<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-15223
OPTICARE HEALTH SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0453392
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
87 GRANDVIEW AVENUE, WATERBURY, CONNECTICUT 06708
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(203) 596-2236
Indicate by check X whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock, par
value $.001 per share, at May 1, 2000 was 12,578,766 shares.
<PAGE>
INDEX TO FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2000
(unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 1999 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II. OTHER INFORMATION
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 16
2
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,378 $ 2,921
Accounts receivable, net 12,613 10,557
Inventories 3,012 3,029
Deferred income taxes, current 2,497 2,579
Other current assets 2,053 2,259
----------- ------------
TOTAL CURRENT ASSETS 23,553 21,345
Property and equipment, net 10,036 9,679
Intangible assets, net 32,128 32,443
Deferred income taxes, non-current 960 951
Other assets 2,909 2,322
----------- ------------
TOTAL ASSETS $ 69,586 $ 66,740
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,434 $ 7,619
Accrued expenses 8,461 8,259
Current portion of long-term debt 4,336 3,459
Deferred income tax liability 222 397
Other current liabilities 724 920
----------- ------------
TOTAL CURRENT LIABILITIES 22,177 20,654
Long-term debt, less current portion 28,638 39,689
Other liabilities 1,236 1,123
----------- ------------
TOTAL LIABILITIES 52,051 61,466
----------- ------------
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock, $.001 par value, 550,000 shares
Authorized; 418,803 shares issued and outstanding 1 1
Common Stock, $0.001 par value; 50,000,000 shares authorized;
12,543,557 and 8,972,128 shares outstanding at March 31, 2000 and
December 31, 1999, respectively. 13 9
Additional paid-in-capital 59,747 47,784
Accumulated deficit (42,226) (42,520)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 17,535 5,274
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $ 69,586 $ 66,740
=========== ============
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
NET REVENUES:
Laser correction and professional services $ 2,251 $ -
Managed care services 9,065 4,462
Other integrated services 23,376 13,634
------------ ------------
Total net revenues 34,692 18,096
------------ ------------
OPERATING EXPENSES:
Cost of product sales 11,296 9,546
Medical claims expense 7,308 3,148
Salaries, wages and benefits 10,294 2,621
Selling, general and administrative 3,587 1,364
Depreciation 635 241
Amortization 372 71
Interest 693 978
------------ ------------
Total operating expenses 34,185 17,969
------------ ------------
INCOME BEFORE INCOME TAXES 507 127
Income tax expense 213 47
------------ ------------
NET INCOME $ 294 $ 80
============ ============
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ 0.03 $ (0.22)
============ ============
Diluted $ 0.02 $ (0.22)
============ ============
Weighted average common shares outstanding:
Basic 11,601,642 2,325,124
============ ============
Diluted 12,163,198 2,325,124
============ ============
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------
2000 1999
----------- ------------
<S> <C> <C>
OPERATING ACTIVITES:
Net income $ 294 $ 80
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 635 241
Amortization 372 71
Changes in operating assets and liabilities
Accounts receivable (2,056) (1,659)
Inventories 17 (93)
Other current assets 288 241
Other assets (652) -
Accounts payable and accrued expenses 1,017 2,187
Other current liabilities (371) -
Other liabilities 113 -
Cash used in discontinued operations - (314)
----------- ------------
Net cash provided by (used in) operating activities (343) 754
----------- ------------
INVESTING ACTIVITES:
Purchases of equipment (992) (182)
Cash placed in escrow - (3,201)
----------- ------------
Net cash (used in) investing activities (992) (3,383)
----------- ------------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 9,966 -
Principal payments on long-term debt (7,574) (431)
Net decrease in revolving credit facility (600) -
----------- ------------
Net cash provided by (used in) financing activities 1,792 (431)
----------- ------------
Increase (decrease) in cash and cash equivalents 457 (3,060)
Cash and cash equivalents at beginning of period 2,921 5,955
=========== ============
Cash and cash equivalents at end of period $ 3,378 $ 2,895
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 732 $ -
Cash paid for income taxes $ 50 $ -
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of OptiCare
Health Systems, Inc., a Delaware corporation, and subsidiaries (the "Company")
for the three months ended March 31, 2000 and 1999 have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X
of the Securities Exchange Act of 1934 and are unaudited. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of only normal recurring accruals)
necessary for a fair presentation of the consolidated financial statements have
been included. The results of operations for the three-month period ended March
31, 2000 are not necessarily indicative of the results to be expected for the
full year. The condensed consolidated balance sheet as of December 31, 1999 was
derived from the Company's audited financial statements, but does not include
all disclosures required by generally accepted accounting principles.
2. MERGERS AND ACQUISITIONS
OptiCare Health Systems, Inc. is an integrated eye care services company
focused on providing laser correction, managed eye care professional eye care
services. The Company's current form is the result of mergers (the "Mergers")
completed on August 13, 1999 by and among Saratoga Resources, Inc. and two eye
care services companies, OptiCare Eye Health Centers, Inc. and Prime Vision
Health, Inc. ("Prime"). For accounting purposes, Prime was the accounting
acquirer. Accordingly, the operating results for the three months ended March
31, 2000 represent the operating results of the combined companies, while the
results of operations for the three months ended March 31, 1999 represent the
historical operating results of Prime only.
On October 1, 1999 the Company purchased Cohen Systems, Inc. (the "Cohen
Acquisition"), a software systems provider, specializing in point of sale and
internet-based solutions for optical retail and optical manufacturing
laboratories.
Assuming the Mergers and Cohen Acquisition had occurred on January 1, 1999,
pro forma net revenue and net loss of the Company for the three months ended
March 31, 1999 would have been $31,999 and $(48), respectively. On the same
pro forma basis, basic and diluted net loss per common share for the three
months ended March 31, 1999 would have been $(0.01). This pro forma information
is for informational purposes only and is not necessarily indicative of the
results that would have been obtained had these events actually occurred at the
beginning of the period presented, nor does it intend to be a projection of
future results.
6
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. EARNINGS PER SHARE
The following tables sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------------
2000 1999
--------------- -------------
<S> <C> <C>
Net income $ 294 $ 80
Preferred stock dividend - (600)
--------------- -------------
Net income (loss) available to common stockholders $ 294 $ (520)
=============== =============
Net income (loss) per share:
Basic $ 0.03 $(0.22)
=============== =============
Diluted $ 0.02 $(0.22)
=============== =============
Weighted average common shares-basic 11,601,642 2,325,124
Effect of dilutive securities:
Preferred stock 418,803 *
Options 142,753 *
--------------- -------------
Weighted average common shares-diluted 12,163,198 2,325,124
=============== =============
</TABLE>
*anti-dilutive
The weighted average common shares outstanding in 1999 has been adjusted to
reflect the conversion associated with the reverse merger with Saratoga in
August 1999. In addition, the effect of dilutive securities excludes warrants
due to anti-dilution.
7
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. SEGMENT INFORMATION
The Company currently manages the operations of the business through three
operating segments: (1) Laser Correction and Professional Services (2) Managed
Care Services and (3) Other Integrated Services.
Management assesses the performance of its segments based on income before
income taxes, interest expense, depreciation and amortization, and other
corporate overhead. Summarized financial information, by segment, for the three
months ended March 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
----------------------------
2000 1999
------------ -----------
<S> <C> <C>
Revenues:
Laser correction and professional services $ 2,251 $ -
Managed care services 9,585 4,462
Other integrated services 25,152 18,563
------------ -----------
Segment totals 36,988 23,025
Elimination of inter-segment revenues (2,296) (4,929)
------------ -----------
Total net revenue $ 34,692 $ 18,096
============ ===========
Operating earnings (loss):
Laser correction and professional services $ 707 $ -
Managed care services 650 597
Other integrated services 2,042 885
------------ -----------
Segment totals 3,399 1,482
Depreciation (635) (241)
Amortization (372) (71)
Interest expense (693) (978)
Corporate (1,192) (65)
------------ -----------
Operating earnings $ 507 $ 127
============ ===========
</TABLE>
5. CONTINGENCIES
The Company is both a plaintiff and defendant in lawsuits incidental to its
current and former operations. Such matters are subject to many uncertainties
and outcomes are not predictable with assurance. Consequently, the ultimate
aggregate amount of monetary liability or financial impact with respect to these
matters at March 31, 2000 cannot be ascertained. Management is of the opinion
that, after taking into account the merits of defenses, insurance coverage and
established reserves, the ultimate resolution of these matters will not have a
material adverse effect in relation to the Company's consolidated financial
statements or results of operations.
8
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. STOCKHOLDERS' EQUITY
In January 2000, the Company completed the sale of 3,571,429 registered
shares of common stock. Gross proceeds from the offering, based on the offering
price of $3.50 per share, totaled $12,500, including the cancellation of a
$2,000 subordinated note payable previously issued by the Company. The shares
were issued under a registration statement filed with the Securities and
Exchange Commission on January 18, 2000. The Company used $7,000 of the net
proceeds to pay down long-term debt and expects to use the remaining proceeds
for, among other things, expansion of laser correction, working capital and
general corporate purposes.
7. VISION TWENTY-ONE, INC. MERGER
On February 10, 2000, the Company entered into a merger agreement with
Vision Twenty-One, Inc. The transaction provides for 6,000,000 shares, which
number is subject to adjustment as described in the merger agreement of OptiCare
Health Systems, Inc.'s common stock to be issued to shareholders of Vision
Twenty-One and the assumption of approximately $60 million of Vision
Twenty-One's outstanding debt. The transaction is subject to certain closing
conditions, including but not limited to, regulatory approvals, renegotiation of
certain debt obligations of the Company and Vision Twenty-One, the Company
obtaining financing and shareholder approval by each party.
9
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion may be understood more fully by reference to the
financial statements, notes to the financial statements, and management's
discussion and analysis contained in the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, as filed with the Securities and Exchange
Commission.
OVERVIEW. OptiCare Health Systems, Inc. (the "Company") is an integrated
eye care services company focused on providing laser correction, managed care
and professional eye care services. On August 13, 1999 Saratoga Resources, Inc.
("Saratoga"), a Delaware corporation, PrimeVision Health, Inc. ("Prime") and
OptiCare Eye Health Centers, Inc. merged (the "Mergers"). In this transaction
Prime merged with Saratoga through a reverse acquisition by Prime of Saratoga at
book value with no adjustments reflected to historical values. Immediately
following the Prime Merger, OptiCare Eye Health Centers, Inc. was acquired by
Saratoga, which was accounted for under the purchase method of accounting with
the excess of purchase price over the estimated fair value of net assets
acquired recorded as goodwill. The financial results for the three months ended
March 31, 2000 are based upon consolidated operating results reported by the
Company and its subsidiaries, including OptiCare Eye Health Centers, Inc., while
the financial results for three months ended March 31, 1999 are based solely
upon the results reported by Prime and its subsidiaries.
The Company executes its business through three business segments: (1)
laser correction and professional services (2) managed care services and (3)
other integrated services. The laser correction and professional services
segment includes the development of laser correction centers and provides
marketing, systems, software and other services to eye care professionals. The
managed care services segment contracts with managed care plans to manage the
eye health portion of managed care plans. The other integrated services segment
owns and operates fully integrated eye health centers, retail optical stores and
a buying group program for optical products.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 Compared to the Three Months
Ended March 31, 1999
Laser correction and professional services revenue. Laser correction and
professional services revenue was $2.3 million for the three months ended March
31, 2000. This revenue was comprised of $1.1 million from laser vision
correction and ambulatory surgery services, $0.7 million from Health Service
Organization agreements and $0.5 million of revenue from Cohen Systems, Inc. for
the three months ended March 31, 2000. There was no comparable revenue for these
operations for the first quarter of 1999.
Managed care services revenue. Managed eye care revenue increased to $9.1
million for the three months ended March 31, 2000 from $4.5 million for the
three months ended March 31, 1999, an increase of $4.6 million or 103.2%. Of
this increase, approximately $3.8 million represents managed eye care revenue of
OptiCare Eye Health Centers for the three months ended March 31, 2000. The
remaining increase is due to new managed eye care contracts and growth in
existing member lives.
Other integrated services revenue. Integrated services and product sales
revenue increased to $23.4 million for the three months ended March 31, 2000
from $13.6 million for the three months ended March 31, 1999, an increase of
$9.7 million or 71.5%. Of this increase, $8.1 million represents optometry and
ophthalmology revenue of OptiCare Eye Health Centers in 2000. In addition, North
Carolina optometry revenue increased from $5.6 million for the three months
ended March 31, 1999 to $7.2 million for the three months ended March 31, 2000,
an increase of $1.6 million or 28.5%.
10
<PAGE>
Cost of product sales. Cost of product sales increased to $11.3 million for
the three months ended March 31, 2000 from $9.5 million for the three months
ended March 31, 1999, an increase of $1.8 million or 18.3%. Approximately $1.4
million of this increase relates to cost of product sales associated with the
optometry, ophthalmology and surgical centers operations of OptiCare Eye Health
Centers for the three months ended March 31, 2000. The remaining increase
primarily represents increases in the cost of sales corresponding to the
Company's increased revenues in the other optometry and software sales areas.
Medical claims expense. Medical claims expense increased to $7.3 million for
the three months ended March 31, 2000 from $3.1 million for the three months
ended March 31, 1999, an increase of $4.2 million. Of this increase, $3.0
million represents medical claims expenses of OptiCare Eye Health Centers for
the three months ended March 31, 2000. The remaining increase is primarily due
to new managed care contracts and growth in existing member lives, and is
consistent with the increase in managed care services revenue.
Salaries wages & benefits. Salaries, wages and benefits increased to $10.3
million for the three months ended March 31, 2000 from $2.6 million for the
three months ended March 31, 1999, an increase of $7.7 million. Of this
increase, $5.1 million represents compensation expenses of OptiCare Eye Health
Centers and $0.2 million represents compensation expenses of Cohen Systems for
the three months ended March 31, 2000. The remaining increase primarily
represents increased employee costs associated with an increase in corporate
staff added to support the company's combined operations as well as increased
costs associated with servicing increased managed care contracts.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $3.6 million for the three months ended
March 31, 2000 from $1.4 million for the three months ended March 31, 1999, an
increase of $2.2 million. This increase is primarily attributed to $2.0 million
of general and administrative expenses of OptiCare Eye Health Centers in the
three months ended March 31, 2000.
Interest expense. Interest expense decreased to $0.7 million for the three
months ended March 31, 2000 from $1.0 for the three months ended March 31, 1999,
a decrease of approximately $0.3 million or 29.1%. Interest expense primarily
relates to the Company's bank indebtedness and notes payable to sellers in
connection with acquisition activities. The decrease in interest expense
primarily results from the reduction in the Company's outstanding bank debt and
reduced interest rate associated with the Mergers in August 1999 and the paydown
of debt using the proceeds received from the registered offering in January
2000.
Income before income taxes. Income before income taxes increased to $0.5
million for the three months ended March 31, 2000 from $0.1 million for the
three months ended March 31, 1999, an increase of $0.4 million. This increase
was primarily attributed to an increase in income associated with the Mergers in
August 1999, as well as overall revenue growth and the reduction of interest
expense as described above.
Income tax expense. The company's effective tax rate for the quarter ended
March 31, 2000 was 42% compared to the same period's effective tax rate of 37%
in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The company's principal sources of liquidity are from cash flows generated
from operations and from borrowing under the company's credit facility. The
company's principal uses of liquidity are to provide working capital, meet debt
service requirements and finance the company's strategic plans. As of March 31,
2000, the company had cash and cash equivalents of approximately $3.4 million
and $1.4 million of additional borrowing capacity available under its revolving
credit facility, net of a $0.4 million letter of credit obligation.
11
<PAGE>
In August 1999, in connection with the mergers, the company entered into a
loan agreement (the "Credit Facility") with Bank Austria Creditanstalt Corporate
Finance, Inc., as agent for the lenders ("Bank Austria"). Borrowings from the
Credit Facility were used to pay certain indebtedness of PrimeVision Health and
OptiCare Eye Health Centers and to fund the company's business operations. The
Credit Facility provided the Company with a $21.5 million term loan and up to a
$12.7 million revolving credit facility and is secured by a security interest in
substantially all of the assets of the Company. The Company is required to
maintain certain financial ratios, which are calculated on a quarterly and
annual basis. The first principal payment on the term loan was April 1, 2000 and
the Credit Facility terminates and all amounts outstanding thereunder are due
and payable on June 1, 2004. As of March 31, 2000, the Company had advances
outstanding of $10.9 million under the revolving credit facility and $18.5
million under the term loan.
The interest rate applicable to the credit facility will equal the Base Rate
or the Eurodollar Rate (each, as defined in the loan agreement with Bank Austria
("Loan Agreement")), as the company may from time to time elect, in accordance
with the provisions of the Loan Agreement. The base rate is generally the higher
of (a) the prime rate of Bank Austria for domestic commercial loans in effect on
such applicable day or (b) the federal funds rate in effect on such applicable
day plus one-half of one percent (1/2 of 1%), which generally equals LIBOR plus
1.75%. The Eurodollar rate will generally equal the offered rate quoted by Bank
Austria in the inter-bank Eurodollar market for U.S. dollar deposits of an
aggregate amount comparable to the principal amount of the Eurodollar loan to
which the quoted rate is to be applicable.
In January 2000, the Company completed the sale of 3,571,429 registered
shares of common stock. The gross proceeds from the stock offering were
approximately $12.5 million, including the cancellation of a $2.0 million
subordinated note payable previously issued by the Company. The shares were
issued under a registration statement filed with the Securities and Exchange
Commission on January 18, 2000. The Company used $7.0 million of the net
proceeds of $10.0 million to pay down long-term debt and expects to use the
remaining proceeds for, among other things, expansion of laser correction,
working capital and general corporate purposes.
For the three months ended March 31, 2000 the company used $0.3 million in
operating activities, $1.0 million in investing activities and generated $1.8
million in financing activities. Cash used in operating activities included a
non-cash charge of $ 1.0 million of depreciation and amortization. Cash used in
investing activities represents capital expenditures. Net cash used in financing
activities included approximately $10.0 million of proceeds, net of issuance
costs of $0.5 million, from the registered stock issuance in January 2000. The
Company reduced its long-term debt by approximately $7.6 million, primarily
using the net proceeds received from the stock issuance, and reduced the
outstanding balance on its revolving credit facility by $0.6 million.
For the three months ended March 31, 1999 the company generated $0.8 million
in operating activities while $3.4 million was used in investing activities and
financing activities used cash of $0.4 million. Net cash used in financing
activities consisted primarily of $0.4 million of principal repayments on bank
indebtedness. Cash used in investing activities consisted primarily of $3.2
million of cash placed in escrow.
As of March 31, 2000, under an agreement with the Texas Department of
Insurance, the company is required to maintain a restricted investment of
$500,000. In addition, the Company is not allowed to declare or pay dividends or
otherwise transfer any funds from its limited purpose health maintenance
organization in Texas without prior approval from the Department of Insurance.
The Company does not believe the requirements of the Texas Department of
Insurance will have a material impact on the Company's liquidity.
Management believes that the combination of funds expected to be provided by
its operations and its credit facility will be sufficient to meet funding needs
for the next twelve months. The Company may incur additional indebtedness and
may issue notes or equity securities, in public or private transactions, in
order to fund future acquisitions, capital expenditure and working capital
requirements.
12
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The Company is subject to pre-determined Medicare reimbursement rates which,
for certain products and services, have decreased over the past three years. A
decrease in Medicare reimbursement rates could have an adverse affect on the
Company's results of operations if it can not manage these reductions through
increases in revenues or decreases in operating costs. To some degree, prices
for health care are driven by Medicare reimbursement rates, so that the
Company's non-Medicare business is also affected by changes in Medicare
reimbursement rates.
Management believes that inflation has not had a material effect on the
Company's revenues for the three-month periods ended March 31, 2000 and 1999.
FORWARD-LOOKING INFORMATION
Certain statements in this Form 10-Q and elsewhere (such as in other filings
by the Company with the Securities and Exchange Commission, press releases,
presentations by the Company or its management and oral statements) may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
include those relating to future opportunities, the proposed acquisition of
Vision Twenty-One, the outlook of customers, the reception of new services,
technologies and pricing methods, resolution of the Year 2000 Issue, existing
and potential strategic alliances, development and execution of an e-commerce
strategy, the success of initiatives including opening laser vision correction
centers and the likelihood of incremental revenues offsetting expense related to
those new initiatives. In addition, such forward-looking statements involve
known and unknown risks, uncertainties, and other factors which may cause the
actual results, performance or achievements of the Company to be materially
different from any future results expressed or implied by such forward-looking
statements. Such factors include: changes in the regulatory environment
applicable to the Company's business, demand and competition for the Company's
products and services, general economic conditions, risks related to the eye
care industry, the Company's ability to successfully integrate and profitably
operate its operations, and other risks detailed from time to time in the
Company's periodic earnings releases and reports filed with the Securities and
Exchange Commission, as well as the risks and uncertainties discussed in this
Form 10-Q. The Company undertakes no obligation to publicly update or revise
forward looking statements to reflect events or circumstances after the date of
this Form 10-Q or to reflect the occurrence of unanticipated events.
ITEM 3: Quantitative AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk from exposure to changes in interest
rates based on financing activities under the Company's credit facility. The
nature and amount of the Company's indebtedness may vary as a result of future
business requirements, market conditions and other factors. The extent of the
company's interest rate risk is not quantifiable or predictable due to the
variability of future interest rates and financing needs. The Company does not
expect changes in interest rates to have a material effect on income or cash
flows in the year 2000, although there can be no assurances that interest rates
will not significantly change. The Company did not use derivative instruments to
adjust the Company's interest rate risk profile during the three months ended
March 31, 2000.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
As previously disclosed, on February 10, 2000, we entered into a merger
agreement with Vision Twenty-One, Inc. The transaction provides for 6,000,000
shares, which number is subject to adjustment as described in the merger
agreement, of our common stock to be issued to shareholders of Vision Twenty-One
and the assumption of approximately $60 million of Vision Twenty One's
outstanding debt. The merger will combine the laser correction and managed eye
care businesses of the two companies. The merger agreement also calls for Vision
Twenty-One to continue to divest certain of its other businesses prior to
closing. Following the closing of the merger, we expect to have over 10,000,000
managed eye care lives and a national provider panel of approximately 11,000
practicing ophthalmologists and optometrists, providing us with a unique
platform to accelerate the growth of our laser correction and ambulatory surgery
segments.
The transaction is subject to certain closing conditions, including
regulatory approvals, the approval of Vision Twenty-One's and our stockholders,
Vision Twenty-One obtaining a release and waiver from Block Vision, Inc. of all
non-compete restrictions or otherwise resolving any issues relating thereto, and
the renegotiation of certain debt obligations of us and Vision Twenty-One, as
well as a financing to provide not less than $30 million of equity or mezzanine
capital.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
The following Exhibits are filed as part of this Quarterly Report on Form
10-Q:
Exhibit Description
- ------- -----------
2.1 Agreement and Plan of Merger and Reorganization among Vision Twenty-One,
Inc., OC Acquisition Corp. and OptiCare Health Systems, Inc.,
incorporated by reference to Appendix A to the Registration Statement
on Form S-4 filed with the Securities and Exchange Commission
on May 12, 2000.
3.1 Certificate of Incorporation of Registrant, incorporated by reference to
Exhibit 3.1 to the Registrant's Annual Report on Form 10-KSB filed
February 3, 1995.
3.2 Certificate of Amendment of the Certificate of Incorporation, dated as
of August 13, 1999, as filed with the Delaware Secretary of State on
August 13, 1999, incorporated by reference to Exhibit 3.1 to
Registrant's report on Form 8-K filed on August 30, 1999.
3.3 Amended and Restated By-laws of Registrant adopted March 27, 2000,
incorporated by reference to Exhibit 3.3 to the Registrant's Annual
Report on Form 10-K filed on March 30, 2000.
10.1 Amended and Restated Loan and Security Agreement, dated as of August 13,
1999, among Consolidated Eye Care, Inc., OptiCare Eye Health Centers,
and PrimeVision Health, Inc. as borrowers, the Registrant as the Parent,
the lenders named therein (the "Lenders"), Bank Austria, AG (the "LC
Issuer"), and Bank Austria Creditanstalt Corporate Finance, Inc., as the
agent (the "Agent")(excluding schedules and other attachments thereto),
incorporated by reference to Exhibit 10.1 to the Registrant's report on
Form 8-K filed on August 30, 1999.
14
<PAGE>
10.2 Guaranty dated as of August 13, 1999, among the Registrant, OptiCare Eye
Health Centers, PrimeVision Health, Inc., Consolidated Eye Care, Inc.
and each of the other subsidiaries and affiliates of the Registrant
listed on the signature pages thereto, in favor of the Lenders, the LC
Issuer and the Agent, incorporated by reference to Exhibit 10.2 to the
Registrant's report on Form 8-K filed on August 30, 1999.
10.3 Security Agreement dated as of August 13, 1999, among the Registrant and
the other parties listed on the signature page thereto in favor of the
Agent for the benefit of the Lenders and the LC Issuer, incorporated by
reference to Exhibit 10.3 to the Registrant's report on Form 8-K filed
on August 30, 1999.
10.4 Conditional Assignment and Trademark Security Agreement dated as of
August 13, 1999, between the Registrant and the Agent for the benefit of
the Lenders and the LC Issuer, incorporated by reference to Exhibit 10.4
to the Registrant's report on Form 8-K filed on August 30, 1999.
10.5 Pledge and Security Agreement, dated as of August 13, 1999, among each
of the Registrant, OptiCare Eye Health Centers, PrimeVision Health,
Inc., Consolidated Eye Care, Inc. and each of the other subsidiaries and
affiliates of the Company listed on the signature pages thereto, in
favor of the Agent for the benefit of the Lenders and the LC Issuer,
incorporated by reference to Exhibit 10.5 to the Registrant's report on
Form 8-K filed on August 30, 1999.
10.6 Assignment of Notes and Security Agreement, dated as of August 13, 1999,
between PrimeVision Health, Inc. and the Agent, incorporated by
reference to Exhibit 10.6 to the Registrant's report on Form 8-K filed
on August 30, 1999.
10.7 Agreement and Plan of Merger, dated as of April 12, 1999, among the
Registrant (then known as "Saratoga Resources, Inc."), OptiCare Shellco
Merger Corporation, Prime Shellco Merger Corporation, OptiCare Eye
Health Centers, Inc., a Connecticut corporation, and PrimeVision Health,
Inc., incorporated herein by reference to Exhibit 2 to the Registration
Statement on Form S-4, registration no. 333-78501, first filed on
May 14, 1999, as amended.
10.8 Registration Rights Agreement dated as of August 13, 1999 between
Registrant and Bank Austria Creditanstalt Corporate Finance, Inc.,
incorporated by reference to Exhibit 10.37 to the Registrant's Annual
Report on Form 10-K filed on March 30, 2000.
27 Financial Data Schedule (for EDGAR filing only).
b. Reports filed on Form 8-K filed in the period covered by this report:
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on February 11, 2000 to announce the signing of a
definitive merger agreement with Vision Twenty-One, Inc.
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on March 2, 2000 associated with the Company's press
release related to 1999 earnings, which discussed the definitive merger
agreement with Vision Twenty-One, Inc.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be filed on its behalf by the
undersigned, hereunto duly authorized.
Date: May 15, 2000 OPTICARE HEALTH SYSTEMS, INC.
By:
------------------------------
Steven L. Ditman
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer and duly
authorized officer)
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