to this
consulting company.
18. SUBSEQUENT EVENT
On June 4, 1999, the Company completed the sale of the Block Buying Group.
Cash proceeds received by the Company were primarily used to repay outstanding
borrowings under the Company's credit facility.
53
<PAGE> 56
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
DISCLOSURE
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference
to the information under the headings "MANAGEMENT -- Directors and Executive
Officers" in the Company's definitive Proxy Statement to be used in connection
with the Company's 1999 Annual Meeting of Shareholders, which was filed with the
Commission on April 30, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the information under the headings "MANAGEMENT -- Directors Compensation,
and -- Compensation of Executive Officers" in the Company's definitive Proxy
Statement to be used in connection with the Company's 1999 Annual Meeting of
Shareholders, which was filed with the Commission on April 30, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
to the information under the headings "MANAGEMENT -- Security Ownership of
Management and Others" in the Company's definitive Proxy Statement to be used in
connection with the Company's 1999 Annual Meeting of Shareholders, which was
filed with the Commission on April 30, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
to the information under the headings "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS" in the Company's definitive Proxy Statement to be used in
connection with the Company's 1999 Annual Meeting of Shareholders, which was
filed with the Commission on April 30, 1999.
54
<PAGE> 57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a)1. The following Financial Statements of the Registrant are
included in Part II, Item 8, Page: 32
Report of Independent Certified Public Accountants.......... 26
Consolidated Balance Sheets -- December 31, 1997 and 1998... 27
Consolidated Statements of Operations -- Years Ended
December 31, 1996, 1997 and 1998.......................... 28
Consolidated Statements of Stockholders' Equity -- Years
Ended December 31, 1996, 1997 and 1998.................... 29
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1996, 1997 and 1998.......................... 30
Notes to Consolidated Financial Statements.................. 31
2. Financial Statement Schedules of the Registrant: See (d)
below.
3. Exhibits: See Exhibit Index.
(b) Reports on Form 8-K: During the last quarter of the year
ended December 31, 1998, the Company filed a Form 8-K/A
dated October 13, 1998 to provide the financial statements
and proformas related to the Company's acquisition of Vision
World which was previously omitted from the Company's Form
8-K dated August 10, 1998, and the Company filed a Form 8-K
dated November 12, 1998 to provide certain press releases
issued by the Company and the financial statements of
certain businesses acquired by the Company.
(c) Exhibits: See Exhibit Index.
(d) Financial Statements Schedules: The following valuation and
qualifying accounts schedule is provided, all other
financial statement schedules are omitted because of the
absence of the conditions under which they are required.
</TABLE>
55
<PAGE> 58
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have audited the consolidated financial statements of Vision Twenty-One,
Inc. and Subsidiaries as of December 31, 1997 and 1998, and for each of the
three years in the period ended December 31, 1998, and have issued our report
thereon dated June 11, 1999 (included elsewhere in this Form 10-K). Our audits
also included the financial statement schedule listed in Item 14(a) (2) of this
Form 10-K. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Tampa, Florida
June 11, 1999
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
SCHEDULE I -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER DEDUCTIONS BALANCE AT END
DESCRIPTION PERIOD EXPENSES ACCOUNTS DESCRIBE OF PERIOD
- ----------- ------------ ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
For the year ended December 31,
1996
Deducted from asset accounts:
Allowance for doubtful
accounts.................. $ -- $ -- $ 685,000(1) $ -- $ 685,000
========== ======== ========== ========== ==========
For the year ended December 31,
1997
Deducted from asset accounts:
Allowance for doubtful
accounts.................. $ 685,000 $262,000 $2,532,000(2) $ -- $3,479,000
========== ======== ========== ========== ==========
For the year ended December 31,
1998
Deducted from asset accounts:
Allowance for doubtful
accounts.................. $3,479,000 $426,000 $ 231,000(3) $ -- $4,136,000
========== ======== ========== ========== ==========
</TABLE>
- ---------------
(1) Amount represents allowance for doubtful accounts acquired in connection
with the December 1, 1996 acquisition of substantially all of the assets and
certain liabilities in 10 ophthalmology and optometry practices.
(2) Amount represents allowance for doubtful accounts acquired in connection
with the 1997 purchases of substantially all of the assets and certain
liabilities of 11 ophthalmology and optometry practices, 3 managed care
companies, a medical consulting company, and an ambulatory surgical center.
(3) Amount represents allowance for doubtful accounts acquired in connection
with the 1998 Acquisitions.
56
<PAGE> 59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company 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 June 18, 1999.
VISION TWENTY-ONE, INC.
By: /s/ THEODORE N. GILLETTE
------------------------------------
Theodore N. Gillette
Chief Executive Officer
(Principal Executive Officer)
By: /s/ RICHARD T. WELCH
------------------------------------
Richard T. Welch
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities indicated on
June 18, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ THEODORE N. GILLETTE Chief Executive Officer, President and
- ----------------------------------------------------- Chairman of the Board (Principal Executive
Theodore N. Gillette Officer)
/s/ RICHARD T. WELCH Chief Financial Officer, Treasurer and
- ----------------------------------------------------- Director (Principal Financial and Accounting
Richard T. Welch Officer)
/s/ RICHARD L. SANCHEZ Chief Development Officer, Secretary and
- ----------------------------------------------------- Director
Richard L. Sanchez
/s/ RICHARD L. LINDSTROM Chief Medical Officer and Director
- -----------------------------------------------------
Richard L. Lindstrom
/s/ BRUCE S. MALLER Director
- -----------------------------------------------------
Bruce S. Maller
/s/ PETER J. FONTAINE Director
- -----------------------------------------------------
Peter J. Fontaine
/s/ MARTIN F. STEIN Director
- -----------------------------------------------------
Martin F. Stein
/s/ JEFFREY I. KATZ Director
- -----------------------------------------------------
Jeffrey I. Katz
</TABLE>
57
<PAGE> 60
1998 FORM 10-K
VISION TWENTY-ONE, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS DESCRIPTION
- ------- --------------------
<C> <C> <S>
2.1* -- Agreement and Plan of Reorganization effective as of
September 1, 1997 among Florida Eye Center, Sever & Ramseur,
M.D., P.A., Raymond J. Sever, M.D. and Henry M. Ramseur,
M.D., and the Registrant.(5)
2.2* -- Asset Purchase Agreement effective as of September 1, 1997
among Thomas J. Pusateri, M.D., P.A., Thomas J. Pusateri,
M.D., and the Registrant.(5)
2.3* -- Asset Purchase Agreement effective as of September 1, 1997
among Leonard E. Cortelli, M.D., P.A., Leonard E. Cortelli,
M.D., and the Registrant.(5)
2.4* -- Optical Asset Purchase Agreement effective as of September
1, 1997 among Center Optical, Inc., Sever, Pusateri &
Cortelli, M.D., P.A., Henry M. Ramseur, M.D., Raymond J.
Sever, M.D., and the Registrant.(5)
2.5* -- Managed Care Organization Asset Purchase Agreement effective
as of September 1, 1997, among Managed Health Services,
Inc., Leonard E. Cortelli, M.D., Thomas J. Pusateri, M.D.,
Henry M. Ramseur, M.D., Raymond J. Sever, M.D., the
Registrant and Vision 21 Management Services, Inc.(5)
2.6* -- Agreement and Plan of Reorganization effective as of
September 1, 1997, among Retina Associates Southwest, P.C.,
Denis Carroll, M.D., Leonard Joffe, M.D., Reid Schindler,
M.D., and the Registrant.(5)
2.7* -- Agreement and Plan of Reorganization dated May 1, 1997 by
and among Cochise Eye & Laser, P.C., Jeffrey S. Felter,
M.D., Thomas Rodcay, M.D., Vision 21 of Sierra Vista, Inc.
and Vision Twenty-One, Inc.(9)
2.8* -- Asset Purchase Agreement dated June 1, 1997 among
Swagel-Wootton Eye Center, Ltd., Wendy Wootton, M.D., James
C. Wootton, M.D., Lorin Swagel, M.D., Daniel T. McGehee,
O.D. and Vision Twenty-One, Inc.(9)
2.9* -- Asset Purchase Agreement dated June 1, 1997 among Aztec
Optical Limited Partnership, Swagel-Wootton Eye Center,
Ltd., Wendy Wootton, M.D., James C. Wootton, M.D., Lorin
Swagel, M.D., Daniel T. McGehee, O.D. and Vision Twenty-One,
Inc.(9)
2.10* -- Stock Purchase Agreement dated as of October 31, 1997 by and
among Vision Twenty-One, Inc., BBG-COA, Inc., MarketCorp
Venture Associates, L.P., New York State Business Venture
Partnership, Chase Venture Capital Associates, Michael P.
Block, Saree Block and James T. Roberto.(8)
2.11* -- Stock Purchase Agreement effective December 1, 1997 among
Vision Twenty-One, Inc., MEC Health Care, Inc., LSI
Acquisition, Inc. and LaserSight Incorporated.(10)
2.12* -- Asset Purchase Agreement dated as of December 1, 1997 by and
Desert Eye Associates, L.T.D., Jack A. Aaron, M.D.,
Marcello, M.D., and Vision Twenty-One, Inc.(13)
2.13* -- Agreement and Plan of Reorganization dated March 31, 1998 by
between Vision Twenty-One, Inc., Eye Care One Corp., Martin
F. Stein, Robert C. Sowinski, Eugene H. Edson, Stephen L.
Charnof, John C. Colman, not individually but solely as
trustee of the John C. Colman Trust, u/t/a dated August 5,
1994, and Stephen L. Charnof and Daniel J. Stein, not
individually but solely in their capacities as Trustees of
the Daniel J. Stein Irrevocable Trust u/a/d April 3,
1996.(12)
2.14* -- Stock Purchase Agreement effective March 31, 1998 by and
Vision Twenty-One, Inc., Vision Twenty-One of, Inc., Vision
Insurance Plan of America, Inc., Martin F. Stein, Robert C.
Sowinski, Eugene H. Edson, Stephen L. Charnof, Thomas W.
Witter, and John C. Colman, not individually but solely as
Trustee of the John C. Colman Trust u/t/a dated August 5,
1994.(13)
</TABLE>
58
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS DESCRIPTION
- ------- --------------------
<C> <C> <S>
2.15* -- Asset Purchase Agreement dated as of April 1, 1998 by and
among Robert L. Garrett, O.D., P.C., Robert L. Garrett,
O.D., Optometric Associates of Arizona, P.L.C., and Vision
Twenty-One, Inc.(13)
2.16* -- Asset Purchase Agreement dated as of April 1, 1998 by and
Master Eye Consultants, P.C., Optometric Associates of
Texas, P.C., Vision Twenty-One, Inc., and J.R. Cacy,
O.D.(13)
2.17* -- Asset Purchase Agreement dated as of May 1, 1998 by and
Johnson Eye Institute, P.A., Sever, Pusateri &, M.D., P.A.,
Optometric Associates of Florida, P.A., Vision Twenty-One,
Inc. and David A. Johnson, M.D. (14)
2.18* -- Asset Purchase Agreement effective January 1, 1998, by and
among Elliot L. Shack, O.D., P.A., Charles M. Cummins, O.D.
and Elliott L. Shack, O.D., P.A., and Vision Twenty-One,
Inc.(13)
2.19* -- Stock Purchase Agreement effective as of January 1, 1998 by
and between Vision Twenty-One, Inc., The Complete Optical
Laboratory, Inc., Elliot L. Shack, and Charles M.
Cummins.(13)
2.20* -- Asset Purchase Agreement dated as of May 1, 1998 by and
among Johnson Eye Institute Surgery Center, Inc., Vision
Twenty-One Surgery Center, Ltd. and David A. Johnson, M.D.
and Debra Pazo Johnson.(14)
2.21* -- Asset Purchase Agreement dated effective June 30, 1998 among
Vision Twenty-One, Inc., Vision World, Inc., Russell
Trenholme and Takako Trenholme.(16) (Schedules (or similar
attachments) have been omitted and the Registrant agrees to
furnish supplementally a copy of any omitted schedule to the
Securities and Exchange Commission upon request.)
3.1* -- Amended and Restated Articles of Incorporation of Vision
Twenty-One, Inc.(1)
3.2* -- Bylaws of Vision Twenty-One, Inc.(1)
4.1* -- Specimen of Vision Twenty-One, Inc. Common Stock
Certificate.(1)
4.2* -- Promissory Note dated June 1996 from Vision Twenty-One, Inc.
to Peter Fontaine.(1)
4.3* -- Promissory Note dated November 1996 from Vision Twenty-One,
Inc. to Peter Fontaine.(1)
4.4* -- Promissory Note dated December 1996 from Vision Twenty-One,
Inc. to Peter Fontaine.(1)
4.5* -- Note Purchase Agreement for 10% Senior Subordinated Notes
December 19, 1999 (Detachable Warrants Exchangeable Into
Common Stock) dated December 20, 1996, by and between Vision
Twenty-One, Inc. and certain purchasers.(1)
4.6* -- Amendment No. 1 dated April 18, 1997, to that certain Note
Purchase Agreement dated December 20, 1996, by and between
Vision Twenty-One, Inc. and certain purchasers.(1)
4.7* -- Note Purchase Agreement for 10% Senior Subordinated Series
1997 Notes Due December 19, 1999 (Detachable Warrants
Exchangeable Into Common Stock) dated February 28, 1997
between Vision Twenty-One, Inc. and Piper Jaffray Healthcare
Fund II Limited Partnership.(1)
4.8* -- Amended and Restated Note and Warrant Purchase Agreement
dated June 1997 and First Amendment to Amended and Restated
Note and Warrant Purchase Agreement dated August 1997
between Vision Twenty-One, Inc. and Prudential Securities
Group.(4)
4.9* -- Credit facility commitment letter dated October 10, 1997
between Prudential Securities Credit Corporation and Vision
Twenty-One, Inc.(5)
4.10* -- Note Purchase Agreement dated October 1997 between Vision
Twenty-One, Inc. and Prudential Securities Credit
Corporation.(9)
4.11* -- Letter Amendment dated December 30, 1997 to the Note and
Warrant Purchase Agreement between Vision Twenty-One, Inc.
and Prudential Securities Credit Corporation.(10)
4.12* -- Stock Distribution Agreement dated December 30, 1997 by and
between Vision Twenty-One, Inc. and LaserSight
Incorporated.(10)
4.13* -- Credit Agreement dated as of January 30, 1998 among Vision
Twenty-One, Inc. the Banks Party Hereto and Bank of Montreal
as Agent.(11)
4.14* -- Amended and Restated Credit Agreement dated as of July 1,
1998 among Vision Twenty-One, Inc., and the Bank of Montreal
as Agent for a consortium of banks.(15)
</TABLE>
59
<PAGE> 62
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS DESCRIPTION
- ------- --------------------
<C> <C> <S>
4.15 -- First Amendment to the Amended and Restated Credit Agreement
dated as of February 23, 1999 among Vision Twenty-One, Inc.,
the Banks party hereto and Bank of Montreal as Agent for the
Banks.
4.16 -- Second Amendment to the Amended and Restated Credit
Agreement dated as of June 11, 1999 among Vision Twenty-One,
Inc., the Banks party hereto and Bank of Montreal as Agent
for the Banks.
(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* -- Employment Agreement dated October 1, 1996 between Vision
Twenty-One, Inc. and Theodore N. Gillette.(1)
10.2* -- Employment Agreement dated October 1, 1996 between Vision
Twenty-One, Inc. and Richard Sanchez.(1)
10.3* -- Employment Agreement dated September 1, 1996 between Vision
Twenty One, Inc. and Richard T. Welch.(1)
10.4* -- Services Agreement dated September 9, 1996 between Vision
Twenty-One, Inc. and Dr. Richard L. Lindstrom, M.D.(1)
10.5* -- Vision Twenty-One, Inc. 1996 Stock Incentive Plan.(1)
10.6* -- Vision Twenty-One, Inc. Affiliated Professionals Stock
Plan.(1)
10.7* -- Agreement dated May 10, 1996 between Vision Twenty-One, Inc.
and Bruce S. Maller.(1)
10.8* -- Advisory Agreement dated October 20, 1996 between Vision
Twenty-One, Inc. and Bruce S. Maller.(1)
10.9* -- Services Agreement dated March 10, 1996 between Vision
Twenty-One, Inc. and The BSM Consulting Group.(1)
10.10* -- Subscription Agreement dated June 4, 1996 between Vision
Twenty-One, Inc. and Peter Fontaine.(1)
10.11* -- Promissory Note dated June 1996 from Vision Twenty-One, Inc.
to Peter Fontaine, filed as Exhibit 4.2 to this Report and
incorporated herein by reference.
10.12* -- Promissory Note dated November 1996 from Vision Twenty-One,
Inc. to Peter Fontaine, filed as Exhibit 4.3 to this Report
and incorporated herein by reference.
10.13* -- Promissory Note dated December 1996 from Vision Twenty-One,
Inc. to Peter Fontaine filed as Exhibit 4.4 to this Report
and incorporated herein by reference.
10.14* -- Note Purchase Agreement for 10% Senior Subordinated Notes
Due December 19, 1999 (Detachable Warrants Exchangeable Into
Common Stock), dated December 20, 1996, by and between
Vision Twenty-One, Inc. and certain purchasers filed as
Exhibit 4.5 to this Report and incorporated herein by
reference.(2)
10.15* -- Amendment No. 1 dated April 18, 1997, to that certain Note
Purchase Agreement dated December 20, 1996, by and between
Vision Twenty-One, Inc. and certain purchasers filed as
Exhibit 4.6 to this Report and incorporated herein by
reference.(1)
10.16* -- Note Purchase Agreement for 10% Senior Subordinated Series
1997 Notes Due December 19, 1999 (Detachable Warrants
Exchangeable Into Common Stock), by and between Vision
Twenty-One, Inc. and Piper Jaffray Healthcare Fund II
Limited Partnership, filed as Exhibit 4.7 to this Report and
incorporated herein by reference.(1)
10.17* -- Amended and Restated Note and Warrant Purchase Agreement
dated June 1997 and First Amendment to Amended and Restated
Note and Warrant Purchase Agreement dated August 1997
between Vision Twenty-One, Inc. and Prudential Securities
Group, Inc. filed as Exhibit 4.8 to this Report and
incorporated herein by reference.(4)
10.18* -- Form of Indemnification Agreement.(1)
</TABLE>
60
<PAGE> 63
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS DESCRIPTION
- ------- --------------------
<C> <C> <S>
10.19+* -- Ancillary Provider Participation Agreement and Provider
Amendment among Humana Medical Plan, Inc., Humana Health
Plan of Florida, Inc., Humana Health Insurance of Florida,
Inc., Humana Insurance Company and Vision 21.(2)
10.20+* -- Asset Purchase Agreement dated December 1, 1996, by and
among Gillette & Associates, #6965, P.A., Theodore N.
Gillette, O.D., Mark Sarno, O.D. and Mark Beiler, O.D. and
Vision Twenty-One, Inc.(2)
10.21* -- Subordinated Promissory Note dated December 1, 1996, from
Vision Twenty-One, Inc. to Gillette & Associates, #6965,
P.A.(1)
10.22* -- Business Management Agreement dated December 1, 1996,
between Vision Twenty-One, Inc. and Gillette & Associates,
#6965, P.A.(2)
10.23+* -- Agreement and Plan of Reorganization dated December 1, 1996,
by and among Eye Institute of Southern Arizona, P.C.,
Jeffrey I. Katz, M.D. and Barry Kusman, M.D., Vision Twenty-
One, Inc. and Vision 21 of Southern Arizona, Inc.(3)
10.24* -- Business Management Agreement dated December 1, 1996,
between Eye Institute of Southern Arizona, P.C. and
ExcelCare, P.C. (as assigned to Vision Twenty-One, Inc.)(1)
10.25+* -- Asset Purchase Agreement dated December 1, 1996, by and
among Lindstrom, Samuelson & Hardten Ophthalmology
Associates, P.A., Richard L. Lindstrom, M.D., Thomas W.
Samuelson, M.D. and David R. Hardten, M.D. and Vision
Twenty-One, Inc.(9)
10.26* -- Subordinated Promissory Note dated December 1, 1996, from
Vision Twenty-One, Inc. to Lindstrom, Samuelson & Hardten
Ophthalmology Associates, P.A.(1)
10.27* -- Business Management Agreement dated December 1, 1996,
between Vision Twenty-One, Inc. and Lindstrom, Samuelson &
Hardten Ophthalmology Associates, P.A.(1)
10.42* -- Stock Purchase Agreement dated May 1997, between David R.
Hardten, M.D., Robert B. Kennedy, O.D., Thomas A. Knox,
Gregory W. Kraupa, O.D., John W. Lahr, O.D., Richard L.
Lindstrom, M.D., Jack W. Moore, Thomas W. Samuelson, M.D.,
and Bradley Dr. Richter, O.D. and Vision Twenty-One, Inc.(1)
10.43* -- Regional Services Agreement dated May 1997, between Vision
Twenty-One, Inc. and Richard L. Lindstrom, M.D.(1)
10.47* -- Form of Contract Provider agreement(2)
10.48+* -- Joint Venture Agreement dated May 1, 1996 by and between For
Eyes Managed Care, Inc. and Vision 21 Managed Eye Care of
Tampa Bay, Inc.(3)
10.49* -- Amendment to Agreement and Plan of Reorganization dated July
31, 1997 by and among Kuscat Investments, L.L.C.,
Ocusite-ASC, Inc., Jeffrey I. Katz, M.D. and Barry Kusman,
M.D., Vital Site, P.C., Vision Twenty-One, Inc. Vision 21 of
Southern Arizona, Inc. and the escrow agent.(9)
10.50* -- Employment Agreement dated October 31, 1997 between Vision
Twenty-One, Inc. and Michael P. Block.(9)
10.51* -- Letter of Intent dated October 15, 1997 by and among Vision
Twenty-One, Inc., BBG-COA, Inc. MarketCorp Venture
Associates, L.P., New York State Business Venture
Partnership, Chase Venture Capital Associates, Michael P.
Block, Saree Block and James T. Roberto.(6)
10.52* -- Credit facility commitment letter dated October 10, 1997
between Prudential Securities Credit Corporation and Vision
Twenty-One, Inc. filed as Exhibit 4.9 to this Report and
incorporated herein by reference.
10.53* -- Note Purchase Agreement dated October 1997 between Vision
Twenty-One, Inc. and Prudential Securities Credit
Corporation, filed as Exhibit 4.10 to this Report and
incorporated herein by reference.
10.54* -- Stock Purchase Agreement effective October 31, 1997 by and
among Vision Twenty-One, Inc., BBG-COA, Inc. Market Corp
Venture Associates, L.P., New York state Business Venture
Partnership, Chase Venture Capital Associates, Michael P.
Block, Saree Block and James T. Roberto, filed as Exhibit
2.10 to this Report and incorporated herein by reference.
</TABLE>
61
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS DESCRIPTION
- ------- --------------------
<C> <C> <S>
10.55* -- Letter Agreement of October 2, 1997 by and between
Prudential Securities Incorporated as exclusive agent for
obtaining $50.0 million credit facility, and Vision
Twenty-One, Inc.(9)
10.56* -- Letter Agreement of October 14, 1997 by and between
Prudential Securities Incorporated, as exclusive financial
adviser in the Block Acquisition, and Vision Twenty-One,
Inc.(9)
10.57* -- Letter Amendment dated December 30, 1997 to the Note and
Warrant Purchase Agreement between Vision Twenty-One, Inc.
and Prudential Securities Credit Corporation, filed as
Exhibit 4.11 to this Report and incorporated herein by
reference.(10)
10.58* -- Stock Distribution Agreement dated December 30, 1997 by and
between Vision Twenty-One, Inc. and LaserSight,
Incorporated, filed as Exhibit 4.12 to this Report and
incorporated herein by reference.(10)
10.59* -- Credit Agreement dated as of January 30, 1998 among Vision
Twenty-One, Inc. ,the Banks Party Hereto and Bank of
Montreal as Agent filed as Exhibit 4.13 to this Report and
incorporated herein by reference.(11)
10.60* -- 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 4.14 to this
Report and incorporated herein by reference.(16)
10.61 -- First Amendment to the Amended and Restated Credit Agreement
dated as of February 23, 1999 among Vision Twenty-One, Inc.,
the Banks party hereto and Bank of Montreal as Agent for the
Banks, filed as Exhibit 4.15 to this report and incorporated
herein by reference.
10.62 -- Second Amendment to the Amended and Restated Credit
Agreement dated as of June 11, 1999 among Vision Twenty-One,
Inc., the Banks party thereto and Bank of Montreal as Agent
for the Banks, filed as Exhibit 4.16 to this Report and
incorporated herein by reference.
10.63* -- Vision Twenty-One, Inc. Employee Stock Purchase Plan.(17)
21 -- List of the subsidiaries of Vision Twenty-One, Inc.
23 -- Consent of Ernst & Young, LLP, independent certified public
accountants.
27 -- Financial Data Schedule for the year ended December 31, 1998
(for SEC use only).
</TABLE>
- ---------------
* Previously filed as an Exhibit in the Company filing identified in the
footnote following the Exhibit Description and incorporated herein by
reference.
(1) Registration Statement on Form S-1 filed on June 13, 1997 (File No.
333-29213).
(2) Amendment No. 1 to Registration Statement on Form S-1 filed on July 23,
1997.
(3) Amendment No. 3 to Registration Statement on Form S-1 filed on August 14,
1997.
(4) Amendment No. 4 to Registration Statement on Form S-1 filed on August 18,
1997.
(5) Form 8-K filed September 30, 1997.
(6) Registration Statement on Form S-1 filed on October 30, 1997 (333-39031).
(7) Amendment No. 1 to Registration Statement on Form S-1 filed on November 3,
1997.
(8) Form 10-Q filed on November 14, 1997.
(9) Amendment No. 2 to Registration Statement on Form S-1 filed November 19,
1997.
(10) Form 8-K filed January 13, 1998.
(11) Form 8-K filed February 10, 1998.
(12) Form 8-K filed April 14, 1998.
(13) Registration Statement on Form S-1 filed on April 30, 1998 (File No.
333-51437).
(14) Amendment No. 1 to Registration Statement on Form S-1 filed on May 12, 1998
(333-51437).
(15) Form 8-K filed July 10, 1998.
(16) Form 10-Q filed August 14, 1998.
(17) Form S-8 filed November 13, 1998.
62
<PAGE> 1
EXHIBIT 4.15
VISION TWENTY-ONE, INC.
FIRST AMENDMENT TO CREDIT AGREEMENT
This First Amendment to Credit Agreement (herein, the "Amendment") is
entered into as of February 23, 1999, among Vision Twenty-One, Inc., a Florida
corporation, the Banks party hereto, and Bank of Montreal as Agent for the
Banks.
PRELIMINARY STATEMENTS
A. The Borrower, the Banks, and the Agent entered into an Amended
and Restated Credit Agreement, dated as of July 1, 1998 (herein, the "Credit
Agreement"). All capitalized terms used herein without definition shall have the
same meanings herein as such terms have in the Credit Agreement.
B. The Credit Agreement currently provides for, among other things,
a $22,500,000 five-year amortizing acquisition term loan facility and a
$70,000,000 seven-year amortizing term loan.
C. The Borrower and the Banks have agreed to reduce the Term A
Credit Commitments from $22,500,000 to $12,500,000 and modify the $70,000,000
term credit facility described above into a $20,000,000 five-year amortizing
term loan and a $50,000,000 seven-year amortizing term loan, and to make certain
other changes to the Credit Agreement as more fully provided for in this
Amendment.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. AMENDMENTS.
Subject to the satisfaction of the conditions precedent set forth in
Section 3 below, the Credit Agreement shall be and hereby is amended as follows:
1.1 The first sentence of Section 1.1 of the Credit
Agreement shall be amended and restated to read as follows:
Subject to the terms and conditions hereof, each Bank, by its
acceptance hereof, severally agrees to make a loan or loans
(individually a "Revolving Loan" and collectively the
"Revolving Loans") to the Borrower from time to time on a
revolving basis up to the amount of such Bank's Revolving
Credit Commitment, subject to any reductions thereof pursuant
to the terms hereof, before the Revolving Credit Termination
Date.
<PAGE> 2
1.2. Section 1.3 of the Credit Agreement shall be amended
and restated in its entirety to read as follows:
Section 1.3. Term Credit Commitments. (a) Subject
to the terms and conditions hereof, each Bank, by its
acceptance hereof, severally agrees to make one or more loans
(individually a "Term A Loan" and collectively the "Term A
Loans") to the Borrower from time to time in the aggregate
amount of such Bank's Term A Credit Commitment, subject to any
reduction thereof pursuant to the terms hereof, on or before
the Term A Credit Commitment Termination Date (at which time
the Term A Credit Commitments of the Banks shall expire). Each
Borrowing of Term A Loans shall be made ratably by the Banks
in proportion to their respective Term A Loan Percentages.
Each Borrowing of Term A Loans shall be used solely for the
purposes provided in Section 6.4 hereof. Each Borrowing of
Term A Loans shall be in an amount of $1,000,000 or such
greater amount which is an integral multiple of $100,000. As
provided in Section 1.6(a) hereof, the Borrower may elect that
each Borrowing of Term A Loans be either Base Rate Loans or
Eurodollar Loans. The principal amount of each Term A Loan
made by a Bank to the Borrower shall permanently reduce the
amount available to the Borrower under such Bank's Term A
Credit Commitment, and no amount repaid or prepaid on any Term
A Loan may be borrowed again.
(b) On or about July 1, 1998, term loans in the
aggregate principal amount of $70,000,000 were made available
to the Borrower by the Banks (herein, the "Term B/C Credit
Commitments") and, of the outstanding principal balance
thereof, $20,000,000 are currently outstanding and owing to
certain of the Banks in the amounts set forth on Schedule 1
attached hereto (individually a "Term B Loan" and collectively
the "Term B Loans"). Each Borrowing of Term B Loans shall be
made and maintained ratably by the Banks in proportion to
their respective Term B Loan Percentages. As provided in
Section 1.6(a) hereof, the Borrower may elect that each
Borrowing of Term B Loans be either Base Rate Loans or
Eurodollar Loans. No amount repaid or prepaid on any Term B
Loan may be borrowed again.
(c) On or about July 1, 1998, term loans in the
aggregate principal amount of $70,000,000 were made available
to the Borrower by the Banks under the Term B/C Credit
Commitments and, of the outstanding principal balance thereof,
$50,000,000 are currently outstanding and owing to certain of
the Banks in the amounts set forth in Schedule 1 attached
hereto
-2-
<PAGE> 3
(individually a "Term C Loan" and collectively the "Term C
Loans"). Each Borrowing of Term C Loans shall be made and
maintained ratably by the Banks in proportion to their
respective Term C Loan Percentages. As provided in Section
1.6(a) hereof, the Borrower may elect that each Borrowing of
Term C Loans be either Base Rate Loans, Eurodollar Loans, or
Fixed Rate Loans. No amount repaid or prepaid on any Term C
Loan may be borrowed again.
1.3. Subsections (c) and (d) of Section 1.4 of the Credit
Agreement shall be amended and restated to read as follows:
(c) Fixed Rate Loans. Each Fixed Rate Loan made
or maintained by a Bank shall bear interest (computed on the
basis of a year of 360 days and the actual days elapsed) on
the unpaid principal amount thereof from the date such Loan is
advanced or created by conversion from a Base Rate Loan or
Eurodollar Loan until maturity (whether by acceleration or
otherwise) at a rate per annum equal to the sum of the
Applicable Margin with respect to Eurodollar Loans as from
time to time in effect plus the Adjusted Fixed Rate applicable
to the relevant Borrowing of Term C Loans, payable on the last
day of each March, June, September, and December occurring
after the relevant Borrowing of Fixed Rate Loans is advanced
or created and at maturity (whether by acceleration or
otherwise). Fixed Rate Loans shall only be available for
Borrowings of Term C Loans. In the event the Borrower elects
that a Borrowing of Term C Loans constitute Fixed Rate Loans,
such election shall be irrevocable and remain in effect with
respect to such Borrowing of Term C Loans from the date such
Fixed Rate Loans are advanced or created by conversion from a
Base Rate Loan or Eurodollar Loan through the final maturity
date of the Term C Loans. It being acknowledged by the parties
hereto that $35,000,000 of Fixed Rate Loans were advanced to
the Borrower on or about July 1, 1998, which Fixed Rate Loans
are outstanding as Term C Loans hereunder.
"Adjusted Fixed Rate" means, for any Borrowing of
Fixed Rate Loans, a rate per annum determined in accordance
with the following formula:
<TABLE>
<S> <C> <C>
Adjusted Fixed Rate = Fixed Rate + (Adjusted
LIBOR-LIBOR, as
determined by the
Floating Rate Payor
pursuant to clause (d)
below)
</TABLE>
-3-
<PAGE> 4
"Fixed Rate" means, with respect to a Borrowing of
Fixed Rate Loans advanced or created by conversion from a Base
Rate Loan or Eurodollar Loan on the same day, the rate per
annum quoted to the Borrower by the Floating Rate Payor on the
date on which such Borrowing is to be advanced or created, it
being acknowledged and agreed that the Fixed Rate shall be
established at the time of each Borrowing of Term C Loans by
the Floating Rate Payor in its sole discretion.
"Floating Rate Payor" means Bank of Montreal, in its
capacity as a payment obligor under Section 1.4(d) below.
(d) Floating Rate Payor Obligation. Subject to
receipt by the Agent of payment in full of interest due by the
Borrower with respect to each Borrowing of Fixed Rate Loans,
the Agent will remit to the Floating Rate Payor the interest
so paid by the Borrower and the Floating Rate Payor shall pay
to the Agent for distribution to the Banks ratably an amount
equal to interest which would have accrued on such Borrowing
during the prior 3-month period at a rate per annum equal to
the sum of the Applicable Margin with respect to Eurodollar
Loans in effect during such period plus the Adjusted LIBOR
(computed on the basis of a year of 360 days and the actual
number of days elapsed) (as determined by the Floating Rate
Payor on the first day of the relevant calendar quarter and
determined as if the relevant Interest Period was 3 months,
provided during the first three months following the date
hereof such rate shall be determined on the first day of each
month and determined as if the relevant Interest Period was 1
month). In the event any such Fixed Rate Loans bear interest
at the default rate provided for in Section 1.10(c) hereof,
the Banks shall also be entitled to receive from the Floating
Rate Payor their pro rata share of any additional interest
provided for therein, based on their Percentages of the
relevant Borrowing of Term C Loans, to the extent paid by the
Borrower. In the event interest on any such Fixed Rate Loan is
not paid in full by the Borrower, then the Floating Rate Payor
shall be obligated to pay to the Agent for distribution to the
Banks an amount determined by multiplying the amounts due the
Banks as set forth above times a fraction, the numerator of
which is the amount of interest actually paid by the Borrower
to the Agent and the denominator of which is the amount of
interest due from Borrower with respect to such Fixed Rate
Loans.
1.4. Section 1.6 of the Credit Agreement shall be amended
by deleting all references therein to "Term B Loans" and inserting
reference to "Term C Loans" in lieu thereof.
-4-
<PAGE> 5
1.5. Section 1.7 of the Credit Agreement shall be amended
and restated in its entirety to read as follows:
Section 1.7. Interest Periods. As provided in
Section 1.6(a) hereof, at the time of each request to advance,
continue, or create by conversion a Borrowing of Eurodollar
Loans, the Borrower shall select an Interest Period applicable
to such Loans from among the available options. The term
"Interest Period" means the period commencing on the date a
Borrowing of Loans is advanced, continued, or created by
conversion and ending: (a) in the case of Base Rate Loans, on
the last day of the calendar quarter in which such Borrowing
is advanced, continued, or created by conversion (or on the
last day of the following calendar quarter if such Loan is
advanced, continued or created by conversion on the last day
of a calendar quarter) and (b) in the case of a Eurodollar
Loan, 1, 2, 3, or 6 months thereafter; provided, however,
that:
(a) any Interest Period for a Borrowing of
Revolving Loans consisting of Base Rate Loans that otherwise
would end after the Revolving Credit Termination Date shall
end on the Revolving Credit Termination Date, and any Interest
Period for a Borrowing of Term Loans consisting of Base Rate
Loans that otherwise would end after the final maturity date
of the relevant Term Loans shall end on the final maturity
date of such Term Loans;
(b) no Interest Period with respect to any
portion of the Term A Loans shall extend beyond the final
maturity date of the Term A Loans, no Interest Period with
respect to any portion of the Term B Loans shall extend beyond
the final maturity date of the Term B Loans, no Interest
Period with respect to any portion of the Term C Loans shall
extend beyond the final maturity date of the Term C Loans, and
no Interest Period with respect to any portion of the
Revolving Loans shall extend beyond the Revolving Credit
Termination Date;
(c) no Interest Period with respect to any
portion of the Term A Loans consisting of Eurodollar Loans
shall extend beyond a date on which the Borrower is required
to make a scheduled payment of principal on the Term A Loans,
unless the sum of (i) the aggregate principal amount of Term A
Loans that are Base Rate Loans plus (ii) the aggregate
principal amount of Term A Loans that are Eurodollar Loans
with Interest Periods expiring on or before such date equals
or exceeds the principal amount to be paid on the Term A Loans
on such payment date;
-5-
<PAGE> 6
(d) no Interest Period with respect to any
portion of the Term B Loans consisting of Eurodollar Loans
shall extend beyond a date on which the Borrower is required
to make a scheduled payment of principal on the Term B Loans,
unless the sum of (i) the aggregate principal amount of Term B
Loans that are Base Rate Loans plus (ii) the aggregate
principal amount of Term B Loans that are Eurodollar Loans
with Interest Periods expiring on or before such date equals
or exceeds the principal amount to be paid on the Term B Loans
on such payment date;
(e) no Interest Period with respect to any
portion of the Term C Loans consisting of Eurodollar Loans
shall extend beyond a date on which the Borrower is required
to make a scheduled payment of principal on the Term C Loans,
unless the sum of (i) the aggregate principal amount of Term C
Loans that are Base Rate Loans plus (ii) the aggregate
principal amount of Term C Loans that are Eurodollar Loans
with Interest Periods expiring on or before such date plus
(iii) the aggregate principal amount of Term C Loans that are
Fixed Rate Loans scheduled to mature on or before such date
equals or exceeds the principal amount to be paid on the Term
C Loans on such payment date;
(f) whenever the last day of any Interest Period
would otherwise be a day that is not a Business Day, the last
day of such Interest Period shall be extended to the next
succeeding Business Day, provided that, if such extension
would cause the last day of an Interest Period for a Borrowing
of Eurodollar Loans to occur in the following calendar month,
the last day of such Interest Period shall be the immediately
preceding Business Day; and
(g) for purposes of determining an Interest
Period for a Borrowing of Eurodollar Loans, a month means a
period starting on one day in a calendar month and ending on
the numerically corresponding day in the next calendar month;
provided, however, that if there is no numerically
corresponding day in the month in which such an Interest
Period is to end or if such an Interest Period begins on the
last Business Day of a calendar month, then such Interest
Period shall end on the last Business Day of the calendar
month in which such Interest Period is to end.
1.6. Subsection (c) of Section 1.8 of the Credit Agreement
shall be amended and restated and a new subsection(d) shall be added to
Section 1.8 of Credit Agreement, each of which shall read as follows:
(c) Scheduled Payments of Term B Loans. The
Borrower shall make principal payments on the Term B Loans in
-6-
<PAGE> 7
installments on the last day of each March, June, September
and December in each year, commencing with the calendar
quarter ending September 30, 2000, with the amount of each
such installment to equal to the amount set forth in Column B
below opposite the relevant due date as set forth in Column A
below:
<TABLE>
<CAPTION>
COLUMN B
COLUMN A SCHEDULED PRINCIPAL PAYMENT
PAYMENT DATE ON THE TERM B LOANS
<S> <C>
09/30/00 $1,250,000.00
12/31/00 $1,250,000.00
03/31/01 $1,250,000.00
06/30/01 $1,250,000.00
09/30/01 $1,250,000.00
12/31/01 $1,250,000.00
03/31/02 $1,250,000.00
06/30/02 $1,250,000.00
09/30/02 $1,250,000.00
12/31/02 $1,250,000.00
03/31/03 $3,750,000.00
06/30/03 $3,750,000.00
</TABLE>
, it being agreed that the final payment of both principal and
interest not sooner paid on the Term B Loans shall be due and
payable on the Term B Credit Final Maturity Date. Each such
principal payment shall be applied to the Banks holding the
Term B Notes pro rata based on their Term B Loan Percentages.
(d) Scheduled Payments of Term C Loans. The
Borrower shall make principal payments on the Term C Loans in
installments on the last day of each June in each year,
commencing June 30, 1999, with the amount of each such
installment to equal 1.0% of the original aggregate principal
amount of the Term C Loans made to the Borrower (with each
such installment deemed to reduce each Fixed Rate Loan then
outstanding by an amount equal to 1.0% of the original
principal amount thereof), except that the final payment of
both principal and interest not sooner paid on the Term C
Loans shall be due and payable on the Term C Credit Final
Maturity Date. Each such principal payment shall be applied to
the Banks holding the Term C Notes pro rata based upon their
Term C Loan Percentages.
-7-
<PAGE> 8
1.7. The last sentence of Section 1.9(a) of the Credit
Agreement shall be amended and restated to read as follows:
No amount of any Term Loans paid or prepaid may be reborrowed.
1.8. Clauses (ii) and (iii) of Section 1.9(b) of the
Credit Agreement shall be amended and restated and a new clause (iv)
shall be added to Section 1.9(b) of the Credit Agreement, each of which
shall read as follows:
(ii) If after the date of this Agreement the
Borrower or any Subsidiary shall issue any Indebtedness for
Borrowed Money, other than Indebtedness for Borrowed Money
permitted by Section 8.13 hereof, the Borrower shall promptly
notify the Agent of the net cash proceeds (i.e., gross
proceeds of cash or cash equivalents minus the costs directly
incurred and payable as a result thereof) of such issuance to
be received by or for the account of the Borrower or such
Subsidiary in respect thereof. Promptly upon, and in no event
later than the Business Day after, receipt by the Borrower or
such Subsidiary of net cash proceeds of such issuance, the
Borrower shall prepay the Term Loans in an aggregate amount
equal to 100% of the amount of such net cash proceeds. The
amount of such prepayment shall be applied on a ratable basis
among the then outstanding Term A Loans, Term B Loans and Term
C Loans, and on a ratable basis among all remaining payments
on such Term A Loans, Term B Loans and Term C Loans. The
Borrower acknowledges that its performance hereunder shall not
limit the rights and remedies of the Banks arising from any
breach of Section 8.13 hereof.
(iii) Notwithstanding anything to the contrary
contained in this Section 1.9(b) or elsewhere in this
Agreement, any Bank with an outstanding Term C Loan shall have
the option to waive any mandatory prepayment of such Term C
Loan pursuant to clause (ii) of this Section 1.9(b) (each such
prepayment a "Waiveable Mandatory Term C Loan Prepayment")
upon the terms and provisions set forth in this Section
1.9(b)(iii). In the event any such Bank desires to waive such
Bank's right to receive any such Waiveable Mandatory Term C
Loan Prepayment in whole or in part, such Bank shall so advise
the Agent no later than the date on which such prepayment is
to occur, which notice shall also includes the amount such
Bank desires to receive in respect of such prepayment. If any
such Bank does not provide such notice, it will be deemed to
have accepted 100% of the total amount. In the event that any
such Bank waives all or any part of such right to receive any
such Waiveable Mandatory Term C Loan Prepayment, the Agent
shall apply 100% of the amount so waived by such Bank
-8-
<PAGE> 9
to the Term A Loans and Term B Loans then outstanding in
accordance with the relevant clause of this Section 1.9(b),
provided that no such waiver request shall be honored
following the prepayment in full of the Term A Loans and Term
B Loans.
(iv) Unless the Borrower otherwise directs,
prepayments of Loans under this Section 1.9(b) shall be
applied first to Borrowings of Base Rate Loans until payment
in full thereof with any balance applied to Borrowings of
Eurodollar Loans in the order in which their Interest Periods
expire and thereafter, in the case of the Term C Loans, with
any balance applied to the Fixed Rate Loans. Each prepayment
of Loans under this Section 1.9(b) shall be made by the
payment of the principal amount to be prepaid and accrued
interest thereon to the date of prepayment together with any
amounts due the Banks under Section 1.12 hereof. Each
prefunding of L/C Obligations shall be made in accordance with
Section 9.4 hereof.
1.9. Subsection (c) of Section 1.11 of the Credit
Agreement shall be amended and restated in its entirety to read as
follows:
(c) (i) The Term B Loans made to the Borrower by
a Bank shall be evidenced by a single promissory note of the
Borrower issued to such Bank in the form of Exhibit F-1
hereto. Each such promissory note is hereinafter referred to
as a "Term B Note" and collectively such promissory notes are
referred to as the "Term B Notes."
(ii) The Term C Loans made to the Borrower
by a Bank shall be evidenced by a single promissory note of
the Borrower issued to such Bank in the form of Exhibit F-2
hereto. Each such promissory note is hereinafter referred to
as a "Term C Note" and collectively such promissory notes are
referred to as the "Term C Notes."
1.10. Subsection (c) of Section 1.13 of the Credit
Agreement shall be amended and restated to read as follows:
(c) Intentionally deleted.
1.11. Subsection (c) of Section 2.1 of the Credit Agreement
shall be amended and restated to read as follows:
(c) Intentionally deleted.
-9-
<PAGE> 10
1.12. The definition of "Applicable Margin" appearing in
Section 5.1 of the Credit Agreement shall be amended and restated in
its entirety to read as follows (and the Applicable Margin, as so
amended, shall be effective retroactive to January 1, 1999):
"Applicable Margin" means, with respect to Loans,
Reimbursement Obligations, and the commitment fees and letter
of credit fees payable under Section 2.1 hereof, the rate per
annum specified below:
<TABLE>
<S> <C>
Applicable Margin for Base Rate Loans under Revolving Credit,
Term A Loans and Term B Loans, and Reimbursement Obligations: 1.5%
Applicable Margin for Eurodollar Loans under Revolving Credit,
Term A Loans and Term B Loans, and letter of credit fee: 3.0%
Applicable Margin for Revolving Credit Commitment fee and
Term A Credit Commitment fee: .625%
Applicable Margin for Base Rate Loans under Term C Loans 1.5%
Applicable Margin for Eurodollar Loans under Term C Loans 3.625%
</TABLE>
; provided, however, that the Applicable Margin shall be
subject to quarterly adjustments on the first Pricing Date,
and thereafter from one Pricing Date to the next the
Applicable Margin shall mean a rate per annum determined in
accordance with the following schedule:
-10-
<PAGE> 11
<TABLE>
<CAPTION>
APPLICABLE APPLICABLE
MARGIN FOR MARGIN FOR
BASE RATE EURODOLLAR
LOANS UNDER LOANS UNDER APPLICABLE
REVOLVING REVOLVING MARGIN FOR THE
CREDIT, TERM A CREDIT, TERM REVOLVING
CREDIT AND A CREDIT CREDIT APPLICABLE APPLICABLE
TOTAL FUNDED TERM B CREDIT, AND TERM B COMMITMENT MARGIN FOR MARGIN FOR
DEBT/ADJUSTED AND CREDIT, AND FEE AND TERM A BASE RATE EURODOLLAR
EBITDA RATIO REIMBURSEMENT LETTER OF CREDIT LOANS UNDER LOANS UNDER
FOR SUCH OBLIGATIONS CREDIT FEE COMMITMENT TERM C: TERM C
PRICING DATE SHALL BE: SHALL BE: FEE SHALL BE: CREDIT: CREDIT:
<S> <C> <C> <C> <C> <C>
Greater than 3.0 to 1.5% 3.0% .625% 1.5% 3.625%
1.0
Equal to or less 1.375% 2.875% .625% 1.375% 3.625%
than 3.0 to 1.0,
but greater than
2.5 to 1.0
Equal to or less 1.25% 2.75% .50% 1.25% 3.375%
than 2.5 to 1.0,
but greater than
2.0 to 1.0
Equal to or less 1.0% 2.5% .50% 1.0% 3.375%
than 2.0 to 1.0,
but greater than
1.5 to 1.0
Equal to or less .75% 2.25% .50% .75% 3.375%
than 1.5 to 1.0
</TABLE>
For purposes hereof, the term "Pricing Date" means, for any
fiscal quarter of the Borrower ending on or after December 31,
1998, the date on which the Agent is in receipt of the
Borrower's most recent financial statements for the fiscal
quarter then ended, pursuant to Section 8.5(b) or (c) hereof.
The Applicable Margin shall be established based on the Total
Funded Debt/Adjusted EBITDA Ratio for the most recently
completed fiscal quarter and the Applicable Margin established
on a Pricing Date shall remain in effect until the next
Pricing Date. If the Borrower has not delivered its financial
statements by the date such financial statements (and, in the
case of the year-end financial statements, audit report) are
required to be delivered under Section 8.5(b) or
-11-
<PAGE> 12
(c) hereof, until such financial statements and audit report
are delivered, the Applicable Margin shall be the highest
Applicable Margin (i.e., the Total Funded Debt/Adjusted EBITDA
Ratio shall be deemed to be greater than 3.0 to 1.0). If the
Borrower subsequently delivers such financial statements
before the next Pricing Date, the Applicable Margin
established by such late delivered financial statements shall
take effect from the date of delivery until the next Pricing
Date. In all other circumstances, the Applicable Margin
established by such financial statements shall be in effect
from the Pricing Date that occurs immediately after the end of
the Borrower's fiscal quarter covered by such financial
statements until the next Pricing Date. Each determination of
the Applicable Margin made by the Agent in accordance with the
foregoing shall be conclusive and binding on the Borrower and
the Banks if reasonably determined.
1.13. The definitions of "Commitments", "Credit", "EBITDA",
"Loan", "Majority Banks", "Notes", "Percentage", "Required Banks",
"Revolving Credit Commitment", "Term A Credit Commitment", "Term B
Credit Commitment", "Term B Final Maturity Date", "Term B Loan", "Term
B Loan Percentage", "Term B Note", "Term Credits" and "Term Loans"
appearing in Section 5.1 of the Credit Agreement shall be amended and
restated in their entirety to read as follows:
"Commitments" means the Revolving Credit Commitments, the L/C
Commitment, the Term A Credit Commitments and the Term B/C
Credit Commitments.
"Credit" means any one of the Revolving Credit, the Term A
Credit, the Term B Credit or the Term C Credit.
"EBITDA" means, with reference to any period, Net Income for
such period plus the sum (without duplication) of all amounts
deducted in arriving at such Net Income amount in respect of
(a) Interest Expense for such period, (b) federal, state and
local income taxes for such period, (c) depreciation of fixed
assets and amortization of intangible assets for such period,
(d) one-time charges incurred on or about January 30, 1998,
arising out of the prepayment of the indebtedness owing to
Prudential Securities Credit Corporation on or about January
30, 1998, (e) one-time charges incurred on or about July 1,
1998, arising out of the refinancing and restructuring of the
indebtedness owing to Bank of Montreal and the other lenders
party to the Original Credit Agreement, and (f) non-recurring
expenses in an aggregate amount up to $9,000,000 incurred as a
result of the implementation of the Ernst & Young
restructuring plan.
-12-
<PAGE> 13
"Loan" means a Base Rate Loan or Eurodollar Loan or Fixed
Rate Loan, each of which is a "type" of Loan hereunder,
outstanding as a Revolving Loan, a Term A Loan, a Term B Loan
or a Term C Loan, as applicable.
"Majority Banks" means, as of the date of determination
thereof, Banks whose outstanding Loans and interests in
Letters of Credit and Unused Revolving Credit Commitments and
unfunded Term A Credit Commitments constitute more than 50% of
the sum of the total outstanding Loans, interests in Letters
of Credit, Unused Revolving Credit Commitments and unfunded
Term A Credit Commitments of the Banks.
"Notes" means and includes the Revolving Notes, the Term A
Notes, the Term B Notes and the Term C Notes.
"Percentage" means for any Bank its Revolver Percentage, Term
A Loan Percentage, Term B Loan Percentage or Term C Loan
Percentage, as applicable.
"Required Banks" means, as of the date of determination
thereof, Banks whose outstanding Loans and interests in
Letters of Credit and Unused Revolving Credit Commitments and
unfunded Term A Credit Commitments constitute more than
66 2/3% of the sum of the total outstanding Loans, interests
in Letters of Credit, Unused Revolving Credit Commitments and
unfunded Term A Credit Commitments of the Banks.
"Revolving Credit Commitment" means, as to any Bank, the
obligation of such Bank to make Revolving Loans and to
participate in Letters of Credit issued for the account of the
Borrower hereunder in an aggregate principal or face amount at
any one time outstanding not to exceed the amount set forth
opposite such Bank's name or Schedule 1 attached hereto and
made a part hereof, as the same may be reduced or modified at
any time and from time to time pursuant to the terms hereof.
The Borrower and the Banks acknowledge and agree that the
Revolving Credit Commitments of the Banks aggregate $7,500,000
on the date of this Agreement.
"Term A Credit Commitment" means, as to any Bank, the
obligation of such Bank to make Term A Loans to the Borrower
hereunder in an aggregate principal amount at any one time
outstanding not to exceed the amount set forth opposite such
Bank's name on Schedule 1 attached hereto and made a part
hereof, as the same may be reduced or modified at any time and
-13-
<PAGE> 14
from time to time pursuant to the terms hereof. The Borrower
and the Banks acknowledge and agree that the Term A Credit
Commitments of the Banks aggregate $12,500,000 on the date of
this Agreement.
"Term B/C Credit Commitments" means the obligations of the
Banks to make Term B Loans and Term C Loans to the Borrower on
or about July 1, 1998 in the aggregate amount of $70,000,000,
which obligations have been satisfied and pursuant to which no
additional advances may be availed of by the Borrower
thereunder.
"Term B Credit Final Maturity Date" means June 30, 2003.
"Term B Loan" is defined in Section 1.3(b) hereof and, as so
defined, includes a Base Rate Loan or a Eurodollar Loan, each
of which is a "type" of Term B Loan hereunder.
"Term B Loan Percentage" means, for each Bank, the percentage
held by such Bank of the aggregate principal amount of all
Term B Loans then outstanding.
"Term B Note" is defined in Section 1.11(c)(i) hereof.
"Term Credits" means and includes the Term A Credit, the Term
B Credit and the Term C Credit.
"Term Loans" means and includes the Term A Loans, the Term B
Loans and the Term C Loans.
1.14. Section 5.1 of the Credit Agreement shall be further
amended by adding the following definitions:
"Term C Credit" means the credit facility for Term C Loans
described in Section 1.3(c) hereof.
"Term C Credit Final Maturity Date" means June 30, 2005.
"Term C Loan" is defined in Section 1.3(c) hereof and, as so
defined, includes a Base Rate Loan or a Eurodollar Loan or a
Fixed Rate Loan, each of which is a "type" of Term C Loan
hereunder.
"Term C Loan Percentage" means, for each Bank, the percentage
held by such Bank of the aggregate principal amount of all
Term C Loans then outstanding.
"Term C Note" is defined in Section 1.11(c)(ii) hereof.
-14-
<PAGE> 15
1.15. Section 5.1 of the Credit Agreement shall be amended
by deleting the "Term B Credit Commitment Termination Date" in its
entirety.
1.16. The first sentence of Section 6.4 of the Credit
Agreement shall be amended and restated to read as follows:
The Borrower shall use the proceeds of (i) the Term A Loans
solely for the purpose of financing one or more acquisitions
permitted by Section 8.13(k) of this Agreement and/or Capital
Expenditures permitted under this Agreement and (ii) the Term
B Loans and the Term C Loans made on the date of this
Agreement, and the Revolving Loans and the Letters of Credit
from time to time made available hereunder to refinance
existing indebtedness on the date of this Agreement and for
its general working capital purposes and such other legal and
proper purposes as are consistent with all applicable laws.
1.17. Sections 8.29 and 8.30 of the Credit Agreement shall
be amended and restated in their entirety to read as follows:
Section 8.29. Interest Rate Protection. Any interest
rate swaps, interest rate caps, interest rate collars or other
recognized interest rate hedging arrangements (collectively,
"Hedging Arrangements") entered into after the date of this
Agreement by the Borrower shall be on terms and conditions,
and with such parties, reasonably acceptable to the Agent. If
the Borrower enters into any Hedging Arrangements with any
Bank, the Borrower's obligations to such Bank in connection
with such Hedging Arrangements do not constitute usage of the
Commitments of such Bank.
Section 8.30. Year 2000 Compliance. The Borrower
shall take all reasonable actions necessary and commit
adequate resources to assure that its computer-based and other
systems (and those of all Subsidiaries) are able to
effectively process data, including dates before, on and after
January 1, 2000, without experiencing any Year 2000 Problems
that could cause a Material Adverse Effect. At the request of
the Agent or the Required Banks, the Borrower will provide the
Banks with assurances and substantiations (including, but not
limited to, the results of internal or external reports
prepared in the ordinary course of business or at the request
of the Agent or the Required Banks) reasonably acceptable to
the Agent and the Required Banks as to the capability of the
Borrower and its Subsidiaries to conduct its and their
businesses and operations before, on, and after January 1,
2000, without experiencing a Year 2000 Problem that,
individually or in
-15-
<PAGE> 16
the aggregate, is reasonably likely to have a Material Adverse
Effect.
1.18. Section 12.1(b) of the Credit Agreement shall be
amended by adding at the end thereof the following additional sentence:
If a Bank is unable to deliver a Form 1001 or Form 4224 but
claims exemption from United States withholding tax under
Section 871(h) or 881(c) of the Code with respect to payments
of "portfolio interest", such Bank shall provide to the
Borrower and the Agent within the time period set forth above
a Form W-8 or any successor form prescribed by the Internal
Revenue Service, together with a certificate representing that
such Bank is not a bank for purposes of Section 881(c) of the
Code, is not a 10-percent shareholder (within the meaning of
Section 871(h)(3)(B) of the Code) of the Borrower and is not a
controlled foreign corporation related to the Borrower (within
the meaning of Section 864(d)(4) of the Code) and such other
forms or certificates as the Borrower or the Agent may
reasonably request establishing such Bank's exemption from
United States withholding tax.
1.19. Section 12.12 of the Credit Agreement shall be
amended and restated in its entirety to read as follows:
Section 12.12. Assignment Agreements. (a) Each Bank shall
have the right at any time, with the prior consent of the
Agent and, so long as no Event of Default then exists, the
Borrower (which consent of the Borrower shall not be
unreasonably withheld) to sell, assign, transfer or negotiate
all or any part of its rights and obligations under the Loan
Documents (including, without limitation, the indebtedness
evidenced by the Notes held by such assigning Bank, together
with an equivalent percentage of its obligation to make Loans
and participate in Letters of Credit) to one or more
commercial banks or other financial institutions or investors,
provided that, unless otherwise agreed to by the Agent, such
assignment shall be of a fixed percentage (and not by its
terms of varying percentage) of the assigning Bank's rights
and obligations under the Loan Documents; provided, however,
that in order to make any such assignment (i) unless the
assigning Bank is assigning all of its Commitments,
outstanding Loans and Reimbursement Obligations, the assigning
Bank shall retain at least $5,000,000 in outstanding Loans,
interests in Letters of Credit and unused Commitments, (ii)
the assignee bank shall have outstanding Loans, interests in
Letters of Credit and unused Commitments of at least
$5,000,000, (iii) each such assignment shall be evidenced by a
written agreement (substantially in the
-16-
<PAGE> 17
form attached hereto as Exhibit I or in such other form
acceptable to the Agent) executed by such assigning Bank, such
assignee bank or banks, the Agent and, if required as provided
above, the Borrower, which agreement shall specify in each
instance the portion of the Obligations which are to be
assigned to the assignee bank and the portion of the
Commitments of the assigning Bank to be assumed by the
assignee bank or banks, and (iv) the assigning Bank shall pay
to the Agent a processing fee of $3,500 and any out-of-pocket
attorneys' fees and expenses incurred by the Agent in
connection with any such assignment agreement. Any such
assignee shall become a Bank for all purposes hereunder to the
extent of the rights and obligations under the Loan Documents
it assumes and the assigning Bank shall be released from its
obligations, and will have released its rights, under the Loan
Documents to the extent of such assignment. The Borrower
authorizes each Bank to disclose to any purchaser or
prospective purchaser of an interest in the Loans and
Reimbursement Obligations owed to it or its Commitments under
this Section any financial or other information pertaining to
the Borrower. Promptly upon the effectiveness of any such
assignment agreement, the Borrower shall execute and deliver
replacement Notes to the assigning Bank and the assignee Bank
in the respective amounts of their Commitments (or assigned
principal amounts, as applicable) after giving effect to the
reduction occasioned by such assignment (all such Notes to
constitute "Notes" for all purposes of this Agreement and the
other Loan Documents) and the assigning Bank shall surrender
to the Borrower its old Notes.
(b) Any Bank may at any time pledge or grant a
security interest in all or any portion of its rights under
this Agreement to secure obligations of such Bank, including
any such pledge or grant to a Federal Reserve Bank, and this
Section shall not apply to any such pledge or grant of a
security interest; provided that no such pledge or grant of a
security interest shall release a Bank from any of its
obligations hereunder or substitute any such pledgee or
secured party for such Bank as a party hereto; provided
further, however, that the right of any such pledgee or
grantee (other than any Federal Reserve Bank) to further
transfer all or any portion of the rights pledged or granted
to it, whether by means of foreclosure or otherwise, shall be
at all times subject to the terms of this Agreement.
-17-
<PAGE> 18
1.20. Section 12.13 of the Credit Agreement shall be
amended and restated in its entirety to read as follows:
Section 12.13. Amendments. Any provision of this
Agreement or the other Loan Documents may be amended or waived
if, but only if, such amendment or waiver is in writing and is
signed by (a) the Borrower, (b) the Required Banks, and (c) if
the rights or duties of the Agent are affected thereby, the
Agent; provided that:
(i) no amendment or waiver pursuant to this
Section 12.13 shall (A) increase any Commitment of any Bank
without the consent of such Bank or (B) reduce the amount of
or postpone the date for payment of any principal of or
interest on any Loan or of any Reimbursement Obligation or of
any fee payable hereunder without the consent of the Bank to
which such payment is owing or which has committed to make
such Loan or Letter of Credit (or participate therein)
hereunder; and
(ii) no amendment or waiver pursuant to this
Section 12.13 shall, unless signed by each Bank, change the
definitions of Revolving Credit Termination Date, Term A
Credit Commitment Termination Date, Term A Credit Final
Maturity Date, Term B Credit Final Maturity Date, Term C
Credit Final Maturity Date, or Required Banks, change the
provisions of this Section 12.13, Section 7, Section 9,
release any guarantor or all or any substantial part of the
Collateral (except as otherwise provided for in the Loan
Documents), or affect the number of Banks required to take any
action hereunder or under any other Loan Document.
1.21. The Credit Agreement shall be amended by adding at
the end thereof a Schedule 1 which shall read as set forth on Schedule
1 attached hereto and made a part hereof.
1.22. Exhibit F to the Credit Agreement shall be deleted
and a new Exhibit F-1 and Exhibit F-2 shall be inserted in lieu thereof
which shall read as set forth on Exhibits F-1 and F-2 attached hereto.
SECTION 2. WAIVER RELATING TO SALE OF BLOCK VISION.
The Borrower has notified the Agent and the Banks that the Borrower
intends to sell its Subsidiary, Block Vision, Inc., on or before June 30, 1999,
for total consideration of not less than $7,000,000, of which net cash proceeds
shall not be less than $5,000,000 (the "Block Vision Sale"). The Block Vision
Sale will constitute a default under Sections 8.16 and 8.17 of the Credit
Agreement and, for that reason, the Borrower hereby requests the Banks waive
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<PAGE> 19
Sections 8.16 and 8.17 of the Credit Agreement to permit the Block Vision Sale
as described herein. By signing below, the Banks hereby agree to waive
compliance with Sections 8.16 and 8.17 of the Credit Agreement to permit, and
only to permit, the Block Vision Sale but only so long as (a) the Block Vision
Sale occurs on or before June 30, 1999, (b) the total consideration received by,
or for the benefit of, the Borrower or any of its other Subsidiaries in
connection with the Block Vision Sale shall be in no event be less than
$7,000,000, of which not less than $5,000,000 shall be received as net cash
proceeds from the sale thereof, (c) promptly upon, and in no event later than
the Business Day after, receipt by the Borrower or any of its Subsidiaries of
the net cash proceeds from the Block Vision Sale, the Borrower shall prepay the
Term B Loans and Term C Loans in an aggregate amount equal to 50% of the amount
of such net cash proceeds (to be applied on a ratable basis among the then
outstanding Term B Loans and Term C Loans, and thereafter applied to such Term B
Loans and Term C Loans in the inverse order of maturity) (with the balance of
such net cash proceeds to be available to the Borrower for the purpose of
financing one or more Permitted Acquisitions within 180 days of the date of such
Block Vision Sale, provided the Borrower hereby agrees that such proceeds shall
be so invested in Permitted Acquisitions only after the Term A Credit
Commitments have been fully drawn upon or otherwise cancelled), and (d) if
within 180 days of the Block Vision Sale the Borrower has not reinvested such
net cash proceeds in one or more Permitted Acquisitions, and to the extent such
net cash proceeds have not been so reinvested, the Borrower shall promptly
prepay the Term B Loans and Term C Loans in the amount of such net cash proceeds
not so reinvested (with the amount of such prepayment to be applied on a ratable
basis among the then outstanding Term B Loans and Term C Loans, and thereafter
applied to such Term B Loans and Term C Loans in the inverse order of maturity).
Any prepayments which would otherwise be applied to the Term C Loans pursuant to
this Section shall be subject to the Waivable Mandatory Term C Loan Prepayment
provisions of Section 1.9(b) of the Credit Agreement as amended hereby. The
Borrower hereby acknowledges and agrees that the Banks are relying on the
foregoing in consenting to the Block Vision Sale and non-compliance by the
Borrower with any of the terms and conditions hereof shall constitute an Event
of Default under the Credit Agreement. Except as specifically waived hereby,
Sections 8.16 and 8.17 of the Credit Agreement shall stand and remain unchanged
and in full force and effect.
SECTION 3. CONDITIONS PRECEDENT.
The effectiveness of this Amendment is subject to the satisfaction of
all of the following conditions precedent:
3.1. The Borrower, the Agent, and each of the Banks shall
have executed and delivered this Amendment.
3.2. The Agent shall have received for each of the Banks
replacement Revolving Notes and Term Notes evidencing the Loans made or
to be made by such Banks in the amounts set forth on Schedule 1
attached hereto and otherwise in compliance with the provision of
Section 1.11 hereof.
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<PAGE> 20
3.3. The Agent shall have received for each Bank copies of
resolutions of the Borrower's Board of Directors authorizing the
execution, delivery, and performance of this Amendment certified to by
its Secretary or Assistant Secretary.
3.4. Each Subsidiary shall have executed its
acknowledgement and consent to this Amendment in the space provided for
that purpose below.
3.5. The Agent shall have received for each Bank the
favorable written opinion of counsel to the Borrower and its
Subsidiaries, in form and substance reasonably satisfactory to the
Agent.
3.6. Legal matters incident to the execution and delivery
of this Amendment shall be satisfactory to the Agent and its counsel.
SECTION 4. ASSIGNMENTS AND EQUALIZATION OF OUTSTANDING COMMITMENTS,
LOANS AND LETTERS OF CREDIT.
Subject to the satisfaction of the conditions precedent set forth in
Section 2 above, Bank of Montreal and Bank One Texas, N.A. each agree to make
such purchases and sales of interests in the Credit Agreement and the Loan
Documents between themselves so that from and after the date of this Amendment
each such Bank's Revolving Credit Commitment (and corresponding Percentage of
outstanding Revolving Credit Loans and L/C Obligations), Term A Loan Commitment
(and corresponding Percentage of outstanding Term A Loans), and interest in the
outstanding Term B Loans after giving effect this Amendment shall be as set
forth on Schedule 1 attached hereto. Such purchases and sales shall be arranged
through the Agent and each such Bank hereby agrees to execute such further
instruments and documents, if any, as the Agent may reasonably request in
connection therewith.
SECTION 5. REPRESENTATIONS.
In order to induce the Banks to execute and deliver this Amendment, the
Borrower hereby represents to the Agent and the Banks that as of the date hereof
the representations and warranties set forth in Section 6 of the Credit
Agreement are and shall be and remain true and correct (except that the
representations contained in Section 6.5 shall be deemed to refer to the most
recent financial statements of the Borrower delivered to the Banks) and the
Borrower and its Subsidiaries are in compliance with all of the terms and
conditions of the Credit Agreement and the other Loan Documents and no Default
or Event of Default has occurred and is continuing or shall result after giving
effect to this Amendment.
SECTION 6. MISCELLANEOUS.
6.1. The Borrower has heretofore executed and delivered to the
Agent and the Banks certain of the Collateral Documents. The Borrower hereby
acknowledges and agrees that, notwithstanding the execution and delivery of this
Amendment, the Collateral Documents remain in full force and effect and the
rights and remedies of the Agent and the Banks thereunder, the
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<PAGE> 21
obligations of the Borrower thereunder, and the liens and security interests
created and provided for thereunder remain in full force and effect and shall
not be affected, impaired, or discharged hereby. The Borrower hereby
acknowledges and agrees that the Loans as modified by this Amendment constitute
Obligations secured by each of the Collateral Documents. Nothing herein
contained shall in any manner affect or impair the priority of the liens and
security interests created and provided for by the Collateral Documents as to
the indebtedness which would be secured thereby prior to giving effect to this
Amendment.
6.2. Except as specifically amended herein, the Credit Agreement
shall continue in full force and effect in accordance with its original terms.
Reference to this specific Amendment need not be made in the Credit Agreement,
the Notes, or any other instrument or document executed in connection therewith,
or in any certificate, letter or communication issued or made pursuant to or
with respect to the Credit Agreement, any reference in any of such items to the
Credit Agreement being sufficient to refer to the Credit Agreement as amended
hereby.
6.3. The Borrower agrees to pay on demand all costs and expenses of
or incurred by the Agent in connection with the negotiation, preparation,
execution, and delivery of this Amendment and the other instruments and
documents to be executed and delivered in connection herewith, including the
fees and expenses of counsel for the Agent.
6.4 This Amendment may be executed in any number of counterparts,
and by the different parties on different counterpart signature pages, all of
which taken together shall constitute one and the same agreement. Any of the
parties hereto may execute this Amendment by signing any such counterpart and
each of such counterparts shall for all purposes be deemed to be an original.
This Amendment shall be governed by the internal laws of the State of Illinois.
[SIGNATURE PAGES TO FOLLOW]
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<PAGE> 22
This First Amendment to Amended and Restated Credit Agreement is dated
as of the date and year first above written.
VISION TWENTY-ONE, INC.
By
Name /s/ Richard T. Welch
--------------------------------------
Title Chief Financial Officer
-------------------------------------
Accepted and agreed to as of the day and year last above written.
BANK OF MONTREAL, in its individual
capacity as a Bank and as Agent
By
Name /s/ Irene M. Geller
--------------------------------------
Title Director
-------------------------------------
BANK ONE TEXAS, N.A.
By
Name /s/ James B. Lukowicz
--------------------------------------
Title Vice President
-------------------------------------
PACIFICA PARTNERS I, L.P.
By: Imperial Credit Asset
Management, as its Investment
Manager
By
Name /s/ Michael J. Bacevich
--------------------------------------
Title Senior Vice President
-------------------------------------
PILGRIM AMERICA PRIME RATE TRUST
By: Pilgrim America Investments, Inc.,
as its Investment Manager
By
Name /s/ Charles E. Lemieux, CFA
--------------------------------------
Title Assistant Vice President
-------------------------------------
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<PAGE> 23
PILGRIM AMERICA HIGH INCOME
INVESTMENTS LTD.
By: Pilgrim America Investments, Inc.,
as its Investment Manager
By
Name /s/ Charles E. Lemieux, CFA
--------------------------------------
Title Assistant Vice President
-------------------------------------
MERRILL LYNCH BUSINESS FINANCIAL
SERVICES, INC.
By
Name /s/ Thaddeus Murphy
--------------------------------------
Title Assistant Vice President
-------------------------------------
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<PAGE> 24
ACKNOWLEDGEMENT AND CONSENT
The undersigned, being all of the Material Subsidiaries of Vision
Twenty-One, Inc., have heretofore executed and delivered to the Agent and the
Banks one or more Guaranties and Collateral Documents. Each of the undersigned
hereby consents to the Amendment to the Credit Agreement as set forth above and
confirms that its Guaranty and Collateral Documents, and all of its obligations
thereunder, remain in full force and effect and, without limiting the foregoing,
acknowledges and agrees that the Loans as modified therein constitute
Obligations guaranteed by, or otherwise secured by, the Loan Documents executed
by it. Each of the undersigned further agrees that the consent of the
undersigned to any further amendments to the Credit Agreement shall not be
required as a result of this consent having been obtained, except to the extent,
if any, required by the Loan Documents referred to above.
"GUARANTORS"
VISION 21 PHYSICIAN PRACTICE
MANAGEMENT COMPANY
VISION 21 OF SOUTHERN ARIZONA, INC.
VISION 21 OF SIERRA VISTA, INC.
VISION 21 MANAGEMENT SERVICES, INC.
VISION 21 MANAGED EYE CARE OF TAMPA
BAY, INC.
VISION TWENTY-ONE MANAGED EYE CARE
IPA, INC.
BBG-COA, INC.
BLOCK VISION, INC.
UVC INDEPENDENT PRACTICE ASSOCIATION,
INC.
MEC HEALTH CARE, INC.
LSI ACQUISITION, INC.
VISION TWENTY-ONE EYE SURGERY CENTERS,
INC.
EYE SURGERY CENTER MANAGEMENT, INC.
VISION TWENTY-ONE REFRACTIVE CENTER,
INC.
VISION TWENTY-ONE OF WISCONSIN, INC.
By /s/ Richard T. Welch
----------------------------------
Richard T. Welch, an authorized signatory
for each of the above-referenced entities
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<PAGE> 25
SCHEDULE 1
AGGREGATE COMMITMENTS AND OUTSTANDING TERM LOANS
<TABLE>
<CAPTION>
Revolving Credit Term A Loan Outstanding Outstanding
Name of Bank Commitment Commitment Term B Loan Term C Loan
- ------------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Bank of Montreal $5,250,000 $ 8,750,000 $ 9,000,000 $25,000,000
Bank One, $2,250,000 $ 3,750,000 $ 6,000,000 $ 0
Texas, N.A.
Pacifica Partners I, $ 0 $ 0 $ 0 $10,000,000
L.P.
Pilgrim America Prime $ 0 $ 0 $ 0 $ 5,000,000
Rate Trust
Pilgrim America High $ 0 $ 0 $ 0 $ 5,000,000
Income Investments Ltd.
Merrill Lynch $ 0 $ 0 $ 5,000,000 $ 5,000,000
Business Financial
Services, Inc.
---------- ----------- ----------- -----------
Totals $7,500,000 $12,500,000 $20,000,000 $50,000,000
</TABLE>
<PAGE> 26
EXHIBIT F-1
TERM B NOTE
U.S. $_______________ ________________, 19___
FOR VALUE RECEIVED, the undersigned, VISION TWENTY-ONE, INC., a Florida
corporation (the "Borrower"), hereby promises to pay to the order of ___________
__________________ (the "Bank") at the principal office of Bank of Montreal, as
Agent, in Chicago, Illinois, in immediately available funds, the principal sum
of ___________________ Dollars ($__________) or, if less, the aggregate unpaid
principal amount of the Term B Loan made or maintained by the Bank to the
Borrower pursuant to the Credit Agreement, in consecutive quarter-annual
principal installments in the amounts called for by Section 1.8(c) of the Credit
Agreement, commencing on September 30, 2000, and continuing on the last day of
each December, March, June, and September occurring thereafter, together with
interest on the principal amount of such Term B Loan from time to time
outstanding hereunder at the rates, and payable in the manner and on the dates,
specified in the Credit Agreement, except that all principal and interest not
sooner paid on the Term B Loan evidenced hereby shall be due and payable on the
Term B Credit Final Maturity Date.
The Bank shall record on its books or records or on a schedule attached
to this Note, which is a part hereof, the Term B Loan made or maintained by it
pursuant to the Credit Agreement, together with all payments of principal and
interest and the principal balances from time to time outstanding hereon,
whether the Term B Loan is a Base Rate Loan or a Eurodollar Loan, the interest
rate and Interest Period applicable thereto, provided that prior to the transfer
of this Note all such amounts shall be recorded on a schedule attached to this
Note. The record thereof, whether shown on such books or records or on a
schedule to this Note, shall be prima facie evidence of the same, provided,
however, that the failure of the Bank to record any of the foregoing or any
error in any such record shall not limit or otherwise affect the obligation of
the Borrower to repay the Term B Loan made to it pursuant to the Credit
Agreement together with accrued interest thereon.
This Note is one of the Term B Notes referred to in the Amended and
Restated Credit Agreement dated as of July 1, 1998, among the Borrower, Bank of
Montreal, as Agent, and the Banks party thereto (the "Credit Agreement"), and
this Note and the holder hereof are entitled to all the benefits and security
provided for thereby or referred to therein, to which Credit Agreement reference
is hereby made for a statement thereof. All defined terms used in this Note,
except terms otherwise defined herein, shall have the same meaning as in the
Credit Agreement. This Note shall be governed by and construed in accordance
with the internal laws of the State of Illinois.
Voluntary prepayments may be made hereon, certain prepayments are
required to be made hereon, and this Note may be declared due prior to the
expressed maturity hereof, all in the events, on the terms and in the manner as
provided for in the Credit Agreement.
<PAGE> 27
The Borrower hereby waives demand, presentment, protest or notice of
any kind hereunder.
VISION TWENTY-ONE, INC.
By
Name
--------------------------------------
Title
-------------------------------------
-2-
<PAGE> 28
EXHIBIT F-2
TERM C NOTE
U.S. $_______________ ________________, 19___
FOR VALUE RECEIVED, the undersigned, VISION TWENTY-ONE, INC., a Florida
corporation (the "Borrower"), hereby promises to pay to the order of____________
___________________ (the "Bank") at the principal office of Bank of Montreal, as
Agent, in Chicago, Illinois, in immediately available funds, the principal sum
of ___________________ Dollars ($__________) or, if less, the aggregate unpaid
principal amount of the Term C Loan made or maintained by the Bank to the
Borrower pursuant to the Credit Agreement, in consecutive annual principal
installments in the amounts called for by Section 1.8(d) of the Credit
Agreement, commencing June 30, 1999, and continuing on the last day of each June
occurring thereafter, together with interest on the principal amount of such
Term C Loan from time to time outstanding hereunder at the rates, and payable in
the manner and on the dates, specified in the Credit Agreement, except that all
principal and interest not sooner paid on the Term C Loan evidenced hereby shall
be due and payable the Term C Credit Final Maturity Date.
The Bank shall record on its books or records or on a schedule attached
to this Note, which is a part hereof, the Term C Loan made or maintained by it
pursuant to the Credit Agreement, together with all payments of principal and
interest and the principal balances from time to time outstanding hereon,
whether the Term C Loan is a Base Rate Loan or a Eurodollar Loan or a Fixed Rate
Loan, the interest rate and Interest Period applicable thereto, provided that
prior to the transfer of this Note all such amounts shall be recorded on a
schedule attached to this Note. The record thereof, whether shown on such books
or records or on a schedule to this Note, shall be prima facie evidence of the
same, provided, however, that the failure of the Bank to record any of the
foregoing or any error in any such record shall not limit or otherwise affect
the obligation of the Borrower to repay the Term C Loan made to it pursuant to
the Credit Agreement together with accrued interest thereon.
This Note is one of the Term C Notes referred to in the Amended and
Restated Credit Agreement dated as of July 1, 1998, among the Borrower, Bank of
Montreal, as Agent, and the Banks party thereto (the "Credit Agreement"), and
this Note and the holder hereof are entitled to all the benefits and security
provided for thereby or referred to therein, to which Credit Agreement reference
is hereby made for a statement thereof. All defined terms used in this Note,
except terms otherwise defined herein, shall have the same meaning as in the
Credit Agreement. This Note shall be governed by and construed in accordance
with the internal laws of the State of Illinois.
Voluntary prepayments may be made hereon, certain prepayments are
required to be made hereon, and this Note may be declared due prior to the
expressed maturity hereof, all in the events, on the terms and in the manner as
provided for in the Credit Agreement.
<PAGE> 29
The Borrower hereby waives demand, presentment, protest or notice of
any kind hereunder.
VISION TWENTY-ONE, INC.
By
Name
--------------------------------------
Title
-------------------------------------
-2-
<PAGE> 1
EXHIBIT 4.16
VISION TWENTY-ONE, INC.
SECOND AMENDMENT TO CREDIT AGREEMENT
This Second Amendment to Credit Agreement (herein, the "Amendment") is
entered into as of June 10, 1999, among Vision Twenty-One, Inc., a Florida
corporation, the Banks party hereto, and Bank of Montreal as Agent for the
Banks.
PRELIMINARY STATEMENTS
A. The Borrower, the Banks, and the Agent are parties to an Amended
and Restated Credit Agreement, dated as of July 1, 1998, as amended (herein, the
"Credit Agreement"). All capitalized terms used herein without definition shall
have the same meanings herein as such terms have in the Credit Agreement.
B. The Borrower and the Banks have agreed to make certain other
changes to the Credit Agreement as provided for in this Amendment.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. AMENDMENTS.
Subject to the satisfaction of the conditions precedent set forth in
Section 3 below, the Credit Agreement shall be and hereby is amended as follows:
1.1. Section 1.4 of the Credit Agreement shall be amended by
adding at the end thereof a new subsection (f) which shall read as
follows:
(f) Anything in this Agreement to the contrary
notwithstanding, the Borrower and the Floating Rate Payor have
agreed to convert all Fixed Rate Loans outstanding on June 30,
1999, into Base Rate Loans or Eurodollar Loans (as designated
by the Borrower in accordance with the procedures set forth in
Section 1.6 hereof), and on and after such date no Fixed Rate
Loans shall be outstanding or available to the Borrower
hereunder In connection with the cancellation of the Fixed
Rate Loan option, the Floating Rate Payor will pay to the
Borrower approximately $75,000 in settlement of the implicit
interest rate trade (which amount shall be held by the Agent
in an account in the manner set forth in Section 9.4 hereof as
collateral security for the Obligation, provided that, in the
absence of any Event of Default and instructions from the
Required Banks to the contrary, such amount shall be made
available to the Borrower for the payment of professional fees
due and owing by it).
<PAGE> 2
1.2. Section 1.7 (Interest Periods) of the Credit Agreement
shall be amended by striking the phrase "(b) in the case of a
Eurodollar Loan, 1, 2, 3, or 6 months thereafter" and inserting in lieu
thereof the following:
(b) in the case of a Eurodollar Loan advanced,
continued, or created by conversion at any time on or after
June 8, 1999, through and including December 31, 1999, 1 month
thereafter and in the case of a Eurodollar Loan advanced,
continued, or created by conversion at any time on or after
January 1, 2000, 1, 2, or 3 months thereafter."
1.3. Section 1.9 of the Credit Agreement shall be amended by
adding at the end thereof a new subsection 1.9(c) which shall read as
follows:
(c) Application of Prepayments. Anything in this
Agreement to the contrary notwithstanding, all prepayments
(whether voluntary or mandatory) made at any time on or after
June 1, 1999, and required to be applied to any Term Loans
shall be applied to the relevant Term Loans in the inverse
order of maturity.
1.4. The second paragraph of Section 3 of the Credit Agreement
shall be amended and restated in its entirety to read as follows:
Anything contained herein to the contrary notwithstanding, all
payments and collections received in respect of the
Obligations and all proceeds of the Collateral received, in
each instance, by the Agent or any of the Banks after the
occurrence and during the continuation of an Event of Default
shall be remitted to the Agent and distributed as follows:
(a) first, to the payment of any outstanding costs
and expenses reasonably incurred by the Agent, and any
security trustee therefor, in monitoring, verifying,
protecting, preserving or enforcing the Liens on the
Collateral or by the Agent, and any security trustee therefor,
in protecting, preserving or enforcing rights under the Loan
Documents, and in any event all costs and expenses of a
character which the Borrower has agreed to pay the Agent under
Section 12.15 hereof (such funds to be retained by the Agent
for its own account unless it has previously been reimbursed
for such costs and expenses by the Banks, in which event such
amounts shall be remitted to the Banks to reimburse them for
payments theretofore made to the Agent);
(b) second, to the payment of any outstanding
interest or other fees or amounts due under the Notes and the
other Loan
-2-
<PAGE> 3
Documents (including amounts owing to the Banks or the
Floating Rate Payor under Section 1.12 hereof), in each case
other than for principal on the Loans or in reimbursement or
collateralization of L/C Obligations, pro rata as among the
Agent and the Banks in accord with the amount of such interest
and other fees or amounts owing each;
(c) third, to the payment of the principal of the
Notes and any unpaid Reimbursement Obligations and to the
Agent to be held as collateral security for any other L/C
Obligations (until the Agent is holding an amount of cash
equal to the then outstanding amount of all such L/C
Obligations) and to ACH Liability then outstanding (up to
$1,500,000 at any one time), the aggregate amount paid to or
held as collateral security for the Agent and the Banks to be
allocated pro rata in accord with the aggregate unpaid
principal balances of Loans, interests in the Letters of
Credit, and ACH Liability, owing to each;
(d) fourth, to the Agent and the Banks ratably in
accordance with the amounts of any other indebtedness,
obligations or liabilities of the Borrower and its
Subsidiaries owing to each of them and secured by the
Collateral Documents (other than for Hedging Liability
described in subsection (e) below), unless and until all such
indebtedness, obligations and liabilities have been fully paid
and satisfied;
(e) fifth, to the payment of the Hedging Liability
(if any) pro rata as among the Banks to whom such Hedging
Liability is owed in accordance with the then respective
unpaid amounts of such liability; and
(f) sixth, to the Borrower or whoever else may be
lawfully entitled thereto.
1.5. Section 4.2 of the Credit Agreement shall be amended and
restated in its entirety to read as follows:
Section 4.2 Collections. The Borrower shall establish and
maintain such arrangements as shall be necessary or
appropriate to assure that all proceeds of the Collateral of
the Borrower and its Material Subsidiaries are deposited (in
the same form as received) in accounts maintained with, or
under the dominion and control of, the Agent, such accounts to
constitute special restricted accounts, the Borrower
acknowledging that the Agent has (and is hereby granted) a
lien on such accounts and all funds contained therein to
secure the Obligations. If and to the extent that proceeds are
-3-
<PAGE> 4
deposited and/or maintained in one or more accounts maintained
with financial institutions other than the Agent, except as
otherwise permitted under Section 4.1(iii) above, it shall be
a condition to the Borrower's or any Material Subsidiary's
right to establish and maintain such deposit accounts at any
time after July 31, 1999, that the financial institutions
maintaining such accounts shall have delivered to the Agent
blocked account agreements satisfactory to the Agent in form
and substance pursuant to which such financial institutions
acknowledge the Agent's Lien thereon, waive any right of
offset or bankers' liens thereon (other than with respect to
account maintenance charges and returned items) and agree
that, upon notice from the Agent, the collected balances in
such accounts will only be transferred to the Agent. The Banks
agree with the Borrower that if and so long as no Default or
Event of Default has occurred or is continuing, amounts on
deposit in the accounts maintained with the Agent will
(subject to the rules and regulations of the Agent as from
time to time in effect applicable to demand deposit accounts)
be made available to the Borrower and its Material
Subsidiaries for use in the conduct of their business. Upon
the occurrence of an Event of Default, the Agent may apply the
funds on deposit in such accounts to the Obligations.
In furtherance of the requirements set forth above, the
Borrower agrees to establish and implement a cash management
system acceptable to the Agent by no later than September 30,
1999, pursuant to which all available cash and cash
equivalents held or maintained by the Borrower and its
Subsidiaries (exclusive of reasonable account balances
maintained for the account of physician practice groups) are
swept on a daily basis into one or more deposit accounts
subject to the Lien of the Agent as set forth above.
1.6. The definition of "Applicable Margin" appearing in
Section 5.1 of the Credit Agreement shall be amended and restated in
its entirety to read as follows (and the Applicable Margin, as so
amended, shall be effective as of June 10, 1999):
"Applicable Margin" means, with respect to Loans,
Reimbursement Obligations, and the commitment fees and letter
of credit fees payable under Section 2.1 hereof, the rate per
annum specified below:
<TABLE>
<S> <C>
Applicable Margin for Base Rate Loans under Revolving
Credit, Term A Loans and Term B Loans, and Reimbursement
Obligations : 1.75%
</TABLE>
-4-
<PAGE> 5
<TABLE>
<S> <C>
Applicable Margin for Eurodollar Loans under Revolving
Credit, Term A Loans and Term B Loans, and letter of credit
fee: 3.25%
Applicable Margin for Revolving Credit Commitment fee: .625%
Applicable Margin for Base Rate Loans under Term C Loans 1.75%
Applicable Margin for Eurodollar Loans under Term C Loans 3.875%
</TABLE>
; provided, however, that the Applicable Margin shall be
subject to quarterly adjustments on the first Pricing Date,
and thereafter from one Pricing Date to the next the
Applicable Margin shall mean a rate per annum determined in
accordance with the following schedule:
<TABLE>
<CAPTION>
APPLICABLE MARGIN
FOR BASE RATE APPLICABLE MARGIN
LOANS UNDER FOR EURODOLLAR
REVOLVING CREDIT, LOANS UNDER APPLICABLE APPLICABLE
TOTAL FUNDED TERM A CREDIT AND REVOLVING CREDIT, MARGIN FOR THE MARGIN FOR
DEBT/ADJUSTED TERM B CREDIT, AND TERM A CREDIT AND REVOLVING APPLICABLE EURODOLLAR
EBITDA RATIO REIMBURSEMENT TERM B CREDIT, AND CREDIT MARGIN FOR BASE LOANS UNDER
FOR SUCH PRICING OBLIGATIONS SHALL LETTER OF CREDIT COMMITMENT FEE RATE LOANS UNDER TERM C
DATE BE: FEE SHALL BE: SHALL BE: TERM C CREDIT: CREDIT:
<S> <C> <C> <C> <C> <C>
Greater than 3.0 1.75% 3.25% .625% 1.75% 3.875%
to 1.0
Equal to or less 1.625% 3.125% .625% 1.625% 3.875%
than 3.0 to 1.0,
but greater than
2.5 to 1.0
Equal to or less 1.50% 3.0% .50% 1.50% 3.625%
than 2.5 to 1.0,
but greater than
2.0 to 1.0
Equal to or less 1.25% 2.75% .50% 1.25% 3.625%
than 2.0 to 1.0,
but greater than
1.5 to 1.0
Equal to or less 1.0% 2.50% .50% 1.0% 3.625%
than 1.5 to 1.0
</TABLE>
-5-
<PAGE> 6
; provided, further, that the Applicable Margin for Loans,
Reimbursement Obligations, and Letter of Credit fees set forth
above shall be (a) increased by .25% per annum on December 10,
1999, and by an additional .50% per annum on each June 10 and
December 10 ending thereafter until the Borrower has sold its
Retail Group, which shall be made in accordance with the terms
and conditions of the Loan Documents (it being acknowledged
that the Borrower has advised the Banks that it intends to
sell its Retail Group and reduce its outstanding Obligations
with the proceeds thereof for a purchase price, and otherwise
on terms and conditions, acceptable to the Banks, and the
Banks have relied on such statements in entering into the
Second Amendment to Credit Agreement with the Borrower dated
on or about June 10, 1999), and (b) upon the sale of the
Retail Group, and the reduction of the Obligations to be made
out of the proceeds thereof, on terms and conditions
acceptable to the Banks, the Applicable Margins for Loans,
Reimbursement Obligations, and Letter of Credit fees shall be
reduced to the levels set forth in the chart above without
regard to the increases called for by clause (a) above.
For purposes hereof, the term "Pricing Date" means, for any
fiscal quarter of the Borrower ending on or after June 30,
1999, the date on which the Agent is in receipt of the
Borrower's most recent financial statements for the fiscal
quarter then ended, pursuant to Section 8.5(b) or (c) hereof.
The Applicable Margin shall be established based on the Total
Funded Debt/Adjusted EBITDA Ratio for the most recently
completed fiscal quarter and the Applicable Margin established
on a Pricing Date shall remain in effect until the next
Pricing Date. If the Borrower has not delivered its financial
statements by the date such financial statements (and, in the
case of the year-end financial statements, audit report) are
required to be delivered under Section 8.5(b) or (c) hereof,
until such financial statements and audit report are
delivered, the Applicable Margin shall be the highest
Applicable Margin (i.e., the Total Funded Debt/Adjusted EBITDA
Ratio shall be deemed to be greater than 3.0 to 1.0). If the
Borrower subsequently delivers such financial statements
before the next Pricing Date, the Applicable Margin
established by such late delivered financial statements shall
take effect from the date of delivery until the next Pricing
Date. In all other circumstances, the Applicable Margin
established by such financial statements shall be in effect
from the Pricing Date that occurs immediately after the end of
the Borrower's fiscal quarter covered by such financial
statements until the next Pricing Date. Each determination of
the Applicable Margin made by the Agent in accordance with the
-6-
<PAGE> 7
foregoing shall be conclusive and binding on the Borrower and
the Banks if reasonably determined.
1.7. The definition of "Capital Expenditures" appearing in
Section 5.1 of the Credit Agreement shall be amended and restated in
its entirety to read as follows:
"Capital Expenditures" means, with respect to any Person for
any period, the aggregate amount of all expenditures (whether
paid in cash or accrued as a liability) by such Person during
that period which, in accordance with GAAP, are or should be
included as "additions to property, plant or equipment" or
similar items reflected in the statement of cash flows of such
Person, and in any event Capital Expenditures shall be deemed
to include all amounts paid by the Borrower or any of its
Subsidiaries for the assets or business of a Target pursuant
to an Acquisition permitted by this Agreement.
1.8. The definition of "EBITDA" appearing in Section 5.1 of
the Credit Agreement shall be amended and restated in its entirety to
read as follows:
"EBITDA" means, with reference to any period, Net Income for
such period plus the sum (without duplication) of all amounts
deducted in arriving at such Net Income amount in respect of
(a) Interest Expense for such period, (b) federal, state and
local income taxes for such period, (c) depreciation of fixed
assets and amortization of intangible assets for such period,
(d) one-time charges incurred on or about January 30, 1998,
arising out of the prepayment of the indebtedness owing to
Prudential Securities Credit Corporation on or about January
30, 1998, (e) one-time charges incurred on or about July 1,
1998, arising out of the refinancing and restructuring of the
indebtedness owing to Bank of Montreal and the other lenders
party to the Original Credit Agreement, and (f) non-recurring
expenses in an aggregate amount up to $11,300,000 incurred as
a result of the implementation of the Ernst & Young
restructuring plan.
1.9. The definition of "Permitted Acquisition" appearing in
Section 5.1 of the Credit Agreement shall be amended by striking clause
(g) thereof and inserting in its place the following:
(g) the Total Consideration paid for the Target, when
taken together with the aggregate amount of Capital
Expenditures incurred during the current fiscal year
(including other Acquisitions made by the Borrower or any of
its Subsidiaries during the current fiscal year), does not
exceed $3,000,000 in the aggregate.
-7-
<PAGE> 8
1.10. Section 5.1 of the Credit Agreement shall be amended by
adding the following definitions (in appropriate alphabetical order):
"ACH Liability" means the liability of the Borrower or any of
its Subsidiaries owing to Bank of Montreal or any of its
Affiliates (including Harris Trust and Savings Bank) arising
out of the processing of incoming and outgoing transfers of
funds by automatic clearing house transfer, wire transfer, or
otherwise pursuant to agreement or overdraft and related cash
management services afforded to the Borrower or any such
Subsidiary by any such financial institution.
"Excess Cash Flow" means, with respect to any period, the
amount (if any) by which (a) the sum of Net Income for such
period plus all amounts deducted in arriving at such Net
Income amount in respect of (i) Interest Expense for such
period, (ii) federal, state and local income taxes for such
period, (iii) depreciation expense, amortization expense, and
all other non-cash charges to Net Income for such period,
minus (plus) (iv) additions (reductions) to non-cash working
capital of the Borrower and its Subsidiaries for such period
exceeds (b) the sum of (i) the aggregate amount of payments
made by the Borrower and its Subsidiaries during such period
in respect of all principal and interest on all Indebtedness
for Borrowed Money (whether at maturity, as a result of
mandatory sinking fund redemption, mandatory prepayment,
acceleration or otherwise), plus (ii) federal, state and local
income taxes paid during such period, plus (iii) the aggregate
amount of payments made with respect to Capital Expenditures
of Borrower and its Subsidiaries during such period (including
payments made with respect to Permitted Acquisitions).
"Retail Group" means the assets and business of the Borrower
relating to providing optometric services, selling optical
goods, and providing related services primarily in the State
of New Jersey, Minnesota, and Wisconsin and manufacturing
optical lenses in the State of New Jersey, all as currently
held on and in effect on May 31, 1999.
1.11. Section 8.5 (Financial Reports) of the Credit Agreement
shall be amended by striking the period appearing at the end of
subsection (h) thereof and inserting a semicolon followed by the word
"and" and inserting a new subsection (i) which shall read as follows:
(i) as soon as available, and in any event within 45
days after the close of each fiscal quarter of each fiscal
year of the Borrower, a copy of the Borrower's consolidated
and
-8-
<PAGE> 9
consolidating cash flow report (including projected sources
and uses of cash) prepared on a month-by-month basis for the
current fiscal quarter, which report shall be in reasonable
detail and in a form reasonably acceptable to the Agent.
1.12. Section 8.8 (Total Funded Debt/Adjusted EBITDA Ratio) of
the Credit Agreement shall be amended and restated in its entirety to
read as follows:
Section 8.8. Total Funded Debt/Adjusted EBITDA Ratio.
As of the last day of each fiscal quarter of the Borrower
ending during the periods specified below, the Borrower shall
not permit the Total Funded Debt/Adjusted EBITDA Ratio as of
the last day of such fiscal quarter to be greater than or
equal to:
<TABLE>
<CAPTION>
RATIO SHALL NOT BE
FROM AND INCLUDING TO AND INCLUDING GREATER THAN OR EQUAL TO
<S> <C> <C>
April 1, 1999 June 30, 1999 6.0 to 1.0
July 1, 1999 September 30, 1999 5.25 to 1.0
October 1, 1999 December 31, 1999 3.5 to 1.0
January 1, 2000 March 31, 2000 3.25 to 1.0
April 1, 2000 September 30, 2000 3.0 to 1.0
October 1, 2000 and at all times thereafter 2.75 to 1.0
</TABLE>
1.13. Sections 8.10 (Interest Coverage Ratio), 8.11 (Debt
Service Coverage Ratio), and 8.12 (Capital Expenditures) of the Credit
Agreement shall be amended and restated in their entirety to read as
follows:
Section 8.10. Interest Coverage Ratio. As of the last
day of each fiscal quarter of the Borrower ending during the
periods specified below, the Borrower shall maintain a ratio
of EBITDA for the four fiscal quarters of the Borrower then
ended to Interest Expense for the same four fiscal quarters
then ended of not less than:
<TABLE>
<CAPTION>
RATIO SHALL NOT BE
FROM AND INCLUDING TO AND INCLUDING LESS THAN
<S> <C> <C>
April 1, 1999 June 30, 1999 1.5 to 1.0
July 1, 1999 September 30, 1999 1.75 to 1.0
October 1, 1999 December 31, 1999 2.75 to 1.0
</TABLE>
-9-
<PAGE> 10
<TABLE>
<S> <C> <C>
January 1, 2000 March 31, 2000 3.25 to 1.0
April 1, 2000 September 30, 2000 3.5 to 1.0
October 1, 2000 and at all times thereafter 4.0 to 1.0
</TABLE>
Section 8.11. Debt Service Coverage Ratio. As of the
last day of each fiscal quarter of the Borrower ending during
the periods specified below, the Borrower shall maintain a
ratio of (a) EBITDA for the four fiscal quarters of the
Borrower then ended less the sum of (i) Capital Expenditures
incurred during such period and (ii) cash payments made during
such period with respect to federal, state, and local income
taxes to (b) the aggregate amount of payments required to be
made by the Borrower and its Subsidiaries during the four
fiscal quarters of the Borrower then ended in respect of all
principal on all Indebtedness for Borrowed Money (whether at
maturity, as a result of mandatory sinking fund redemption,
mandatory prepayment, acceleration or otherwise) plus Interest
Expense for the same four fiscal quarter period then ended, of
not less than:
<TABLE>
<CAPTION>
RATIO SHALL NOT BE
FROM AND INCLUDING TO AND INCLUDING LESS THAN
<S> <C> <C>
April 1, 1999 September 30, 1999 1.25 to 1.0
October 1, 1999 December 31, 2002 1.75 to 1.0
January 1, 2003 and at all time thereafter 2.0 to 1.0
</TABLE>
Section 8.12. Capital Expenditures. The Borrower
shall not, nor shall it permit any other Subsidiary to, incur
Capital Expenditures in an aggregate amount in excess of
$3,000,000 during any fiscal year.
1.14. Section 8 of the Credit Agreement shall be amended by
adding at the end thereof new Sections 8.33 (Excess Cash Flow), 8.34
(Physician Advances), and 8.35 (Bank Group Consultant) which shall read
as follows:
Section 8.33. Excess Cash Flow. Within 45 days after
the last day of each fiscal quarter of the Borrower
(commencing with the fiscal quarter ending March 31, 2000),
the Borrower shall pay to the Agent an amount equal to 50% of
Excess Cash Flow (if positive) for the fiscal quarter then
ended, such amount(s) to be held by the Agent in an Account in
the manner provided for in Section 9.4(b) hereof as collateral
security for the Obligations. The
-10-
<PAGE> 11
amounts so held in the Account may, at the Borrower's request
and with the written consent of the Required Banks, be applied
to the Obligations then outstanding (and in such order and
manner as the Required Banks then require). During the
existence of any Event of Default, at the request of or with
the written consent of the Required Banks, the Agent shall
apply the amounts held in the Account (or any part thereof) to
the Obligations then outstanding (such amounts to be applied
in accordance with Section 3 of the Credit Agreement unless
otherwise agreed to by the Required Banks).
Section 8.34. Physician Advances. Within 45 days
after the last day of each fiscal quarter of the Borrower, the
Borrower shall prepare and distribute to the Agent and the
Banks a report of all advances due from physicians and related
professions under management agreements with the Borrower
and/or any one or more of its Subsidiaries, together with a
comparison of such receivable balances with the Borrower's
current operating budget, with such report to be in form and
substance, and in such detail, as the Agent may reasonably
request.
Section 8.35. Bank Group Consultant. The Agent, on
behalf of the Banks, shall have the continuing right to engage
at the Borrower's cost and expense a firm of independent
public accountants or such other financial consultants
selected by the Agent to periodically review the Borrower's
and its Subsidiaries' financial condition and operations as
reasonably requested by the Agent (such review to include,
without limitation, quarterly reviews of the Borrower's and
its Subsidiaries' cash management systems and procedures and
the status of the Borrower's implementation of any
modifications thereto, quarterly reviews of outstanding
material Year 2000 Problems affecting the Borrower or any of
its Subsidiaries and the status of the Borrower's
implementation of any plans to eliminate or mitigate the same,
quarterly reviews of the Borrower's consolidated and
consolidating weekly cash flow reports and quarterly operating
budget, reviewing the Borrower's accounting procedures and
systems, and the operations thereof, relating to accounting
for and reconciling intercompany transactions, and reviews of
all material agreements relating to the sale or other
disposition of any material assets or business of the Borrower
or any of its Subsidiaries or of any proposed Acquisition).
1.14. Section 9.1 of the Credit Agreement shall be amended by
striking the period appearing at the end of Section 9.1(k) thereof and
inserting therefor a semicolon
-11-
<PAGE> 12
followed by the word "or" and inserting a new Section 9.1(l) at the end
of such Section as so amended which shall read as follows:
(l) (i) the aggregate amount of net advances due from practice
group physicians and related professionals from and payable to
the Borrower and/or any one or more of its Subsidiaries under
management agreements between such practice groups and the
Borrower and/or any one or more of its Subsidiaries at any one
time outstanding exceeds the following: (x) $3,100,000 from
June 10, 1999 to and including December 31, 1999, (y)
$2,000,000 from January 1, 2000 to and including December 31,
2000, and (z) $1,000,000 from January 1, 2001 and thereafter;
and (ii) the aggregate amount of net advances due from any
practice group physician or related professional and payable
to the Borrower and/or any one or more of its Subsidiaries
under the relevant management agreement between the relevant
practice group and the Borrower and/or any one or more of its
Subsidiaries as of the last day of any fiscal year beginning
January 1, 2001 and thereafter of such practice group (net of
allocable income for such year actually paid to the Borrower
or its Subsidiaries from such practice group within 120 days
of year-end) exceeds $0.
SECTION 2. WAIVERS.
The Borrower has advised the Banks that as of December 31, 1998, and as
of March 31, 1999, the Borrower was not in compliance with any one or more of
Sections 8.7 (Current Ratio), 8.8 (Total Funded Debt/Adjusted EBITDA Ratio), 8.9
(Net Worth), 8.10 (Interest Coverage Ratio), and 8.11 (Debt Service Coverage
Ratio) of the Credit Agreement (herein, the "Financial Covenant Defaults"); and
that as of the date of this Amendment, the Borrower continues to be in default
under Section 8.5(c) of the Credit Agreement regarding the delivery of its
December 31, 1998, year-end audited financial statements and under Section
8.5(a) of the Credit Agreement regarding the delivery of its January 1999,
February 1999, March 1999, and April 1999 month-end financial statements (the
defaults under Sections 8.5(c) and 8.5(a) referenced above being referred to
herein as the "December 31, 1998--April 30, 1999, Financial Reporting
Defaults"). The Borrower has requested that the Banks waive the Borrower's
non-compliance with the foregoing and, by signing below, the Required Banks
hereby agree to waive the Financial Covenant Defaults for, and only for, the
periods ending on or prior to March 31, 1999, and the December 31, 1998--April
30, 1999, Financial Reporting Defaults for, and only for, the financial
reporting periods so described, provided that the waivers set forth herein shall
not be effective unless and until the conditions precedent set forth in Section
3 below have been satisfied.
-12-
<PAGE> 13
SECTION 3. CONDITIONS PRECEDENT.
The effectiveness of this Amendment is subject to the satisfaction of
all of the following conditions precedent:
3.1. The Borrower, the Agent, and the Required Banks shall
have executed and delivered this Amendment.
3.2. The Borrower shall, and shall cause each of its
Subsidiaries to, amend the Collateral Documents and the Guaranties so
as to provide that ACH Liabilities from time to time outstanding are
secured or otherwise guarantied by the relevant Loan Document in form
and substance acceptable to the Agent.
3.3. The Agent shall have received for each of the Banks: (a)
drafts of the Borrower's December 31, 1998, Form 10-K report and March
31, 1999, Form 10-Q report to be filed with the Securities and Exchange
Commission substantially concurrently with the execution and deliver of
this Amendment, (b) a copy of the Borrower's consolidated and
consolidating cash flow report (including projected sources and uses of
cash) prepared on a week-by-week basis through the period ending
December 31, 1999, and (c) a copy of the Borrower's consolidated and
consolidating operating budget (including projected operating revenues
and expenses) prepared on a quarter-by-quarter basis for the period
from January 1, 1999, through the period ending December 31, 2000.
3.4. Each Subsidiary shall have executed its acknowledgement
and consent to this Amendment in the space provided for that purpose
below.
3.5. The Agent shall have received for each Bank the favorable
written opinion of counsel to the Borrower and its Subsidiaries, in
form and substance reasonably satisfactory to the Agent.
3.6. The Borrower shall have paid to the Agent for the benefit
of the Lenders an amendment fee equal to .40% on the principal balance
of Term Loans and the total Revolving Credit Commitments outstanding
immediately prior to the Block Vision Sale (such fee to be paid to the
Lenders ratably based upon the outstanding principal balance of the
Term Loans owed to, or the Revolving Credit Commitments held by, such
Lenders). The Borrower shall have also paid to the Agent, for its own
use and benefit, an additional administrative fee in the amount
required by the fee letter being entered into between the Borrower and
the Agent substantially concurrently herewith.
3.7. Legal matters incident to the execution and delivery of
this Amendment shall be satisfactory to the Agent and its counsel.
-13-
<PAGE> 14
SECTION 4. CONDITION SUBSEQUENT.
In addition to the financial information required by Section 8.5 of the
Credit Agreement and Section 3.3 of this Amendment, the Borrower agrees to
deliver to the Agent: (a) within 10 days of the date of this Amendment copies of
the Borrower's December 31, 1998, Form 10-K and March 31, 1999, Form 10-Q
reports filed by the Borrower with the Securities and Exchange Commission and
(b) within 15 days of the date of this Amendment, copies of the monthly
financial statements of the Borrower required under Section 8.5(a) hereof for
the months of January, February, March, and April of 1999. Failure by the
Borrower to timely comply with the foregoing conditions subsequent shall
constitute an Event of Default under the Credit Agreement.
SECTION 5. REPRESENTATIONS.
In order to induce the Banks to execute and deliver this Amendment, the
Borrower hereby represents to the Agent and the Banks that as of the date
hereof, and after giving effect to the amendments and waivers set forth above,
the representations and warranties set forth in Section 6 of the Credit
Agreement are and shall be and remain true and correct (except that the
representations contained in Section 6.5 shall be deemed to refer to the most
recent financial statements of the Borrower delivered to the Banks) and the
Borrower and its Subsidiaries are in compliance with all of the terms and
conditions of the Credit Agreement and the other Loan Documents and no Default
or Event of Default has occurred and is continuing or shall result after giving
effect to this Amendment.
SECTION 6. RELEASE OF CLAIMS.
To induce the Banks and the Agent to enter into this Amendment, the
Borrower and, by signing the acknowledgement and consent referred to below, each
of its Subsidiaries hereby release, acquit, and forever discharge the Banks and
the Agent, and their officers, directors, agents, employees, successors, and
assigns, from all liabilities, claims, demands, actions, and causes of action of
any kind (if any there be), whether absolute or contingent, due or to become
due, disputed or undisputed, at law or in equity, that they now have or ever had
against the Banks and the Agent, or any one or more of them individually, under
or in connection with the Credit Agreement or any of the other Loan Documents.
SECTION 7. MISCELLANEOUS.
7.1. The Borrower has heretofore executed and delivered to the Agent and
the Banks certain of the Collateral Documents. The Borrower hereby acknowledges
and agrees that, notwithstanding the execution and delivery of this Amendment,
the Collateral Documents remain in full force and effect and the rights and
remedies of the Agent and the Banks thereunder, the obligations of the Borrower
thereunder, and the liens and security interests created and provided for
thereunder remain in full force and effect and shall not be affected, impaired,
or discharged hereby. The Borrower hereby acknowledges and agrees that the Loans
as modified by this Amendment constitute Obligations secured by each of the
Collateral Documents. Nothing herein
-14-
<PAGE> 15
contained shall in any manner affect or impair the priority of the liens and
security interests created and provided for by the Collateral Documents as to
the indebtedness which would be secured thereby prior to giving effect to this
Amendment.
7.2. Except as specifically amended herein, the Credit Agreement shall
continue in full force and effect in accordance with its original terms.
Reference to this specific Amendment need not be made in the Credit Agreement,
the Notes, or any other instrument or document executed in connection therewith,
or in any certificate, letter or communication issued or made pursuant to or
with respect to the Credit Agreement, any reference in any of such items to the
Credit Agreement being sufficient to refer to the Credit Agreement as amended
hereby.
7.3. The Borrower agrees to pay on demand all costs and expenses of or
incurred by the Agent in connection with the negotiation, preparation,
execution, and delivery of this Amendment and the other instruments and
documents to be executed and delivered in connection herewith, including the
fees and expenses of counsel for the Agent.
7.4 This Amendment may be executed in any number of counterparts, and
by the different parties on different counterpart signature pages, all of which
taken together shall constitute one and the same agreement. Any of the parties
hereto may execute this Amendment by signing any such counterpart and each of
such counterparts shall for all purposes be deemed to be an original. This
Amendment shall be governed by the internal laws of the State of Illinois.
[SIGNATURE PAGES TO FOLLOW]
-15-
<PAGE> 16
This Second Amendment to Amended and Restated Credit Agreement is dated
as of the date and year first above written.
VISION TWENTY-ONE, INC.
By /s/ Richard T. Welch
Name Richard T. Welch
Title Chief Financial Officer
Accepted and agreed to as of the day and year last above written.
BANK OF MONTREAL, in its individual capacity
as a Bank and as Agent
By /s/ Mark F. Spencer
Name Mark F. Spencer
Title Managing Director
BANK ONE TEXAS, N.A.
By /s/ Jason O. White
Name Jason O. White
Title Assistant Vice President
PACIFICA PARTNERS I, L.P.
By: Imperial Credit Asset
Management, as its Investment
Manager
By /s/ Dean K. Kawai
Name Dean K. Kawai
Title Vice President
PILGRIM PRIME RATE TRUST
By: Pilgrim Investments, Inc., as its
Investment Manager
By /s/ Charles E. LeMieux
Name Charles E. LeMieux CFA
Title Assistant Vice President
S-1
<PAGE> 17
PILGRIM AMERICA HIGH INCOME
INVESTMENTS LTD.
By: Pilgrim Investments, Inc., as its
Investment Manager
By /s/ Charles E. LeMieux
Name Charles E. LeMieux CFA
Title Assistant Vice President
MERRILL LYNCH BUSINESS FINANCIAL
SERVICES, INC.
By /s/ Jeremy M. Dhein
Name Jeremy M. Dhein
Title Assistant Vice President
S-2
<PAGE> 18
ACKNOWLEDGEMENT AND CONSENT
The undersigned, being all of the Material Subsidiaries of Vision
Twenty-One, Inc., have heretofore executed and delivered to the Agent and the
Banks one or more Guaranties and Collateral Documents. Each of the undersigned
hereby consents to the Second Amendment to Credit Agreement as set forth above
and confirms that its Guaranty and Collateral Documents, and all of its
obligations thereunder, remain in full force and effect and, without limiting
the foregoing, acknowledges and agrees that the Loans as modified therein
constitute Obligations guaranteed by, or otherwise secured by, the Loan
Documents executed by it. Each of the undersigned further agrees that the
consent of the undersigned to any further amendments to the Credit Agreement
shall not be required as a result of this consent having been obtained, except
to the extent, if any, required by the Loan Documents referred to above.
"GUARANTORS"
VISION 21 PHYSICIAN PRACTICE
MANAGEMENT COMPANY
VISION 21 OF SOUTHERN ARIZONA, INC.
VISION 21 OF SIERRA VISTA, INC.
VISION 21 MANAGEMENT SERVICES, INC.
VISION 21 MANAGED EYE CARE OF TAMPA
BAY, INC.
VISION TWENTY-ONE MANAGED EYE CARE
IPA, INC.
BBG-COA, INC.
BLOCK VISION, INC.
UVC INDEPENDENT PRACTICE ASSOCIATION,
INC.
MEC HEALTH CARE, INC.
LSI ACQUISITION, INC.
VISION TWENTY-ONE EYE SURGERY CENTERS,
INC.
EYE SURGERY CENTER MANAGEMENT, INC.
VISION TWENTY-ONE REFRACTIVE CENTER,
INC.
VISION TWENTY-ONE OF WISCONSIN, INC.
By /s/ Richard T. Welch
Richard T. Welch, an authorized signatory
for each of the above-referenced entities
S-3
<PAGE> 1
Exhibit 21
LIST OF SUBSIDIARIES OF VISION TWENTY-ONE, INC.
<TABLE>
<CAPTION>
JURISDICTION
SUBSIDIARY OF INCORPORATION
- ---------- ----------------
<S> <C>
Vision 21 Managed Eye Care of Tampa, Bay, Inc. Florida
Vision 21 Management Services, Inc. Florida
Vision 21 of Southern Arizona, Inc. Florida
Vision 21 of Sierra Vista, Inc. Florida
Vision Twenty-One Managed Eye Care, IPA, Inc. New York
Vision Twenty-One Surgery Center, Ltd. Florida LP
Vision Twenty-One Surgery Center-Largo, Ltd. Florida LP
Vision Twenty-One Eye Surgery Centers, Inc. Florida
Vision Twenty-One Refractive Center, Inc. Florida
Vision Twenty-One of Wisconsin, Inc. Wisconsin
Vision Insurance Plan of America, Inc. Wisconsin
Eye Surgery Center Management, Inc. Florida
LSI Acquisition, Inc. New Jersey
MEC Health Care, Inc. Maryland
Vision Twenty-One Physician Practice Management Company Florida
Vision Twenty-One Eye Laser Centers, Inc. Florida
BBG-COA, Inc. Delaware
BVC Administrators, Inc. New Jersey
Block Vision, Inc. New Jersey
UVC Independent Practice Association, Inc. New York
CHVC Independent Practice Association, Inc. New York
MVC Independent Practice Association, Inc. New York
WVC Independent Practice Association, Inc. New York
FVC Independent Practice Association, Inc. New York
BHVC Independent Practice Association, Inc. New York
The Block Group of New York, Inc. New York
BBG Independent Practice Association, Inc. New York
VCA Independent Practice Association, Inc. New York
Block Vision of Texas, Inc. Texas
</TABLE>
<PAGE> 1
EXHIBIT 23
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, the Registration Statement (Form S-8 No. 333-67315) pertaining to Vision
Twenty-One, Inc. 1998 Employee Stock Purchase Plan, and the Registration
Statement (Post-Effective Amendment No. 2 on Form S-3 to Form S-1 No. 333-51437)
of our report dated June 11, 1999 with respect to the consolidated financial
statements and schedule of Vision Twenty-One, Inc. and Subsidiaries included in
the Annual Report (Form 10-K) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Tampa, Florida
June 11, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF VISION TWENTY-ONE, INC. AND SUBSIDIARIES
FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,052,423
<SECURITIES> 0
<RECEIVABLES> 26,744,722
<ALLOWANCES> 3,912,000
<INVENTORY> 3,308,813
<CURRENT-ASSETS> 35,360,794
<PP&E> 23,352,494
<DEPRECIATION> 8,129,908
<TOTAL-ASSETS> 191,677,124
<CURRENT-LIABILITIES> 28,226,608
<BONDS> 81,692,287
0
0
<COMMON> 15,067
<OTHER-SE> 73,706,546
<TOTAL-LIABILITY-AND-EQUITY> 191,677,124
<SALES> 101,892,251
<TOTAL-REVENUES> 223,417,114
<CGS> 87,933,408
<TOTAL-COSTS> 207,667,460
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,379,099
<INCOME-PRETAX> (9,086,285)
<INCOME-TAX> (2,450,000)
<INCOME-CONTINUING> (6,636,285)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,318,512
<CHANGES> 0
<NET-INCOME> (7,954,797)
<EPS-BASIC> (0.55)
<EPS-DILUTED> (0.55)
</TABLE>