<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 2000
REGISTRATION NO.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
OPTICARE HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
DELAWARE 8099 76-0453392
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer Identification No.)
of incorporation) Classification)
</TABLE>
87 GRANDVIEW AVENUE
WATERBURY, CT 06708
(860) 596-2236
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
-----------------
STEVEN L. DITMAN CHIEF FINANCIAL OFFICER
OPTICARE HEALTH SYSTEMS, INC.
87 GRANDVIEW AVENUE
WATERBURY, CT 06708
(860) 596-2236
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------------
Copy to:
ROBERT L. LAWRENCE, ESQ. DARRELL C. SMITH, ESQ.
KANE KESSLER, P.C. SHUMAKER, LOOP & KENDRICK, LLP
1350 AVENUE OF THE AMERICAS BANKAMERICA PLAZA, SUITE 2800
NEW YORK, NY 10019 101 EAST KENNEDY BOULEVARD
(212) 541-6222 TAMPA, FL 33602
(813) 229-7600
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement and the
satisfaction or waiver of all other conditions to the Merger as described in
the Agreement and Plan of Merger and Reorganization described in the enclosed
Joint Proxy Statement/Prospectus.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act Registration Statement number of the earlier effective
Registration Statement for the same offering. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=======================================================================================================================
PROPOSED
PROPOSED MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$0.001 per share .................. 6,250,000 $ 2.94 $18,375,000 $ 4,851.00
=======================================================================================================================
</TABLE>
(1) Represents the maximum number of shares of common stock of OptiCare
Health Systems, Inc. potentially issuable upon consummation of the Merger
and the transactions contemplated thereby.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f) under the Securities Act of 1933, as amended (the
"Securities Act"), and based on the market value (average of the high and
low prices) as of May 5, 2000, of the shares of common stock of OptiCare
Health Systems, Inc., as reported on the American Stock Exchange.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
OPTICARE HEALTH SYSTEMS, INC.
87 GRANDVIEW AVENUE
WATERBURY, CT 06708
(860) 596-2236
, 2000
Dear OptiCare Stockholders:
I am writing to you today about our proposed merger with Vision
Twenty-One, Inc. This merger is intended to provide OptiCare Health Systems,
Inc. with a unique platform to accelerate the growth of its laser vision and
ambulatory surgery segments. The combination also creates a leading managed eye
care business and provides OptiCare with substantial critical mass to leverage
our systems, infrastructure and software tools.
In the merger (the "Merger"), each share of Vision Twenty-One common stock
will be exchanged for approximately shares of OptiCare common
stock, par value $0.001 per share, which exchange ratio will be adjusted prior
to closing in accordance with the terms of the Merger Agreement. We expect to
issue approximately million shares of our common stock in the Merger.
OptiCare common stock is traded on the American Stock Exchange under the symbol
"OPT," and closed at $ per share on , 2000. The Merger is described
more fully in this Joint Proxy Statement/Prospectus.
You will be asked to vote upon the issuance of shares of OptiCare common
stock pursuant to a Merger Agreement with Vision Twenty-One, at an annual
meeting of OptiCare stockholders to be held on at a.m., local time,
at . The Merger cannot be consummated unless the holders of a majority of
the shares of OptiCare common stock present in person or by proxy and entitled
to vote at the meeting approve the issuance of these shares. Only stockholders
who hold shares of OptiCare common stock at the close of business on
will be entitled to vote at the annual meeting.
At the meeting, you will also be asked to vote upon the election of eight
members to serve on OptiCare's Board of Directors, to approve an amendment to
the OptiCare Performance Stock Program to increase the maximum number of shares
of OptiCare common stock authorized for issuance over the term of the plan by
an additional 2,000,000 and to ratify the appointment of Deloitte & Touche LLP
as OptiCare's independent auditors for the year ending December 31, 2000.
We are very excited by the opportunities we envision for the combined
company. YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE TERMS AND CONDITIONS
OF THE MERGER ARE FAIR TO YOU AND IN YOUR BEST INTERESTS, AND UNANIMOUSLY
RECOMMENDS THAT YOU APPROVE THE ISSUANCE OF THE SHARES OF OPTICARE COMMON STOCK
IN CONNECTION WITH THE MERGER.
This Joint Proxy Statement/Prospectus provides detailed information about
the two companies and the Merger. Please give all of this information your
careful attention. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE DISCUSSION
IN THE SECTION ENTITLED "RISK FACTORS" ON PAGE OF THIS JOINT PROXY
STATEMENT/PROSPECTUS.
YOUR VOTE IS VERY IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. To
vote your shares, you may use the enclosed proxy card, or attend the annual
stockholders meeting. To approve the issuance of shares of OptiCare common
stock pursuant to the Merger Agreement, you MUST vote "FOR" the proposal by
following the instructions stated on the enclosed proxy card. We urge you to
vote FOR this proposal, a necessary step in the Merger of OptiCare and Vision
Twenty-One.
Sincerely,
Dean J. Yimoyines
Chairman and Chief Executive
Officer
i
<PAGE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THIS TRANSACTION OR THE OPTICARE
COMMON STOCK TO BE ISSUED IN THE MERGER, OR DETERMINED IF THIS JOINT PROXY
STATEMENT/PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
This Joint Proxy Statement/Prospectus is dated , 2000, and was first
mailed to OptiCare stockholders on or about , 2000.
ii
<PAGE>
OPTICARE HEALTH SYSTEMS, INC.
87 GRANDVIEW AVENUE
WATERBURY, CT 06708
(860) 596-2236
-------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 2000
-------------------------
We will hold an annual meeting of stockholders of OptiCare Health Systems,
Inc. at a.m., local time, on , 2000 at , or any adjournment
or postponement thereof:
1. To consider and vote upon a proposal to approve the issuance of
shares of common stock, par value $0.001 per share, of OptiCare Health
Systems, Inc. pursuant to a Merger Agreement, among OptiCare Health
Systems, Inc., Vision Twenty-One, Inc. and OC Acquisition Corp., a wholly
owned subsidiary of OptiCare Health Systems, Inc., under which Vision
Twenty-One, Inc. will become a subsidiary of OptiCare Health Systems, Inc.
(Proposal 1);
2. To elect eight (8) members to serve on the Board of Directors until
the next annual meeting of stockholders and until their successors are duly
elected and qualified (Proposal 2);
3. To approve an amendment to OptiCare's Performance Stock Program
(the "Program") to increase the maximum number of shares of OptiCare common
stock authorized for issuance over the term of the Program by an additional
2,000,000.
4. To ratify the appointment of Deloitte & Touche LLP as OptiCare's
independent auditors for the year ending December 31, 2000 (Proposal 4);
and
5. To transact such other business as may properly come before the
annual meeting or any adjournment or postponement.
Only OptiCare stockholders of record at the close of business on ,
2000 are entitled to notice of and to vote at the annual meeting, or any
adjournment or postponement.
Your vote is important regardless of the number of shares you own. To
assure that your shares are represented at the annual meeting, we urge you to
complete, date and sign the enclosed proxy and mail it promptly in the
postage-paid envelope provided; whether or not you plan to attend the annual
meeting in person. You may revoke your proxy in the manner described in this
Joint Proxy Statement/Prospectus at any time before it has been voted at the
annual meeting. You may vote in person at the annual meeting even if you have
returned a proxy.
By Order of the Board of Directors
Steven L. Ditman,
Executive Vice President
And Chief Financial Officer
Waterbury, Connecticut
, 2000
iii
<PAGE>
VISION TWENTY-ONE, INC.
7360 BRYAN DAIRY ROAD
LARGO, FLORIDA 33777
, 2000
Dear Vision Twenty-One Stockholders:
I am pleased to inform you that on February 10, 2000, Vision Twenty-One,
Inc. and OptiCare Health Systems, Inc. entered into a Merger Agreement under
which each outstanding Vision Twenty-One common share will be converted into
the right to receive shares of OptiCare common stock and Vision
Twenty-One will become a wholly-owned subsidiary of OptiCare. The transaction
is structured as a tax-free reorganization.
At a Special Meeting of Stockholders of Vision Twenty-One to be held at
, .m. on , 2000, you will be asked to vote upon the proposal to approve
the Merger Agreement. The Merger is conditioned, in part, on the approval of
this proposal by Vision Twenty-One stockholders holding a majority of the
outstanding shares.
The Board of Directors has unanimously approved the Merger Agreement and
has determined the Merger contemplated by the Merger Agreement is fair to, and
in the best interest of, Vision Twenty-One and its stockholders. THE BOARD
UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO APPROVE THE MERGER
AGREEMENT.
PaineWebber Incorporated has acted as financial advisor to Vision
Twenty-One in connection with the Merger and has delivered its written opinion
dated February 9, 2000 to the Vision Twenty-One Board to the effect that, based
upon and subject to certain matters stated therein, as of the date of such
opinion, the exchange ratio in the Merger is fair to such stockholders from a
financial point of view. The full text of PaineWebber's written opinion, which
sets forth a description of the assumptions made, matters considered and
limitations on the review undertaken, is attached as Appendix E to the
accompanying Joint Proxy Statement/Prospectus and should be read carefully in
its entirety.
Details of the proposed Merger and other important information concerning
Vision Twenty-One and OptiCare are contained in the Joint Proxy
Statement/Prospectus. Please give this material your careful attention. In
particular, you should carefully consider the discussion in the section
entitled "Risk Factors" on page of this Joint Proxy Statement/Prospectus.
Whether or not you plan to attend the special meeting, please complete, sign
and date the accompanying proxy card and return it in the enclosed prepaid
envelope. To approve the Merger you MUST vote "FOR" the proposal. The Board of
Directors urges you to vote for this proposal. Your prompt cooperation will be
greatly appreciated. We are gratified by your continued support.
Sincerely yours,
BRUCE S. MALLER
Chairman of the Board
iv
<PAGE>
VISION TWENTY-ONE, INC.
7360 BRYAN DAIRY ROAD
LARGO, FL 33777
-------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 2000
-------------------------
TO THE STOCKHOLDERS OF VISION TWENTY-ONE:
You are cordially invited to attend a special meeting of stockholders of
Vision Twenty-One, Inc. at a.m., local time, on , 2000 at the , or
any adjournment or postponement thereof. You will be asked to vote on the
following proposals:
1. To approve and adopt the Merger Agreement and Plan of
Reorganization dated February 10, 2000 among OptiCare Health Systems Inc.,
Vision Twenty-One, Inc. and OC Acquisition Corp., under which each
outstanding share of Vision Twenty-One common stock will be converted into
the right to receive shares of OptiCare Health Systems, Inc. common stock,
and Vision Twenty-One will become a wholly-owned subsidiary of OptiCare
Health Systems, Inc.; and
2. To transact such other business as may properly come before the
special meeting or any adjournment or postponement.
Only Vision Twenty-One stockholders of record at the close of business on
, 2000 are entitled to notice of and to vote at the special meeting, or any
adjournment or postponement.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. TO
ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL MEETING, WE URGE YOU TO
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING IN PERSON. YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THIS
JOINT PROXY STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE
SPECIAL MEETING. YOU MAY VOTE IN PERSON AT THE SPECIAL MEETING EVEN IF YOU HAVE
RETURNED A PROXY.
By Order of the Board of Directors
[ ]
Largo, Florida
, 2000
v
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER ................................................... 1
SUMMARY OF THE JOINT PROXY STATEMENT/PROSPECTUS .......................................... 2
RISK FACTORS ............................................................................. 15
RISKS RELATED TO THE MERGER ........................................................... 15
OPTICARE RISKS ........................................................................ 17
INDUSTRY RISKS ........................................................................ 22
FORWARD-LOOKING STATEMENTS ............................................................... 23
THE MEETINGS ............................................................................. 24
General ............................................................................... 24
Date, Time and Place .................................................................. 24
Matters to be Considered at the Meetings .............................................. 24
Record Dates .......................................................................... 25
Voting of Proxies ..................................................................... 25
Votes Required ........................................................................ 26
Quorum; Abstentions and Broker Non-Votes .............................................. 26
Solicitation of Proxies and Expenses .................................................. 27
Board Recommendations ................................................................. 27
THE MERGER ............................................................................... 29
Background of the Merger .............................................................. 29
Reasons for the Merger; Recommendations of Boards of Directors ........................ 31
Opinion of OptiCare Advisor ........................................................... 34
Opinion of Vision Twenty-One Advisor .................................................. 38
Interests of Vision Twenty-One's Officers and Directors in the Merger ................. 45
Applicable Waiting Periods and Regulatory Approvals ................................... 46
Certain Federal Income Tax Consequences of the Merger ................................. 46
Accounting Treatment .................................................................. 48
Appraisal Rights ...................................................................... 48
Delisting and Deregistration of Vision Twenty-One's Common Stock following the Merger . 48
Listing of OptiCare Common Stock to be Issued in the Merger ........................... 48
Restrictions on Sale of Shares By Affiliates of OptiCare and Vision Twenty-One ........ 48
Operations Following the Merger ....................................................... 49
The Financing. ........................................................................ 49
Dispute with Block Buying Group ....................................................... 49
THE MERGER AGREEMENT AND RELATED AGREEMENTS .............................................. 50
MERGER AGREEMENT ...................................................................... 50
The Merger ......................................................................... 50
Effective Time ..................................................................... 50
Conversion of Vision Twenty-One Shares in the Merger ............................... 50
Vision Twenty-One Stock Options and Warrants ....................................... 50
No Fractional Shares ............................................................... 51
The Exchange Agent ................................................................. 51
Exchange of Vision Twenty-One Stock Certificates for OptiCare Stock Certificates ... 51
Distributions with Respect to Unexchanged Shares ................................... 52
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Representations and Warranties .............................................. 52
Vision Twenty-One's Conduct of Business Before Completion of the Merger ..... 54
OptiCare's Conduct of Business Before Completion of the Merger .............. 56
No Solicitation of Transactions ............................................. 57
Director and Officer Indemnification and Insurance .......................... 57
Additional Agreements ....................................................... 58
Conditions to the Merger .................................................... 58
Termination of the Merger Agreement ......................................... 60
Payment of Fees and Expenses ................................................ 61
Extension, Waiver and Amendment of the Merger Agreement ..................... 62
RELATED AGREEMENTS ............................................................. 62
Irrevocable Proxy Agreements ................................................ 62
Lock-Up Agreements .......................................................... 63
Affiliate Agreements ........................................................ 63
Credit Facility Restructuring ............................................... 63
INFORMATION ABOUT OPTICARE ........................................................ 64
OPTICARE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .......................................... 64
BUSINESS OF OPTICARE ........................................................... 70
OPTICARE'S MANAGEMENT .......................................................... 85
STOCKHOLDER RETURN PERFORMANCE GRAPH ........................................... 96
OPTICARE CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........................ 97
OPTICARE PRINCIPAL STOCKHOLDERS ................................................ 102
INFORMATION ABOUT VISION TWENTY-ONE ............................................... 104
VISION TWENTY-ONE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................ 104
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS .............................. 119
BUSINESS OF VISION TWENTY-ONE .................................................. 122
VISION TWENTY-ONE MANAGEMENT CONTINUING AFTER MERGER ........................... 135
VISION TWENTY-ONE PRINCIPAL STOCKHOLDERS ....................................... 138
VISION TWENTY-ONE CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS ................................................................. 139
COMPARISON OF RIGHTS OF HOLDERS OF VISION TWENTY-ONE COMMON
STOCK AND OPTICARE COMMON STOCK .................................................. 140
DESCRIPTION OF OPTICARE'S CAPITAL STOCK ........................................... 147
ADDITIONAL MATTERS BEING SUBMITTED TO A VOTE OF ONLY
OPTICARE'S STOCKHOLDERS .......................................................... 150
PROPOSAL 2
TO ELECT EIGHT DIRECTORS TO THE OPTICARE BOARD ................................ 150
</TABLE>
vii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROPOSAL 3
APPROVAL OF INCREASE OF SHARES OF COMMON STOCK UNDER
PERFORMANCE STOCK PROGRAM ........................ 151
PROPOSAL 4
RATIFICATION OF APPOINTMENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS ................................ 156
EXPERTS ................................................ 156
CHANGES OF INDEPENDENT ACCOUNTANTS ..................... 156
LEGAL MATTERS .......................................... 157
OTHER MATTERS .......................................... 157
WHERE YOU CAN FIND MORE INFORMATION .................... 157
</TABLE>
viii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY ARE THE COMPANIES PROPOSING THE MERGER?
A: We believe that Vision Twenty-One's capabilities complement OptiCare's
business. This Merger is intended to provide OptiCare with a unique
platform to accelerate the growth of its laser vision and ambulatory
surgery segments. The combination also creates a leading managed eye care
business and provides OptiCare with substantial critical mass to leverage
its systems, infrastructure and software tools.
Q: WHAT WILL VISION TWENTY-ONE'S STOCKHOLDERS RECEIVE IN THE MERGER?
A: If the Merger is completed, Vision Twenty-One stockholders will receive
approximately shares of OptiCare common stock for each share of Vision
Twenty-One common stock they own, which exchange ratio will be adjusted
prior to closing in accordance with the terms of the Merger Agreement.
OptiCare will not issue fractional shares of common stock. Instead of a
fractional share, Vision Twenty-One stockholders will receive cash based
on the market price of OptiCare common stock. Based on an exchange ratio
of one share of Vision Twenty-One common stock for shares of OptiCare
common stock, former Vision Twenty-One stockholders will own
approximately % of the outstanding shares of OptiCare common stock.
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A: We are working to complete the Merger during the third quarter of 2000.
Because the Merger is subject to governmental and other regulatory
approvals, however, we cannot predict the exact timing.
Q: SHOULD VISION TWENTY-ONE STOCKHOLDERS SEND IN THEIR STOCK CERTIFICATES
NOW?
A: No. After we complete the Merger, OptiCare will send instructions to
Vision Twenty-One stockholders explaining how to exchange their shares of
Vision Twenty-One common stock for the appropriate number of shares of
OptiCare common stock.
Q: SHOULD OPTICARE STOCKHOLDERS SEND IN THEIR STOCK CERTIFICATES?
A: No. OptiCare stockholders will continue to own their shares of OptiCare
common stock after the Merger and should continue to hold their stock
certificates.
Q: HOW DO I VOTE?
A: Mail your signed proxy card in the enclosed return envelope as soon as
possible so that your shares may be represented at the stockholders
meeting. You may also attend the meeting in person instead of submitting
a proxy. If your shares are held in "street name" by your broker, your
broker will vote your shares in connection with the Merger only if you
provide instructions on how to vote. You should follow the directions
provided by your broker regarding how to instruct your broker to vote
your shares.
Q: CAN I CHANGE MY VOTE AFTER MAILING MY PROXY?
A: Yes. You may change your vote by delivering a signed notice of revocation
or a later-dated, signed proxy card to the corporate secretary of
OptiCare or Vision Twenty-One, as appropriate, before the appropriate
stockholder meeting, or by attending the stockholder meeting and voting
in person.
Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE
MERGER?
A: Yes. We have set out under the heading "Risk Factors" beginning on page
of this Joint Proxy Statement/Prospectus a number of risk factors that
you should consider.
Q: WHO CAN I CALL WITH QUESTIONS?
A: If you are a Vision Twenty-One stockholder with questions about the
Merger, please call Vision Twenty-One's investor relations department at
(727) 545-4300, ext. 52103. If you are an OptiCare stockholder with
questions about the Merger, please call OptiCare's investor relations
department at (203) 596-2236.
1
<PAGE>
SUMMARY OF THE JOINT PROXY STATEMENT/PROSPECTUS
The following summary highlights selected information from this Joint
Proxy Statement/Prospectus and may not contain all of the information that is
important to you. You should carefully read this entire Joint Proxy
Statement/Prospectus, including the appendices, and the other documents we
refer to for a more complete understanding of the Merger.
THE COMPANIES
OptiCare Health Systems, Inc.
87 Grandview Avenue
Waterbury, CT 06708
www.opticare.net
(860) 596-2236
OptiCare Health Systems, Inc. ("OptiCare") is an integrated eye care
services company focused on providing laser correction, managed care and
professional eye care services. We currently own, operate and develop laser and
ambulatory surgery centers and provide systems, including Internet-based
software solutions, to eye care professionals. We also provide managed eye care
services to health plans and operate integrated eye health centers, retail
optical stores and a buying group program. See "Business of OptiCare."
Vision Twenty-One, Inc.
7360 Bryan Dairy Road
Largo, FL 33777
www.vision21.com
(727) 545-4300
Vision Twenty-One, Inc. ("Vision Twenty-One") is a vision care company
focused on the management of refractive eye laser and surgery centers and the
provision of managed care services. As of March 31, 2000, Vision Twenty-One
operated seven refractive eye laser surgery centers and six ambulatory surgery
centers and had approximately 100 managed care contracts covering approximately
4.9 million exclusively contracted patient lives. Vision Twenty-One is
headquartered in Largo, Florida. See "Business of Vision Twenty-One."
THE MERGER
Vision Twenty-One and OptiCare have entered into an Agreement and Plan of
Merger and Reorganization (the "Merger Agreement") that provides for the merger
of Vision Twenty-One and a newly formed subsidiary of OptiCare (the "Merger").
Stockholders of Vision Twenty-One will become common stockholders of OptiCare
following the Merger, and each share of Vision Twenty-One common stock will be
exchanged for approximately shares of OptiCare common stock, which exchange
ratio will be adjusted prior to closing in accordance with the terms of the
Merger Agreement. In addition, at the effective time, each outstanding option
or warrant to purchase shares (as disclosed to OptiCare) of Vision Twenty-One
common stock will be assumed by OptiCare regardless of whether the options are
exercisable. We urge you to read the Merger Agreement, which is attached as
Appendix A to this Joint Proxy Statement/Prospectus, carefully and in its
entirety. See "The Merger" and "The Merger Agreement and Related Agreements --
Conversion of Vision Twenty-One Shares in the Merger," and "The Merger
Agreement and Related Agreements -- Vision Twenty-One Stock Options and
Warrants."
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
We intend that the Merger qualify as a tax-free reorganization for United
States federal income tax purposes. If the Merger qualifies as a tax-free
reorganization, Vision Twenty-One stockholders will
2
<PAGE>
not recognize gain or loss for United States federal income tax purposes as a
result of the Merger, except for taxes payable because of cash they receive
instead of fractional shares. It is a condition to completion of the Merger
that we receive a legal opinion from outside counsel that the Merger
constitutes a tax-free reorganization for federal income tax purposes. See "The
Merger -- Certain Federal Income Tax Consequences of the Merger."
THE FEDERAL INCOME TAX CONSEQUENCES DESCRIBED ABOVE MAY NOT APPLY TO ALL
HOLDERS OF VISION TWENTY-ONE COMMON STOCK. YOUR TAX CONSEQUENCES WILL DEPEND ON
YOUR OWN SITUATION, YOU SHOULD CONSULT YOUR TAX ADVISOR SO AS TO FULLY
UNDERSTAND THE TAX CONSEQUENCES OF THE MERGER TO YOU.
ABILITY TO SELL OPTICARE COMMON STOCK AFTER THE MERGER
All shares of OptiCare common stock that Vision Twenty-One stockholders
receive in connection with the Merger will be freely transferable unless the
holder is considered an "affiliate" of either OptiCare or Vision Twenty-One for
purposes of the Securities Act of 1933 or as defined in the Merger Agreement.
Shares of OptiCare common stock held by these affiliates may be sold only under
a registration statement or exemption under the Securities Act. See "The Merger
- -- Restrictions on Sale of Shares By Affiliates of OptiCare and Vision
Twenty-One."
NO DISSENTERS' OR APPRAISAL RIGHTS
Under both Delaware and Florida law, stockholders of OptiCare and Vision
Twenty-One are not entitled to dissenters' or appraisal rights in connection
with the Merger. See "The Merger -- Appraisal Rights."
OPINIONS OF FINANCIAL ADVISORS
In deciding to approve the Merger, the Vision Twenty-One and OptiCare
boards of directors considered opinions, among other things, from each of their
financial advisors.
Legg Mason Wood Walker, Incorporated ("Legg Mason"), acted as OptiCare's
financial advisor, and delivered its opinion to the OptiCare board of directors
that the total consideration to be paid by OptiCare (including any assumed
debt) in the Merger is fair to OptiCare and its Stockholders from a financial
point of view. The full text of the written opinion of Legg Mason, dated
February 9, 2000, is attached as Appendix D to this Joint Proxy
Statement/Prospectus. You should read this opinion in its entirety. See "The
Merger -- Opinion of OptiCare Advisor."
PaineWebber Incorporated ("PaineWebber"), acted as Vision Twenty-One's
financial advisor, and delivered its opinion to the Vision Twenty-One board
that, as of February 9, 2000, the exchange ratio in the Merger was fair from a
financial point of view to Vision Twenty-One stockholders. The full text of the
written opinion of PaineWebber, dated February 9, 2000, is attached as Appendix
E to this Joint Proxy Statement/Prospectus. You should read this opinion in its
entirety. See "The Merger -- Opinion of Vision Twenty-One Advisor."
OWNERSHIP OF OPTICARE FOLLOWING THE MERGER
Based on the number of outstanding shares of Vision Twenty-One common
stock as of , 2000, following the Merger and an exchange ratio of one share
of Vision Twenty-One common stock for shares of OptiCare common stock, former
Vision Twenty-One stockholders will own approximately % of the outstanding
shares of OptiCare common stock.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The Vision Twenty-One and OptiCare boards of directors have determined
that the terms and conditions of the Merger are fair to, and in the best
interests of, their company's stockholders. The
3
<PAGE>
Vision Twenty-One board unanimously recommends that Vision Twenty-One
stockholders vote FOR approval of the Merger Agreement and the Merger, and the
OptiCare board unanimously recommends that OptiCare stockholders vote FOR
issuing the shares of OptiCare common stock in the Merger. See "The Merger --
Reasons for the Merger; Recommendations of Boards of Directors."
IRREVOCABLE PROXY AGREEMENTS
Vision Twenty-One Stockholders
The holders of a majority of the outstanding shares of Vision Twenty-One
common stock must approve the Merger Agreement and the Merger. Vision
Twenty-One stockholders are entitled to cast one vote per share of Vision
Twenty-One common stock owned at the close of business on , 2000. Under an
Irrevocable Proxy in the form attached as Appendix B to this Joint Proxy
Statement/Prospectus, Vision Twenty-One stockholders owning approximately %
of Vision Twenty-One's common stock, excluding any shares issuable upon the
exercise of options, outstanding as of , 2000 have agreed to vote all of
their shares of Vision Twenty-One common stock for approval of the Merger
Agreement and the Merger. See "The Merger Agreement and Related Agreements --
Irrevocable Proxy Agreements."
OptiCare Health Systems, Inc. Stockholders
The holders of a majority of the shares of OptiCare common stock entitled
to vote and that are present or represented by proxy at the OptiCare meeting
must approve the issuance of OptiCare common stock in the Merger. OptiCare
stockholders are entitled to cast one vote per share of OptiCare common stock
owned at the close of business on , 2000. Under an Irrevocable Proxy in the
form attached as Appendix C to this Joint Proxy Statement/Prospectus, OptiCare
stockholders owning approximately % of OptiCare's common stock, excluding
any shares issuable upon the exercise of options, outstanding as of ,
2000 have agreed to vote all of their shares of OptiCare's common stock for
approval of the Merger Agreement and the Merger. See "The Merger Agreement and
Related Agreements -- Irrevocable Proxy Agreements."
INTERESTS OF VISION TWENTY-ONE'S OFFICERS AND DIRECTORS IN THE MERGER
When considering the recommendation of the Vision Twenty-One board, Vision
Twenty-One stockholders should be aware that directors and officers of Vision
Twenty-One will have interests in the Merger that are different from, or in
addition to, those of Vision Twenty-One stockholders. If we complete the
Merger, certain directors and executive officers will be designated as members
of the Board of Directors and management of OptiCare. In addition, Vision
Twenty-One's existing employment agreements with its officers will be assumed
by OptiCare upon the consummation of the Merger. As a result, Vision
Twenty-One's directors and officers may be more likely to vote to approve the
Merger than Vision Twenty-One stockholders generally. See "The Merger --
Interests of Vision Twenty-One's Officers and Directors in the Merger."
CONDITIONS TO COMPLETION OF THE MERGER
We will complete the Merger only if we satisfy or waive several
conditions, some of which are:
o the registration statement relating to the issuance of shares of
OptiCare common stock as contemplated by the Merger Agreement must be
declared effective by the SEC;
o no order, writ, injunction or decree exists that makes the Merger
illegal or otherwise prohibits completion of the Merger;
o all material consents, approvals and authorization legally required to
consummate the Merger must have been obtained from all governmental
entities;
4
<PAGE>
o OptiCare must have obtained financing in an amount not less than
$30,000,000. See "The Merger--The Financing";
o OptiCare must enter into an amendment to its existing credit agreement
with a group of lenders represented by Bank Austria Creditanstalt
Corporate Finance, Inc. ("Bank Austria"), which consolidates the loans
of OptiCare under its existing credit facility with Bank Austria
together with the loans of Vision Twenty-One under its credit facility
with the Bank of Montreal, as agent for a consortium of banks ("Bank
of Montreal"), into one senior credit facility. See "The Merger
Agreement and Related Agreements -- Credit Facility Restructuring."
o all third-party consents required under any material contract must be
obtained;
o obtain the opinion from Shumaker, Loop & Kendrick, LLP , counsel to
Vision Twenty-One, that states the Merger will qualify as a tax-free
reorganization; and
o no change in or effect on the business of OptiCare or Vision
Twenty-One and their subsidiaries exists that, individually or in the
aggregate, is or is reasonably likely to be materially adverse to
their respective business, assets, liabilities, financial condition or
results of operations.
OptiCare's obligations to complete the Merger and the other transactions
contemplated by the Merger Agreement are subject to the satisfaction or waiver
of certain additional conditions before completion of the Merger, some of which
are :
o OptiCare must have entered into agreements with each of Bruce S.
Maller and Richard Lindstrom, M.D., both directors of Vision
Twenty-One, for continuation of their services;
o Vision Twenty-One shall have divested its business and assets relating
to Vision Twenty-One's ophthalmology and optometry practices and
Vision Twenty-One shall have received from all such practices a
release from all liabilities and obligations relating to such
practices except as the parties may agree with respect to the Talbert
practice in Arizona.
o Vision Twenty-One shall have received a release and waiver of all
non-compete restrictions contained in that certain Purchase Agreement,
dated June 4, 1999, among Block Vision Inc., Block Buying Group LLC
and Vision Twenty-One or otherwise resolved any issues relating
thereto to the satisfaction of OptiCare.
o Vision Twenty-One shall not have received any notice of default or
notice of cancellation under Vision Twenty-One's managed care
contracts which are reasonably likely to cause a material adverse
effect on Vision Twenty-One's managed care business.
If either of us waives any conditions, we will consider the facts and
circumstances at that time and determine whether completion of the Merger
requires a resolicitation of proxies from stockholders. See "The Merger
Agreement and Related Agreements -- Conditions to the Merger."
RESTRICTIONS ON ALTERNATIVE TRANSACTIONS
The Merger Agreement prohibits Vision Twenty-One from soliciting or
participating in discussions with third parties about transactions alternative
to the Merger, except under certain circumstances involving a superior
proposal. See "The Merger Agreement and Related Agreements -- No Solicitation
of Transactions."
TERMINATION OF THE MERGER AGREEMENT
We may mutually agree to terminate the Merger Agreement at any time before
the Merger is completed. The Merger Agreement may also be terminated by either
of us for several other reasons, some of which are:
5
<PAGE>
o if the conditions to completion of the Merger would not be satisfied
because of either (A) a breach of an agreement in the Merger Agreement
by the other party, (B) a breach of a representation or warranty of
the other party in the Merger Agreement, or (C) any other failure to
satisfy the conditions of the Merger, and the breaching party does not
take reasonable steps to cure the breach.
o if the Merger is not completed, without the fault of the terminating
party, by October 25, 2000;
o if a final court or governmental order prohibiting the Merger is
issued and is not appealable;
Furthermore, the Merger Agreement may be terminated by OptiCare if any of
the following occur:
o Vision Twenty-One's board withdraws or modifies in a manner adverse to
OptiCare its recommendation as to the Merger Agreement or the Merger,
or resolves to do so;
o Vision Twenty-One's board recommends a competing transaction to Vision
Twenty-One's stockholders;
o Vision Twenty-One fails to comply with the non-solicitation provisions
contained in the Merger Agreement, which are discussed in more detail
in "No Solicitation of Transactions;" or
o with respect to a competing transaction as described in more detail in
"No Solicitation of Transactions," Vision Twenty-One's board
recommends one of these transactions to its stockholders, fails to
recommend against its acceptance by its stockholders, fails to
reconfirm its approval and recommendation of the Merger with OptiCare
or determines that this competing transaction is superior and takes
permitted actions in furtherance of negotiating the transaction, or
resolves to do any of these.
See "The Merger Agreement and Related Agreements -- Termination of the
Merger Agreement."
TERMINATION FEE
Upon the event of certain circumstances, Vision Twenty-One has agreed to
pay OptiCare, a cash termination fee in the amount equal to the greater of 4%
or 2%, as the case may be, of the total enterprise value of (i) the transaction
contemplated in the Merger Agreement or (ii) a competing transaction or
superior proposal. In addition, Vision Twenty-One would be obligated to
reimburse OptiCare for its out-of-pocket expenses upon the event of certain
circumstances. See "The Merger Agreement and Related Agreements -- Payment of
Fees and Expenses."
ANTICIPATED ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for by OptiCare as a purchase of a business.
Under this method of accounting, the assets and liabilities of Vision
Twenty-One will be recorded at their estimated fair value, and any excess of
OptiCare's purchase price over such fair value will be accounted for as
goodwill. The results of operations and cash flows of Vision Twenty-One will be
included in OptiCare's financial statements from the date of consummation of
the Merger. See "The Merger -- Accounting Treatment."
COMPLIANCE WITH ANTITRUST LAWS
Pursuant to the requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), OptiCare and Vision
Twenty-One will each file a Notification and Report Form for review under the
HSR Act with the Federal Trade Commission (the "FTC") and the
6
<PAGE>
Antitrust Division of the Department of Justice (the "Antitrust Division"). The
waiting period under the HSR Act with respect to such filings will expire 30
days after such filings if no request for additional information is made by the
FTC and/or the Antitrust Division. The thirty (30) day waiting period may
terminate sooner if OptiCare and Vision Twenty-One are granted early
termination of the waiting period. See "The Merger -- Applicable Waiting
Periods and Regulatory Approvals."
OPTICARE HEALTH SYSTEMS, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data has been
derived from OptiCare's audited historical financial statements and should be
read in conjunction with the consolidated financial statements of OptiCare and
the notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere herein. OptiCare in
its present form is the result of mergers completed on August 13, 1999 among
Saratoga Resources, Inc., PrimeVision Health, Inc. and OptiCare Eye Health
Centers, Inc. For accounting purposes, PrimeVision Health was treated as the
accounting acquirer and, therefore, the predecessor business for historical
financial statement reporting purposes.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1999 (1) 1998 1997 1996 1995
---------- ---------- ------------ ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total net revenues ............................... $94,633 $ 64,612 $ 58,346 $ 52,157 $38,523
Income (loss) from continuing operations ......... 351 (3,239) (2,034) (767) (391)
Weighted average shares outstanding (2) .......... 4,777 2,256 1,856 693 --
Income (loss) from continuing operations
per share (3) ................................... $ (0.05) $ (2.54) $ (1.10) $ (1.11) $ --
</TABLE>
- ----------
(1) OptiCare acquired OptiCare Eye Health Centers, Inc. on August 13, 1999
and Cohen Systems, Inc. on October 1, 1999, which were accounted for as
purchases. Accordingly, the results of operations of OptiCare Eye Health
Centers and Cohen Systems, Inc. are included in the historical results of
operations since September 1, 1999 and October 1, 1999, respectively, the
deemed effective dates of the acquisitions for accounting purposes.
(2) The weighted average common shares outstanding have been adjusted to
reflect the conversion associated with the reverse merger with Saratoga.
(3) Income (loss) from continuing operations per share for 1999 and 1998 are
calculated after giving effect to preferred stock dividends.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ------------ ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net assets of discontinued operations .......... -- $ 5,582 $69,473 $13,845 --
Total current assets ........................... $21,345 20,237 18,274 20,306 $ 5,315
Total assets ................................... 66,740 26,556 86,397 26,296 11,873
Total current liabilities ...................... 20,654 51,198 8,289 4,138 2,941
Total debt (including current portion) ......... 43,148 39,976 46,536 22,273 6,895
Mandatorily redeemable preferred stock ......... -- 9,200 -- -- 40
Total stockholders' equity (deficit) ........... 5,274 (34,690) 4,546 4,683 23,036
</TABLE>
7
<PAGE>
VISION TWENTY-ONE, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected financial data with respect to Vision Twenty-One's
statements of operations for the years ended December 31, 1995, 1996, 1997,
1998 and 1999 and the balance sheet data as of December 31, 1995, 1996, 1997,
1998 and 1999 are derived from the audited Consolidated Financial Statements of
Vision Twenty-One. The results for the year ended December 31, 1999 are not
necessarily indicative of the results to be expected for future periods. The
following data should be read in conjunction with the Consolidated Financial
Statements of Vision Twenty-One and the related notes thereto and "Vision
Twenty-One Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Joint Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ------------ -------------
(In thousands except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Revenues:
Refractive and ambulatory surgery centers, net ......... $ -- $ -- $ -- $ 4,084 12,508
Managed care ........................................... 3,229 8,192 18,762 54,980 56,743
Buying group ........................................... -- -- 7,261 58,959 19,151
-------- -------- -------- --------- ------
Total Revenue ........................................ 3,229 8,192 26,023 118,023 88,402
-------- -------- -------- --------- ------
Operating expenses:
Refractive and ambulatory surgery center operating
expenses ............................................. -- -- -- 3,688 11,478
Medical claims ......................................... 3,350 9,475 14,090 42,159 42,444
Cost of buying group sales ............................. -- -- 6,882 55,926 18,261
General & administrative ............................... 1,342 3,114 7,807 18,434 27,889
Depreciation & amortization ............................ 23 81 519 2,500 3,047
Special items:
Restructuring and other charges (credits) ............ -- -- -- 6,463 (1,413)
Start-up and software development costs .............. -- -- -- 932 511
Merger costs ......................................... -- -- -- 718 --
Business development ................................. -- 1,927 -- -- --
-------- -------- -------- --------- ------
Total operating expenses ............................ 4,715 14,597 29,298 130,820 102,217
-------- -------- -------- --------- -------
Loss from operations .................................... (1,486) (6,405) (3,275) (12,797) (13,815)
Amortization of loan fees ............................... -- -- 179 314 2,401
Interest expense, net ................................... 12 147 934 4,085 5,551
Gain on sale of assets .................................. -- -- -- -- (518)
-------- -------- -------- --------- -------
Loss from continuing operations before income taxes
and minority interest .................................. (1,498) (6,552) (4,388) (17,196) (21,249)
Income taxes ............................................ -- -- -- -- --
Minority interest ....................................... -- -- -- -- (63)
-------- -------- -------- --------- -------
Loss from continuing operations ......................... (1,498) (6,552) (4,388) (17,196) (21,312)
Discontinued operations:
Income from discontinued operations .................... 682 905 4,794 11,127 3,951
Loss on disposal of discontinued operations ............ -- -- -- -- (65,722)
-------- -------- -------- --------- -------
Income (loss) before extraordinary items ............... (816) (5,647) 406 (6,069) (83,083)
Extraordinary item-gain on sale of EyeCare One
Corp. .................................................. -- -- -- -- 3,770
Extraordinary item-early extinguishment of debt ......... -- -- (323) (1,886) --
-------- -------- -------- --------- -------
Net income (loss) ....................................... $ (816) $ (5,647) $ 83 $ (7,955) $ (79,313)
======== ======== ======== ========= =========
Income (loss) from continuing operations ................ $ (0.43) $ (1.65) $ (0.55) $ (1.20) $ (1.39)
Discontinued operations:
Income from discontinued operations .................... $ 0.19 $ 0.23 $ 0.60 $ 0.78 $ 0.26
Loss on disposal of discontinued operations ............ -- -- -- -- $ (4.28)
-------- -------- -------- --------- ---------
Income (loss) before extraordinary items ............... ( .24) (1.42) .05 ( .42) (5.41)
Extraordinary item-gain on sale of EyeCare One
Corp. .................................................. -- -- -- -- $ 0.25
Extraordinary item-early extinguishment of debt ......... -- -- $ (0.04) $ (0.13) --
-------- -------- -------- --------- ---------
Net income (loss) per common share ...................... $ (0.24) $ (1.42) $ 0.01 $ (0.55) $ (5.16)
======== ======== ======== ========= =========
Weighted average number of common shares
outstanding ............................................ 3,434 3,978 8,571 14,385 15,309
======== ======== ======== ========= =========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------ ---------- ---------- -------------
(In thousands except per share data)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (1):
Working capital (deficit) .................... $ (1,237) $ (2,303) $ 4,868 $ 7,134 $ (57,108)
Total assets ................................. 3,485 20,576 119,380 119,677 84,879
Long-term debt and capital lease obligations,
including current maturities ................ 363 5,196 24,475 83,530 58,534
Total stockholders' equity (deficit) ......... (289) 3,624 67,731 73,722 (2,750)
</TABLE>
- ----------
1. Data has been restated as a result of the use of the pooling of interests
method of accounting for the March 1998 acquisitions of EyeCare One Corp.
and Vision Insurance Plan of America, Inc. and the use of discontinued
operations treatment of accounting for the financial condition and results
of operation of the retail optical chains and physician practice management
businesses.
9
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The selected unaudited pro forma combined financial data of the combined
company has been derived from the audited financial statements of OptiCare and
Vision Twenty-One and gives effect to the Merger as if it had been completed on
January 1, 1999 for income statement purposes and on December 31, 1999 for
balance sheet purposes. The pro forma combined financial information should be
read in conjunction with the unaudited pro forma combined financial statements
and related notes, which are included elsewhere in this Joint Proxy
Statement/Prospectus.
The total estimated purchase cost of Vision Twenty-One has been allocated
on a preliminary basis to assets and liabilities based on management's best
estimates of their fair value with the excess costs over the net assets
acquired allocated to goodwill. This allocation is subject to change pending a
final analysis of the total purchase cost and the fair value of the assets
acquired and liabilities assumed.
The unaudited pro forma combined information is presented for
informational purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the transaction had
been consummated at the times indicated, nor is it necessarily indicative of
future operating results or the financial condition of OptiCare.
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31, 1999
--------------------------------------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<S> <C>
STATEMENT OF OPERATIONS DATA:
Total net revenues ..................................................... $ 198,876
Loss from continuing operations ........................................ (11,575)
Weighted average shares outstanding -- basic and diluted ............... 18,543,557
Loss from continuing operations per share -- basic and diluted ......... (0.72)
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1999
------------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Total current assets ........................... $ 32,789
Total assets ................................... 161,111
Total current liabilities ...................... 32,190
Total debt (including current portion) ......... 66,462
Total stockholders' equity ..................... 65,720
</TABLE>
10
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth (a) historical net loss per share and
historical book value per share data of OptiCare; (b) historical net loss per
share and historical book value per share data of Vision Twenty-One; (c)
unaudited pro forma combined net loss per share and unaudited pro forma
combined book value per share data of OptiCare after giving effect to the
Merger and (d) unaudited equivalent pro forma condensed combined book value per
share data of Vision Twenty-One based on an assumed exchange ratio of .402 of a
share of OptiCare common stock for each share of Vision Twenty-One common
stock.
The information in the table should be read in conjunction with the
financial statements of OptiCare and Vision Twenty-one and the related notes and
the unaudited pro forma combined financial statements and related notes included
elsewhere in this Joint Proxy Statement/Prospectus. The unaudited pro forma
combined financial information is not necessarily indicative of the net loss per
share or book value per share that would have been achieved had the Merger been
consummated as of the beginning of the periods presented and should not be
construed as representative of these amounts for any future dates or periods.
<TABLE>
<CAPTION>
HISTORICAL(1)
--------------------------- PRO FORMA VISION
VISION CONDENSED TWENTY-ONE
OPTICARE TWENTY-ONE COMBINED(2) EQUIVALENT(2)
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Loss from continuing operations per
common share -- basic and diluted
for the year ended
December 31, 1999 ................ $ (0.05) $ (1.39) $ (0.72) $ (0.56)
Book value (deficit) per share at
December 31, 1999 (3) ............ $ 0.59 $ (0.18) $ 1.62 $ (0.07)
</TABLE>
- ----------
(1) Per share historical amounts are derived directly from the historical
audited financial statements of OptiCare and Vision Twenty-One included
elsewhere herein.
(2) The Vision Twenty-One equivalent pro forma condensed combined per share
amounts are calculated by multiplying the pro forma condensed combined
book value per share amounts by an assumed exchange ratio of .402 of a
share of OptiCare common stock for each share of Vision Twenty-One common
stock.
(3) The pro forma condensed combined book value per share is calculated after
giving effect to the $30 million of preferred stock.
11
<PAGE>
MARKET PRICE INFORMATION
OPTICARE
You should evaluate the following information about the market prices of
our common stock in light of the material and substantial qualitative changes
in our business that became effective upon the closing of the mergers of the
company with PrimeVision Health and OptiCare Eye Health Centers, on August 13,
1999. Among other changes, Saratoga Resources, Inc., a Delaware corporation,
effected a 0.06493-for 1 reverse stock split on August 13, 1999, (ii) Saratoga
spun off to its stockholders of record prior to the mergers, the capital stock
of certain subsidiaries, and (iii) we issued approximately 8.7 million shares
of post-reverse-split common stock to effectuate the mergers. The prices
reported below for periods ending on or before August 13, 1999, have been
adjusted to reflect the reverse stock split.
Commencing August 16, 1999, our common stock has been listed on the
American Stock Exchange and is traded under the symbol "OPT" (or, from August
16 through September 20, 1999, under the symbol "OPTWI"). Prior to August 16,
1999, our common stock was not listed on any stock exchange, but quotations
from time to time were reported by the NASD on the OTC Bulletin Board under the
symbol "SRIK."
The high and low prices for the period from August 16, 1999, through May
1, 2000, are based on trades effected on the American Stock Exchange. The range
of high and low bid information for the shares of our common stock for 1997 and
1998, and for January 1, 1999 through August 13, 1999, as set forth below, was
reported by the National Quotation Bureau. Such quotations represent prices
between dealers, do not include retail markup, markdown or commission, and may
not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
2000 ---------- ----------
<S> <C> <C>
2nd Quarter (through May 1, 2000) .......... $ 3.50 $ 2.75
1st Quarter ................................ $ 4.13 $ 3.00
1999
4th Quarter ................................ $ 5.00 $ 2.75
3rd Quarter*:
August 16--September 30* .................. $ 12.50 $ 5.00
July 1--August 13** ....................... 0.106 0.037
2nd Quarter ................................ 0.067 0.004
1st Quarter ................................ 0.004 0.004
1998
4th Quarter ................................ 0.016 0.004
3rd Quarter ................................ 0.016 0.016
2nd Quarter ................................ 0.073 0.012
1st Quarter ................................ 0.012 0.012
1997
4th Quarter ................................ 0.073 0.004
3rd Quarter ................................ 0.014 0.006
2nd Quarter ................................ 0.014 0.006
1st Quarter ................................ 0.018 0.006
</TABLE>
- ----------
* The range of prices and quotations in the 3rd Quarter of 1999 is reported
separately for periods ending on or before August 13, 1999, which is the
last trading day before the reverse stock split and the mergers of
OptiCare Eye Health Centers and PrimeVision Health became effective.
** Quotations for all periods ending on or before August 13, 1999, have been
adjusted to give effect to a 1-for-0.06493 reverse stock split that
became effective at the close of business on August 13, 1999.
As of May 1, 2000, OptiCare had approximately 196 stockholders of record.
12
<PAGE>
VISION TWENTY-ONE
Vision Twenty-One's common stock has historically been trading publicly
under the symbol "EYES" on the Nasdaq National Market since Vision Twenty-One's
initial public offering on August 18, 1997 and currently trades under the
symbol "EYESE". Prior to Vision Twenty-One's initial public offering, there was
no active trading market for Vision Twenty-One's common stock. The following
table sets forth the high and low closing sale price of Vision Twenty-One'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
2000 --------- ---------
<S> <C> <C>
Second Quarter (through May 1, 2000) ............... 1.50 0.47
First Quarter ...................................... 2.84 1.06
1999
Fourth Quarter ..................................... 6.38 1.38
Third Quarter ...................................... 10.06 4.88
Second Quarter ..................................... 8.75 3.44
First Quarter ...................................... 5.25 3.50
1998
Fourth Quarter ..................................... 7.13 3.63
Third Quarter ...................................... 7.00 4.63
Second Quarter ..................................... 11.63 6.38
First Quarter ...................................... 11.75 8.25
1997
Fourth Quarter ..................................... 14.38 7.25
Third Quarter (beginning August 18, 1997) .......... $ 14.63 $ 9.00
</TABLE>
As of April 28, 2000, Vision Twenty-One had approximately 243 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.
RECENT CLOSING PRICES
As of February 9, 2000, the last trading day before announcement of the
proposed Merger, the closing price per share on the Nasdaq National Market of
OptiCare common stock was $3.50 and of Vision Twenty-One common stock was
$1.98. On , 2000, the latest practicable trading day before the printing of
this Joint Proxy Statement/Prospectus, the closing price per share of OptiCare
common stock was $ and of Vision Twenty-One was $ .
Because the market price of OptiCare common stock is subject to
fluctuation, the market value of the shares of OptiCare common stock that
holders of Vision Twenty-One common stock will receive in the Merger may
increase or decrease prior to and following the Merger. WE URGE STOCKHOLDERS TO
OBTAIN CURRENT MARKET QUOTATIONS FOR OPTICARE COMMON STOCK AND VISION
TWENTY-ONE COMMON STOCK. WE CANNOT ASSURE YOU AS TO THE FUTURE PRICES OR
MARKETS FOR OPTICARE COMMON STOCK OR VISION TWENTY-ONE COMMON STOCK.
13
<PAGE>
DIVIDEND POLICY
OPTICARE
The holders of OptiCare common stock are entitled to share ratably in any
dividends OptiCare declares on its common stock. OptiCare has never paid any
cash dividends on its common stock and OptiCare does not intend to pay any cash
dividends for the foreseeable future. OptiCare expects to continue to retain
any earnings for repayment of indebtedness, working capital, capital
expenditures and general corporate purposes. OptiCare's credit facility
restricts it from declaring or paying any cash dividends or making any other
payment or distribution on account of its capital stock.
VISION TWENTY-ONE
The holders of Vision Twenty-One common stock are entitled to share
ratably in any dividends Vision Twenty-One declares on its common stock. Vision
Twenty-One has never paid any cash dividends on its common stock and Vision
Twenty-One does not intend to pay any cash dividends for the foreseeable
future. Vision Twenty-One expects to continue to retain any earnings for
repayment of indebtedness, working capital, capital expenditures and general
corporate purposes. Vision Twenty-One's credit facility restricts it from
declaring or paying any cash dividends or making any other payment or
distribution on account of its capital stock.
14
<PAGE>
RISK FACTORS
By voting in favor of the Merger, Vision Twenty-One stockholders will be
choosing to invest in OptiCare common stock. An investment in OptiCare common
stock involves a high degree of risk. In addition to the other information
contained in this Joint Proxy Statement/Prospectus, you should carefully
consider the following risk factors in deciding whether to vote for the Merger.
If any of the matters described in the following risks actually occur, the
business and prospects of Vision Twenty-One or OptiCare may be seriously
harmed. In this case, the trading price of OptiCare common stock may decline,
and you may lose all or part of your investment.
RISKS RELATED TO THE MERGER
VISION TWENTY-ONE STOCKHOLDERS WILL RECEIVE A FIXED NUMBER OF SHARES OF
OPTICARE COMMON STOCK AND AS A RESULT, THEY WILL BEAR ALL THE MARKET RISK OF A
DECREASE OF THE VALUE OF OPTICARE SHARES ISSUED IN THE MERGER.
Upon the Merger's completion, each share of Vision Twenty-One common stock
will be exchanged for approximately shares of OptiCare common stock. There
will be no adjustment for changes in the market price of either Vision
Twenty-One common stock or OptiCare common stock. In addition, neither Vision
Twenty-One nor OptiCare may terminate the Merger Agreement or "walk away" from
the Merger or resolicit the vote of its stockholders solely because of changes
in the market price of OptiCare common stock. Accordingly, the specific dollar
value of OptiCare common stock that Vision Twenty-One stockholders will receive
upon the Merger's completion will depend on the market value of OptiCare common
stock when the Merger is completed and may decrease from the date you submit
your proxy. The share price of OptiCare common stock is by nature subject to
the general price fluctuations in the market for publicly traded equity
securities and has experienced significant volatility. We urge you to obtain
recent market quotations for OptiCare common stock and Vision Twenty-One common
stock. OptiCare cannot predict or give any assurances as to the market price of
OptiCare common stock at any time before or after the completion of the Merger.
For historical and current market prices of OptiCare shares, see "Summary of
the Joint Proxy Statement/Prospectus -- Market Price Information -- OptiCare."
Also see "-- The price of OptiCare's common stock may be volatile, which could
affect the stockholders' return on investment and our ability to use our stock
to acquire other companies."
IF WE DO NOT SUCCESSFULLY INTEGRATE VISION TWENTY-ONE'S OPERATIONS AND
PERSONNEL OR EFFECTIVELY MANAGE THE COMBINED COMPANY, WE MAY NOT ACHIEVE THE
BENEFITS OF THE MERGER, MAY LOSE KEY PERSONNEL AND CUSTOMERS AND EXPERIENCE
LOSSES AND SUCH FAILURE COULD RESULT IN A MATERIAL ADVERSE EFFECT TO THE
COMBINED COMPANIES BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We entered into the Merger Agreement with the expectation that the Merger
will result in significant benefits. Achieving the benefits of the Merger
depends on the timely, efficient and successful execution of a number of
post-Merger events, including integrating the operations, systems and personnel
of the two companies managed care business. We will need to overcome
significant issues, however, in order to realize any benefits or synergies from
the Merger. The successful execution of these post-Merger activities will
involve considerable risk and may not be successful. Furthermore, Vision
Twenty-One's and OptiCare's corporate and managed care offices are widely
dispersed in different locations which could hinder OptiCare's integration
efforts. The failure of OptiCare to complete the integration successfully and
on a timely basis could result in the loss of key personnel and customers and
result in a material adverse effect to the combined companies business,
financial condition and results of operations.
IF OPTICARE DOES NOT SUCCESSFULLY INTEGRATE VISION TWENTY-ONE OR THE MERGER'S
BENEFITS DO NOT MEET THE EXPECTATIONS OF FINANCIAL OR INDUSTRY ANALYSTS, THE
MARKET PRICE FOR OPTICARE'S COMMON STOCK MAY DECLINE.
15
<PAGE>
The market price of OptiCare common stock may decline as a result of the
Merger, if any of the following occurs:
o the integration of OptiCare and Vision Twenty-One is unsuccessful;
o OptiCare does not achieve the perceived benefits of the Merger if any,
or as rapidly or to the extent anticipated by OptiCare or by financial
or industry analysts; or
o the effect of the Merger on OptiCare's financial results is not
consistent with OptiCare's expectations or the expectations of
financial or industry analysts.
VISION TWENTY-ONE'S OFFICERS AND DIRECTORS HAVE CONFLICTS OF INTEREST THAT MAY
INFLUENCE THEM TO SUPPORT OR APPROVE THE MERGER.
The directors and officers of Vision Twenty-One participate in
arrangements and have continuing indemnification against liabilities that
provide them with interests in the Merger that are different from, or in
addition to, yours. The directors and officers of Vision Twenty-One could
therefore be more likely to vote to approve the Merger Agreement than if they
did not hold these interests. Vision Twenty-One stockholders should consider
whether these interests may have influenced these directors and officers to
support or recommend the Merger. See "The Merger -- Interests of Vision
Twenty-One's Officers and Directors in the Merger."
UNCERTAINTIES ASSOCIATED WITH THE MERGER MAY CAUSE VISION TWENTY-ONE TO LOSE
CONTRACTS.
The parties to Vision Twenty-One's managed care contracts may be reluctant
to continue their arrangements with the combined company. The loss of contracts
could have a material adverse effect on both Vision Twenty-One and OptiCare.
FAILURE TO COMPLETE THE MERGER COULD NEGATIVELY IMPACT VISION TWENTY-ONE'S
STOCK PRICE AND OPERATING RESULTS.
If the Merger is not completed for any reason, Vision Twenty-One may be
subject to a number of material risks, including the following:
o Vision Twenty-One may be required to pay OptiCare a termination fee
and reimburse OptiCare for expenses and may be financially unable to
do so unless it raises additional financing, see "The Merger Agreement
and Related Agreements -- Payment of Fees and Expenses;"
o the price of Vision Twenty-One common stock may decline to the extent
that the current market price of Vision Twenty-One common stock
reflects a market assumption that the Merger will be completed;
o costs related to the Merger, such as legal and accounting fees, must
be paid even if the Merger is not completed;
o Vision Twenty-One's lender under its credit facility may refuse to
continue to fund its operations and could foreclose on its security
interest in Vision Twenty-One's assets;
o Vision Twenty-One will need significant additional capital to operate
its business and might not be able to successfully raise the necessary
capital to continue its operations;
o Vision Twenty-One could continue to incur significant operating and
net losses;
o Vision Twenty-One will likely fail to maintain the listing of its
common stock on Nasdaq and its common stock may end up trading on the
NASD Electronic Bulletin Board, the "pink sheets," or not having an
active trading market for its stock.
o Vision Twenty-One could lose its managed care contracts; and
o Vision Twenty-One's creditors and vendors could refuse to continue to
do business with Vision Twenty-One.
16
<PAGE>
If the Merger is terminated and Vision Twenty-One's board of directors
determines to seek another merger or business combination, there can be no
assurance that it will be able to find a partner willing to pay an equivalent
or more attractive price than the price to be paid in the Merger. In addition,
while the Merger Agreement is in effect, under certain circumstances Vision
Twenty-One is prohibited from soliciting, initiating or encouraging or entering
into extraordinary transactions, such as a merger, sale of assets or other
business combination, with any party other than OptiCare. As a result of this
prohibition, Vision Twenty-One will be precluded from discussing potential
transactions should the Merger not occur, and may lose an opportunity for a
transaction with another potential partner at a favorable price if the Merger
is not completed.
UNCERTAINTIES ASSOCIATED WITH THE MERGER MAY CAUSE VISION TWENTY-ONE TO LOSE
KEY PERSONNEL.
In accordance with Vision Twenty-One's previously announced plans to close
its Largo, Florida operations, a significant number of Vision Twenty-One
employees have left their employment since the Merger was announced in February
2000. Vision Twenty-One expects further attrition over the coming months as it
concludes the Merger. Current and prospective Vision Twenty-One employees may
experience uncertainty about their future roles with OptiCare. Such uncertainty
has and will continue to adversely affect Vision Twenty-One's ability to
attract and retain key management, sales, marketing and technical personnel.
The loss of Vision Twenty-One employees could have a material adverse effect on
OptiCare.
OPTICARE RISKS
IF OPTICARE FAILS TO EXECUTE ITS GROWTH STRATEGY, OPTICARE MAY NOT SUSTAIN ITS
PROFITABILITY AND MAY INCUR LOSSES IN THE FUTURE.
OptiCare's growth strategy depends in part on its ability to expand and
successfully implement its laser vision correction business, including
implementation of the OptiCare Laser Advantage (Trade Mark) program.
OptiCare's growth strategy also requires successful sales results and
operational execution in its managed care business. OptiCare's growth strategy
has resulted in, and will continue to result in, new and increased
responsibilities for management and additional demands on management, operating
and financial systems and resources. OptiCare's ability to continue to expand
will also depend upon its ability to hire and train new staff and managerial
personnel, and adapt OptiCare's structure to comply with present or future
legal requirements affecting OptiCare's arrangements with ophthalmologists and
optometrists. If OptiCare is unable to implement these and other requirements,
its business, financial condition, results of operations and ability to achieve
and sustain profitability could be materially adversely affected. For more
information, see "Business of OptiCare."
OPTICARE HAS A HISTORY OF LOSSES AND MAY INCUR FURTHER LOSSES IN THE FUTURE.
Although OptiCare had income from continuing operations of $351,000 for
the year ended December 31, 1999 and income from continuing operations of
$139,000 for the fourth quarter of 1999, on a pro forma basis giving effect to
the mergers of PrimeVision Health and OptiCare Eye Health Centers and related
transactions, OptiCare had losses from continuing operations for the year ended
December 31, 1999 of approximately $186,000. Vision Twenty-One had losses from
continuing operations of $21,313,000 for the year ended December 31, 1999. On a
pro forma basis giving effect to the mergers of PrimeVision Health and OptiCare
Eye Health Systems and related transactions, as well as, the proposed Merger
with Vision Twenty-One, the losses from continuing operations for the year
ended December 31, 1999 were approximately $11,575,000. See "Summary of the
Joint Proxy Statement/Prospectus--Selected Unaudited Pro Forma Combined
Financial Data." OptiCare cannot assure that it will not incur further or more
substantial losses in the future.
IF OPTICARE IS UNABLE TO OBTAIN ADDITIONAL CAPITAL, OPTICARE'S GROWTH AND
OPERATIONS COULD BE LIMITED.
If OptiCare does not generate sufficient cash from its operations,
OptiCare may need to obtain additional capital in order to successfully
implement its growth strategy and to finance its continued
17
<PAGE>
operations. Additional capital may not be available to OptiCare and if it is,
it may not be on terms that are favorable to OptiCare or sufficient for its
needs. OptiCare's failure to obtain additional capital on favorable terms or at
all may have a material adverse effect on OptiCare's business, financial
condition and results of operations.
SUBSTANTIAL INDEBTEDNESS; IF OPTICARE DEFAULTS ON ITS DEBT, OPTICARE'S
CREDITORS COULD FORECLOSE ON ITS ASSETS.
OptiCare's outstanding indebtedness under its credit facility as of May 1,
2000 was approximately $30.6 million. Substantially all of OptiCare's assets
are pledged to secure this indebtedness. In addition, as of May 1, 2000,
OptiCare has approximately $3.6 million of unsecured subordinated debt. Vision
Twenty-One's outstanding indebtedness under its credit facility as of May 1,
2000 was approximately $57.5 million. Substantially all of Vision Twenty-One's
assets are pledged to secure this indebtedness. In addition, as of May 1, 2000,
Vision Twenty-One has approximately $5.6 million of unsecured subordinated
debt.
It is a condition to the Merger that OptiCare shall have entered into an
amendment to its existing credit agreement to consolidate the loans of OptiCare
under its existing credit facility together with the loans of Vision Twenty-One
under its credit facility with Bank of Montreal into one senior secured credit
facility.
Upon closing of the Merger, OptiCare anticipates consolidated bank
indebtedness of approximately $59.8 million and net equity of approximately
$65.7 million. In addition to the anticipated bank debt described above, the
combined company will have approximately $6.7 million of unsecured subordinated
debt subject to market interest rates. The resulting total indebtedness will
therefore be approximately $66.5 million.
If OptiCare defaults on the financial covenants in its credit facility,
OptiCare's lender could foreclose on its security interest in OptiCare's
assets, which would have a material adverse effect on OptiCare's business,
financial condition and results of operations. See "OptiCare Management's
Discussion and Analysis of Financial Condition and Results of Operations," "The
Merger Agreement and Related Agreements -- Credit Facility Restructuring,"
"Business of OptiCare -- Credit Facility," and "Business of Vision Twenty-One
- -- Credit Facilities."
OPTICARE MAY HAVE DIFFICULTY COMPLETING THE INTEGRATION OF THE OPERATIONS AND
REALIZING BENEFITS FROM THE PREVIOUS MERGERS OF PRIMEVISION HEALTH AND OPTICARE
EYE HEALTH CENTERS.
OptiCare may not be able to successfully complete the integration of the
operations of PrimeVision Health and OptiCare Eye Health Centers without
encountering difficulties or experiencing the loss of key employees, potential
customers or suppliers. If OptiCare does not successfully complete the
integration of the two companies, or if the effort requires greater time or
resources than OptiCare has anticipated, OptiCare may not realize the expected
benefits from the mergers, and this could have a material adverse effect on
OptiCare's business, financial condition, and results of operations. See
"Business of OptiCare -- Formation and History."
OPTICARE MAY NOT COMPETE EFFECTIVELY WITH OTHER EYE CARE SERVICES COMPANIES
THAT HAVE MORE RESOURCES AND EXPERIENCE THAN IT DOES.
Some of OptiCare's competitors have substantially greater financial,
technical, managerial, marketing and other resources and experience than
OptiCare and, as a result, may compete more effectively than OptiCare. OptiCare
competes with other businesses, including other eye care services companies,
hospitals, individual ophthalmology and optometry practices, other ambulatory
surgery and laser vision correction centers, managed care companies, eye care
clinics and providers of retail optical products. Companies in other health
care industry segments, including managers of hospital-based medical
specialties or large group medical practices, may become competitors in
providing surgery and laser centers as well as competitive eye care-related
services. OptiCare's failure to compete effectively with these and other
competitors, could have a material adverse effect on its business, financial
condition and results of operations. See "Business of OptiCare -- Competition."
18
<PAGE>
LOSS OF THE SERVICES OF KEY MANAGEMENT PERSONNEL COULD ADVERSELY AFFECT OUR
BUSINESS.
OptiCare's success, in part, depends upon the continued services of Dean
J. Yimoyines, M.D., who is OptiCare's chairman, president and chief executive
officer. OptiCare believes that the loss of the services of Dr. Yimoyines could
have a material adverse effect on its business, financial condition and results
of operations. OptiCare has an employment agreement with Dr. Yimoyines having a
three year term, subject to certain early termination provisions, which is
renewable for subsequent terms. In addition, OptiCare has employment agreements
with Dean J. Yimoyines and other executive officers that require lump sum
payments to be made upon the event of a change in control of OptiCare. These
change in control payments could deter takeover bids even if those bids are in
the stockholders' best interests. For more information on the employment
agreements, see "OptiCare's Management -- Employment Agreements with Certain
Officers."
LASER VISION CORRECTION MAY NOT ACHIEVE GREATER CONSUMER ACCEPTANCE OR THE
PRICE TO CONSUMERS MAY BE SUBSTANTIALLY REDUCED.
The profitability and expansion of OptiCare's Laser Correction and
Professional Services division may be materially adversely affected if laser
vision correction is not increasingly accepted by consumers or the price
charged for such procedure continues to decrease which could have a material
adverse effect on our operating margins. OptiCare cannot be certain that laser
vision correction will become more widely accepted by the general public as an
alternative to existing methods of treating refractive vision disorders, i.e.,
principally nearsightedness, farsightedness and astigmatism. Several factors
may inhibit laser vision correction from achieving broad market acceptance,
including:
o the cost, particularly since laser vision correction patients are
generally billed directly and not reimbursed by third party payors;
o the effectiveness of current and future alternative methods of
correcting refractive vision disorders, including contact lenses and
eye glasses;
o concerns about safety and effectiveness, including uncertainty about
long-term side-effects;
o general resistance to surgery; and
o unfavorable publicity involving laser vision correction procedures.
For more information, see "Business of OptiCare -- The Eye Care
Industry."
NEW TECHNOLOGICAL ADVANCES MAY MATERIALLY ADVERSELY AFFECT OPTICARE'S GROWTH
STRATEGY.
New technological advances in the treatment of vision disorders that are
comparable or superior to laser vision correction could materially harm
OptiCare's growth strategy. If such advances become readily available and
accepted, OptiCare may have to quickly make adjustments to the OptiCare Laser
Advantage (Trade Mark) program in order to remain competitive. OptiCare may
not be able to make all necessary adjustments, and the adjustments could also
require additional capital expenditures for which funds might not be available,
which could have a material adverse effect on OptiCare's business, financial
condition and results of operations. See "Business of OptiCare." OptiCare
depends on limited sources of excimer lasers and related products and
equipment, shortages of these products could hinder our ability to increase our
procedure volume. Furthermore, should excimer lasers become more widely
available it may result in downward pressure on prices which may lower the cost
after we have invested in it at higher prices. This in turn may enable
OptiCare's competitors to compete with it on the basis of price and may reduce
or eliminate our gross margins.
OptiCare currently uses one laser supplier, Summit Technologies, Inc., for
excimer lasers and related refractive-surgery equipment on the OptiCare Laser
Advantage (Trade Mark) program. OptiCare plans to utilize other laser
manufacturers for the program, but OptiCare has not yet executed any agreements
with other manufacturers. If Summit became unable or unwilling to supply
OptiCare with excimer lasers and the related equipment, to repair parts or to
provide services, OptiCare's business could be materially adversely affected.
Vision Twenty-One has established a relationship with VISX, Inc., another
supplier of excimer lasers. Although VISX, Inc. has indicated a willingness to
provide lasers to OptiCare at competitive prices after the Merger, there can be
no assurance at this time that this arrangement can be consummated. To
OptiCare's knowledge, only a few companies have been
19
<PAGE>
approved by the United States Food and Drug Administration for commercial sale
of excimer lasers in the U.S. If any of these manufacturers were for any reason
to discontinue commercial sale of excimer lasers, or be unwilling or unable to
meet OptiCare's excimer laser and other equipment needs, we may not be able to
equip our centers with the appropriate technology or operate the OptiCare Laser
Advantage (Trade Mark) program. For more information, see "Business of
OptiCare -- Description of Business Divisions."
IF OPTICARE FAILS TO NEGOTIATE CAPITATED FEE ARRANGEMENTS WHICH BECOME
PROFITABLE, THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON ITS RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
Under some managed care contracts, known as "capitation" contracts,
OptiCare or any other health care providers accept a fixed payment per member
per month, whether or not a person covered by a managed care plan receives any
services, but OptiCare is obligated to provide all necessary covered services
to the patients covered under the agreement. Many of these contracts pass part
of the financial risk of providing care from the payor, i.e., an HMO, health
insurer, employee welfare plan or self-insured employer, to the provider. The
growth of capitation contracts in markets which we serve could result in less
certainty with respect to profitability and requires a higher level of
actuarial acumen in evaluating such contracts. OptiCare does not know whether
it will be able to continue to negotiate arrangements on a capitated or other
risk-sharing basis which prove to be profitable, or to pass the financial risks
of providing care to other parties, or to accurately predict utilization or the
costs of rendering services. In addition, changes in federal or state
regulations of these contracts may limit our ability to transfer financial
risks away from us. Any such developments could have a material adverse effect
on our business, financial condition and results of operations. For more
information, see "Business of OptiCare -- Description of Business Divisions."
OPTICARE HAS POTENTIAL CONFLICTS OF INTERESTS FROM RELATED PARTY TRANSACTIONS
WHICH COULD RESULT IN CERTAIN OF OPTICARE'S OFFICERS, DIRECTORS AND KEY
EMPLOYEES HAVING INTERESTS THAT DIFFER FROM OPTICARE AND ITS STOCKHOLDERS.
There are contractual agreements between OptiCare and entities owned or
controlled by several of its officers, directors and key employees, which
agreements could create the potential for possible conflicts of interests for
such individuals. For a discussion of those agreements, see "OptiCare Certain
Relationships and Related Transactions."
A WRITE-OFF OF INTANGIBLE ASSETS WOULD ADVERSELY AFFECT OPTICARE'S RESULTS OF
OPERATIONS.
At December 31, 1999, intangible assets represented approximately 49% of
total assets and this percentage is expected to increase as a result of the
Merger. The intangible asset value represents the excess of cost over the fair
value of the separate tangible net assets acquired in various transactions. As
a result of the Merger, the percentage of intangible assets is expected to
increase along with the corresponding amortization expense which will have a
negative impact on earnings. These intangible assets are generally amortized on
a straight line basis over an expected useful of 25 years. If, in the future,
we determine that our unamortized intangible assets have suffered an impairment
which requires us to write off a large portion of unamortized intangible assets
due to a change in events or circumstances, this write-off would significantly
reduce our total assets, may place us in default under the terms of our credit
facility, and result in a substantial charge to earnings. See "Summary of the
Joint Proxy Statement/Prospectus--Selected Unaudited Pro Forma Combined
Financial Data."
YOU MAY BE DILUTED IN CONNECTION WITH THE VISION TWENTY-ONE MERGER AND IN THE
FUTURE IF OPTICARE ISSUES STOCK TO FINANCE WORKING CAPITAL, ACQUISITIONS OR
OTHER NEEDS.
OptiCare may in the future determine that it needs additional funding for
expansion of our laser correction surgery business, for general working
capital, or for other needs for capital. OptiCare may in the future want to
issue common stock to raise cash needed for working capital or to make
acquisitions. OptiCare does not have any plans or proposals under consideration
that would require the issuance of additional common stock in the next 12
months other than in connection with the proposed Vision Twenty-One
transaction, the financing contemplated in connection with the Merger,
20
<PAGE>
and pursuant to its performance stock program and employee stock plans.
However, OptiCare would consider an appropriate opportunity if it is presented
in the future. See "The Merger -- The Financing."
THE PRICE OF OPTICARE'S COMMON STOCK MAY BE VOLATILE, WHICH COULD EFFECT THE
STOCKHOLDERS' RETURN ON INVESTMENT AND OUR ABILITY TO USE OUR STOCK TO ACQUIRE
OTHER COMPANIES.
The market price of OptiCare's common stock has been subject to
significant fluctuations, and OptiCare expects it to continue to be subject to
such fluctuations after the Merger. OptiCare believes the current reasons for
these fluctuations include the relatively thin level of trading in our stock,
and the relatively low public float. The public float will increase
significantly after the Merger which could result in additional volatility. In
addition, the influx into the market of a significant number of OptiCare shares
currently subject to lock-up agreements could affect the price of OptiCare
common stock. Variations in financial results, announcements of material events
by OptiCare or its competitors, OptiCare's quarterly operating results, changes
in general conditions in the economy or the health care industry, or other
developments affecting OptiCare or its competitors, could cause the market
price of the common stock to fluctuate substantially. The equity markets have
on occasion experienced significant price and volume fluctuations that have
affected the market prices for many companies' securities, and sometimes such
fluctuations have been unrelated to the operating performance of these
companies. Concern about the potential effects of health care reform measures
has contributed to the volatility of stock prices of companies in health care
and related industries and may similarly affect the OptiCare common stock. The
volatility of the OptiCare common stock price could affect your return on
investment as well as OptiCare's ability to acquire other companies or
businesses in exchange for the OptiCare common stock. See "Summary of the Joint
Proxy Statement/Prospectus -- Market Price Information."
OPTICARE'S BOARD OF DIRECTORS HAVE THE AUTHORITY TO ISSUE PREFERRED STOCK,
WHICH COULD DETER TAKEOVER BIDS EVEN IF THOSE BIDS ARE IN THE STOCKHOLDERS'
BEST INTERESTS.
OptiCare has 5,000,000 shares of authorized and unissued preferred stock,
of which 418,803 shares of non-voting convertible preferred stock have been
issued to Bank Austria AG or its affiliate in connection with the credit
facility. The balance of approximately 4,500,000 authorized shares of preferred
stock could be issued to third parties selected by management or used as the
basis for a stockholders' rights plan, which could have the effect of deterring
potential acquirers. The ability of OptiCare's Board of Directors to establish
the terms and provisions of different series of preferred stock could
discourage unsolicited takeover bids from third parties even if those bids are
in the stockholders' best interests.
OPTICARE IS RESTRICTED BY CONTRACT FROM PAYING DIVIDENDS AND DOES NOT INTEND TO
PAY DIVIDENDS IN THE FORESEEABLE FUTURE AND, AS SUCH, ANY RETURN ON INVESTMENT
ON OPTICARE COMMON STOCK WILL DEPEND PRIMARILY UPON THE APPRECIATION IN THE
PRICE OF THE COMMON STOCK.
OptiCare's credit facility places certain restrictions on the future
payment of dividends. Furthermore, OptiCare currently intends to retain all
future earnings for the operation and expansion of OptiCare's business, and,
accordingly, OptiCare does not anticipate that any dividends will be declared
or paid for the foreseeable future. Therefore, any return earned on an
investment in OptiCare's common stock in the foreseeable future, if any, will
most likely depend upon the appreciation in the price of the common stock. See
"OptiCare Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
OPTICARE MAY NOT BE ABLE TO MAINTAIN THE LISTING OF ITS COMMON STOCK ON THE
AMERICAN STOCK EXCHANGE, WHICH MAY MAKE IT MORE DIFFICULT FOR STOCKHOLDERS TO
DISPOSE OF OPTICARE'S COMMON STOCK.
OptiCare's common stock is listed on the American Stock Exchange. OptiCare
cannot guarantee that it will always be listed. The American Stock Exchange
rules for continual listing include stockholders' equity requirements, which
OptiCare may not meet if it experiences losses, and market value requirements,
which it may not meet if the price of OptiCare's common stock declines.
21
<PAGE>
If OptiCare's common stock is delisted from the American Stock Exchange,
trading in OptiCare common stock would be conducted, if at all, in the
over-the-counter market. This would make it more difficult for stockholders to
dispose of their common stock and more difficult to obtain accurate quotations
on OptiCare common stock. This could have an adverse effect on the price of the
common stock. There are separate rules regulating broker-dealers who trade on
behalf of customers in unlisted stocks. These rules require broker-dealers to
sell common stock only to established customers and accredited investors
(generally defined as investors with a net worth in excess of $1,000,000 or
annual income exceeding $200,000, or $300,000 together with a spouse), to make
special suitability determinations about the purchasers, and to receive the
purchaser's written consent to the transaction prior to sale. The effect of
these requirements may be to limit the ability or incentive of broker-dealers
to sell OptiCare common stock.
INDUSTRY RISKS
HEALTH CARE COST CONTAINMENT AND LOWER REIMBURSEMENT TRENDS MAY IMPAIR PROFITS.
A portion of the revenues received by OptiCare's eye care and retail
optical providers are derived from government-sponsored health care programs
and private third-party payors. The health care industry has experienced a
trend toward cost containment as government and private third-party payors seek
to impose lower reimbursement and utilization rates and negotiate reduced
payment schedules with service providers. OptiCare believes that these trends
may result in a reduction from historical levels in per patient revenue
received by the eye care providers. For more information regarding health care
cost containment, see "Business of OptiCare -- Government Regulation."
HEALTH CARE REGULATIONS OR HEALTH CARE REFORM INITIATIVES COULD MATERIALLY
ADVERSELY AFFECT OPTICARE'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
OptiCare is subject to extensive federal and state governmental regulation
and supervision, including:
o anti-kickback statutes;
o self-referral laws;
o insurance and licensor requirements associated with our managed care
business;
o civil false claims acts;
o corporate practice of medicine restrictions;
o fee-splitting laws;
o facility license requirements and certificates of need;
o regulation of medical devices, including laser vision correction and
other refractive surgery procedures;
o FTC guidelines for marketing laser vision correction.
OptiCare cannot assure you that these laws and regulations will not change
or be interpreted in the future either to restrict or adversely affect its
business activities or relationships with other eye care providers. In
addition, federal and state governments are currently considering various types
of health care initiatives and comprehensive revisions to the health care and
health insurance systems. Some of the proposals under consideration, or others
that may be introduced, could, if adopted, have a material adverse effect on
our business, financial condition and results of operations. For more
information regarding health care regulations and reform initiatives, see
"Business of OptiCare -- Government Regulation."
THE NATURE OF OPTICARE'S BUSINESS COULD SUBJECT OPTICARE'S BUSINESS TO
POTENTIAL MALPRACTICE, PRODUCT LIABILITY, NEGLIGENCE AND OTHER CLAIMS.
The provision of eye care services entails the potentially significant
risk of physical injury to patients and an inherent risk of potential
malpractice, product liability and other similar claims.
22
<PAGE>
OptiCare's insurance may not be adequate to satisfy claims or protect OptiCare
or its affiliated eye care providers, and this coverage may not continue to be
available at acceptable costs. A partially or completely uninsured claim
against OptiCare could have a material adverse effect on its business,
financial condition and results of operations.
MANAGED CARE COMPANIES FACE INCREASING THREATS OF PRIVATE-PARTY LITIGATION,
INCLUDING CLASS ACTIONS, OVER THE SCOPE OF CARE THAT THE MANAGED CARE COMPANIES
MUST COVER.
Recently, several large national managed care companies have been the
target of class action lawsuits alleging fraudulent practices in the
determination of health care coverage policies for their beneficiaries. Such
lawsuits have, thus far, been aimed solely at full service managed care plans
and not companies that specialize in specific segments, such as eye care.
OptiCare cannot assure you that private party litigation, including class
action suits, will not target it in the future, or that OptiCare will not
otherwise be affected by such litigation.
FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement/Prospectus contains discussion of events or
results that have not yet occurred or been realized. Certain of the matters
discussed concerning OptiCare's and Vision Twenty-One's operations, economic
performance, financial condition, including in particular statements regarding
their financial prospects, ability to manage and grow their business, ability
to expand laser vision correction business, statements regarding industry
trends, financing plans, growth and operating strategies, ability to recruit
and retain eye care providers, ability to expand the managed care business, the
impact of government regulations, and the success of initiatives including
opening laser vision correction centers and the likelihood of incremental
revenues offsetting expenses related to those new initiatives, are areas, among
others, which include forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. Statements that
are predictive in nature, that depend upon or refer to future events or
conditions, or that include words such as, "expects", "anticipates", "intends",
"plans", "believes", "estimates" and similar expressions are forward-looking
statements. You should read forward-looking statements carefully because they
discuss our future expectations, contain projections of its future results of
operations or of OptiCare's and Vision Twenty-One's financial position, or
state other expectations of future performance.
Please do not place unjustified or excessive reliance on any forward
looking statements. There are many factors that impact greatly upon strategies
and expectations and are outside OptiCare's and Vision Twenty-One's direct
control, including without limitation, those factors listed in the section
captioned "Risk Factors." There may be events in the future that OptiCare or
Vision Twenty-One did not anticipate or accurately predict or control. The
factors listed in the section captioned "Risk Factors", as well as any
cautionary language in this Joint Proxy Statement/Prospectus, provide examples
of risks, uncertainties and events that may cause our actual results to differ
from the expectations expressed in forward-looking statements. In evaluating
the Merger, you should be aware that the occurrence of the events described in
the section captioned "Risk Factors" and elsewhere in this Joint Proxy
Statement/Prospectus could materially adversely affect our business, financial
condition and results of operations.
23
<PAGE>
THE MEETINGS
GENERAL
OptiCare
We are furnishing this Joint Proxy Statement/Prospectus to holders of
OptiCare common stock in connection with the solicitation of proxies by the
OptiCare board of directors for use at the annual meeting of stockholders of
OptiCare to be held on , 2000, and any adjournment or postponement.
Vision Twenty-One
We are furnishing this Joint Proxy Statement/Prospectus to holders of
Vision Twenty-One common stock in connection with the solicitation of proxies
by the Vision Twenty-One board of directors for use at the special meeting of
stockholders of Vision Twenty-One to be held on , 2000, and any
adjournment or postponement.
This Joint Proxy Statement/Prospectus is first being furnished to
stockholders of Vision Twenty-One on or about , 2000. This Joint Proxy
Statement/Prospectus is also furnished to Vision Twenty-One stockholders as a
prospectus in connection with the issuance by OptiCare of shares of OptiCare
common stock as contemplated by the Merger Agreement.
DATE, TIME AND PLACE
OptiCare
The annual meeting will be held on , 2000 at : a.m., local time,
at .
Vision Twenty-One
The special meeting will be held on , 2000 at : a.m., local time,
at .
MATTERS TO BE CONSIDERED AT THE MEETINGS
OptiCare
At the annual meeting and any adjournment or postponement hereof, OptiCare
stockholders will be asked:
o to consider and vote upon the approval of the issuance of OptiCare
common stock as contemplated by the Merger Agreement (Proposal 1);
o to elect eight members to serve on the Board of Directors until the
next annual meeting of stockholders and until their successors are
duly elected and qualified (Proposal 2);
o to approve an amendment to the OptiCare Performance Stock Program to
increase the maximum number of shares of OptiCare common stock
authorized for issuance over the term of the plan by an additional
2,000,000, while maintaining the Program's existing percentage
limitations (Proposal 3);
o to ratify the appointment of Deloitte & Touche LLP as the Company's
independent auditors for the year ending December 31, 2000 (Proposal
4); and
o to transact such other business as may properly come before the annual
meeting.
Vision Twenty-One
At the Vision Twenty-One special meeting and any adjournment or
postponement of the special meeting, Vision Twenty-One stockholders will be
asked:
24
<PAGE>
o to consider and vote upon the approval and adoption of the Merger
Agreement; and
o to transact such other business as may properly come before the
special meeting.
RECORD DATES
OptiCare
OptiCare's board has fixed the close of business on , 2000, as the
record date for determining of OptiCare stockholders entitled to notice of and
to vote at the annual meeting.
Vision Twenty-One
Vision Twenty-One's board has fixed the close of business on , 2000,
as the record date for determining of Vision Twenty-One stockholders entitled
to notice of and to vote at the special meeting.
VOTING OF PROXIES
OptiCare
We request that OptiCare stockholders complete, date and sign the
accompanying proxy and promptly return it in the accompanying envelope or
otherwise mail it to OptiCare. All properly executed proxies that OptiCare
receives prior to the vote at the annual meeting, and that are not revoked,
will be voted in accordance with the instructions indicated on the proxies. If
no direction is indicated, the proxies will be voted to approve the issuance of
shares of OptiCare as contemplated by the Merger Agreement. As far as
OptiCare's board knows, no other matters are to be brought before the annual
meeting. If other business properly comes before the annual meeting or any
postponement or adjournment, the proxies will vote in accordance with their own
judgment.
Stockholders may revoke their proxies at any time prior to its use
o by delivering to the Secretary of OptiCare a signed notice of
revocation or a later-dated, signed proxy; or
o by attending the annual meeting and voting in person.
Attendance at the annual meeting does not in itself constitute the
revocation of a proxy.
Vision Twenty-One
We request that Vision Twenty-One stockholders complete, date and sign the
accompanying proxy and promptly return it in the accompanying envelope or
otherwise mail it to Vision Twenty-One. Brokers holding shares in "street name"
may vote the shares only if the beneficial stockholder provides instructions on
how to vote. Brokers will provide beneficial owners instructions on how to
direct the brokers to vote the shares. All properly executed proxies that
Vision Twenty-One receives prior to the vote at the special meeting, and that
are not revoked, will be voted in accordance with the instructions indicated on
the proxies or, if no direction is indicated, to approve the Merger Agreement
and the Merger. Vision Twenty-One's board does not currently intend to bring
any other business before the special meeting and, so far as Vision
Twenty-One's board knows, no other matters are to be brought before the special
meeting. If other business properly comes before the special meeting or any
postponement or adjournment, the proxies will vote in accordance with their own
judgment.
Stockholders may revoke their proxies at any time prior to its use
o by delivering to the Secretary of Vision Twenty-One a signed notice of
revocation or a later-dated, signed proxy; or
o by attending the special meeting and voting in person.
Attendance at the special meeting does not in itself constitute the
revocation of a proxy.
25
<PAGE>
VOTES REQUIRED
OptiCare
As of the close of business on , 2000, there were shares of
OptiCare common stock outstanding and entitled to vote. The holders of a
majority of the shares of OptiCare common stock entitled to vote and that are
present or represented by proxy at the OptiCare meeting must approve the
issuance of OptiCare common stock in the Merger (Proposal 1), approve the
amendment to the Plan (Proposal 3) and the ratification of the appointment of
independent auditors (Proposal 4). The affirmative vote of a plurality of the
votes cast in person or by proxy is necessary for the election of directors
(Proposal 2). OptiCare stockholders have one vote per share of OptiCare common
stock owned on the record date.
As of , 2000, directors and executive officers of OptiCare and their
affiliates beneficially owned an aggregate of shares of OptiCare common
stock (exclusive of any shares issuable upon the exercise of options) or
approximately % of the shares of OptiCare common stock outstanding on that
date. The directors and executive officers of OptiCare have indicated their
intention to vote their shares of OptiCare common stock in favor of the
issuance of the shares of OptiCare common stock as contemplated by the Merger
Agreement. As of , 2000, directors and executive officers of Vision
Twenty-One owned no shares of OptiCare common stock. Under an Irrevocable Proxy
in the form attached as Appendix C to this Joint Proxy Statement/Prospectus,
OptiCare stockholders owning approximately % of OptiCare's common stock
outstanding as of , 2000, excluding any shares issuable upon the exercise
of options, have agreed to vote all of their shares of OptiCare common stock
for approval of the Merger Agreement and the Merger.
Vision Twenty-One
As of the close of business on , 2000, there were shares of
Vision Twenty-One common stock outstanding and entitled to vote. The holders of
a majority of the outstanding shares of Vision Twenty-One common stock must
approve the Merger Agreement and the Merger. The vote required to grant to the
Vision Twenty-One board of directors discretionary authority to adjourn the
special meeting for the solicitation of additional votes is a majority of
shares actually voted at the special meeting where a quorum is present. Vision
Twenty-One stockholders have one vote per share of Vision Twenty-One common
stock owned on the record date.
As of , 2000, directors and executive officers of Vision Twenty-One
and their affiliates beneficially owned an aggregate of shares of Vision
Twenty-One common stock (exclusive of any shares issuable upon the exercise of
options) or approximately % of the shares of Vision Twenty-One common stock
outstanding on that date. The directors and executive officers of Vision
Twenty-One have indicated their intention to vote their shares of Vision
Twenty-One common stock in favor of the Merger Agreement. Under an Irrevocable
Proxy in the form attached as Appendix B to this Joint Proxy
Statement/Prospectus, Vision Twenty-One stockholders owning approximately %
of Vision Twenty-One's common stock outstanding as of , excluding any
shares issuable upon the exercise of options, have agreed to vote all of their
shares of Vision Twenty-One common stock for approval of the Merger Agreement
and the Merger. See "The Merger -- Interests of Vision Twenty-One's Officers
and Directors in the Merger."
QUORUM; ABSTENTIONS AND BROKER NON-VOTES
OptiCare
The required quorum for the transaction of business at the annual meeting
is a majority of the shares of OptiCare common stock issued and outstanding on
the record date. Abstentions and broker non-votes each will be included in
determining the number of shares present and voting at the meeting for the
purpose of determining the presence of a quorum. Brokers holding shares for
beneficial owners cannot vote on the issuance of shares in the Merger in this
Joint Proxy Statement/Prospectus without the owners' specific instructions.
Accordingly, OptiCare stockholders are urged to return the enclosed proxy card
marked to indicate their vote. Broker non-votes will not be
26
<PAGE>
included in vote totals and will have no effect on the outcome of the votes on
the issuance of the shares in the Merger, the approval of the amendment to the
plan, the ratification of the independent auditors or the proposal to grant the
board discretionary authority to adjourn the annual meeting. Abstentions,
however, will have the same effect as a vote against these proposals. However,
since the affirmative vote of a plurality of votes cast is required for the
election of directors, abstentions and "broker non-votes" will have no effect
on the outcome of such election.
Vision Twenty-One
The required quorum for the transaction of business at the special meeting
is a majority of the shares of Vision Twenty-One common stock issued and
outstanding on the record date. Abstentions and broker non-votes each will be
included in determining the number of shares present and voting at the meeting
for the purpose of determining the presence of a quorum. Because approval of
the Merger Agreement and the consummation of the Merger requires the
affirmative vote of a majority of the outstanding shares of Vision Twenty-One
common stock entitled to vote, abstentions and broker non-votes will have the
same effect as votes against the Merger Agreement and the consummation of the
Merger. In addition, the failure of a Vision Twenty-One stockholder to return a
proxy or vote in person will have the effect of a vote against the approval of
the Merger Agreement and the Merger. Broker non-votes will not be included in
the vote totals and will have no effect on the outcome of the votes on the
proposal to grant the board discretionary authority to adjourn the special
meeting. Abstentions, however, will have the same effect as a vote against this
proposal. Brokers holding shares for beneficial owners cannot vote on the
actions proposed in this Joint Proxy Statement/Prospectus without the owners'
specific instructions. Accordingly, Vision Twenty-One stockholders are urged to
return the enclosed proxy card marked to indicate their vote.
SOLICITATION OF PROXIES AND EXPENSES
OptiCare and Vision Twenty-One will each bear their own expenses in
connection with the solicitation of proxies for their meetings of stockholders,
except that each will pay one-half of all printing, filing and mailing costs
and expenses incurred in connection with the registration statement and this
Joint Proxy Statement/Prospectus.
In addition to solicitation by mail, the directors, officers and employees
of OptiCare and Vision Twenty-One may each solicit proxies from their
stockholders by telephone, facsimile, e-mail or in person. Brokerage houses,
nominees, fiduciaries and other custodians will be requested to forward
soliciting materials to beneficial owners and will be reimbursed for their
reasonable expenses incurred in sending proxy materials to beneficial owners.
BOARD RECOMMENDATIONS
OptiCare
THE OPTICARE BOARD HAS DETERMINED THAT THE MERGER AGREEMENT AND THE MERGER
ARE FAIR TO, AND IN THE BEST INTERESTS OF, OPTICARE AND ITS STOCKHOLDERS.
ACCORDINGLY, THE BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF THE ISSUANCE OF
SHARES OF OPTICARE COMMON STOCK AS CONTEMPLATED BY THE MERGER AGREEMENT.
In addition, the board unanimously recommends [that stockholder's vote for
the election of eight directors], the approval of an amendment to the Program
and the ratification of Deloitte & Touche LLP as the independent auditors for
the year ended December 31, 2000.
The matters to be considered at the annual meeting are of great importance
to OptiCare stockholders. Accordingly, OptiCare stockholders are urged to read
and carefully consider the information presented in this Joint Proxy
Statement/Prospectus, and to complete, date, sign and promptly return the
enclosed proxy in the enclosed postage-paid envelope.
OPTICARE STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR
PROXY CARDS.
27
<PAGE>
Vision Twenty-One
THE VISION TWENTY-ONE BOARD HAS DETERMINED THAT THE MERGER AGREEMENT AND
THE MERGER ARE FAIR TO, AND IN THE BEST INTEREST OF, VISION TWENTY-ONE AND ITS
STOCKHOLDERS. ACCORDINGLY, THE BOARD HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF THE
MERGER AGREEMENT AND THE MERGER. In considering this recommendation, Vision
Twenty-One stockholders should be aware that Vision Twenty-One's directors and
officers have interests in the Merger that are different from, or in addition
to, those of Vision Twenty-One's stockholders, and that OptiCare has agreed to
provide employment, severance and indemnification arrangements to the directors
and officers of Vision Twenty-One. See "The Merger -- Interests of Vision
Twenty-One's Officers and Directors in the Merger."
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO THE STOCKHOLDERS OF VISION TWENTY-ONE. ACCORDINGLY, VISION
TWENTY-ONE STOCKHOLDERS ARE URGED TO READ AND CAREFULLY CONSIDER THE
INFORMATION PRESENTED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, AND TO
COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
VISION TWENTY-ONE' STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES
WITH THEIR PROXY CARDS. If the Merger Agreement is approved by the Vision
Twenty-One stockholders and the Merger is consummated, a transmittal form with
instructions for the surrender of Vision Twenty-One common stock certificates
will be mailed to Vision Twenty-One stockholders promptly after completion of
the Merger. For more information regarding the procedures for exchanging Vision
Twenty-One stock certificates for OptiCare stock certificates, see "The Merger
Agreement and Related Agreements -- Exchange of Vision Twenty-One Stock
Certificates for OptiCare Stock Certificates."
28
<PAGE>
THE MERGER
This section of the Joint Proxy Statement/Prospectus describes material
aspects of the proposed merger, including the Merger Agreement and the stock
option agreement. While we believe that the description covers the material
terms of the Merger and the related transactions, this summary may not contain
all of the information that is important to OptiCare stockholders and Vision
Twenty-One stockholders. Stockholders should read the Merger Agreement, and the
other documents we refer to carefully and in their entirety for a more complete
understanding of the Merger.
BACKGROUND OF THE MERGER
In November of 1999, the Vision Twenty-One board requested its financial
advisor, PaineWebber, to explore various strategic alternatives for maximizing
Vision Twenty-One stockholder value, including the sale of all or part of
Vision Twenty-One's business. Over the next several weeks, PaineWebber, on
behalf of Vision Twenty-One, received indications of interest from a number of
parties, including OptiCare. Vision Twenty-One entered into confidentiality
agreements, provided confidential information and held discussions with several
of these parties.
Since the merger of OptiCare Eye Health Centers and PrimeVision Health in
August, 1999, OptiCare has focused its resources on consolidating operations
(particularly in its managed care business) and integrating its financial and
administrative systems across all businesses. Based on the progress of its
integration efforts, OptiCare began to consider opportunities to accelerate its
growth, particularly in its laser vision correction and managed care
businesses. In the fourth quarter of 1999, OptiCare became aware of Vision
Twenty-One's announcement of its plan to evaluate strategic alternatives. Based
on general market knowledge, OptiCare considered Vision Twenty-One's laser
vision correction and ambulatory surgery center business to be an excellent
strategic fit with OptiCare's existing operations and believed it would provide
additional traction to its growth efforts in this area. In addition, OptiCare
believed Vision Twenty-One's managed care business, particularly its strong
position in providing vision-only programs, could provide complementary product
strength and cross-selling opportunities if merged with OptiCare's business.
In mid-December 1999, representatives of PaineWebber made a presentation
to the Vision Twenty-One board regarding the status of the process and the
interest levels of various parties, including OptiCare. PaineWebber reviewed
with the Board matters relating to the industry in which Vision Twenty-One
operates, as well as specific financial information about potential strategic
partners. The Vision Twenty-One Board authorized PaineWebber and management to
continue discussions with potential strategic partners, including OptiCare. The
Board also considered the possibility of remaining an independent entity.
Through the end of December and into early January, Vision Twenty-One and
PaineWebber continued to hold discussions with interested parties, including
OptiCare.
On January 4, 2000, OptiCare contacted Vision Twenty-One directly to
reconfirm its interest in a potential business combination. Over the next few
days, management of both companies held several more detailed discussions,
including a meeting in Largo, Florida between Theodore Gillette, CEO of Vision
Twenty-One and Dean J. Yimoyines, President and CEO of OptiCare, on January
6th, regarding a potential combination. From January 4, 2000, through January
7, 2000, Dr. Yimoyines had individual discussions with members of the OptiCare
board of directors surrounding these discussions.
On January 7th, OptiCare and Vision Twenty-One discussed entering into a
non-binding letter of intent expressing their interest in entering into a tax
free business combination in which Vision Twenty-One stockholders would receive
OptiCare stock in exchange for their Vision Twenty-One stock. From January 7th
through January 10th, the parties discussed and negotiated the terms of this
letter of intent.
On January 10th, OptiCare held a board of directors meeting in which Dr.
Yimoyines presented the proposed letter of intent with Vision Twenty-One. The
directors unanimously authorized Dr. Yimoyines to execute the non-binding
letter of intent and continue the discussions with Vision Twenty-One. The
Vision Twenty-One board held a telephonic meeting the same day and authorized
Mr. Gillette to execute the letter of intent.
29
<PAGE>
On January 10th, OptiCare and Vision Twenty-One finalized and executed the
letter of intent.
During the period subsequent to signing the non-binding letter of intent
and prior to the execution of the Merger Agreement the parties conducted
extensive due diligence with respect to the other party.
From January 11, 2000 through January 15, 2000 members of OptiCare's
corporate staff and outside advisors, including legal counsel, conducted
on-site due diligence on Vision Twenty-One. This was performed in Largo,
Florida as well as Phoenix and Tucson, Arizona, Boca Raton, Florida, Somerset,
New Jersey and Baltimore, Maryland. Also, from January 17th through January
20th, Vision Twenty-One's staff and outside advisors conducted on-site due
diligence on OptiCare. During this time, the due diligence process continued
and Vision Twenty-One's staff continued to provide information and answer
questions from OptiCare staff and vice versa.
On January 24th, executive management of both companies met at the Newark
airport to share due diligence findings and review terms of the transaction. At
that meeting, adjustments were made to the January 10th letter of intent on a
number of provisions, including valuation.
On January 26, 2000 the Vision Twenty-One board held a telephonic meeting
to discuss the outstanding issues related to the OptiCare letter of intent.
Vision Twenty-One management updated the Vision Twenty-One board on the current
status of the negotiations with OptiCare and legal counsel for Vision
Twenty-One discussed the status of the due diligence review and the general
terms and conditions of the draft merger agreement. The Vision Twenty-One board
also authorized Bruce S. Maller, Chairman of Vision Twenty-One, and Mr.
Gillette to finalize the terms of a proposed merger agreement with the goal of
maximizing stockholder value.
On January 27th, the OptiCare board of directors met to review due
diligence findings and management's assessment of the financial and strategic
impact to OptiCare and its stockholders. In addition, the OptiCare board
reviewed the proposed consideration of 6 million shares of OptiCare common
stock to be issued to stockholders of Vision Twenty-One, which is an exchange
ratio of .402 shares of OptiCare stock for each share of Vision Twenty-One
stock, plus the assumption of approximately $60 million of Vision Twenty-One's
outstanding debt. OptiCare's management explained that the final exchange ratio
would be adjusted prior to closing if certain balance sheet items varied from
negotiated levels or certain other events occured. In that meeting, the
OptiCare board of directors authorized management to proceed with drafting and
negotiating a definitive agreement. The OptiCare board authorized the officers
to engage Legg Mason Wood Walker, Incorporated ("Legg Mason") to assist
OptiCare in evaluating the fairness of the potential merger to the
stockholders.
Detailed negotiations between representatives of the two companies on the
terms of a definitive merger agreement began on February 4, 2000 and continued
daily through February 9, 2000.
On February 7th, at a meeting of the OptiCare board, management apprised
the OptiCare board on the status of those negotiations and received guidance
from the directors on key outstanding issues. Representatives from Legg Mason
Wood Walker participated in this call and provided the OptiCare board with
their initial, not yet final, assessment of the fairness of the transaction.
On February 8 and 9, the Vision Twenty-One Board held telephonic meetings
to review the terms of the proposed merger agreement with OptiCare and related
agreements (the "Merger Documents"). Vision Twenty-One's legal counsel and
representatives from PaineWebber reviewed the terms and conditions of the
Merger Documents. The Vision Twenty-One Board considered Vision Twenty-One's
alternatives to proceeding with the OptiCare proposal, including remaining an
independent company, as well as the relative benefits and detriments of the
OptiCare proposal. Legal counsel for Vision Twenty-One described the fiduciary
duties of the Vision Twenty-One Board in connection with the proposed merger.
The Board discussed its fiduciary obligations in connection with approving any
strategic relationships, including the proposed transaction with OptiCare.
Following the presentation of such information and after discussion among the
Vision Twenty-One Board members, the Vision Twenty-One Board determined it to
be in the best interest of its stockholders to merge with OptiCare
30
<PAGE>
pursuant to the terms of the proposed Merger Documents. The Vision Twenty-One
Board unanimously approved the Merger Documents and authorized Mr. Maller and
Mr. Gillette to execute the documents. At the Board meetings, PaineWebber
delivered its oral opinion, subsequently confirmed in writing on February 10,
that, as of such date, and based upon and subject to certain matters stated in
such opinion, the exchange ratio in the Merger was fair to Vision Twenty-One
stockholders from a financial point of view.
On February 9, 2000, the OptiCare Board met again and reviewed the terms
of the proposed definitive agreement in detail. In that meeting, Legg Mason
delivered to the OptiCare Board its opinion as to the fairness of the total
consideration to be paid by OptiCare (including any assumed debt), from a
financial point of view, to OptiCare and its stockholders. OptiCare's legal
counsel described the terms of the merger agreement and related transactions
and advised the OptiCare Board of their fiduciary duties in connection with
approving the merger agreement and related transactions. After lengthy
discussion and based upon the experience of the OptiCare Board, its analysis of
the proposed merger and the fairness opinion received from Legg Mason, the
OptiCare Board concluded that the Merger was fair to, and in the best interests
of OptiCare and its stockholders and to consummate the transactions
contemplated thereby. The OptiCare Board unanimously approved the definitive
merger agreement, authorized officers to execute the merger agreement and
recommended that the OptiCare stockholders approve the issuance of shares of
OptiCare common stock in the Merger. In reaching its decision the OptiCare
Board determined that no directors or management of OptiCare had any interest
in the Merger in addition to their interests as OptiCare stockholders. See
"Reasons for the Merger; Recommendations of Boards of Directors" for a
discussion of the factors considered by the OptiCare board of directors.
The definitive Merger Agreement was executed in the morning of February
10, 2000. On February 10, 2000, the parties issued a joint press release
announcing the execution of the Merger Agreement.
REASONS FOR THE MERGER; RECOMMENDATIONS OF BOARDS OF DIRECTORS
OptiCare
The OptiCare board unanimously concluded that the Merger was advisable and
fair to, and in the best interests, of OptiCare and its stockholders and
determined to recommend that the stockholders approve the issuance of the
shares of OptiCare common stock in the Merger.
The decision by OptiCare's board was based on several potential benefits
and opportunities of the Merger that it believes will contribute to the success
of the combined company including the potential benefits and opportunities
described below:
o A primary reason for OptiCare's acquisition of Vision Twenty-One is Vision
Twenty-One's strong laser vision correction and ambulatory surgery
businesses. Other key opportunities related to the laser operations
include:
o strong, nationally recognized leadership in Bruce S. Maller and Dr.
Richard Lindstrom;
o addition of solid laser vision correction and ambulatory surgery
center development and implementation team, headquartered in New
Jersey; and
o Vision Twenty-One's Northeast and Mid-Atlantic assets are
complementary to OptiCare's existing markets.
o A second fundamental reason for the acquisition of Vision Twenty-One is its
managed care business, which complements existing OptiCare operations both
strategically and operationally. For example:
o Vision Twenty-One is primarily a vision-only company and OptiCare is
more concentrated in medical/surgical eye care. These complementary
strengths permit the combined company to go to single-service
customers and cross-sell the other services. Additionally, the Merger
strengthens OptiCare's ability to offer integrated services to new
customers in more markets;
31
<PAGE>
o The combined company is expected to benefit from economies of scales
as it will manage approximately 10 million lives and approximately $88
million in managed care revenues as of December 31, 1999 on a pro
forma basis;
o The combined company will have a national provider network in excess
of 11,000 eye care professionals, providing a broad reach to serve
managed care or third party payor customers; and
o OptiCare will significantly benefit from the leadership contributions
of selected Vision Twenty-One management.
OptiCare's board reviewed a number of factors in evaluating the Merger,
including, but not limited to, the following:
o historical information concerning OptiCare and Vision Twenty-One's
businesses, financial performance and condition, operations,
technology and management;
o OptiCare's management's view of the financial condition, results of
operations and businesses of OptiCare and Vision Twenty-One before and
after giving effect to the Merger and the OptiCare board's
determination of the Merger's effect on stockholder value;
o current industry, economic and financial market conditions and
historical stock market prices, volatility and trading information;
o the consideration Vision Twenty-One stockholders will receive in the
Merger in light of comparable merger transactions analyzed by Legg
Mason in connection with providing its fairness opinion to the
OptiCare board;
o the opinion of Legg Mason that, as of the date of its opinion and
subject to the assumptions made, matters considered and limitations of
the review undertaken in connection with the opinion, as set forth in
the opinion, the total consideration to be paid by OptiCare (including
any debt assumed) in the Merger is fair from a financial point of view
to OptiCare and its stockholders (a copy of the written opinion dated
February 10, 2000 of Legg Mason setting forth the assumptions,
limitations and qualifications set forth in such opinion, is attached
hereto as Appendix D) see "Opinion of OptiCare Advisor;"
o the belief that the terms and structure of the Merger Agreement are
reasonable; and
o results of the due diligence investigation conducted by OptiCare's
management, accountants and counsel as to the results of the due
diligence investigation of Vision Twenty-One.
The OptiCare board also identified and considered a number of potentially
negative factors in its deliberations concerning the Merger including the
following:
o the risk that the potential benefits of the Merger may not be
realized;
o the possibility that the Merger may not be consummated, even if
approved by OptiCare's and Vision Twenty-One's stockholders;
o the risk that the operations of Vision Twenty-One could be negatively
impacted prior to the closing of the Merger;
o the risk of management and employee disruption associated with the
Merger, including the risk that despite the efforts of the combined
company, key technical, sales and management personnel might not
remain employed by the combined company; and
o other applicable risks described in this Joint Proxy
Statement/Prospectus under "Risk Factors."
OptiCare's board concluded, however, that, on balance, the Merger's
potential benefits to OptiCare and its stockholders outweighed the associated
risks. This discussion of the information and factors considered by OptiCare's
board is not intended to be exhaustive. In view of the variety of
32
<PAGE>
factors considered in connection with its evaluation of the Merger, OptiCare's
board did not find it practicable to, and did not quantify or otherwise assign
relative weight to, the specific factors considered in reaching its
determination.
FOR THE REASONS DISCUSSED ABOVE, OPTICARE'S BOARD OF DIRECTORS HAS
DETERMINED THE MERGER AGREEMENT AND THE MERGER TO BE ADVISABLE AND FAIR TO, AND
IN THE BEST INTERESTS OF, OPTICARE'S STOCKHOLDERS. IN CONNECTION WITH THE
MERGER, OPTICARE'S BOARD OF DIRECTORS RECOMMENDS APPROVAL OF THE ISSUANCE OF
SHARES OF OPTICARE COMMON STOCK AS CONTEMPLATED BY THE MERGER AGREEMENT.
Vision Twenty-One
The Vision Twenty-One Board believes that the Merger is fair to and in the
best interests of Vision Twenty-One and its stockholders. The Vision Twenty-One
board has unanimously approved and recommends that all Vision Twenty-One
stockholders vote for the proposed Merger. In approving the Merger Agreement
and the transactions contemplated thereby, the Vision Twenty-One Board
carefully considered the following material factors:
o the presentations of and the opinion of PaineWebber to the Vision
Twenty-One Board, that the exchange ratio in the Merger is fair to
Vision Twenty-One stockholders from a financial point of view (a copy
of the written opinion dated February 9, 2000 of PaineWebber setting
forth the assumptions, limitations and qualifications set forth in
such opinion, is attached hereto as Appendix E);
o the investigation and consideration of strategic alternatives to the
Merger and the lack of other strategic alternatives to the Merger;
o Vision Twenty-One's need for significant additional capital to run its
business, the restrictions and default under its current credit
facility and the lack of financing alternatives available to Vision
Twenty-One;
o information concerning the business, assets, capital structure,
financial performance and condition, competitive position and
prospects for Vision Twenty-One both as an independent entity and as a
subsidiary of OptiCare;
o current industry, economic and market conditions, and trends;
o the terms and structure of the transaction and the terms and
conditions of the Merger Agreement, including the Merger
consideration;
o the potential for appreciation in the value of the OptiCare shares to
be issued to Vision Twenty-One stockholders in connection with the
Merger;
o the strategic fit between Vision Twenty-One and OptiCare, the
opportunity for cost savings and synergies and the possibility that
Vision Twenty-One on its own might be able to achieve the level of
cost savings, operating efficiencies and synergies that may be
available as a result of the Merger;
o the ability to consummate the Merger as a tax-free reorganization for
federal income tax purposes;
o the provisions of the Merger Agreement that permit Vision Twenty-One
under certain circumstances, to furnish information to and participate
in substantive discussions and negotiations with third parties, and to
terminate the Merger Agreement and enter into a definitive agreement
with a third party in the event of a superior proposal;
o while the termination payment provisions of the Merger Agreement could
have the effect of discouraging alternative proposals for a business
combination with Vision Twenty-One, these provisions would not prevent
bona fide superior proposals and the size of the termination fee was
reasonable in relation to the size and benefits of the transaction;
33
<PAGE>
o Vision Twenty-One's stockholders will own, as a result of the Merger,
approximately 33% of the outstanding stock of OptiCare after the
Merger; and
o Vision Twenty-One will designate up to three individuals to serve on
the Board of the combined company.
In view of the variety of factors considered in connection with its
evaluation of the Merger Agreement, the Vision Twenty-One Board did not
consider it practicable to, nor did it attempt to, quantify, rank or otherwise
assign relative weights to the specific factors considered in reaching its
determination. The Vision Twenty-One Board did rely on the experience and
expertise of its financial advisors for quantitative analysis of the financial
terms of the Merger. Further, the Vision Twenty-One Board did not undertake to
make any specific determination as to whether any particular factor (or any
aspect of any particular factor) was favorable or unfavorable to its ultimate
determination, but rather conducted a discussion of the factors described above
and reached a general consensus that the Merger was in the best interests of
Vision Twenty-One and its stockholders. In considering the foregoing factors,
individual members of the Vision Twenty-One Board may have given different
weight to different factors. However, on balance, the discussions among the
members of the Vision Twenty-One Board evidenced the general view that the
factors enumerated were regarded favorably in making its determination to
approve the Merger Agreement and recommend to the Vision Twenty-One
stockholders that they approve the same. There can be no assurances that the
expected benefits of the Merger will be realized. See "Risk Factors."
OPINION OF OPTICARE ADVISOR
Under an engagement letter dated February 2, 2000, OptiCare retained Legg
Mason to provide a fairness opinion in connection with the Merger. Legg Mason
is a nationally recognized investment banking firm and was selected by OptiCare
based on the firm's reputation and experience in investment banking in general,
its recognized expertise in the valuation of middle-market businesses, and its
knowledge of the healthcare industry. Legg Mason, as part of its investment
banking business, is continually engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed securities, private placements
and valuations for corporate and other purposes. On February 9, 2000, Legg
Mason rendered its opinion that, as of that date, based upon and subject to the
various considerations set forth in the Legg Mason opinion, the total
consideration to be paid by OptiCare (including any debt assumed) was fair to
OptiCare and its stockholders, from a financial point of view.
THE FULL TEXT OF THE LEGG MASON OPINION SETS FORTH, AMONG OTHER THINGS,
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON
THE SCOPE OF THE REVIEW UNDERTAKEN BY LEGG MASON IN RENDERING ITS OPINION. THE
FULL TEXT OF THE OPINION IS ATTACHED AS APPENDIX D TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED BY REFERENCE IN ITS ENTIRETY. OPTICARE
STOCKHOLDERS ARE URGED TO READ THE LEGG MASON OPINION CAREFULLY AND IN ITS
ENTIRETY. THE LEGG MASON OPINION ADDRESSES ONLY THE FAIRNESS TO OPTICARE AND
ITS STOCKHOLDERS FROM A FINANCIAL POINT OF VIEW OF THE TOTAL CONSIDERATION TO
BE PAID BY OPTICARE (INCLUDING ANY DEBT ASSUMED) IN THE MERGER AS OF THE DATE
OF THE LEGG MASON OPINION, AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE OPTICARE ANNUAL
MEETING. THE SUMMARY OF THE LEGG MASON OPINION IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF THE LEGG MASON OPINION.
In connection with rendering its opinion, Legg Mason:
o reviewed and analyzed draft copies of the Merger Agreement, dated
February 9, 2000;
o reviewed and analyzed audited consolidated financial statements of
OptiCare contained in a registration statement on Form S-1 (dated
December 17, 1999) for the fiscal year ended December 31, 1998 and
unaudited consolidated financial statements for the quarter ended
September 30, 1999;
o reviewed and analyzed audited consolidated financial statements of
Vision Twenty-One contained on Form 10-K for the fiscal year ended
December 31, 1998 and unaudited condensed statements contained on Form
10-Q for the quarters ended March 31, 1999, June 30, 1999, and
September 30, 1999;
34
<PAGE>
o reviewed and analyzed certain internal information, primarily
financial in nature, concerning the business and operations of
OptiCare prepared by the management of OptiCare, including five-year
financial projections;
o reviewed and analyzed certain internal information, primarily
financial in nature, concerning the business and operations of Vision
Twenty-One prepared by the management of Vision Twenty-One, including
five-year financial projections;
o reviewed and analyzed certain publicly available information
concerning OptiCare and Vision Twenty-One;
o reviewed the reported stock prices and trading values for OptiCare
common stock and Vision Twenty-One common stock;
o reviewed and analyzed financial and market data and operating
statistics relating to OptiCare and Vision Twenty-One and compared
them with similar information of selected public companies that it
deemed relevant to its inquiry;
o reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions involving companies it deemed to be
comparable to OptiCare and Vision Twenty-One;
o held meetings and discussions with certain officers and employees of
OptiCare and Vision Twenty-One concerning the past and current
operations, financial condition and prospects of OptiCare and Vision
Twenty-One; and
o conducted such other financial studies, analyses and investigations
and considered such other information as it deemed appropriate for the
purposes of its Opinion.
In connection with its review, Legg Mason did not assume any
responsibility for independent verification of any information that was
publicly available or supplied by OptiCare or Vision Twenty-One and relied on
such information being complete and accurate in all material respects. With
respect to financial forecasts, Legg Mason assumed that they had been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the managements of OptiCare and Vision Twenty-One as to the
future financial performance of Vision Twenty-One. Legg Mason assumed, based
upon assurances of OptiCare management, that the Merger would be treated as a
tax-free reorganization for federal income tax purposes. In addition, Legg
Mason did not make an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of OptiCare or Vision Twenty-One, nor was
Legg Mason furnished with any such evaluations or appraisals. The Legg Mason
opinion is necessarily based upon financial, economic, market and other
conditions as they existed and could be evaluated on the date of the Legg Mason
opinion. Legg Mason did not express any opinion as to what the value of the
OptiCare common stock actually will be when issued to Vision Twenty-One's
stockholders pursuant to the Merger or the prices at which such OptiCare common
stock will trade subsequent to the Merger.
The total consideration to be paid by OptiCare was determined by
arm's-length negotiation between the parties. In preparing the Legg Mason
opinion, Legg Mason performed a variety of financial and comparative analyses.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Legg Mason
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all analyses and factors, could create a misleading view of the
processes underlying the Legg Mason opinion. No company or transaction used in
the analysis performed by Legg Mason as a comparison is identical to OptiCare,
Vision Twenty-One or the contemplated Merger. In addition, Legg Mason may have
given various analyses more or less weight than other analyses, and may have
deemed various assumptions more or less probable than other assumptions, so
that the range of valuation resulting from any particular analysis described
below should not be taken to be Legg Mason's view of the actual value of
OptiCare or Vision Twenty-One. In performing its analyses, Legg Mason made
numerous assumptions with respect to industry
35
<PAGE>
performance, general business and economic conditions and other matters, many
of which are beyond the control of OptiCare or Vision Twenty-One. The analyses
performed by Legg Mason are not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
suggested by such analyses. In addition, analyses relating to the value of
businesses or assets do not purport to be appraisals or to necessarily reflect
the prices at which businesses or assets may actually be sold. The analyses
performed were prepared solely as part of Legg Mason's analysis of the fairness
of the total consideration to be paid by OptiCare (including any debt assumed)
from a financial point of view and were provided to the OptiCare board of
directors in connection with the delivery of the Legg Mason opinion.
The following is a summary of the material financial analyses performed by
Legg Mason in connection with the preparation of its opinion, and reviewed with
the OptiCare board of directors at a meeting of the OptiCare board of directors
held on February 9, 2000. Certain of the summaries of those financial analyses
include information presented in tabular format. In order to understand fully
the material financial analyses used by Legg Mason, the tables should be read
together with the text of each summary. The tables alone do not constitute a
complete description of the material financial analyses.
FINANCIAL ANALYSIS
(a) Public Company Trading Analysis. Legg Mason compared certain financial
market and operating information and commonly used valuation measurements for
Vision Twenty-One with corresponding data for two groups of publicly held
companies. The first group included several firms in the laser center operator
industry (which we refer to collectively as the "Laser Center Operators")
including:
o Laser Vision Centers, Inc.
o LCA-Vision, Inc.
o NovaMed Eyecare, Inc.
o TLC The Laser Center, Inc.
The second group included several firms that engage in specialty managed
care, including eye care (which we refer to collectively as the "Specialty
Managed Care -- Including Eye Care") including:
o Magellan Health Services, Inc.
o Matria Healthcare, Inc.
o OptiCare Health Systems, Inc.
o Pediatrix Medical Group, Inc.
o Vision America, Inc.
o US Oncology, Inc.
Vision Twenty-One's results in whole, and on a lines of business basis, were
compared to the Laser Center Operators and Specialty Managed Care publicly
traded comparable groups. Legg Mason compared data and ratios including, among
other things, enterprise value or leveraged market capitalization (current
stock price multiplied by shares outstanding plus debt minus cash and cash
equivalents) to the latest twelve months ("LTM") sales-revenues and LTM
earnings before interest, tax, depreciation and amortization ("EBITDA").
<TABLE>
<CAPTION>
LASER CENTER OPERATORS
----------------------
MEAN MEDIAN
---------- ----------
<S> <C> <C>
Enterprise Value/LTM Sales-Revenues 3.48x 3.49x
Enterprise Value/LTM EBITDA ....... 26.05x 24.77x
</TABLE>
<TABLE>
<CAPTION>
SPECIALTY MANAGED CARE
----------------------
MEAN MEDIAN
---------- ----------
<S> <C> <C>
Enterprise Value/LTM Sales-Revenues ... 0.91x 0.70x
Enterprise Value/LTM EBITDA ........... 10.45x 10.42x
</TABLE>
36
<PAGE>
The implied enterprise value of Vision Twenty-One ranged from $80.3
million to $87.5 million. No company utilized in the peer group comparison
analysis is identical to Vision Twenty-One. In evaluating the peer groups, Legg
Mason made judgments and assumptions with regard to industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of Vision Twenty-One, such as the impact of
competition on the businesses of Vision Twenty-One and the industry generally,
industry growth and the absence of any adverse material change in the financial
condition and prospects of Vision Twenty-One or the industry or in the financial
markets in general. Mathematical analysis, such as determining the average or
median, is not in itself a meaningful method of using peer group data.
(b) Selected Precedent Transaction Analysis. Legg Mason analyzed certain
information relating to selected precedent transactions in the Laser Center
Operators industry (the "Selected Laser Center Operators Transactions")
including:
o the acquisition of Midwest Surgical Centers by Laser Vision Centers
o the acquisition of Refractive Surgical Centers by Laser Vision Centers
o the acquisition of Refractive Centers International by LCA Vision
o the acquisition of American Vision Centers by Cole National Corp.
o the acquisition of eight eye care practices by Physicians Resource
Group
Legg Mason also analyzed certain information relating to selected precedent
transactions in the Specialty Managed Care industry (the "Selected Specialty
Managed Care -- Including Eye Care Transactions") including:
o the acquisition of Physician Reliance Network by American Oncology
Resources
o the acquisition of Gainor Medical Management by Matria Healthcare
o the acquisition of American Surgisite Centers by Vision Twenty-One,
Inc.
o the acquisition of Merit Behavioral Health Care Corp. by Magellan
Health Services
o the acquisition of MEC Health Care & LSI by Vision Twenty-One, Inc.
o the acquisition of EmCare Holdings by Laidlaw
o the acquisition of Davis Vision by Pennsylvania Blue Shield
o the acquisition of MEC Health Care by Lasersight
Such analysis indicated that for the Selected Laser Center Operators
Transactions, enterprise value or aggregate consideration as a multiple of LTM
sales-revenues produced a mean of 1.57x and a median of 1.57x. Additionally,
analysis indicated that for the Selected Laser Center Operators Transactions,
enterprise value or aggregate consideration as a multiple of LTM EBITDA
produced a mean of 17.47x and a median of 17.02x.
Legg Mason analyzed certain information related to selected transactions
in the Specialty Managed Care -- Including Eye Care industry. Such analysis
indicated that for the Selected Specialty Managed Care -- Including Eye Care
Transactions, enterprise value or aggregate consideration as a multiple of LTM
sales-revenues produced a mean of 1.49x and a median of 1.44x. Additionally,
analysis indicated that for the Selected Specialty Managed Care -- Including
Eye Care Transactions, enterprise value or aggregate consideration as a
multiple of LTM EBITDA produced a mean of 14.17x and a median of 15.12x.
The implied enterprise value of Vision Twenty-One ranged from $127.6
million to $134.0 million.
No company, transaction or business used in the "Public Company Trading
Analysis" or "Selected Precedent Transaction Analysis" as a comparison is
identical to Vision Twenty-One or the Merger. Accordingly, an analysis of the
results of the foregoing is not entirely mathematical. Instead, it
37
<PAGE>
involves complex considerations and judgments concerning differences in
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the peer companies, Selected
Transactions or the business segment, company or transaction to which they are
being compared.
(c) Discounted Cash Flow Analysis. Legg Mason performed a discounted cash
flow analysis of Vision Twenty-One using projections provided by the company
management. Legg Mason calculated a net present value of estimated free cash
flows for the calendar years 2000 through 2004 using a discount rate of 23.32%.
Legg Mason calculated terminal values in the year 2004 based on the 2004 EBITDA
multiplied by a range of multiples from 5.0x to 7.0x. These terminal values
were then discounted to present value using the applicable discount rate.
The implied enterprise value of Vision Twenty-One ranged from $98.4
million to $127.4 million.
As described above, Legg Mason's opinion and presentation to the OptiCare
board of directors was one of many factors taken into consideration by the
OptiCare board of directors in making its determination to recommend the Merger
Agreement and the transactions contemplated thereby. Consequently, the analyses
described above should not be viewed as determinative of the opinion of the
OptiCare board of directors or the management of OptiCare with respect to the
value of Vision Twenty-One or whether the OptiCare board of directors would
have been willing to agree to a different total consideration.
In the ordinary course of its business, Legg Mason and its affiliates may
actively trade the equity securities of OptiCare and Vision Twenty-One for its
own account and for the accounts of its customers and, accordingly, may at any
time hold a long or short position in such securities.
Pursuant to an engagement letter dated February 2, 2000, OptiCare engaged
Legg Mason to provide financial advisory services to the OptiCare board of
directors in connection with the Merger, including, among other things,
rendering its opinion and making the presentation referred to above. Pursuant
to the terms of the engagement letter, OptiCare has agreed to pay Legg Mason a
customary fee in connection with the engagement, a portion of which is
contingent upon the closing of the Merger. In addition, OptiCare has agreed to
reimburse Legg Mason for its out-of-pocket expenses, including attorney's fees,
incurred in connection with its engagement and to indemnify Legg Mason and
certain related persons against certain liabilities and expenses arising out of
or in conjunction with its rendering of services under its engagement,
including liabilities arising under the federal securities laws.
OPINION OF VISION TWENTY-ONE ADVISOR
PaineWebber, as part of its engagement by Vision Twenty-One, was retained
to render an opinion as to whether the Exchange Ratio was fair, from a
financial point of view, to the holders of Vision Twenty-One common stock. The
following is a summary of the report presented on February 9, 2000, by
PaineWebber to the Vision Twenty-One Board of Directors in connection with the
rendering of its opinion on that date.
THE FULL TEXT OF THE PAINEWEBBER OPINION, DATED FEBRUARY 9, 2000, WHICH
SETS FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS APPENDIX E TO THIS
DOCUMENT. YOU SHOULD READ THE PAINEWEBBER OPINION CAREFULLY AND IN ITS
ENTIRETY. THIS SUMMARY OF THE PAINEWEBBER OPINION IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF THE PAINEWEBBER OPINION.
In connection with the consideration by the Vision Twenty-One Board of the
merger, PaineWebber delivered its oral opinion, subsequently confirmed in
writing, dated February 9, 2000, to the effect that as of that date, and based
upon its review and assumptions and subject to the limitations summarized
below, the Exchange Ratio is fair, from a financial point of view, to the
holders of Vision Twenty-One common stock. The PaineWebber opinion was directed
to, and prepared at the request and for the information of the Vision
Twenty-One Board and does not constitute a recommendation to any holder of
Vision Twenty-One common stock as to how any such stockholder should vote with
respect to the Merger.
38
<PAGE>
In arriving at its opinion, PaineWebber, among other things:
o Reviewed Vision Twenty-One's Annual Reports, Forms 10-K and related
financial information for the three fiscal years ended December 31,
1998; and Vision Twenty-One's Form 10-Q and the related unaudited
financial information for the nine months ended September 30, 1999;
o Reviewed OptiCare's Form S-4, Form S-1 and related financial
information for the predecessor company of OptiCare for the three
fiscal years ended December 31, 1998; and OptiCare's Form 10-Q and the
related unaudited financial information for the nine months ended
September 30, 1999;
o Reviewed certain information, including financial forecasts, relating
to the business, earnings, cash flow, assets and prospects of Vision
Twenty-One and OptiCare, furnished to PaineWebber by Vision Twenty-One
and OptiCare, respectively;
o Conducted discussions with members of senior management of Vision
Twenty-One and OptiCare concerning their respective businesses and
prospects;
o Reviewed the historical market prices and trading activity for the
Vision Twenty-One common stock and OptiCare's common stock and
compared them with that of certain publicly traded companies which
PaineWebber deemed to be relevant;
o Compared the financial position and results of operations of Vision
Twenty-One and OptiCare with that of certain companies which
PaineWebber deemed to be relevant;
o Compared the proposed financial terms of the transactions contemplated
by the Merger Agreement with the financial terms of certain other
mergers and acquisitions which PaineWebber deemed to be relevant;
o Reviewed a draft of the Agreement and Plan of Merger and
Reorganization dated February 9, 2000; and
o Reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as
PaineWebber deemed necessary, including its assessment of general
economic, market and monetary conditions.
In preparing its opinion, PaineWebber relied on the accuracy and
completeness of all information that was publicly available, supplied or
otherwise communicated to PaineWebber by or on behalf of Vision Twenty-One and
OptiCare, and PaineWebber did not assume any responsibility to independently
verify such information. With respect to the financial forecasts examined by
PaineWebber, PaineWebber assumed, with Vision Twenty-One's and OptiCare's
consent, that they were reasonably prepared on bases reflecting the best
currently available estimates and good faith judgments of the management of
Vision Twenty-One and OptiCare as to the future performance of Vision
Twenty-One and OptiCare, respectively. PaineWebber also relied upon assurances
of the management of Vision Twenty-One and OptiCare that they were unaware of
any facts that would make the information or financial forecasts provided to
PaineWebber incomplete or misleading. PaineWebber was not engaged to make, and
did not make, an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of Vision Twenty-One or OptiCare, nor was
PaineWebber furnished with any such evaluations or appraisals. PaineWebber also
assumed the following, with Vision Twenty-One's consent:
o The Merger will receive purchase accounting treatment under U.S.
generally accepted accounting principles, or GAAP;
o The Merger will qualify as a tax-free, stock-for-stock exchange under
U.S. tax law; and
o Any material liabilities (contingent or otherwise, known or unknown)
of Vision Twenty-One and OptiCare were as set forth in the
consolidated financial statements of Vision Twenty-One and OptiCare,
respectively.
According to the Merger Agreement between Vision Twenty-One and OptiCare,
Vision Twenty-One shareholders will receive 0.402 shares of OptiCare common
stock for each share of
39
<PAGE>
Vision Twenty-One common stock, subject to adjustments made prior to mailing of
this Proxy Statement/Prospectus. For purposes of rendering its opinion,
PaineWebber was advised by Vision Twenty-One, and it assumed with Vision
Twenty-One's consent, that based on the best available financial forecasts of
Vision Twenty-One as of February 9, 2000 (the date on which the opinion was
issued), the Exchange Ratio after all relevant adjustments to be made as of the
adjustment date was expected to be 0.407. As discussed above, the final
Exchange Ratio is .
The PaineWebber opinion was based upon economic, monetary and market
conditions existing on the date of the PaineWebber opinion. Furthermore,
PaineWebber expressed no opinion as to the price or trading ranges at which
Vision Twenty-One common stock or OptiCare common stock will trade after the
date of the PaineWebber opinion.
The PaineWebber opinion does not address the relative merits of the merger
and any other transactions or business strategies that may have been discussed
by the Vision Twenty-One Board as alternatives to the merger, or the decision
of the Vision Twenty-One Board to proceed with the merger. Vision Twenty-One
did not place any limitations upon PaineWebber with respect to the procedures
followed or factors considered in rendering its opinion.
The following paragraphs summarize the significant analyses performed by
PaineWebber in arriving at its opinion.
Historical stock performance. PaineWebber reviewed trading prices for the
shares of Vision Twenty-One common stock. This share performance review
indicated that for the twelve months ended February 4, 2000, the low and high
closing prices for the Vision Twenty-One common stock on the Nasdaq National
Market were $1.06 and $10.06, respectively. PaineWebber also reviewed the
Vision Twenty-One share price averages over the following periods prior to
February 4, 2000, as set forth in the following table:
<TABLE>
<CAPTION>
TRADING PERIOD CLOSING PRICE
-------------- -------------
<S> <C>
5 days prior .................. $ 1.25
TRADING PERIOD AVERAGE PRICE
-------------- -------------
Latest 5 days ................. $ 1.13
Latest 10 days ................ $ 1.25
Latest 20 days ................ $ 1.37
Latest 30 days ................ $ 1.57
Latest 60 days ................ $ 2.64
Latest 180 days ............... $ 5.02
Latest twelve months .......... $ 4.62
Twelve month high ............. $ 10.06
Twelve month low .............. $ 1.06
</TABLE>
PaineWebber also reviewed trading prices for the shares of OptiCare common
stock. This share performance review indicated that for the period from August
16, 1999 through February 4, 2000, the low and high closing prices for the
OptiCare common shares on the American Stock Exchange were $1.75 and $12.31,
respectively. PaineWebber also reviewed the OptiCare share price averages over
the following periods prior to February 4, 2000, as set forth in the following
table:
<TABLE>
<CAPTION>
TRADING PERIOD CLOSING PRICE
-------------- -------------
<S> <C>
5 days prior .................. $ 3.44
TRADING PERIOD AVERAGE PRICE
-------------- -------------
Latest 5 days ................. $ 3.43
Latest 10 days ................ $ 3.56
Latest 20 days ................ $ 3.61
Latest 30 days ................ $ 3.47
Latest 60 days ................ $ 3.67
Latest 90 days ................ $ 3.81
High (since 8/13/99) .......... $ 12.31
Low (since 8/13/99) ........... $ 1.75
</TABLE>
40
<PAGE>
Exchange ratio analysis. PaineWebber calculated exchange ratios based on
the trading price relationship between the Vision Twenty-One common stock and
OptiCare common stock. This exchange ratio review indicated that for the period
from August 13, 1999 through February 4, 2000, the low Vision
Twenty-One/OptiCare exchange ratio was 0.3036 and the high Vision
Twenty-One/OptiCare ratio was 4.2857. PaineWebber also reviewed the Vision
Twenty-One/OptiCare exchange ratio on February 4, 2000, and averages over
certain periods prior to February 4, 2000, as set forth in the following tables:
<TABLE>
<CAPTION>
TRADING PERIOD EXCHANGE RATIO
-------------- --------------
<S> <C>
February 4, 2000 .......... 0.3241
5 days prior .............. 0.3636
TRADING PERIOD AVERAGE EXCHANGE RATIO
-------------- ----------------------
Latest 5 days ............. 0.3303
Latest 10 days ............ 0.3509
Latest 30 days ............ 0.4517
Latest 60 days ............ 0.7206
</TABLE>
Selected comparable public company analysis. Using publicly available
information, PaineWebber compared selected historical and projected financial,
operating and stock market performance data of Vision Twenty-One and OptiCare
to the corresponding data of certain publicly traded companies that PaineWebber
deemed to be relevant for the purposes of comparison to Vision Twenty-One and
OptiCare.
In light of Vision Twenty-One's business mix, PaineWebber selected two
sets of companies for purposes of comparison to Vision Twenty-One:
<TABLE>
<CAPTION>
LASER VISION CORRECTION COMPANIES MANAGED CARE COMPANIES
--------------------------------- ----------------------
<S> <C>
Gimbel Vision International Inc. American Medical Security Group, Inc.
Laser Vision Centers, Inc. American Service Group Inc.
LCA-Vision, Inc. Ceres Group Inc.
NovaMed EyeCare, Inc. First Health Group Corp.
TLC Laser Eye Centers, Inc. Medical Control, Inc.
VisionAmerica Incorporated OptiCare Health Systems, Inc.
United Wisconsin Services, Inc.
</TABLE>
PaineWebber reviewed, among other information, the comparable companies'
multiples of total enterprise value, which consists of the market value of
equity plus total debt less cash and cash equivalents as of September 30, 1999,
to:
o Latest twelve months revenue;
o Revenue run rate based on results from the most recent three months,
annualized;
o Latest twelve months earnings before interest, taxes, depreciation and
amortization, or EBITDA; and
o EBITDA run rate based on results from the most recent three months,
annualized.
Multiples of total enterprise value represent the value of a particular
company's operating statistics compared to its total enterprise value. These
operating statistics include revenue, revenue run rate, EBITDA and EBITDA run
rate as described above.
PaineWebber also reviewed, among other information, the comparable
companies' multiples of market value to latest twelve months net income.
Multiples of market value represent the value of a particular company's
operating statistics compared to its total market value. These operating
statistics include latest twelve months net income for each company.
41
<PAGE>
The Vision Twenty-One comparable companies analysis resulted in the
following range of values as of February 4, 2000:
<TABLE>
<CAPTION>
ANALYSIS MULTIPLE RANGE
- -------- --------------
<S> <C>
Latest twelve months revenue ............. 0.13x to 3.93x
Annualized revenue run rate .............. 0.13x to 3.58x
Latest twelve months EBITDA .............. 4.2x to 30.1x
Annualized EBITDA run rate ............... 4.1x to 22.5x
Latest twelve months net income .......... 13.1x to 113.2x
</TABLE>
Based on an Exchange Ratio of 0.407 OptiCare shares for each outstanding
share of Vision Twenty-One common stock, Vision Twenty-One's implied multiples,
calculated on a pro forma basis for Vision Twenty-One's managed care and laser
vision correction businesses, were as follows:
<TABLE>
<CAPTION>
ANALYSIS VISION TWENTY-ONE IMPLIED MULTIPLE
- -------- ----------------------------------
<S> <C>
Latest twelve months revenue ............. 0.86x
Annualized revenue run rate .............. 0.71x
Latest twelve months EBITDA .............. 21.5x
Annualized EBITDA run rate ............... 41.0x
Latest twelve months net income .......... Not meaningful
</TABLE>
The OptiCare comparable companies consisted of:
<TABLE>
<S> <C>
American Medical Security Group, Inc. First Health Group Corp.
American Service Group Inc. Medical Control, Inc.
Ceres Group Inc. United Wisconsin Services, Inc.
</TABLE>
The OptiCare comparable companies analysis resulted in the following range
of values as of February 4, 2000:
<TABLE>
<CAPTION>
ANALYSIS MULTIPLE RANGE
- -------- --------------
<S> <C>
Latest twelve months revenue ............. 0.13x to 3.47x
Annualized revenue run rate .............. 0.13x to 3.58x
Latest twelve months EBITDA .............. 8.8x to 10.7x
Annualized EBITDA run rate ............... 5.6x to 10.4x
Latest twelve months net income .......... 20.2x to 62.7x
One-year forward EPS ..................... 9.1x to 18.8x
Two-year forward EPS ..................... 4.8x to 15.4x
</TABLE>
Data for the latest twelve months were as of September 30, 1999. The
one-year and two-year forward EPS were based on publicly available consensus
estimates from First Call Research.
42
<PAGE>
Based upon the closing price of OptiCare common stock on February 4, 2000,
of $3.38, OptiCare's implied multiples, calculated on the same basis as the
OptiCare comparable companies, were as follows:
<TABLE>
<CAPTION>
ANALYSIS OPTICARE IMPLIED MULTIPLE
-------- -------------------------
<S> <C>
Latest twelve months revenue ............. 0.53x
Annualized revenue run rate .............. 0.72x
Latest twelve months EBITDA .............. 8.3x
Annualized EBITDA run rate ............... 11.1x
Latest twelve months net income .......... Not meaningful
One-year forward EPS ..................... 18.9x
Two-year forward EPS ..................... 8.8x
</TABLE>
One-year forward and two-year forward EPS for OptiCare were provided by
OptiCare management.
PaineWebber believed that a purely quantitative analysis would be
insufficient and not adequately reliable to render a fairness opinion. As
PaineWebber informed the Vision Twenty-One Board, an appropriate use of
comparable company analysis in this instance would involve a combination of
quantitative and qualitative judgments concerning differences between the
financial and operating characteristics among the comparable companies, Vision
Twenty-One and OptiCare. These differences would affect the public trading
values of the Vision Twenty-One and OptiCare comparable companies as well as
Vision Twenty-One and OptiCare.
Selected comparable mergers and acquisitions analysis. PaineWebber
reviewed publicly available financial information for selected mergers and
acquisitions involving laser vision correction companies, surgical center
companies, as well as managed care companies. From this universe, PaineWebber
used information from the following seven mergers and acquisitions to perform
its analysis:
VISION CORRECTION TRANSACTIONS/SURGICAL CENTERS
<TABLE>
<CAPTION>
ACQUIROR TARGET
-------- ------
<S> <C>
Vision Twenty-One, Inc. American SurgiSite Centers
HealthSouth Corp. National Surgery Centers
ESC Medical Systems Ltd. Luxar Corp.
TLC Laser Eye Centers, Inc. 20/20 Laser Centers
HealthSouth Corp. Surgical Care Affiliates
</TABLE>
MANAGED CARE TRANSACTIONS
<TABLE>
<CAPTION>
ACQUIROR TARGET
-------- ------
<S> <C>
Guardian Life Insurance Company of America First Commonwealth Inc.
Protective Life Corp. United Dental Care
</TABLE>
PaineWebber reviewed the consideration paid based on stock prices on the
day prior to the announcement of the comparable transactions and calculated
multiples of total enterprise value. The comparable transactions analysis
resulted in the following range of values:
<TABLE>
<CAPTION>
ANALYSIS MULTIPLE RANGE
-------- --------------
<S> <C>
Latest twelve months revenue ............. 0.70x to 4.99x
Annualized revenue run rate .............. 1.04x to 4.77x
Latest twelve months EBITDA .............. 4.6x to 16.2x
Annualized EBITDA run rate ............... 10.0x to 13.6x
Latest twelve months net income .......... 21.0x to 62.1x
</TABLE>
43
<PAGE>
Based on an Exchange Ratio of 0.407 OptiCare shares for each outstanding
share of Vision Twenty-One common stock, Vision Twenty-One's implied multiples,
calculated on a pro forma basis for Vision Twenty-One's managed care and laser
vision correction businesses, were as follows:
<TABLE>
<CAPTION>
ANALYSIS VISION TWENTY-ONE IMPLIED MULTIPLE
-------- ----------------------------------
<S> <C>
Latest twelve months revenue ............. 0.86x
Annualized revenue run rate .............. 0.71x
Latest twelve months EBITDA .............. 21.5x
Annualized EBITDA run rate ............... 41.0x
Latest twelve months net income .......... Not meaningful
</TABLE>
Because the reasons for and the circumstances surrounding each of the
transactions analyzed were specific to each transaction and because of the
inherent differences between the businesses, operations and prospects of Vision
Twenty-One compared to the businesses, operations and prospects of the
companies that were parties to the selected mergers and acquisitions
PaineWebber analyzed, PaineWebber believed it was inappropriate to, and
therefore did not, rely solely on the quantitative results of the analysis, and
accordingly also made qualitative judgments concerning differences between the
characteristics of these transactions. These qualitative judgments did not lead
to specific conclusions regarding the fairness of the Exchange Ratio, but
rather were part of PaineWebber's evaluation of the relevance of this analysis
under the particular circumstances of the merger.
Premiums paid analysis. PaineWebber reviewed purchase price per share
premiums paid in 213 publicly disclosed stock-for-stock merger transactions of
non-financial domestic companies pending and completed from January 1, 1998 to
February 4, 2000. This analysis indicated the following premiums to the
target's closing stock prices as set forth in the following table:
<TABLE>
<CAPTION>
PERIOD PRIOR TO ANNOUNCEMENT AVERAGE MEDIAN
- ------------------------------- --------- ----------
<S> <C> <C>
One day ..................... 34.8% 25.7%
One week .................... 42.2% 33.5%
Four weeks .................. 51.2% 42.1%
</TABLE>
PaineWebber also reviewed the purchase price per share premiums paid in
the seven comparable mergers and acquisitions transactions involving selected
vision correction and managed care companies described previously. This
analysis indicated the following premiums to the targets' closing stock prices
as set forth in the following table:
<TABLE>
<CAPTION>
PERIOD PRIOR TO ANNOUNCEMENT AVERAGE MEDIAN
- ------------------------------- --------- ----------
<S> <C> <C>
One day ..................... 21.4% 21.6%
One week .................... 30.2% 29.6%
Four weeks .................. 42.6% 45.9%
</TABLE>
The implied premiums to the Vision Twenty-One closing stock price based on
an Exchange Ratio of 0.407 OptiCare common shares per Vision Twenty-One share
for the one day, one week and four week periods prior to February 7, 2000, were
as set forth in the following table:
<TABLE>
<CAPTION>
PERIOD PRIOR TO FEBRUARY 7, 2000 VISION TWENTY-ONE IMPLIED PREMIUM
- ---------------------------------- ----------------------------------
<S> <C>
One day ........................ 25.7%
One week ....................... 4.6%
Four weeks ..................... (31.5)%
</TABLE>
Pro forma merger analysis. PaineWebber performed an analysis of the
potential pro forma effect of the Merger on OptiCare's projected earnings per
share or EPS, as well as projected cash earnings per share or cash EPS. In
performing this analysis, PaineWebber assumed the following with Vision
Twenty-One's and OptiCare's consent:
44
<PAGE>
o The merger will receive purchase accounting treatment under U.S.
generally accepted accounting principles;
o Goodwill will be amortized over twenty-five years;
o No synergies are achieved in the merger;
o OptiCare will raise $30.0 million by issuing 10% convertible preferred
securities exercisable at $3.50; and
o The issuance of 5.598 million OptiCare shares in the Merger.
PaineWebber combined the projected operating results of Vision Twenty-One
provided by Vision Twenty-One management with projected operating results for
OptiCare provided by OptiCare management to arrive at the combined company
projected net income. PaineWebber divided this result by the pro forma diluted
shares outstanding to arrive at a combined company diluted EPS. PaineWebber
then compared the calculated combined company EPS to the EPS estimate for
OptiCare on a stand-alone basis to determine the pro forma impact of the merger
on OptiCare.
General. The summary of the PaineWebber opinion set forth above does not
purport to be a complete description of the data or analyses presented by
PaineWebber. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant quantitative methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. Accordingly, PaineWebber believes that
its analysis must be considered as a whole and that considering any portion of
such analysis and of the factors considered, without considering all analyses
and factors, could create a misleading or incomplete view of the process
underlying the opinion. In its analyses, PaineWebber made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of Vision Twenty-One
and OptiCare. Any estimates contained in these analyses are not necessarily
indicative of actual values or predictive of future results or values, which
may be significantly more or less favorable than as set forth therein.
Accordingly, such estimates are inherently subject to substantial uncertainty
and Vision Twenty-One, OptiCare or PaineWebber do not assume responsibility for
the accuracy of such estimates. In addition, analyses relating to the value of
businesses do not purport to be appraisals or to reflect the prices at which
businesses may actually be sold.
Vision Twenty-One selected PaineWebber to be its financial advisor in
connection with the merger because PaineWebber is a prominent investment
banking and financial advisory firm with experience in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and valuations for corporate purposes.
Pursuant to an engagement letter between Vision Twenty-One and PaineWebber
dated November 22, 1999, PaineWebber earned a fee of $500,000 for rendering the
opinion. In addition, PaineWebber will receive a fee, payable upon completion
of the merger, of approximately $1.6 million, against which the opinion fee
will be credited, and will be reimbursed for certain of its related expenses.
PaineWebber will not be entitled to any additional fees or compensation in the
event the merger is not approved or otherwise consummated. Vision Twenty-One
also agreed, under separate agreement, to indemnify PaineWebber, its affiliates
and each of its directors, officers, agents and employees and each person, if
any, controlling PaineWebber or any of its affiliates against certain
liabilities, including liabilities under the federal securities laws.
Prior to this engagement, PaineWebber has not provided investment banking
services to Vision Twenty-One. In the ordinary course of business, PaineWebber
may actively trade the securities of Vision Twenty-One and OptiCare for its own
account and for the accounts of its customers and, accordingly, may at any time
hold long or short positions in such securities.
INTERESTS OF VISION TWENTY-ONE'S OFFICERS AND DIRECTORS IN THE MERGER
When considering the recommendation of the Vision Twenty-One board, Vision
Twenty-One stockholders should be aware that Vision Twenty-One's officers and
directors have interests in the
45
<PAGE>
Merger that differ from, or are in addition to, those of Vision Twenty-One
stockholders. The Vision Twenty-One board was aware of these potential
conflicts and considered them, among other matters, in approving the Merger.
Stock Options. Upon completion of the Merger, the vesting under stock
options to purchase 100,000 shares held by Bruce Maller, Chairman of Vision
Twenty-One will become fully vested and exercisable.
Agreements with OptiCare. Upon completion of the Merger, Bruce S. Maller
and Andrew Alcorn, Chairman and Senior Vice President of Vision Twenty-One,
respectively, are expected to serve as Interim President of Laser Correction
and President of Managed Care Services Division, respectively, of OptiCare. Mr.
Maller is also expected to serve as a Director of OptiCare. The terms of their
employment agreements are currently being discussed among the parties.
Indemnification. The Merger Agreement provides that, from and after the
effective time, OptiCare will cause Vision Twenty-One to indemnify the present
and former officers, directors and employees and agents of Vision Twenty-One in
respect of acts or omissions occurring on or prior to the effective time. This
indemnity will apply to the full extent permitted under the Vision Twenty-One
certificate of incorporation or the Vision Twenty-One bylaws in each case as in
effect on the date of the Merger Agreement, for a period of five years. See
"The Merger Agreement and Related Agreements -- Director and Officer
Indemnification and Insurance."
Board of Directors. OptiCare Health Systems, Inc. has agreed to expand its
board and to nominate up to three additional members designated by Vision
Twenty-One. See "The Merger -- Operations Following the Merger" and "Proposal 2
- -- To Elect Eight Directors to the OptiCare Board."
As a result of the foregoing, these directors and officers may be more
likely to vote to approve the Merger than Vision Twenty-One stockholders
generally.
APPLICABLE WAITING PERIODS AND REGULATORY APPROVALS
Pursuant to the requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), OptiCare and Vision
Twenty-One will each file a Notification and Report Form for review under the
HSR Act with the Federal Trade Commission (the "FTC) and the Antitrust Division
of the Department of Justice (the "Antitrust Division"). The waiting period
under the HSR Act with respect to such filings will expire 30 days after such
filings if no request for additional information is made by the FTC and/or the
Antitrust Division. The thirty (30) day waiting period may terminate sooner if
OptiCare and Vision Twenty-One are granted early termination of the waiting
period.
Neither Vision Twenty-One nor OptiCare is aware of any other material
governmental or regulatory approval required for completion of the Merger,
other than compliance with applicable corporate law of Delaware and the consent
of the insurance department of each of Texas and Wisconsin in connection with
the change in control of two single service HMO's in those states, which are
subsidiaries of Vision Twenty-One.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion summarizes the material federal income tax
consequences of the Merger generally applicable to holders of Vision Twenty-One
common stock. It is a condition to the obligation of OptiCare to consummate the
Merger that OptiCare shall have received an opinion from Shumaker, Loop &
Kendrick, LLP, or such other law firm or professional services firm reasonably
acceptable to OptiCare in form and substance reasonably satisfactory to
OptiCare, dated as of the Closing Date and based on reasonably requested
representations contained in certificates of Vision Twenty-One, OptiCare and
OptiCare's newly created subsidiary, to the effect that the Merger will
constitute a reorganization within the meaning of Section 368(b) of the
Internal Revenue Code (the "Code"). The discussion below under "-- Exchange of
Vision Twenty-One Shares for OptiCare
46
<PAGE>
Shares", "-- Cash Received in Lieu of Fractional Shares" and "-- Reporting
Requirements" assumes that the Merger will be treated in accordance with the
opinion of Shumaker, Loop & Kendrick, LLP described in the preceding sentence.
There can be no assurance that the Internal Revenue Service (the "IRS") will
not take a contrary view, and no ruling from the IRS has been or will be
sought.
The discussion below is based upon the Code, the applicable Treasury
Department regulations thereunder, judicial authority and current
administrative rulings and practice, all as in effect as of the date hereof.
Future legislative, judicial or administrative changes or interpretations could
alter or modify the statements and conclusions set forth herein, and any such
changes or interpretations could have retroactive effect and could affect the
federal income tax consequences to holders of Vision Twenty-One common stock.
The following discussion does not address the consequences of the Merger
under state, local or foreign law nor does the discussion address all aspects
of federal income taxation that may be important to a stockholder in light of
such stockholder's particular circumstances or to stockholders subject to
special rules, including, without limitation, financial institutions, insurance
companies, foreign individuals and entities, tax-exempt entities, dealers in
securities, persons who acquired Vision Twenty-One common stock pursuant to the
exercise of an employee option (or otherwise as compensation) or persons
holding Vision Twenty-One shares as part of an integrated investment (including
a "straddle") comprised of Vision Twenty-One shares and one or more other
positions. This discussion assumes that Vision Twenty-One stockholders hold
their respective Vision Twenty-One common stock as capital assets within the
meaning of Section 1221 of the Code.
Exchange of Vision Twenty-One Shares for OptiCare Shares. Except as
discussed below under "Cash Received in Lieu of Fractional Shares," no gain or
loss will be recognized for federal income tax purposes by holders of Vision
Twenty-One shares who exchange their Vision Twenty-One shares for OptiCare
shares pursuant to the Merger. The aggregate tax basis of OptiCare shares
received as a result of the Merger will be the same as the stockholder's
aggregate tax basis in the Vision Twenty-One common stock surrendered in the
exchange (reduced by any tax basis allocable to fractional shares exchanged for
cash) and the holding period of the OptiCare shares received will include the
holding period of the Vision Twenty-One common stock surrendered therefor.
Cash Received in Lieu of Fractional Shares. The payment of cash to a
holder of Vision Twenty-One shares in lieu of a fractional share interest in
OptiCare common stock will be treated as if the fractional share had been
distributed as part of the exchange and then redeemed by OptiCare. The cash
payment will be treated as having been received as a distribution in payment
for the OptiCare common stock hypothetically redeemed as provided in Section
302 of the Code and generally should result in the recognition of capital gain
or loss measured by the difference between the amount of cash received and the
portion of the tax basis of the Vision Twenty-One common stock allocable to
such fractional share interest. Such capital gain or loss will be long-term
capital gain or loss if such Vision Twenty-One common stock have been held for
more than one year at the Effective Time. In the case of individuals, "net
capital gain" (i.e., the excess of net long-term capital gain over net
short-term capital loss) is generally subject to a reduced rate of federal
income tax.
Reporting Requirements. Each holder of Vision Twenty-One common stock that
receives OptiCare common stock in the Merger will be required to retain certain
records and those Vision Twenty-One stockholders who receive cash in lieu of
fractional shares in addition to OptiCare common stock will be required to file
with such holder's federal income tax return a statement setting forth certain
facts relating to the Merger.
Backup Withholding. Unless an exemption applies under the applicable law
and regulations, the Exchange Agent (as defined in "The Merger Agreement and
Related Agreements -- The Exchange Agent") is required to withhold, and will
withhold, 31% of any cash payments to a Vision Twenty-One stockholder in the
Merger unless the stockholder provides the appropriate form as described below.
Each Vision Twenty-One stockholder should complete and sign the Substitute Form
W-9 included as part of the letter of transmittal to be sent to each Vision
Twenty-One stockholder, so as to provide the information (including the
stockholder's taxpayer identification number) and certification necessary to
avoid backup withholding, unless an applicable exemption exists and is proved
in a manner satisfactory to OptiCare and the Exchange Agent.
47
<PAGE>
THE FOREGOING GENERAL DISCUSSION OF THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER IS WITHOUT REFERENCE TO THE FACTS AND CIRCUMSTANCES
OF ANY PARTICULAR STOCKHOLDER AND IS NOT TAX ADVICE. THE DISCUSSION DOES NOT
ADDRESS ANY NON-INCOME TAX OR ANY FOREIGN, STATE OR LOCAL TAX CONSEQUENCES OF
THE MERGER. MOREOVER, THE DISCUSSION DOES NOT ADDRESS THE TAX CONSEQUENCES OF
ANY TRANSACTION OTHER THAN THE MERGER. ACCORDINGLY, EACH STOCKHOLDER IS URGED
AND EXPECTED TO CONSULT WITH SUCH STOCKHOLDER'S TAX ADVISOR TO DETERMINE THE
PARTICULAR UNITED STATES FEDERAL, STATE, LOCAL OR FOREIGN INCOME OR OTHER TAX
CONSEQUENCES OF THE MERGER TO SUCH STOCKHOLDER.
ACCOUNTING TREATMENT
The Merger will be accounted for by OptiCare as a purchase of a business.
Under this method of accounting, the assets and liabilities of Vision
Twenty-One will be recorded at their estimated fair value, and any excess of
OptiCare purchase price over such fair value will be accounted for as goodwill.
The results of operations and cash flows of Vision Twenty-One will be included
in OptiCare's financial statements from the date of consummation of the Merger.
APPRAISAL RIGHTS
Stockholders of OptiCare are not entitled to exercise dissenters' or
appraisal rights as a result of the Merger or to demand cash payment for their
shares under Delaware law.
Stockholders of Vision Twenty-One are not entitled to exercise dissenters'
or appraisal rights as a result of the Merger under Florida law.
DELISTING AND DEREGISTRATION OF VISION TWENTY-ONE'S COMMON STOCK FOLLOWING THE
MERGER
If the Merger is consummated, Vision Twenty-One's common stock will be
delisted from NASDAQ and will be deregistered under the Securities Exchange Act
of 1934.
LISTING OF OPTICARE COMMON STOCK TO BE ISSUED IN THE MERGER
The authorization for listing on American Stock Exchange of the shares of
OptiCare Health Systems, Inc. common stock to be issued in the Merger is a
condition to the consummation of the Merger.
RESTRICTIONS ON SALE OF SHARES BY AFFILIATES OF OPTICARE AND VISION TWENTY-ONE
The shares of OptiCare common stock to be issued in connection with the
Merger will be registered under the Securities Act and will be freely
transferable under the Securities Act, except for shares of OptiCare common
stock issued to any person who is deemed to be an affiliate of either OptiCare
or Vision Twenty-One at the time of the meetings. Persons who may be deemed to
be affiliates include individuals or entities that control, are controlled by,
or are under common control of either OptiCare or Vision Twenty-One and may
include some of the officers, directors, or principal stockholders of OptiCare
or Vision Twenty-One. Affiliates may not sell their shares of OptiCare common
stock acquired in connection with the Merger except under:
o an effective registration statement under the Securities Act covering
the resale of those shares;
o an exemption under paragraph (d) of Rule 145 under the Securities Act;
or
o another applicable exemption under the Securities Act. OptiCare's
registration statement on Form S-4, of which this Joint Proxy
Statement/Prospectus forms a part, does not cover the resale of shares
of OptiCare Health Systems, Inc. common stock to be received by
affiliates in the Merger.
48
<PAGE>
OPERATIONS FOLLOWING THE MERGER
Following the Merger, Vision Twenty-One will operate as a wholly-owned
subsidiary of OptiCare. OptiCare expects that Vision Twenty-One's refractive
and ambulatory surgery centers division will be integrated with OptiCare's
laser correction and professional services segment. In addition, OptiCare
expects that Vision Twenty-One's managed care division will be integrated with
OptiCare's managed care services segment to expand its board and to cause up to
three designees of Vision Twenty-One, with one such designee being an
independent director to be appointed to the Board of Directors of OptiCare as
of the effective time of the Merger. The stockholders of Vision Twenty-One will
become stockholders of OptiCare, and their rights as stockholders will be
governed by OptiCare's certificate of incorporation, OptiCare's bylaws and the
laws of the State of Delaware. See "Proposal 2 -- To Elect Eight Directors to
the OptiCare Board," "Comparison of Rights of Holders of Vision Twenty-One
Common Stock and OptiCare Common Stock" and "Vision Twenty-One Management
Continuing After Merger."
THE FINANCING
It is a condition to the completion of the Merger that OptiCare raise not
less than $30 million through the issuance of equity, equity linked or
subordinated debt securities (the "Financing"). At this time, OptiCare is
seeking to raise approximately $30 million through the issuance of convertible
preferred equity simultaneously with the closing of the Merger. The net
proceeds from the sale of the convertible preferred equity will be used
substantially by OptiCare to pay down its senior bank debt obligations
including the obligations assumed in connection with the acquisition of Vision
Twenty-One. See "Risk Factors -- Substantial Indebtedness; If OptiCare defaults
on its debt OptiCare's creditors could foreclose on its assets."
DISPUTE WITH BLOCK BUYING GROUP
Block Buying Group, LLC (the "Block Group"), an entity owned by Michael P.
Block, the former President of Vision Twenty-One's Block Vision subsidiary, has
filed a civil action in Palm Beach County Circuit Court seeking to enjoin the
proposed merger between Vision Twenty-One and OptiCare. Vision Twenty-One
previously sold its buying group division to the Block Group in June of 1999.
The Block Group has informed Vision Twenty-One that it believes that the
proposed merger with OptiCare is in violation of the non-competition and
confidentiality provisions entered into in connection with the June 1999 sale
since OptiCare operates a buying group division which currently competes with
the Block Group. On April 21, 2000, the Block Group and Vision Twenty-One,
through counsel, signed a stipulation to participate in expedited arbitration
in accordance with the terms and conditions of the June 1999 sale and to
jointly seek the completion of the arbitration on or before June 1, 2000, or as
soon thereafter as reasonably possible. While it is impossible to determine the
eventual outcome of this action, Vision Twenty-One believes that it has
substantial defenses to this claim and intends to vigorously defend itself. The
consummation of the proposed merger between Vision Twenty-One and OptiCare is
subject to certain conditions being waived or satisfied including resolution of
this matter to OptiCare's satisfaction. The failure to consummate the OptiCare
transaction would have a material adverse effect on Vision Twenty-One.
In relation to the same matter, OptiCare, on or about April 26, 2000,
filed a complaint in the United States District Court in the District of
Connecticut seeking to enjoin the Block Group from preventing the proposed
merger between OptiCare and Vision Twenty-One. As part of its request for
injunctive relief, OptiCare is seeking a declaratory judgment that the
non-competition covenant would violate federal antitrust and common law
prohibitions against restraints on trade if that covenant would prevent
OptiCare from competing against the Block Group after OptiCare's acquisition of
Vision Twenty-One.
49
<PAGE>
THE MERGER AGREEMENT
AND RELATED AGREEMENTS
The following is a brief summary of the material provisions of the Merger
Agreement, a copy of which is attached as Appendix A to this Joint Proxy
Statement/Prospectus and incorporated by reference in this Joint Proxy
Statement/Prospectus. We urge you to read the Merger Agreement in its entirety
for a more complete description of the Merger. In the event of any discrepancy
between the terms of the Merger Agreement or other agreements and the following
summary, the applicable agreement will control.
MERGER AGREEMENT
THE MERGER
Vision Twenty-One will merge with OC Acquisition Corp., a wholly owned
subsidiary of OptiCare, following
o the approval and adoption of the Merger Agreement and the Merger by
the Vision Twenty-One stockholders;
o the approval of the issuance of OptiCare common stock in the Merger by
the OptiCare stockholders; and
o the satisfaction or waiver of the other conditions to the Merger.
Vision Twenty-One will be the surviving corporation and become a wholly
owned subsidiary of OptiCare following the Merger.
EFFECTIVE TIME
As soon as practicable on or after the closing of the Merger, the parties
will cause the Merger to become effective by filing a certificate of merger
with the Secretary of State of the State of Florida. OptiCare and Vision
Twenty-One are working toward completing the Merger as soon as possible and
hope to complete the Merger during the third quarter of 2000. Because the
Merger is subject to governmental and other regulatory approvals, however, we
cannot predict the exact timing.
CONVERSION OF VISION TWENTY-ONE SHARES IN THE MERGER
At the effective time, each outstanding share of Vision Twenty-One common
stock will automatically be converted into the right to receive shares of
OptiCare common stock, which exchange ratio will be adjusted prior to closing
in accordance with the terms of the Merger Agreement. The final number of
shares of OptiCare common stock issuable in the Merger will be adjusted and
recalculated prior to the Merger by the exchange ratio, which is the quotient
of
o (x) 6,000,000 -- (0.25 (Net Debt Equivalents -- $54 million)) + (0.125
(Tangible Net Worth -- $56 Million)) divided by (y) the number of
outstanding shares of Vision Twenty-One common stock,
where Net Debt Equivalents means Vision Twenty-One's long term indebtedness and
certain other debt equivalents, less its cash, including cash equivalents or
marketable securities, and Tangible Net Worth means Vision Twenty-One's net
worth less intangible assets.
VISION TWENTY-ONE STOCK OPTIONS AND WARRANTS
At the effective time, each outstanding option or warrant to purchase
shares (as disclosed to OptiCare) of Vision Twenty-One common stock will be
assumed by OptiCare regardless of whether the options are exercisable. To the
fullest extent permitted under applicable law and the applicable stock option
agreements, the Vision Twenty-One stock plans and the warrant agreements,
outstanding options and warrants shall be exchanged or substituted without any
action on the part of the holder
50
<PAGE>
thereof into an option or warrant to purchase shares of OptiCare common stock
as of the Merger. It is OptiCare's intention to roll the assumed outstanding
options into options to purchase OptiCare common stock, pursuant to OptiCare's
Performance Stock Program. However, at OptiCare's discretion or in the event
that OptiCare is unable to roll converted options into the Performance Stock
Program, then OptiCare will assume the stock plans of Vision Twenty-One. Each
Vision Twenty-One stock option or warrant assumed by OptiCare will generally
continue to have substantially the same terms, and be subject to the same
conditions, that were applicable to the option immediately prior to the
effective time, except that:
o each Vision Twenty-One stock option or warrant will be exercisable for
shares of OptiCare common stock;
o unless otherwise determined by OptiCare, each Vision Twenty-One stock
option assumed by OptiCare will generally be subject to the terms,
provisions and conditions of the Performance Stock Program;
o the number of shares of OptiCare common stock issuable upon exercise
of any given Vision Twenty-One option or warrant shall be the same
number of shares of Vision Twenty-One common stock as the holder of
such option or warrant would have been entitled to receive pursuant to
the Merger had such holder exercised such option or warrant in full
immediately prior to the effective time; and
o the per share exercise price of any given option after the effective
time shall be equal to (x) the aggregate exercise price for the shares
of Vision Twenty-One common stock otherwise purchasable pursuant to
such option or warrant divided by (y) the exchange ratio.
NO FRACTIONAL SHARES
No fractional shares of OptiCare common stock will be issued in connection
with the Merger. Instead Vision Twenty-One stockholders will receive an amount
of cash, in lieu of a fraction of a share of OptiCare common stock, equal to
(A) the product of this fraction multiplied by (B) the closing price for a
share of OptiCare common stock on the American Stock Exchange on the last
business day prior to the effective time of the Merger. See "The Merger --
Certain Federal Income Tax Consequences of the Merger -- Cash Received in Lieu
of Fractional Shares."
THE EXCHANGE AGENT
OptiCare is required to deposit with a bank or trust company promptly
after the effective time of the Merger, certificates representing the shares of
OptiCare common stock to be exchanged for shares of Vision Twenty-One common
stock and cash to pay for fractional shares and any dividends or distributions
that holders of Vision Twenty-One common stock may be entitled to receive under
the Merger Agreement.
EXCHANGE OF VISION TWENTY-ONE STOCK CERTIFICATES FOR OPTICARE STOCK
CERTIFICATES
Promptly after the effective time, the exchange agent will mail to Vision
Twenty-One stockholders a letter of transmittal and instructions for
surrendering their Vision Twenty-One stock certificates in exchange for
OptiCare stock certificates and cash in lieu of fractional shares.
Vision Twenty-One stockholders should not submit their stock certificates
for exchange until they have received the letter of transmittal and
instructions referred to above.
OptiCare stockholders should not submit their stock certificates for
exchange.
51
<PAGE>
DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES
Vision Twenty-One stockholders are not entitled to receive any dividends
or other distributions on OptiCare common stock with a record date after the
Merger is completed until they have surrendered their Vision Twenty-One stock
certificates in exchange for OptiCare stock certificates.
If there is any dividend or other distribution on OptiCare common stock
with a record date after the effective time of the Merger, former Vision
Twenty-One stockholders will receive, without interest, subject to applicable
escheat or similar laws and only following surrender of their Vision Twenty-One
stock certificates, the dividend or other distribution payable with respect to
the whole shares of OptiCare common stock issued in exchange for their Vision
Twenty-One stock certificates.
REPRESENTATIONS AND WARRANTIES
OptiCare and Vision Twenty-One each made a number of representations and
warranties in the Merger Agreement about their authority to enter into the
Merger Agreement and to consummate the other transactions contemplated by the
Merger Agreement and about aspects of their business, financial condition,
structure and other facts pertinent to the Merger.
Vision Twenty-One made representations about the following topics:
o Vision Twenty-One's organization, qualification to do business and
good standing;
o validity of Vision-Twenty-One's organizational documents;
o Vision Twenty-One's capitalization;
o Vision Twenty-One's corporate power to enter into and its
authorization of the Merger Agreement and the transactions
contemplated by the Merger Agreement;
o consents and permits required in connection with the Merger Agreement
and transactions contemplated by the Merger Agreement;
o the absence of conflicts with and/or defaults under (i) Vision
Twenty-One's organizational documents, (ii) applicable laws (iii)
material agreements of Vision Twenty-One, and the absence of the
creation of liens or other encumbrances on Vision Twenty-One's assets,
in any case as a result of the transactions contemplated by the Merger
Agreement;
o possession of and compliance with permits required to conduct Vision
Twenty-One's business;
o Vision Twenty-One's compliance with applicable laws, rules and
regulations of governmental entities;
o Vision Twenty-One's filings and reports with the Securities and
Exchange Commission;
o Vision Twenty-One's financial statements;
o changes in Vision Twenty-One's business since September 30, 1999;
o Vision Twenty-One's employee benefit plans;
o matters relating to Vision Twenty-One's employees;
o the treatment of the Merger as a tax-free reorganization;
o Vision Twenty-One's material contracts and obligations;
o litigation involving Vision Twenty-One;
o compliance with environmental laws that apply to Vision Twenty-One;
o intellectual property used or owned by Vision Twenty-One;
o Vision Twenty-One's taxes, tax returns and reporting;
o Vision Twenty-One's insurance;
52
<PAGE>
o Vision Twenty-One's title to the properties it owns and leases;
o Vision Twenty-One's affiliates;
o the provision of a fairness opinion by Vision Twenty-One's financial
advisors;
o Vision Twenty-One's brokers' and finders' fees in connection with the
Merger;
o Vision Twenty-One's political contributions, gifts and unrecorded
funds;
o the inapplicability of the Florida anti-takeover statute to the
Merger;
o restrictions on Vision Twenty-One's business;
o the absence of dissenters' rights; and
o the recommendation of the Board of Directors of Vision Twenty-One.
OptiCare made representations about the following topics:
o OptiCare's organization, qualification to do business and good
standing;
o validity of OptiCare's organizational documents;
o OptiCare's capitalization; OptiCare's corporate power to enter into
and its authorization of the Merger Agreement and the transactions
contemplated by the Merger Agreement;
o consents and permits required in connection with the Merger Agreement
and transactions contemplated by the Merger Agreement;
o absence of conflicts with and/or defaults under (ii) OptiCare's
organizational documents (ii) applicable laws or (iii) material
agreements of OptiCare, and the absence of the creation of liens or
other encumbrances on OptiCare's material assets, in any case as a
result of the transactions contemplated by the Merger Agreement;
o possession of and compliance with permits required to conduct
OptiCare's business;
o OptiCare's compliance with applicable laws, rules and regulations of
governmental entities;
o OptiCare's filings and reports with the Securities and Exchange
Commission;
o OptiCare's financial statements;
o changes in OptiCare's business since September 30, 1999;
o OptiCare's employee benefit plans;
o matters relating to OptiCare's employees;
o the treatment of the Merger as a tax-free reorganization;
o OptiCare's material contracts and obligations;
o litigation involving OptiCare;
o compliance with environmental laws that apply to OptiCare;
o intellectual property used or owned by OptiCare;
o OptiCare's insurance;
o OptiCare's title to the properties it owns and leases;
o the provision of a fairness opinion by OptiCare's financial advisors;
o OptiCare's brokers' and finders' fees in connection with the Merger;
and
o the absence of interested stockholders.
The representations and warranties in the Merger Agreement are complicated
and not easily summarized. We urge stockholders to read carefully the articles
in the Merger Agreement entitled "Representations and Warranties of Company"
and "Representations and Warranties of Parent."
53
<PAGE>
VISION TWENTY-ONE'S CONDUCT OF BUSINESS BEFORE COMPLETION OF THE MERGER
Vision Twenty-One has agreed that, until the completion of the Merger or
unless OptiCare otherwise agrees, Vision Twenty-One and its subsidiaries will,
except for certain exceptions, conduct their businesses in the ordinary course
of business consistent with past practices, and shall use reasonable efforts to
keep available the services of such current officers, significant employees,
consultants and to preserve relationships with such corporate partners,
customers, suppliers and other persons with which they have significant
business relations as is necessary to preserve substantially intact their
business organization.
To this end, Vision Twenty-One has agreed that, until the completion of
the Merger or unless OptiCare otherwise agrees, Vision Twenty-One and its
subsidiaries will not, subject to certain exceptions, take any action that
would result in the following:
o the modification of Vision Twenty-One's organizational documents;
o the issuance, sale, pledge or encumbrance of shares of Vision
Twenty-One capital stock or securities convertible into Vision
Twenty-One capital stock, except for limited issuances of securities
in connection with stock options already outstanding;
o the disposition or encumbrance of any properties or assets, including
the property or assets of MEC Healthcare, Inc., other than providing
products and services in the ordinary course of business consistent
with past practice;
o the acquisition of interests in other entities except as to business
interests in new refractive centers or ambulatory surgical centers as
provided in Vision Twenty-One's business plan and after written notice
to OptiCare;
o the incurrence of any material indebtedness; the assumption of any
material indebtedness of any person other than a subsidiary; or the
making of any material loan or advance other than routine loans under
a specified amount to employees who are not executive officers,
borrowing under Vision Twenty-One's credit facility for the operation
of the Company's business in the ordinary course, or to pay debt or
liabilities for an amount less than reflected or reserved against on
Vision Twenty-One's balance sheet;
o the entrance into, modification or termination of material contracts;
o the making of capital expenditures, other than certain budgeted and
disclosed expenditures in the ordinary course that do not exceed an
aggregate specified amount for Vision Twenty-One and its subsidiaries;
o the declaration, setting aside or issuance of dividends or other
distributions, except by Vision Twenty-One's subsidiaries to Vision
Twenty-One or other subsidiaries;
o any reclassification, acquisition or other modification of any of its
capital stock;
o the modification of any stock options or warrants or the authorization
of cash payments in exchange for stock options;
o the amendment, repurchase, or redemption of any securities of Vision
Twenty-One or its subsidiaries, except in connection with the
disposition of Vision Twenty-One's ophthalmology or optometry
practices;
o the increase of compensation payable to directors, officers,
consultants or employees, except as disclosed to OptiCare;
o the granting of any severance arrangements or entering into of any
agreement providing benefits upon a change of control that would be
triggered by the Merger;
o the adoption, entering into or amendment of any plan, agreement,
policy or arrangement for the benefit of any director, officer,
consultant or employee except to the extent required by applicable
law;
54
<PAGE>
o the entering into or amendment of any contract, commitment or
arrangement between Vision Twenty-One or its subsidiaries and any of
their respective directors, officers, consultants or employees;
o the payment of claims, liabilities or obligations other than (i) in
the ordinary course consistent with past practice, (ii) as reserved
against on Vision Twenty-One's consolidated balance sheet or (iii) for
the payment or discharge of any such liability for an amount less than
reflected or reserved against on Vision Twenty-One's balance sheet;
o modifications to accounting policies and procedures other than as
required by GAAP and except for accounting charges for discontinued
business operations in connection with practice dispositions in
accordance with GAAP;
o the making of material tax elections, settlements or compromises; and
o authorizing or taking any action that would make untrue any of the
representations or warranties of Vision Twenty-One in the Merger
Agreement, except as otherwise permitted in the Merger Agreement.
Vision Twenty-One has also agreed not to take any action that would have a
principal purpose of and would reasonably be likely to result in delaying or
interfering with the consummation of the Merger.
Furthermore, Vision Twenty-One will use its commercially reasonable
efforts to:
o enter into a standstill agreement with Bank of Montreal within a
specific date following the date of the Merger Agreement;
o obtain a release and waiver of all restrictions set forth in an Asset
Purchase Agreement, dated June 4, 1999, among Vision Twenty-One, Block
Vision Inc., and Block Buying Group LLC, or obtain a nonappealable
judgment from a Florida court holding that restrictions set forth in
such Asset Purchase Agreement are not enforceable against OptiCare;
o enter into letters of intent with Bank of Montreal and Bank Austria to
amend certain credit agreements, and to finalize such amendments, such
that certain loans are consolidated into one senior credit facility;
and
o complete the termination of all of its management relationships with
all of its ophthalmology and optometry practices (except for certain
specified practices), transfer all of the assets and leases relating
thereto back to such ophthalmology and optometry practices and cause
such practices to assume all liabilities and obligations relating to
such practices.
Each of Vision Twenty-One and OptiCare has also agreed:
o to notify the other promptly of material events affecting the Merger
or the parties' rights under the Merger Agreement;
o to provide reasonable access to the other to its facilities and
records;
o to use its reasonable efforts to cause the Merger to qualify as a
tax-free reorganization;
o to make all necessary filings and obtain any consents and approvals as
may be required in connection with the Merger Agreement and the
Merger; and
o to provide the other copies of its filings with the Securities
Exchange Commission.
The agreements related to the conduct of Vision Twenty-One's business in
the Merger Agreement are complicated and not easily summarized. We urge
stockholders to carefully read the article in the Merger Agreement entitled
"Covenants."
55
<PAGE>
OPTICARE'S CONDUCT OF BUSINESS BEFORE COMPLETION OF THE MERGER
OptiCare has also agreed that, until the completion of the Merger or
unless Vision Twenty-One consents in writing, OptiCare and its subsidiaries
will conduct their business in compliance with certain restrictions and
accordingly have agreed that they will not do, or agree to do, the following:
o the modification of OptiCare's organizational documents;
o the issuance, sale, pledge or encumbrance of more than 20% of
OptiCare's or its subsidiaries' capital stock, or securities
convertible into OptiCare's or its subsidiaries' capital stock, except
for limited issuances of securities in connection with OptiCare's
Performance Stock Program and its Employee Stock Purchase Plan;
o the disposition or encumbrance of any material properties or assets
other than providing products and services in the ordinary course of
business consistent with past practice;
o the acquisition of interests in other entities that would be
considered a significant subsidiary of OptiCare;
o the incurrence or assumption (except from a subsidiary) of any
material indebtedness, except in connection with an acquisition of an
entity that would not be considered a significant subsidiary of
OptiCare;
o the making of any material loan or advance, other than borrowings
under OptiCare's credit facility for the operation of the business;
o the declaration, setting aside or issuance of dividends or other
distributions, except by OptiCare's subsidiaries to OptiCare or other
subsidiaries;
o any reclassification or other modification of any of its capital
stock;
o the modification of any stock options or warrants;
o any action that results in the delisting of OptiCare from the American
Stock Exchange; and
o any action resulting in a material adverse effect on OptiCare.
OptiCare has also agreed not to take any action that would have a
principal purpose of and would reasonably be likely to result in delaying or
interfering with the consummation of the Merger.
Furthermore, OptiCare has agreed:
o to take all actions necessary to increase the number of members of the
Board of Directors of OptiCare and to cause up to three designees of
Vision Twenty-One (including an independent director) to be appointed
to such Board;
o to use commercially reasonable efforts to enter into a financing
commitment for not less than $30,000,000 by a certain date, see "The
Merger -- The Financing;" and
o use its commercially reasonable efforts to enter into a letter of
intent with Bank Austria by a certain date to amend its credit
agreement and to finalize such amendment, such that its loans and
Vision Twenty-One's loans from Bank of Montreal are consolidated into
one senior credit facility. See "Related Agreements -- Credit Facility
Restructuring"
In addition, each stockholder who granted an irrevocable proxy pursuant to
stockholder agreements of OptiCare or Vision Twenty-One, as applicable, will
vote its shares in favor of approval of the Merger, or the issuance of shares
in connection with the Merger, as the case may be, in person, or by proxy.
The agreements related to the conduct of OptiCare's business in the Merger
Agreement are complicated and not easily summarized. We urge stockholders to
carefully read the article in the Merger Agreement entitled "Covenants."
56
<PAGE>
NO SOLICITATION OF TRANSACTIONS
Until the Merger Agreement is terminated or as otherwise provided in the
Merger Agreement, Vision Twenty-One has agreed not to, directly or indirectly,
solicit, initiate, negotiate, encourage or agree to any (i) merger or similar
business combination, (ii) sale, exchange or other disposition of 33% or more
of Vision Twenty-One's and/or its subsidiaries' assets, (iii) tender or
exchange offer for, or acquisition by a person or certain groups (except to
obtain financing) of, 33% or more of Vision Twenty-One's outstanding voting
securities or (iv) acquisition by any person or certain groups of 49% or more
of Vision Twenty-One's outstanding voting securities in connection with a
financing transaction, in each case by a third party.
The Vision Twenty-One board is not prohibited, however, from taking and
disclosing to Vision Twenty-One's stockholders a position with respect to a
tender or exchange offer under Rules 14d-9 and 14e-2(a) under the Exchange Act
not made in violation of the Merger Agreement.
Vision Twenty-One has agreed to provide OptiCare prompt notice and
detailed information of any proposal it receives with respect to any of the
above-described competing transactions. Vision Twenty-One may, however, engage
in any of the foregoing actions, other than solicitation, initiation or
encouragement of any such competing transaction, if:
o the Vision Twenty-One board concludes in good faith after advice from
outside legal counsel that this action is necessary to prevent the
board from violating its fiduciary duties under applicable law;
o the board determines based upon advice of its independent financial
advisors in the exercise of its fiduciary duties that the acquiring
party is capable of consummating the competing transaction as
proposed;
o the Vision Twenty-One board has determined in the exercise of its
fiduciary duties that the competing transaction provides greater value
(based on a written opinion from its financial advisors) to Vision
Twenty-One stockholders than the Merger; and
o after making the foregoing determinations, Vision Twenty-One has
provided notice of its intentions to OptiCare, has allowed OptiCare to
propose modifications to the Merger between OptiCare and Vision
Twenty-One, has negotiated such modifications in good faith with the
objective of allowing OptiCare to match the competing proposal, and
reasonably and in good faith continues to believe such competing
transaction is a superior proposal.
If the board of Vision Twenty-One withdraws its recommendation and
approves and recommends a superior proposal, it must terminate the Merger
Agreement, concurrently enter into a definitive agreement to complete the
relevant competing transaction and pay a termination fee and OptiCare's
expenses (as described in greater detail under "Payment of Fees and Expenses"
below).
DIRECTOR AND OFFICER INDEMNIFICATION AND INSURANCE
The Merger Agreement provides that, after the completion of the Merger,
all rights of indemnification, advancement of expenses, exculpation, limitation
of liability and similar rights existing in favor of present and former
officers, directors, employees and agents of Vision Twenty-One shall survive
the Merger and shall continue for five years from the effective time. The
Merger Agreement also provides that, for five years after the completion of the
Merger, OptiCare will either:
o cause the surviving corporation to purchase tail coverage for the
directors' and officers' liability insurance policies currently
maintained by Vision Twenty-One; or
o if not available, maintain (subject to a maximum annual premium of
150% of the annual amount that Vision Twenty-One paid for this
insurance) directors' and officers' liability insurance with coverage
and terms substantially as favorable to the directors and officers as
the Vision Twenty-One directors' and officers' liability insurance
policy in effect on the date of the Merger Agreement, or to the extent
not available for such maximum premium, with the greatest coverage
available for such premium.
57
<PAGE>
ADDITIONAL AGREEMENTS
OptiCare and Vision Twenty-One must prepare and file with the Securities
and Exchange Commission (i) the Prospectus forming part of the registration
statement on Form S-4 of OptiCare, in connection with the registration under
the Securities Act of OptiCare's common stock to be issued to Vision
Twenty-One's stockholders pursuant to the Merger and (ii) the Joint Proxy
Statement relating to the meetings of Vision Twenty-One's stockholders to be
held to consider approval of the Merger and of OptiCare's stockholders to be
held to consider approval of the issuance of OptiCare common stock to Vision
Twenty-One's stockholders pursuant to the Merger.
The Joint Proxy Statement shall include:
o the approval of the Merger and the recommendation of the Board of
Directors of Vision Twenty-One to its stockholders that they vote in
favor of approval the Merger;
o the opinion of PaineWebber regarding the fairness of the exchange
ratio for the Merger;
o the approval of the share issuance and the recommendation of the Board
of Directors of OptiCare to its stockholders that they vote in favor
of approval of OptiCare's share issuance pursuant to the Merger; and
o the opinion of Legg Mason regarding the fairness of the exchange ratio
for the Merger.
OptiCare shall:
o file with the American Stock Exchange a Notification Form for Listing
of Additional Shares with respect to the OptiCare common stock issued
or issuable in connection with the Merger; and
o use all reasonable efforts to obtain all necessary permits and
approvals required under Blue Sky Laws to permit the distribution of
the shares of OptiCare common stock to be issued in accordance with
the provisions of the Merger.
Prior to the effective time, neither OptiCare, nor any of its subsidiaries
or affiliates will acquire or attempt to acquire ownership of more than 5% of
Vision Twenty-One's capital stock.
Prior to the effective time, neither Vision Twenty-One, nor any of its
subsidiaries or affiliates will acquire or attempt to acquire ownership of more
than 5% of OptiCare's capital stock.
CONDITIONS TO THE MERGER
OptiCare's and Vision Twenty-One's obligations to complete the Merger and
the related transactions are subject to the satisfaction or waiver of each of
the following conditions before completion of the Merger:
o the registration statement relating to the issuance of shares of
OptiCare common stock as contemplated by the Merger Agreement must be
declared effective by the SEC;
o the Merger Agreement must be approved by the requisite number of the
outstanding shares of Vision Twenty-One common stock and the OptiCare
share issuance must be approved by the requisite number of the
outstanding shares of OptiCare's common stock;
o no order, writ, injunction or decree shall exist that makes the Merger
illegal or otherwise prohibits completion of the Merger;
o any waiting period under the antitrust laws that applies to the
consummation of the Merger must have expired or been terminated;
o all material consents, approvals and authorization legally required to
consummate the Merger must have been obtained from all governmental
entities;
o the shares of OptiCare common stock to be issued in connection with
the Merger must be registered under the Securities Act and shall have
been authorized for listing on the American Stock Exchange;
58
<PAGE>
o OptiCare must have obtained financing in an amount not less than
$30,000,000;
o OptiCare must have entered into an amendment to its existing credit
agreement with Bank Austria, which consolidates the loans of OptiCare
under its existing credit facility with Bank Austria together with the
loans of Vision Twenty-One under its credit facility with Bank of
Montreal into one senior credit facility, see "-- Related Agreements
-- Credit Facility Restructuring;"
o Vision Twenty-One must have entered into a letter of intent with Bank
of Montreal;
o all third-party consents required under any material contract must
have been obtained; and
o the opinion from Shumaker, Loop & Kendrick, LLP the special counsel to
Vision Twenty-One that states the Merger will qualify as a tax-free
reorganization must be obtained.
Vision Twenty-One's obligations to complete the Merger and the other
transactions contemplated by the Merger Agreement are subject to the
satisfaction or waiver of each of the following additional conditions before
completion of the Merger:
o OptiCare's representations and warranties must be true and correct in
all material respects when made and as of the closing of the Merger;
o OptiCare must have complied in all material respects with all of its
covenants in the Merger Agreement; and
o no change in or effect on the business of OptiCare and its
subsidiaries shall exist that, individually or in the aggregate, is or
is reasonably likely to be materially adverse to the business, assets,
liabilities, financial condition or results of operations of OptiCare
and its subsidiaries, taken as a whole.
OptiCare's obligations to complete the Merger and the other transactions
contemplated by the Merger Agreement are subject to the satisfaction or waiver
of each of the following additional conditions before completion of the Merger:
o Vision Twenty-One's representations and warranties must be true and
correct in all material respects when made and as of the closing of
the Merger;
o Vision Twenty-One must have complied in all material respects with all
of its covenants in the Merger Agreement;
o no change in or effect on the business of Vision Twenty-One and its
subsidiaries shall exist that, individually or in the aggregate, is or
is reasonably likely to be materially adverse to the business, assets,
liabilities, financial condition or results of operations of Vision
Twenty-One and its subsidiaries, taken as a whole;
o OptiCare must have entered into agreements with Bruce S. Maller and
Richard Lindstrom, M.D., directors of Vision Twenty-One, for their
continuation of services with OptiCare;
o certain officers, directors and stockholders of Vision Twenty-One
(Theodore Gillette, Richard Lindstrom, and Bruce S. Maller) shall have
entered into lock-up agreements;
o Vision Twenty-One shall not have received any notice of default or
notice of any pending or threatened cancellation, revocation or
termination under any of the Vision Twenty-One's managed care
contracts which could cause a material adverse effect on the Vision
Twenty-One's managed care business as a stand alone business;
o Vision Twenty-One shall have divested its business and assets relating
to Vision Twenty-One's ophthalmology and optometry practices and
Vision Twenty-One shall have received from all such practices a
release from all liabilities and obligations relating to such
practices, except as the parties may agree with respect to the Talbert
practice in Arizona;
o Vision Twenty-One shall have used its commercially reasonable efforts
to obtain a release and waiver of all non-compete restrictions
contained in that certain Asset Purchase Agreement,
59
<PAGE>
dated June 4, 1999, among Block Vision Inc., Block Buying Group LLC
and Vision Twenty-One or otherwise resolve any issues to the
satisfaction of OptiCare; and
o Vision Twenty-One shall not have received any notice of default or
notice of cancellation under any of the Vision Twenty-One's managed
care contracts which are reasonably likely to cause a material adverse
effect on Vision Twenty-One's managed care business.
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time before the completion
of the Merger, as summarized below:
o the Merger Agreement may be terminated by mutual consent; or
o the Merger Agreement may be terminated by either OptiCare or Vision
Twenty-One (i) if the conditions to completion of the Merger are not
satisfied by the date on which they are required to be satisfied, (ii)
upon a material breach by the other party of an agreement, covenant,
representation or warranty of the other party in the Merger Agreement
or (iii) if any material representation or warranty of the other party
has become materially untrue, incomplete or incorrect, in each case
subject to a 20 day cure period.
In addition, the Merger Agreement may be terminated by either OptiCare or
Vision Twenty-One under any of the following circumstances:
o if the Merger is not completed, without the fault of the terminating
party, by October 25, 2000;
o if a final court or governmental order prohibiting the Merger is
issued and is not appealable;
o if the OptiCare stockholders do not approve the issuance of OptiCare
common stock at the OptiCare annual meeting; or
o if the Vision Twenty-One stockholders do not approve the Merger
Agreement and the Merger at the Vision Twenty-One special meeting.
Furthermore, the Merger Agreement may be terminated by OptiCare if any of
the following occur:
o Vision Twenty-One's Board of Directors withdraws or modifies in a
manner adverse to OptiCare its recommendation as to the Merger
Agreement or the Merger, or resolves to do so;
o Vision Twenty-One's Board of Directors recommends a competing
transaction to Vision Twenty-One's stockholders;
o Vision Twenty-One fails to comply with the non-solicitation provisions
contained in the Merger Agreement, which are discussed in more detail
in "No Solicitation of Transactions;" or
o with respect to a competing transaction as described in more detail in
"No Solicitation of Transactions," Vision Twenty-One's Board of
Directors recommends one of these transactions to its stockholders,
fails to recommend against its acceptance by its stockholders, fails
to reconfirm its approval and recommendation of the Merger with
OptiCare or determines that this competing transaction is superior and
takes permitted actions in furtherance of negotiating the transaction,
or resolves to do any of these.
The Merger Agreement may also be terminated by Vision Twenty-One if, with
respect to a competing transaction as described in more detail in "No
Solicitation of Transactions," Vision Twenty-One accepts a superior proposal.
60
<PAGE>
PAYMENT OF FEES AND EXPENSES
Whether or not the Merger is consummated, all costs and expenses incurred
in connection with the Merger Agreement and the Merger will be paid by the
party incurring the expense, except that expenses incurred in connection with
printing, filing and mailing the Joint Proxy Statement/Prospectus and the
registration statement, other than attorney's and accountant's fees and
expenses, shall be shared equally.
Vision Twenty-One has agreed to pay OptiCare a cash termination fee in the
amount equal to the greater of 4% of the total enterprise value of the
transactions contemplated in the Merger or as reflected in the competing
transaction or superior proposal, in addition to reimbursing OptiCare for its
out-of-pocket expenses incurred in connection with the Merger Agreement and
proposed Merger, in the following circumstances:
o OptiCare terminates the Merger Agreement as a result of Vision
Twenty-One's Board of Directors withdrawing, modifying or changing its
recommendation in favor of the Merger in a manner adverse to OptiCare;
o OptiCare terminates the Merger Agreement as a result of Vision
Twenty-One's Board of Directors' recommendation of a competing
transaction;
o OptiCare terminates the Merger Agreement as a result of Vision
Twenty-One's failure to comply in all material respects with the
prohibitions on solicitations of transactions, as more fully described
in "No Solicitation of Transactions;"
o OptiCare terminates the Merger Agreement as a result of a competing
transaction's being publicly announced or otherwise publicly known and
Vision Twenty-One's Board of Directors either:
o fails to recommend against the competing transaction;
o fails to reconfirm its approval and recommendation of the Merger
Agreement and the transactions contemplated by the Merger Agreement
within five days of OptiCare's written request to do so; or
o determines that the competing transaction is a superior proposal and
provides information in connection with or negotiates the competing
transaction;
o OptiCare terminates the Merger Agreement as a result of Vision
Twenty-One's Board of Directors' resolving to take any of the actions
described above;
o OptiCare or Vision Twenty-One terminates the Merger Agreement as a
result of the effective time not occurring on or before October 25,
2000 and (A) at or prior to the termination, a competing transaction
existed and (B) within 9 months after the termination, Vision
Twenty-One enters into a definitive agreement with respect to a
competing transaction or consummates any competing transaction; and
o OptiCare or Vision Twenty-One terminates the Merger Agreement as a
result of the Merger Agreement and the Merger not receiving the
requisite votes for approval by Vision Twenty-One's stockholders and
(A) at or prior to the termination, a competing transaction existed
and (B) within 9 months after the termination, Vision Twenty-One
enters into a definitive agreement with respect to a competing
transaction or consummates any competing transaction.
Vision Twenty-One would be required to pay OptiCare's out-of-pocket
expenses if OptiCare terminates the Merger Agreement as a result of Vision
Twenty-One's breach of any representation, warranty, covenant or agreement in
the Merger Agreement, where Vision Twenty-One would thereby fail to meet its
closing obligations, unless the condition is curable and cured within 20 days.
Additionally, if Vision Twenty-One subsequently enters into a definitive
agreement with respect to any competing transaction or consummates any
competing transaction within 9 months of the termination,
61
<PAGE>
Vision Twenty-One must also generally pay OptiCare half the termination fee if
Vision Twenty-One (i) breached a material representation or warranty and knew
or should have known about such breach, or (ii) breached a material covenant or
agreement.
Vision Twenty-One would be required to pay OptiCare's out-of-pocket
expenses if OptiCare terminates the Merger Agreement as a result of Vision
Twenty-One's representations or warranties becoming untrue, incomplete or
incorrect, where Vision Twenty-One would thereby fail to meet its closing
obligations, unless the condition is curable and cured within 20 days.
Vision Twenty-One would be required to pay OptiCare's out-of-pocket
expenses in connection with the Merger Agreement and proposed Merger if Vision
Twenty-One does not enter into a standstill agreement with the Bank of Montreal
within 45 days following the date of the Merger Agreement.
OptiCare would be required to pay Vision Twenty-One's out-of-pocket
expenses if Vision Twenty-One terminates the Merger Agreement as a result of
OptiCare's breach of any representation, warranty, covenant or agreement in the
Merger Agreement or as a result of any of OptiCare's representations or
warranties being untrue, incomplete or incorrect, where OptiCare would thereby
fail to meet its closing obligations, unless the condition is curable and cured
within 20 days.
EXTENSION, WAIVER AND AMENDMENT OF THE MERGER AGREEMENT
OptiCare and Vision Twenty-One may amend the Merger Agreement before
completion of the Merger; provided, however, that after the Vision Twenty-One
stockholders adopt the Merger Agreement, no change may be made to the amount or
type of consideration into which Vision Twenty-One common stock will be
converted.
Either OptiCare or Vision Twenty-One may, in writing, extend the other's
time for the performance of any of the obligations or other acts under the
Merger Agreement, waive any inaccuracies in the other's representations and
warranties and waive compliance by the other with any of the agreements or
conditions contained in the Merger Agreement.
RELATED AGREEMENTS
IRREVOCABLE PROXY AGREEMENTS
In connection with the Merger, each of Theodore N. Gillette, Peter J.
Fontaine, Richard L. Lindstrom, M.D., Bruce S. Maller, Jeffrey Katz and Martin
Stein have executed an irrevocable proxy (the "Irrevocable Proxy") with respect
to all shares of Vision Twenty-One common stock beneficially owned by them with
certain exceptions, or any new shares of Vision Twenty-One common stock they
may acquire. Pursuant to the Irrevocable Proxy, the members of the Board of
Directors of OptiCare are authorized to vote such shares at the Special Meeting
of Vision Twenty-One in favor of the approval of the Merger Agreement and the
Merger. A copy of a form of the Irrevocable Proxy is attached as Appendix B to
this Joint Proxy Statement/Prospectus and is incorporated by reference in this
Joint Proxy Statement/Prospectus. As of , 2000, the Vision Twenty-One
stockholders who executed the Irrevocable Proxy collectively held approximately
shares of Vision Twenty-One common stock which represented
approximately % of the outstanding Vision Twenty-One common stock.
None of the stockholders who are parties to the stockholder agreement was paid
additional consideration in connection with the stockholder agreement.
In connection with the Merger, each of Dean J. Yimoyines, Gordon A.
Bishop, Marlin Capital, L.P., Ian Ashken, Martin Franklin, Allan Barker, Steven
L. Ditman, Dennis Blair Harrold, Samuel Petteway and John F. Croweak have
executed an irrevocable proxy (the "Irrevocable Proxy") with respect to all
shares of OptiCare common stock beneficially owned by them with certain
exceptions, or any new shares of OptiCare common stock they may acquire.
Pursuant to the Irrevocable Proxy, the members of the Board of directors of
Vision Twenty-One, are authorized to vote such shares at
62
<PAGE>
the Annual Meeting of OptiCare in favor of the approval of the Merger Agreement
and the Merger. A copy of a form of the Irrevocable Proxy is attached as
Appendix C to this Joint Proxy Statement/Prospectus and is incorporated by
reference in this Joint Proxy Statement/Prospectus. As of , 2000, the
OptiCare stockholders who executed the Irrevocable Proxy collectively held
approximately shares of OptiCare common stock which represented
approximately % of the outstanding OptiCare common stock. None of the
stockholders who are parties to the stockholder agreement was paid additional
consideration in connection with the stockholder agreement.
LOCK-UP AGREEMENTS
Each of Theodore Gillette, Bruce S. Maller and Richard Lindstrom will be
requested to enter into lock-up agreements with OptiCare in which they will
agree not to sell their shares of OptiCare common stock for a period of 180
days following the closing of the Merger except pursuant to existing margin
accounts.
AFFILIATE AGREEMENTS
OptiCare has or will shortly seek to enter into an agreement (the
"Affiliate Agreements") with each stockholder who may, at the time the Merger
Agreement is submitted to the stockholders of OptiCare or Vision Twenty-One (as
appropriate), be an "affiliate" of OptiCare or Vision Twenty-One under SEC
rules that govern sales of stock held by affiliate of a public company. The
Affiliate Agreements restrict those stockholders from making any sale, transfer
or other disposition of such shares in violation of the Securities Act of 1933
or the rules and regulations of the Securities and Exchange Commission in
connection with such statute. Accordingly, those stockholders must hold their
shares indefinitely unless the shares have been registered under the Securities
Act, a sale of such shares is made under Rule 145, or some exemption from
registration (affirmed by an opinion of counsel) is available.
Each certificate representing the shares received by stockholders
executing an Affiliate Agreement will bear a legend stating that the shares
were issued in a transaction to which Rule 145 under the Securities Act of 1933
applies and referring to appropriate restrictions on the sale of such shares.
This legend may be removed by delivery of a substitute certificate, if a
stockholder who has executed an Affiliate Agreement delivers to OptiCare a copy
of a letter from the staff of the Securities and Exchange Commission or an
opinion of counsel in form and substance satisfactory to OptiCare; in either
event, providing that the legend is not required for the purposes of the
Securities Act.
CREDIT FACILITY RESTRUCTURING
It is a condition of OptiCare's and Vision Twenty-One's obligations to
complete the Merger and the related transactions that OptiCare must have
entered into an amendment to its existing credit agreement with Bank Austria
and that Vision Twenty-One's loans under its credit facility with Bank of
Montreal are consolidated into one senior credit facility. See "Business of
OptiCare -- Credit Facility," for information concerning OptiCare's existing
credit facility and "Business of Vision Twenty-One -- Recent Developments --
Credit Facilities" for information regarding Vision Twenty-One's existing
credit facility.
Each of OptiCare, Bank Austria, Vision Twenty-One and Bank of Montreal are
currently engaged in discussions regarding the terms of letters of intent
relating to the restructuring of the existing credit facilities and a
standstill agreement with the Bank of Montreal.
63
<PAGE>
INFORMATION ABOUT OPTICARE
OPTICARE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto of OptiCare Health Systems, Inc.,
which are included elsewhere herein. See the Index to Financial Statements,
beginning at page F-1.
Overview. OptiCare Health Systems, Inc. is an integrated eye care services
company that delivers a range of services and systems for eye health
professionals, managed care plans and consumers, including laser correction,
managed eye care and professional eye care services. On August 13, 1999
Saratoga Resources, Inc. ("Saratoga"), a Delaware corporation, PrimeVision
Health, Inc. and OptiCare Eye Health Centers, Inc. merged (the "Mergers")
pursuant to the terms of an Agreement and Plan of Merger dated as of April 12,
1999. In this transaction PrimeVision Health merged with Saratoga through a
reverse acquisition by PrimeVision Health of Saratoga at book value with no
adjustments reflected to historical values. Immediately following the
PrimeVision Health merger, OptiCare Eye Health Centers 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.
In connection with the Mergers, our stockholders approved an amendment to
the Articles of Incorporation changing, among other things, the company's name
to OptiCare Health Systems, Inc., effective August 13, 1999.
For accounting purposes, PrimeVision Health was the accounting acquirer
and the surviving accounting entity. Accordingly, the operating results of
OptiCare Eye Health Centers have been included in the accompanying consolidated
financial statements since September 1, 1999, the deemed effective date of the
acquisition for accounting purposes. The impact of results from August 13, 1999
through August 31, 1999 are deemed immaterial to the consolidated financial
statements. Financial results for periods prior to September 1, 1999 are based
solely upon the results reported by Prime and its subsidiaries. The excess of
the aggregate purchase price including merger costs of $29.1 million over the
estimated fair value of the net assets acquired was approximately $20.7
million. Of this excess $18.5 million has been recorded as goodwill and is
being amortized on a straight-line basis over 25 years and $2.2 million has
been used to eliminate the valuation allowance related to Prime's deferred tax
assets. In addition, the company recorded an intangible asset of $7.1 million
in connection with a new administrative services agreement that is being
amortized over 25 years.
On October 1, 1999, we 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. The total purchase price of approximately $1.6 million was
comprised of approximately $0.8 million in cash and notes payable and 110,000
shares of common stock (having a value of approximately $0.8 million). The
Cohen Acquisition was accounted for under the purchase method of accounting,
whereby the purchase cost has been allocated to the fair value of assets
acquired and liabilities assumed with the excess identified as goodwill. Fair
values were based on valuations and other studies. The goodwill resulting from
this transaction was approximately $1.2 million and is being amortized on a
straight-line basis over 25 years. The results of operations of Cohen Systems,
Inc. are included in our consolidated financial statements from the purchase
date.
In the fourth quarter of 1999, our board of directors approved a new
corporate strategy to focus on the growth of laser correction in the eye care
industry. In connection with that strategy, we reorganized our operations from
two operating segments into three segments : (1) laser correction and
professional services, (2) managed care services and (3) other integrated
services. The laser correction and professional services segment includes a
range of services rendered to licensed practitioners of ophthalmology and
optometry, including the development and marketing of laser correction centers,
the sale of eye health systems and software, and the operation of ambulatory
surgery centers. The managed care segment provides a range of administrative,
network management and related services
64
<PAGE>
to health maintenance organizations and other health care entities. The
integrated services and product sales segment operates integrated eye health
centers in Connecticut and owns and operates retail optical stores in
Connecticut and North Carolina. This segment also includes a buying group
program for optical products.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Laser correction and professional services revenue. Laser correction and
professional services revenue was $4.1 million for the year ended December 31,
1999. This revenue was comprised of $1.5 million from laser vision correction
and ambulatory surgery services, $1.6 million from HSO service agreements and
$1.0 million of revenue from Cohen Systems, Inc. for the three months ended
December 31, 1999. There was no such revenue from these operations in 1998 or
1997.
Managed care services revenue. Managed care revenue increased to $24.4
million for the year ended December 31, 1999 from $14.9 million for the year
ended December 31, 1998, an increase of $9.5 million or 63.8%. Of this
increase, $3.7 million represents managed care revenue of OptiCare Eye Health
Centers for the months of September through December 1999. The remaining
increase is due to new managed care contracts and growth in existing member
lives.
Other integrated services revenue. Integrated services and product sales
revenue increased to $66.1 million for the year ended December 31, 1999 from
$49.7 million for the year ended December 31, 1998, an increase of $16.4
million or 33.0%. Of this increase $10.4 million represents optometry and
ophthalmology revenue of OptiCare Eye Health Centers for the months of
September through December 1999. The increase is also a result of growth in
revenue from the buying group that increased from $30.0 million for the year
ended December 31, 1998 to $33.4 million for the year ended December 31, 1999,
an increase of $3.4 million or 11.3%. The remaining increase is attributable to
growth in the other optometry and retail areas.
Cost of product sales. Cost of product sales increased to $41.2 million
for the year ended December 31, 1999 from $35.2 million for the year ended
December 31, 1998, an increase of $6.0 million or 17.1%. Of this increase
approximately $3.3 million represents an increase in costs of product sales
related to the buying group program, representing an increase of approximately
11.9% from 1998 and is consistent with the related increase in buying group
revenue. In addition, approximately $1.8 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 months of September
through December 1999. The remaining increase is consistent with the increases
in revenues in the other optometry and software sales areas.
Medical claims expense. Medical claims expense increased to $19.5 million
for the year ended December 31, 1999 from $11.0 million for the year ended
December 31, 1998, an increase of $8.5 million or 77.3%. This 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. The
remaining increase of approximately $2.7 million represents medical claims
expenses of OptiCare Eye Health Centers for the four months ended December 31,
1999.
Salaries wages & benefits. Salaries, wages and benefits increased to $20.1
million for the year ended December 31, 1999 from $9.3 million for the year
ended December 31, 1998, an increase of $10.8 million or 116.1%. Of this
increase $8.0 million represents compensation expenses of OptiCare Eye Health
Centers for the months of September through December 1999. The remaining
increase primarily represents increased employee costs associated with
servicing increased managed care contracts.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $7.9 million for the year ended December
31, 1999 from $6.0 million for the year ended December 31, 1998, an increase of
$1.9 million or 31.7%. This increase is primarily attributed to the general and
administrative expenses of OptiCare Eye Health Centers for the period September
1 through December 31, 1999.
65
<PAGE>
Interest Expense. Interest expense decreased to $3.2 million for the year
ended December 31, 1999 from $4.5 million for the year ended December 31, 1998,
a decrease of $1.3 million or 28.9%. Interest expense primarily relates to our
bank indebtedness and notes payable to sellers in connection with acquisition
activities. The decrease in interest expense is primarily due to the reduction
in outstanding bank debt and reduced interest rates associated with the mergers
in August 1999 and the reduction in the seller notes payable in connection with
the disposal of PrimeVision Health's ophthalmology division in December 1998.
Income (loss) from continuing operations before income taxes. Income from
continuing operations before income taxes increased to $0.6 million for the
year ended December 31, 1999 from a loss of $(2.8) million for the year ended
December 31, 1998, an increase of $3.4 million or 121.4%. This increase was
primarily attributed to revenue growth and the reduction of interest expense as
described above.
Income tax expense. The effective tax rate for the year ended December 31,
1999 of 45.2% represents the tax expense on the book income for the year. The
1999 rate differs from the statutory rate primarily due to state income taxes
and non-deductible goodwill amortization.
Loss from discontinued operations, net of tax. Discontinued operations
represent the loss from Prime's ophthalmology division. Loss from discontinued
operations for the year ended December 31, 1998 was $34.9 million. Discontinued
operations for the year ended December 31, 1999 includes an additional loss on
disposal of $2.3 million, which represents our revised estimate of loss.
Net Income (loss). The company had a net loss of $2.0 million for the year
ended December 31, 1999 compared to a net loss of $38.1 million for the year
ended December 31, 1998, a decrease of $36.1 million. This change was the
result of an increase in net income from continuing operations of $3.6 million
and a decrease in the loss from discontinued operations of $32.5 million.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
For the year ended December 31, 1998, the company recorded a net loss of
approximately $38.1 million, was highly leveraged and was not in compliance
with its bank debt covenants. Accordingly, all bank debt was classified in
current liabilities at December 31, 1998. Management determined that the
ophthalmology segment was the main contributing factor to the company's
liquidity problems, due to lower than anticipated cash flows from the
ophthalmology practices, as evidenced by the historical operating losses
experienced by the ophthalmology segment.
On December 15, 1998, in recognition of the significant losses and the
fact that the physician practice management business model as operated by the
company was largely unsuccessful, the company determined that the business
should be disposed of and that a combination should be sought with a related
business with a stronger infrastructure. Subsequent to such decision by the
board, the merger among Saratoga, PrimeVision Health and OptiCare Eye Health
Centers was approved.
Other integrated services net revenue. Other integrated services revenue
decreased to $49.7 million for the year ended December 31, 1998 from $50.9
million for the year ended December 21, 1997, a decrease of $1.2 million or
2.4%. This change is primarily due to a decrease in the revenues in the buying
group and is slightly offset by a small increase in the optometry division.
Managed care services revenue. Managed care net revenue increased to $14.9
million for the year ended December 31, 1998 from $7.4 million for the year
ended December 31, 1997, an increase of $7.5 million or 101.3%. This increase
is primarily attributable to additional managed care contracts in 1998.
Cost of product sales. Cost of product sales decreased to $35.2 million
for the year ended December 31, 1998 from $37.0 million for the year ended
December 31, 1997, a decrease of $1.8 million or 4.9%. This decrease is
consistent with the related decrease in other integrated services revenue.
66
<PAGE>
Medical claims expense. Medical claims expense increased to $11.0 million
for the year ended December 31, 1998 from $5.0 million for the year ended
December 31, 1997, an increase of $6.0 million or 120%. This increase is
consistent with the increase in managed care revenues.
Salaries, wages & benefits. Salaries, wages and benefits were relatively
unchanged at $9.3 million for the year ended December 31, 1998 compared to
$ 9.1 million for the year ended December 31, 1997, an increase of $0.2 million
or 2.2%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $6.0 million for the year ended December
31, 1998 from $5.2 million for the year ended December 31, 1997 an increase of
$0.8 million or 15.4%. The increase in 1998 was primarily due to additional
costs to support revenue growth in the managed care division.
Interest expense. Interest expense increased to $4.5 million for the year
ended December 31, 1998 from $3.9 million for the year ended December 31, 1997,
an increase of $0.6 million or 15.4%. This increase is due to increased
borrowings on PrimeVision Health's bank credit facility resulting from
acquisitions and lower than expected cash generation in the discontinued
ophthalmology business.
Loss from continuing operations before income taxes. Loss from continuing
operations before income taxes decreased to $2.8 million for the year ended
December 31, 1998 from $3.1 million for the year ended December 31, 1997, a
decrease of $0.3 million or 9.7%.
Income taxes. The effective tax rate for the year ended December 31, 1998
of 15.5% represents the tax expense on book losses during 1998. The book basis
loss before income taxes is significantly more than the tax basis loss.
Accordingly, the effective tax rate differs from the statutory rate. Prime's
effective tax rate in 1997 was (33.7%).
Income (loss) from discontinued operations, net of tax. Discontinued
operations represent the income (loss) from Prime's ophthalmology division.
Loss from discontinued operations for the year ended December 31, 1998 was
$34.9 million. In 1997, income from discontinued operations was $0.6 million.
Net loss. The company had a net loss of $38.1 million for the year ended
December 31, 1998 compared to a net loss of $1.4 million for the year ended
December 31, 1997, an increase in loss of $36.7 million. This change was the
result of the $34.9 million loss from discontinued operations in 1998.
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 December
31, 1999, the company had cash and cash equivalents of approximately $2.9
million and $0.8 million of additional borrowing capacity available under its
revolving credit facility, net of a $0.4 million letter of credit obligation.
In August 1999, in connection with the mergers, the company entered into a
loan agreement (the "Credit Facility") with Bank Austria. Proceeds from the
Credit Facility were used to pay certain indebtedness of Prime Vision Health
and OptiCare Eye Health Centers and to fund the company's business operations.
The Credit Facility provides 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 to be calculated on a
quarterly and annual basis beginning on December 31, 1999. The first principal
payment on the term loan is April 1, 2000 and the Credit Facility terminates
and all amounts outstanding thereunder are due and payable on June 1, 2004. As
of December 31, 1999, the company had advances outstanding of $11.5 million
under the credit facility.
67
<PAGE>
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 will
generally be 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 2.25% (in January 2000, the rate decreased to
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. For the year
ended December 31, 1999 the company used $0.4 million in operating activities,
$1.2 million in investing activities and $1.5 million in financing activities.
Cash used in operating activities included $2.3 million of discontinued
operations partially offset by a non-cash charge of $2.0 million of
depreciation and amortization. Cash used in investing activities included $1.9
million of capital expenditures. Net cash used in financing activities included
$32.5 million for the repayment of the old credit facility and $33.0 million of
proceeds from the new credit facility.
For the year ended December 31, 1998 the company generated $2.2 million in
operating activities and $1.9 million in financing activities while investing
activities used cash of $0.6 million. Cash from operating activities represents
a $3.2 million net loss from continuing operations, a non-cash charge of $1.4
million of depreciation and amortization, an increase in accounts receivable
and decreases in inventory, accounts payable and accrued expenses. Net cash
provided from financing activities consisted of $8.0 million from the issuance
of mandatorily redeemable preferred stock that is partially offset by the
repayment of $6.0 million of bank indebtedness. Cash used in investing
activities consisted of $0.6 million of capital expenditures.
For the year ended December 31, 1997, proceeds from the issuance of
long-term debt totaled $28.8 million, which was primarily used in the
discontinued operations of the company.
As of December 31, 1999, under agreements with the North Carolina and
Texas Departments of Insurance, the company was required to maintain restricted
investments of $25,000 and $500,000 on behalf of these respective regulatory
bodies. In addition, the company is not 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.
As of January 1, 2000, the company withdrew its HMO license in North Carolina
and is no longer subject to any liquidity restrictions with the North Carolina
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.
In January 2000, the company completed the sale of 3,571,429 registered
shares of common stock. The net proceeds from the stock offering were
approximately $12.5 million, which included the cancellation of a $2 million
subordinated note payable previously issued by the company. The company used
$7.0 million 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.
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.
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
68
<PAGE>
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 past three years.
FORWARD-LOOKING INFORMATION
Certain statements in this Joint Proxy Statement/Prospectus 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 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 Joint
Proxy Statement/Prospectus. The company undertakes no obligation to publicly
update or revise forward looking statements to reflect events or circumstances
after the date of this Joint Proxy Statement/Prospectus or to reflect the
occurrence of unanticipated events.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
OptiCare is subject to market risk from exposure to changes in interest
rates based on financing activities under OptiCare's credit facility. The
nature and amount of OptiCare's indebtedness may vary as a result of future
business requirements, market conditions and other factors. The extent of
OptiCare's interest rate risk is not quantifiable or predictable due to the
variability of future interest rates and financing needs. OptiCare 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. An increase of 10% in the interest rate payable
by OptiCare would increase the annual interest expense by $0.3 million,
assuming that OptiCare's borrowing level is unchanged. OptiCare did not use
derivative instruments to adjust OptiCare's interest rate risk profile during
the year ended December 31, 1999.
69
<PAGE>
BUSINESS OF OPTICARE
GENERAL
OptiCare Health Systems, Inc. is an integrated eye care services company
focused on providing laser correction, managed care and professional eye care
services. We currently own, operate and develop laser and ambulatory surgery
centers and provide systems, including Internet-based software solutions, to
eye care professionals. We also provide managed eye care services to health
plans and operate integrated eye health centers, retail optical stores and a
buying group program.
In the fourth quarter of 1999, our board of directors approved a new
corporate strategy to focus on the growth of laser correction in the eye care
industry. As part of our new growth strategy, we reorganized our operations
from two divisions into the following three divisions: Laser Correction and
Professional Services, Managed Care Services, and Other Integrated Services.
RECENT DEVELOPMENTS
Sale of Registered Shares
During January 2000, we sold in the aggregate 3,571,429 registered shares
of common stock at a price of $3.50 per share. We received gross proceeds from
the offering of approximately $12.5 million, including the cancellation of a $2
million note previously issued by us. See "OptiCare Certain Relationships and
Related Transactions -- Arrangements with Marlin Capital, L.P." The proceeds
have and will be used to pay down indebtedness, to expand our laser correction
and professional services division, and for general corporate purposes.
THE EYE CARE INDUSTRY
Overview
The eye care market includes both eye care services and optical products.
In the eye care services market, eye health professionals, including
ophthalmologists and optometrists, provide diagnostic eye examinations and
treatment interventions to address complex eye and vision conditions. The most
common conditions addressed by eye care professionals are nearsightedness,
farsightedness and astigmatism. These eye and vision conditions have
historically been treated with pharmaceuticals, prescription glasses, contact
lenses or some combination of these treatments. With the introduction of LASIK
in 1996, eye care professionals are beginning to use laser correction as an
additional treatment alternative for these three conditions. The optical
products portion of the eye care market consists of the manufacture,
distribution and sale of optical goods, including corrective lenses,
eyeglasses, frames, contact lenses and other related optical products.
In the U.S., eye care services have traditionally been delivered by
ophthalmologists and optometrists. Ophthalmologists are specifically trained
physicians who have completed four years of medical school, obtained a medical
degree and have received specialty training in ophthalmology. In addition to
diagnostic examinations, ophthalmologists are licensed to perform ophthalmic
surgery. Optometrists complete four years of optometry school and are generally
licensed to perform routine eye exams and prescribe corrective optical goods.
Optometrists do not perform surgery, but often provide pre-and post-operative
care. There are approximately 32,000 practicing optometrists and 22,000
practicing ophthalmologists in the U.S.
According to the Vision Council of America, 163 million people, or
approximately 60% of the U.S. population, utilized eye care services in 1998,
and 60% of those eye care consumers purchased eye wear products. Spending in
1998 for both services and products is estimated to be over $55 billion,
increasing at approximately 6% per year.
Laser Correction
Recently, new surgical technologies and procedures have been introduced
for surgical correction of common vision conditions. Within the eye care
industry, one sector that is experiencing rapid
70
<PAGE>
growth is laser correction. Although earlier applications for laser based
surgical treatment of eye disorders, such as photorefractive keratotomy, or
PRK, were introduced in the late 1980's, widespread interest in laser
correction did not occur until the introduction and approval of LASIK.
Introduced in 1996 in the U.S., LASIK has led to a dramatic increase in the
popularity of laser correction surgery.
The three most common conditions which are candidates for laser correction
are:
o nearsightedness, which is caused by a steepening of the cornea,
resulting in the blurring of distant objects;
o farsightedness, which is caused by a flattening of the cornea,
resulting in the blurring of close objects; and
o astigmatism, in which images are not focused on any point due to the
varying curvature of the eye along different axes, which results in a
distorted view of images.
In the LASIK procedure, an ophthalmologist uses an automated microsurgical
instrument to peel back a thin layer of corneal tissue, which remains hinged to
the eye. A number of laser pulses are then applied to the cornea to remove
tissue and thereby correct the patient's vision by reshaping the patient's
cornea. After the surgeon replaces the layer of corneal tissue, no bandages are
required and most patients experience no discomfort. A LASIK procedure
typically takes 10 to 15 minutes from set-up to completion and is performed in
an outpatient setting. At this time, only ophthalmologists are licensed to
perform LASIK, although optometrists are often involved in providing pre-and
post-operative care.
Because of the effectiveness and convenience of LASIK, laser correction
has grown from approximately 430,000 procedures performed in 1998 to
approximately 939,000 procedures performed in 1999. Despite this rapid growth,
the number of laser correction patients in 1998 represented less than 0.3% of
the 163 million people with refractive vision conditions in the U.S. Further,
unlike most other eye-related surgical procedures, laser correction is an
elective procedure for which patients pay and are generally not reimbursed by
third party payors.
Laser correction has been practiced in the United States only since 1996,
and so there is only minimal information available for medical and scientific
study of its long-term effects. Long-term follow-up data may reveal additional
complications that may have a material adverse effect on acceptance of laser
correction. Concern over the safety of laser correction procedures could
adversely affect market acceptance of laser correction or result in adverse
regulatory action, including product recalls. Any of these factors could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Concerns about the safety and effectiveness of laser correction include
predictability and stability of results. Potential complications and side
effects include:
o post-operative discomfort;
o an increase in the light-scattering properties of the cornea during
healing (corneal hazing);
o glare/halos (undesirable visual sensations produced by bright lights);
o decreases in contrast sensitivity;
o temporary increases in pressure within the eye in reaction to
medication;
o modest fluctuations in focusing capabilities during healing;
o modest decreases in best corrected vision (i.e., with corrective
lenses);
o unintended over-or under-corrections;
o decline in corrective effect;
o disorders in corneal healing, corneal scars and corneal ulcers; and
71
<PAGE>
o induced astigmatism.
Managed care
According to InterStudy, a health care research firm, total 1998 U.S.
enrollment in health maintenance organizations, the most common type of managed
care plan, was 76.6 million. This represents a 14% increase in membership
versus 1997. Almost all managed care plans cover medical/surgical treatment of
eye disorders and many also provide vision care benefits, including routine eye
exams or optical products. According to the 1999 U.S. Optical Industry
Handbook, 66% of consumers seeking eye care services received either full or
partial reimbursement from a third-party insurance or managed care plan.
We believe that enrollment in managed care plans and, therefore, the
population with coverage of eye care services will continue to grow. We believe
this trend will be supported by managed care plans offering enhanced vision and
eye care benefits in order to more aggressively compete for potential
membership. We also believe that the management of eye care services and
products is specialized and best provided by companies that focus on these
services. Given its success in both acquiring new customers and retaining
existing customers, we believe this market segment has significant growth
potential.
Other eye care products and services
Although vision correction techniques and technologies are growing
dramatically, the demand for basic optical goods, including corrective lenses,
eyeglass frames and other optical products, and eye health surgery, remains
significant. Of the $55 billion eye care market, consumers spend approximately
$16.3 billion on retail optical products. Approximately 83%, or $13.5 billion,
is spent on lenses and frames, while approximately 12%, or $2 billion, is spent
on contact lenses.
We also expect the demand for eye surgery other than vision to show steady
growth. Common eye disorders include glaucoma, macular degeneration, diabetic
retinopathy and cataracts. We believe that the aging of the population,
including the "baby boom" generation, will increase the demand for medical and
surgical treatment of these disorders. Glaucoma affects approximately 3 million
people in the U.S. and is projected by industry sources to double by 2030.
Cataract surgery, the most widely performed eye care surgical procedure in the
U.S., is typically performed on an outpatient basis using local anesthesia, and
the procedure time is typically less than 30 minutes. In 1997, over 2.3 million
cataract procedures were performed in the U.S. Since the preponderance of these
other eye disorders affect patients over the age of 65, the Medicare program is
the primary payor for treatment of these disorders, including surgery.
DESCRIPTION OF BUSINESS DIVISIONS
As a result of our expectations for the growth of laser correction, we
have reorganized our operations from two business divisions to three:
o Laser Correction and Professional Services. We develop laser
correction centers and provide marketing, systems, software and other
services to eye care professionals.
o Managed Care Services. We contract with managed care plans to manage
the eye health portion of managed care plans.
o Other Integrated Services. We own and operate fully integrated eye
health centers, retail optical stores and a buying group program.
Laser Correction and Professional Services Division
Laser Correction. We have two business models for providing laser
correction and ambulatory surgery services. The first model involves ownership
and operation of laser vision correction and
72
<PAGE>
ambulatory surgical centers. In the second model, we operate the OptiCare Laser
Advantage (Trade Mark) program, in which we develop laser correction centers
for independent ophthalmologists, and participate on a fee-per-procedure basis
in the growth of that center.
We own and operate four surgery centers in Connecticut, one of which is a
laser correction center. In our ambulatory surgery centers, ophthalmic surgeons
perform a range of eye care surgical procedures, including cataract surgery,
and surgical treatment of glaucoma, macular degeneration and diabetic
retinopathy. One of the ambulatory surgery centers is being converted from an
eye-care-only center to a multi-specialty facility, permitting ophthalmic
surgery and other types of non-eye care surgery to be performed there. In these
centers, we bill patients (or their insurers, HMO's, Medicare, Medicaid or
other responsible third-party payors) for use of the surgery center facility,
and the surgeons bill the patients separately for their services. For laser
correction, patients are billed directly and generally we are not reimbursed by
third party payers. Our ambulatory facility in Waterbury, Connecticut is
approved for the payment of facility fees by most health plans and our other
surgery facilities are Medicare approved. We have contracted with OptiCare P.C.
to provide surgical and other services to patients at the ambulatory surgical
centers. OptiCare P.C., is wholly owned by Dean J. Yimoyines, M.D., Chairman of
the Board, President and Chief Executive Officer and a beneficial holder of
3.1% of the Company's common stock.
In the OptiCare Laser Advantage (Trade Mark) program, we use our
marketplace position to identify, screen and negotiate agreements with
prospective ophthalmology practices which already perform laser correction
surgery at separate surgery centers, but have no ownership position in the
center. Working with these physicians and the laser manufacturer, we will
participate in developing, equipping, training and implementing a new laser
correction center to be owned by the practice. We will also provide a laser
vision correction marketing program and ongoing marketing support for the
center. We intend to enter into agreements which provide that we be paid by
each practice on a multi-year, fixed-price-per procedure basis, with guaranteed
minimum procedure volume. As the laser correction volume of the center grows,
we receive increasing revenues. To support the program, we have executed a
strategic partnership agreement with Summit Technology, an excimer laser
manufacturer and anticipate agreements with other laser manufacturers. We
opened our first center under this business model in Rocky Mount, N.C.
Professional Services. Beyond establishing laser vision correction
centers, we sell a broad range of other management services and eye care
systems to eye care professionals, principally ophthalmologists and
optometrists.
As a result of our acquisition on October 1, 1999, of Cohen Systems, Inc.,
we provide eye care systems and software, in which we sell Internet based and
point-of-sale systems solutions for optometry practices, retail optical
locations and manufacturing laboratories. These products support eye health
practice management, point-of-sale, and inventory control applications. As of
March 15, 2000, we had approximately 150 retail customers and 100 lens
manufacturing customers for various eye care systems and software services
throughout the United States and Canada. In addition to these products, we have
developed and sell Internet based order entry software systems that captures
and links all eye health patient data, including providing such data to a
remote manufacturing location for immediate processing of patient optical goods
orders.
Our Health Service Organization ("HSO") operations provide marketing,
managed care and other administrative services to individual ophthalmology and
optometry practices. As of March 15, 2000, we had HSO agreements in place with
31 ophthalmology and optometry practices, having in the aggregate 56
facilities, pursuant to which we offer core and supplemental services. These
agreements generally run for a fifteen-year term. Under these agreements we
receive a percentage of the revenues earned by these practices (generally 3% of
revenues). In addition to these services, the practices may obtain various
supplemental services at agreed upon rates, which are purchased on a menu
basis. In the HSO arrangements, we offer core services including access to its
buying group program and marketing assistance.
73
<PAGE>
Our HSO customers are also allowed access to supplemental services
including certain laser correction programs, systems administration and human
resources services.
We believe that there will be increasing demand for management and
information systems solutions for independent practitioners who are not
interested in a traditional physician practice management model. Management
believes that these independent practitioners, which make up approximately 95%
of practicing ophthalmologists, still require assistance in a range of
administrative, marketing and information systems and software services. We
believe these doctors have the potential to benefit from the Company's services
in this area.
Managed Care Services Division
We have significant expertise in providing managed care services for
insurance companies, HMO's and other third-party payors and have leveraged our
leadership position in key markets to build a strong provider base of eye care
professionals. We believe that we are well positioned to compete for all types
of eye care contracts because of our managed care expertise, sophisticated
information systems and operating history.
As of March 15, 2000, we administered eye care benefits for over 5 million
lives, delivered through networks of eye care professionals nationwide.
Approximately 2.7 million of these lives are in medical/surgical benefit plans,
which we believe, makes us one of the largest specialized managers of eye care
medical/surgical benefits in the country.
Under each managed care contract, we credential eye care professionals who
provide the eye care services specified under the contract to the third-party
payor's members. We also perform other services, including quality assurance
and utilization review, and are compensated on either a capitated or
fee-for-service basis. Most contracts have a term of three years and contain an
automatic renewal provision for additional one-year periods and grant either
party the right to terminate the contract upon 90-180 days notice.
Upon obtaining a managed care contract, we develop a network of eye care
professionals to provide the eye care services required under the contract.
Generally, we attempt to contract first with eye care professionals with whom
we have a business relationship. Additionally, we seek to enter into contracts
with independent eye care professionals. We undertake a thorough credential
review process on each prospective eye care professional, which includes
obtaining a copy of the state license and Drug Enforcement Agency number,
verifying hospital privileges, liability insurance and board certification, and
reviewing work history for each provider. Eye care professionals who are on one
of our panels are recredentialed every two years. All credentialed eye care
professionals must meet the guidelines of the National Committee for Quality
Assurance a leading quality assurance authority.
We believe that our managed care services provide significant value to
third-party payors by delivering high quality, cost-effective managed eye care
to plan members and comprehensive administrative services to the third-party
payor. Some of the services provided include:
Plan Member Relations. Service representative staff are available to
answer questions on members' benefits, the status of claims and to resolve
complaints about the service rendered.
Simplified Pre-Authorization Process. Network eye care professionals, with
the assistance of our staff, obtain any required authorizations for the plan
members prior to performing an eye care procedure. We believe that this
approach simplifies the process for the plan member and thereby increases the
plan members' overall satisfaction with their eye care benefits. We utilize
proprietary systems to effectively administer eye health claims submitted,
including Internet-based electronic authorization and claim protocols, to lower
cost, reduce cycle time and improve the effectiveness of the administrative
process.
Quality Assurance Program. We solicit patient comments through monthly
patient satisfaction surveys sent to a sample of members of its managed care
customers. In addition, we track unsolicited comments that typically are in the
nature of telephone complaints. If a plan member is dissatisfied with the
service received, a service representative staff can quickly resolve routine
complaints relating
74
<PAGE>
to matters such as eyeglasses, contact lenses and the quality of the eye
examination. We believe that our issue-resolution structure is unique to the
industry and increases plan members' satisfaction with their eye care benefits.
In addition, we perform prospective-outcome studies and other quality
assessment studies on the care rendered by our network of providers.
Utilization Review Services. We periodically monitor every eye care
professional in our network to verify that the eye care professionals are
properly coding the medical services and treatment provided. Using proprietary
clinical criteria for eye care procedures that are based on the American
Academy of Ophthalmology's own guidelines, we work with eye care professionals
regarding the appropriate eye care treatment of members.
Credentialing. We provide credentialing services according to national
standards set forth by the National Committee of Quality Assurance by which
health plans are measured for compliance with quality assurance initiatives.
The credentialing process includes collection of data from applications
prepared by physicians, verification of licenses, insurance and education, and
review of the physician's file in the National Practitioner Data Bank.
Periodic Cost Reports. Periodic analytical reports on costs are prepared
for each of the company's health plans and the application of the funds of the
health plans for the benefit of the participants. We utilize our systems
technology to regularly and carefully monitor the economic and qualitative
performance of the networks, individual providers and health plan customers.
Licensing requirements. Our managed care division provides services to
customers in 8 states. Texas requires the company to be licensed, and our
subsidiary, AECC Total Vision of Texas, is licensed as a single-purpose HMO in
Texas. Prior to January 1, 2000, the managed care division also had a single
service license in North Carolina, but because of regulatory changes, this
license is no longer required to conduct the Company's business and has been
relinquished. We expect to seek a utilization review license in Georgia in the
next 12 months for our Georgia managed care operations. We hold licenses as a
third-party administrator in Florida and a utilization review agent in Rhode
Island, but have not commenced business in either state at the present time.
Other Integrated Services Division
The Other Integrated Services division provides eye care services and
products to consumers and also provides wholesale distribution of eye health
products. We provide these diversified eye care services to customers at our
integrated eye health centers and retail optical stores.
Integrated eye health centers. Our integrated eye health centers provide
comprehensive eye care services to consumers, including medical and surgical
treatment by ophthalmologists of eye diseases and disorders, and vision
measuring and non-surgical correction services for patients by optometrists. We
operate 17 centers in Connecticut and provide all management, billing, systems
and related services for the operation of these centers.
Retail optical stores. Our retail optical stores, both owned and
franchised, provide vision correction services through optometrists, and/or
sell eyeglasses and other optical products. The optical locations are either
free-standing or co-located with fully integrated eye health centers. The
retail optical stores provide all the customary optical goods and provide all
the billing, collection, and information systems to support the company's
optical operations. We own 46 retail optical locations as well as 7 optical
dispensaries in Connecticut and North Carolina. In Connecticut, we also have a
complete manufacturing facility in which lenses are manufactured, surfaced and
ground to specifications and supplied to all of our Connecticut locations.
For both the integrated eye health centers and retail optical stores, we
contract with professional corporations -- OptiCare, P.C., and Optometric Eye
Care Center, P.A. -- which employ ophthalmologists and optometrists to provide
surgical, medical and other professional services to consumers. We provide
management services to OptiCare P.C. under a renewable 5-year professional
services and support agreement, and to Optometric Eye Care Center, P.A. under a
renewable 15-year professional administrative services and support agreement.
75
<PAGE>
In addition to our owned and operated locations, we have entered into
license agreements regarding our franchise of 32 retail optical locations in
North Carolina and South Carolina. Pursuant to these license agreements, we
permit these establishments to utilize our proprietary trademarks and trade
names, including "Optometric Eye Care Center," and offer specific marketing
programs and group purchasing services. These agreements are generally for five
year terms, however, we generally grant the licensee the right to terminate the
agreement upon 90 days notice. The licensees pays us a fee based on a
percentage of their gross revenue and have the option of requesting additional
services from us on a separate fee basis.
Optical Supplies. We purchase most of our eyeglasses, contact lenses and
other optical goods and devices through our Buying Group.
Buying Group Program. We operate one of the largest U.S. wholesale optical
goods distribution or "buying group" programs, which supplies both our
integrated eye health centers and retail optical operations, as well as
independent ophthalmology and optometric practices with optical and ophthalmic
goods and medical supplies, i.e., eyeglass frames and lenses, contact lenses,
clinical equipment and other supplies. Over 4,000 eye care professionals
nationwide participate in our Buying Group. This purchasing program leverages
the purchasing strength of the large number of participating optometrists and
buys from a national panel of approximately 175 vendors. We enter into a
non-exclusive account relationship with the buying ophthalmologists and
optometrists who place "bill to-ship to" orders directly with our contracted
vendors. The vendors are required to furnish a discount to the purchasers, ship
the product directly to the practice and bill us at the predetermined price.
We, in turn, bill the participating practices and bear the credit risk.
Earnings are achieved from the buying group program based upon the spread
between the merchandise cost and the prices paid for the merchandise by the
group members.
TRADEMARKS
We own the following U.S. trademark registrations: OPTICARE (Registered
Trademark) , EYECARE FOR A LIFETIME (Registered Trademark) , EYEWEAR/EYECARE
FOR A LIFETIME (Registered Trademark) , CONNECTICUT VISION CORRECTION
(Registered Trademark) , and THE DIFFERENCE IS CLEAR (Registered Trademark) .
Other trademarks for which applications for U.S. registration are pending are:
RBNI (Trade Mark) , KEEPING YOU AHEAD OF THE CURVE (Trade Mark) and curve
design, DOCTOR'S EXPRESS (Trade Mark) , DOCTORSXPRESS.COM (Trade Mark) LOSE
THE GLASSES, KEEP THE VISION (Trade Mark) and OPTICARE LASER ADVANTAGE (Trade
Mark) . We also own the following domain names: opticare.com; opticare.net;
opticarenas.net; doctorsxpress.com; and opticareonline.com. We consider these
trademarks and domain names important to our business. However, our business is
not dependent on any individual trademark or trade name.
COMPETITION
The market for eye care services is highly competitive in each segment of
our business. In the Laser Correction and Professional Services Division, we
compete with:
o Refractive laser surgery companies;
o Stand-alone laser surgery operators;
o Hospitals; and
o Physician practice management companies, among others.
While some of the competition in this segment is local and regional, we do
have national competitors. For laser correction, these include Lasersight, TLC
The Laser Center, Inc., Laser Vision Centers, Inc., ClearVision Laser Centers,
Ltd., LCA-Vision Inc. and Novamed. Laser correction companies primarily compete
on the basis of quality of service, reputation, price and convenience. With
respect to professional services, we generally compete with a range of services
specific operators providing services to eye health professionals, such as
marketing companies, systems and software vendors. We have identified few, if
any, integrated providers of eye health services other than
76
<PAGE>
physician practice management companies, which, under a substantially different
business model, require substantial capital investment by the practice
management company and equity participation by ophthalmologists and
optometrists.
Our Managed Care Services Division competes with several regional and
national eye health companies which provide services to managed care plans.
These include Vision Twenty-One and Vision Service Plan of America. We also
compete for managed care contracts with HMO's, PPO's and private insurers, many
of which have larger provider networks and greater financial and other
resources. Managed care organizations compete on the basis of administrative
strength, size, quality and geographic coverage of their provider networks,
marketing abilities, informational systems, the strategy of their managed care
contracts, operating efficiencies and price.
For our Other Integrated Services Division, the most direct form of
competition is with independent ophthalmologists and optometrists, as well as
regional operators of retail optical locations. On a national basis, companies
that compete in this sector include retail optical operators, such as
LensCrafters, Cole National, Sight Resources, Eye Care Centers of America, and
Sterling Vision. Retail optical operators compete on price, service, product
availability and location. Buying group organizations compete on the basis of
price, size and purchasing power of their member buying group, the strength of
their credit, and the strength of their supplier agreements and relationships.
Several competitors in each of our divisions have greater capital or may
charge less for certain services. However, we believe the integrated nature of
our business model provides significant competitive advantages in the
marketplace.
FORMATION AND HISTORY
Our present form is the result of two mergers completed on August 13, 1999
(more fully described below) between (i) a subsidiary of the company and
OptiCare Eye Health Centers, Inc., a Connecticut corporation ("OptiCare Eye
Health Centers"), and (ii) another subsidiary of the company and PrimeVision
Health, Inc., a Delaware corporation ("PrimeVision Health"). As a result of the
mergers, OptiCare Eye Health Centers and PrimeVision Health are wholly owned
subsidiaries of the company. At the time of the mergers, PrimeVision Health and
OptiCare Eye Health Centers were each an integrated vision services company,
with PrimeVision Health headquartered in North Carolina, and OptiCare Eye
Health Centers headquartered in Connecticut.
The company was incorporated in Delaware in 1994 under the name "Saratoga
Resources, Inc." ("Saratoga"). At the time the company was formed, it succeeded
by merger to the assets of an oil exploration and production business.
Saratoga, while engaged in the oil business prior to 1999, experienced
several years of losses and in 1998 determined to spin off its oil assets and
seek a merger partner or other transaction to take advantage of Saratoga's
status as a publicly held company. On April 12, 1999, Saratoga entered into a
merger agreement with PrimeVision Health and OptiCare Eye Health Centers.
Pursuant to the merger agreement, Saratoga spun off or otherwise disposed of
its assets other than a modest amount of cash and two "shell" subsidiaries, and
PrimeVision Health and OptiCare Eye Health Centers merged with the shell
subsidiaries. The merger agreement closed on August 13, 1999, and, pursuant to
the merger agreement, Saratoga changed its name to "OptiCare Health Systems,
Inc.," which is now the name of our company.
At the closing of the merger agreement, the board of directors and
management of Saratoga resigned and, in accordance with the terms of the merger
agreement, were replaced by persons selected by PrimeVision Health and OptiCare
Eye Health Centers. Likewise, the capital structure of the company was altered
by amendments to the certificate of incorporation and by the filing of a
certificate of designation establishing a class of preferred stock designated
as the Series A Convertible Preferred Stock.
77
<PAGE>
GOVERNMENT REGULATION
The federal and state governments extensively regulate the health care
industry. Our business is subject to numerous federal and state laws and
regulations, including the following:
Excimer Laser Regulation. Medical devices, including the excimer lasers
used in our eye surgery and laser centers, are subject to regulation by the
U.S. Food and Drug Administration, referred to as the FDA. Medical devices may
not be marketed for commercial sale in the United States until the FDA grants
pre-market approval for the device.
The FDA has not specifically approved the use of LASIK or the use of
excimer lasers to treat both eyes on the same day, commonly referred to as
bilateral treatment. The FDA considers these uses to be a practice of medicine
decision. Ophthalmologists, including our affiliated ophthalmologists, often
perform LASIK and bilateral treatment in an exercise of professional judgment
in connection with the practice of medicine.
Failure to comply with applicable FDA requirements could subject the
company, our affiliated providers or laser manufacturers to enforcement action,
product seizures, recalls, withdrawal of approvals and civil and criminal
penalties. Further, failure to comply with regulatory requirements, or any
adverse regulatory action, including a reversal of the FDA's current position
that the "off-label," or non-FDA-approved, use of excimer lasers by physicians
outside the FDA approved guidelines is a practice of medicine decision, which
the FDA is not authorized to regulate, could result in a limitation on or
prohibition of the company's use of excimer lasers.
Regulation of Laser Vision Marketing. The marketing and promotion of laser
correction and other vision correction surgery procedures in the United States
are subject to regulation by the FDA and the Federal Trade Commission, referred
to as the FTC. The FDA and FTC have released a joint communique on the
requirements for marketing these procedures in compliance with the laws
administered by both agencies. The FTC staff also issued more detailed staff
guidance on the marketing and promotion of these procedures and has been
monitoring marketing activities in this area through a non-public inquiry to
identify areas that may require further FTC attention. The FDA has
traditionally taken the position that the promotion and advertising of lasers
by manufacturers and physicians should be limited to the uses approved by the
FDA. Although the FDA does not prevent surgeons from using excimer lasers
off-label, the FDA reserves the right to regulate advertising and promotion of
off-label uses.
Insurance Licensure. Most states impose strict licensure requirements on
health insurance companies, HMO's, and other companies that engage in the
business of insurance or pre-paid health care. In most states, these laws do
not apply to discounted fee-for-service arrangements or networks that are paid
on a capitated basis, i.e. based on the number of covered persons the network
is required to serve without regard to the actual rendering of eye care service
to patients, provided that the association with which the network provider has
contracted is a licensed health insurer or HMO. There are exceptions to these
rules in some states. For example, certain states require a license for a
capitated arrangement with any party unless the risk-bearing association is a
professional corporation that employs the eye care providers. If we are
required to become licensed under these laws, the licensure process can be
lengthy and time consuming and, unless the regulatory authority permits us to
continue to operate while the licensure process is progressing, we could suffer
losses of revenue that would result in material adverse changes in its business
while the licensing process is pending. In addition, many of the licensing
requirements mandate strict financial and other requirements we may not
immediately be able to meet. Once licensed, we would be subject to continuing
oversight by and reporting to the licensing authority.
Regulation of our HMO Subsidiary. We hold one single service HMO license
in Texas. Prior to January 1, 2000, we also held a single service HMO license
in North Carolina. However, because of regulatory changes, this license is no
longer required to conduct the company's business and has been relinquished.
Texas requires the filing of quarterly and annual reports as well as periodic
on-site audits.
78
<PAGE>
The Florida, North Carolina and Texas, managed care businesses are highly
regulated. Such regulation can include, but is not limited to, caps on
permissible premiums charged to customers; mandated benefits; and rules
governing relationships with, and payments to, network providers. Each of these
states also require pre-approval from their respective Departments of Insurance
prior to allowing a significant change of ownership control to take place.
In Texas, a single service HMO must maintain a reserve of $500,000, net of
accrued unpaid liabilities. However, if such a reserve is currently
unavailable, the HMO must achieve and maintain a current reserve of $200,000;
this reserve must increase to $275,000 by December 31, 1999; $350,000 by
December 31, 2000; $425,000 by December 31, 2001; and $500,000 by December 31,
2002.
Texas Administrative Oversight Order. Our wholly owned Texas HMO, AECC
Total Vision Health Plan of Texas, Inc., is required by the terms of an
administrative oversight order dated August 18, 1999, from the Texas Insurance
Department to maintain a minimum net worth of $1,400,000. The Texas HMO is also
prohibited from paying dividends or making any other payments to us without the
prior written approval of the Texas Insurance Department. The Texas HMO
subsidiary is therefore restricted in its ability to apply its earnings (if
any) to the payment of dividends on our common stock, the reduction of bank
debt or any other corporate purpose, other than operation of the Texas HMO. We
do not consider this requirement burdensome under present circumstances, but we
are nevertheless restricted in the use of its capital. We have a cost
allocation agreement with our Texas HMO subsidiary, approved by the Texas
Insurance Department, which permits this subsidiary to reimburse us, the parent
company, for shared administrative costs. The cost allocation agreement may be
amended only with approval of the Texas Insurance Department.
Third Party Administration Licensing. Some states require licensing for
companies providing administrative services in connection with managed care
business. We hold third-party administrator's licenses in Florida and Rhode
Island. We intend to seek licenses in the states where they are available for
eye care networks. However, we may not be able to meet the licensing
requirements in all states, and this may have an adverse effect on our business
and operating results or inhibit its growth.
Physician Incentive Plans. Medicare regulations impose certain disclosure
requirements on managed care networks that compensate providers in a manner
that is related to the volume of services provided to Medicare patients (other
than services personally provided by the provider). If incentive payments
exceed 25% of the provider's potential payments, the network is also required
to show that the providers have certain "stop loss" financial protections 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
qualified and licensed provider who is willing to abide by the terms of the
network's contracts. These laws may also prohibit termination of providers
without cause. These laws limit our ability to develop effective managed care
networks in such states.
Corporate Practice of Optometry and Ophthalmology. The laws of many states
prohibit corporations that are not owned entirely by eye care professionals
from:
o employing eye care professionals;
o receiving for their own account reimbursements from third party payors
for health care services rendered by licensed professionals;
o controlling clinical decision-making; or
o engaging in other activities that constitute the practice of optometry
or ophthalmology.
To comply with these requirements, we:
o contract with professional associations (which are owned by one or
more licensed optometrists or ophthalmologists), which in turn employ
or contract with licensed optometrists or ophthalmologists to provide
professional services to patients;
79
<PAGE>
o perform only non-professional services;
o do not represent to the public or customers that it provides
professional eye care services; and
o do not exercise influence or control over the practices of the eye
care practitioners employed by the professional associations.
Our agreements with eye care providers specifically provide that all
decisions required by law to be made by licensed ophthalmologists or
optometrists shall be made only by such licensed persons, and that we shall not
engage in any services or activities which would constitute the practice of
ophthalmology or optometry. If health care regulations and their
interpretations change in the future, we may have to revise the terms of such
agreements to comply with regulatory changes. See "OptiCare Certain
Relationships and Related Transactions -- OptiCare P.C. Professional Services
and Support Agreement and -- Optometric Eye Care Centers, P.A. Professional
Services and Support Agreement"
State Fee-Splitting and Anti-kickback Law. Most states have laws
prohibiting the paying or receiving of any remuneration, direct or indirect,
that is intended to induce referrals for health care products or services. Many
states also prohibit "fee-splitting" by health care professionals with any
party except other health 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 revenues of the professional practice.
However, in some states, "fee-splitting" has been interpreted to include
payments by health professionals of a portion of fees in return for certain
services.
The North Carolina Medical Board stated in an Official Position Statement,
which was adopted in 1993 and amended in 1996, that sharing profits between a
non-physician and physician partner on a percentage basis is fee splitting and
is grounds for disciplinary action. In the past year, this issue has been
raised in several lawsuits in the state. In each of these cases, the court was
asked to find that the profit sharing arrangement between a physician or
physician group and management company is unethical and void as against public
policy. To date, no court in North Carolina has ruled on this issue. There is a
risk that a court could find that our arrangements with physicians are
unethical and void as against public policy or that the Medical Board could
determine that the Company's arrangements with physicians in the state
constitute unethical fee-splitting and that these physicians are subject to
disciplinary action. This risk could also extend to arrangements with
optometrists since the North Carolina Optometry Board has informally indicated
that it takes a similar view on fee-splitting.
North Carolina law also prohibits health care providers from paying any
type of financial compensation to any person, firm or corporation for
recommending or securing the provider's employment by a patient, or as a reward
for having made a recommendation resulting in the provider's employment by a
patient.
Federal Fee-Splitting and Anti-kickback Law. Federal law prohibits the
offer, payment, solicitation or receipt of any form of remuneration in return
for the referral of patients covered by federally funded health care programs
such as Medicare and Medicaid, or in return for purchasing, leasing, ordering
or arranging for the purchase, lease or order of any product or service that is
covered by a federal program.
On April 15, 1998 the Office of Inspector General of the U.S. Department
of Health and Human Services (the "OIG") issued Advisory Opinion 98-4, which
raised questions about whether a percentage of revenue management fee
arrangement could be viewed as violating the federal anti-kickback law if the
manager is involved in helping generate revenues derived from Medicare and
Medicaid programs. Under the arrangement reviewed by the OIG, the manager's
duties included management and marketing services, negotiation and oversight of
health care contracts with various payors, including Federal healthcare
programs, and setting up provider networks that included physicians. Payments
to the management company included a "fair market value payment" for
80
<PAGE>
operating services provided by the manager, a payment based on a percentage of
the cost of capital assets, and an additional 20% of net revenues of the
practice for management services. The OIG noted that since the manager was paid
a percentage of net revenue, including revenue from business derived from
managed care contracts arranged by the manager, that a potential technical
violation of the anti-kickback statute existed. The OIG further noted that
since the manager would presumably receive some compensation for management
efforts in connection with the development and operation of specialist
networks, any evaluation by the OIG would require information about the
relevant financial relationships. The OIG summarized that while the management
arrangement "may" violate the anti-kickback statute, a definitive conclusion
would require a determination of the parties' intent, which is beyond the scope
of the advisory opinion process.
Our services agreements are different from the arrangements reviewed by
the OIG in its advisory opinion. Therefore, we believe that the opinion is
inapplicable to our relationships with our eye care professionals. As a result,
there are no present plans to change the terms of these relationships, but we
will continue to monitor any clarifications or determinations in this area. If
the forms of our services agreements are ever determined to be in violation of
the federal anti-kickback statute, it is likely that there would be a material
adverse impact on our business, financial condition and results of operation.
Advertising Restrictions. Many states, including Connecticut and North
Carolina, prohibit licensed eye care professionals from using advertising which
includes any name other than their own, or from advertising in any manner that
is likely to lead a person to believe that a non-licensed professional is
engaged in the delivery of eye care services. Certain of our forms of services
agreements provide that all advertising shall conform to these requirements,
but there can be no assurance that the interpretation of the applicable laws or
our advertising will not inhibit us or result in legal violations that could
have a material adverse effect on us.
Electronic Record Privacy and Security Regulations. Recently proposed
federal regulations will, if finalized, strictly regulate health care providers
and plans that transmit health information electronically. Under the
regulations, providers and plans must limit access to health information to
employees who have a business need. They must install computer security
hardware and software to ensure that access is appropriately limited. Further,
a patient's written consent would be required to release personally
identifiable health information for any purpose other than treatment, payment
and certain specified purposes (e.g., public health). Patients are granted
rights to obtain an accounting of all disclosures of personally identifiable
information, access their health information upon request, and amend or correct
their health information. Providers and plans would have to adopt numerous
security and privacy policies to implement the regulations. They would also
have to identify a privacy official and a person responsible for security and
provide employee training programs regarding the security and privacy
requirements.
The privacy and security regulations are expected to be issued in final
form sometime this year. Providers and plans will have two years to comply with
the regulations. The regulations could have an adverse impact on the cost of
providing vision care-related services, including the types of services
furnished by OptiCare.
The laws described above have civil and criminal penalties and have been
subject to limited judicial and regulatory interpretation. They are enforced by
regulatory agencies that are vested with broad discretion in interpreting their
meaning. Our agreements and activities have not been examined by federal or
state authorities under these laws and regulations. There can be no assurance
that review of our business arrangements will not result in determinations that
adversely affect our operations or that certain material agreements between us
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 our
expansion into, or ability to continue operations within, such jurisdictions if
we are unable to modify its operational structure to conform with such
regulatory framework. Any limitation on our ability to continue operating in
the manner in which it has operated in the past could have an adverse effect on
our business, financial condition and results of operations.
81
<PAGE>
CREDIT FACILITY
On August 13, 1999, we and certain of our subsidiaries entered into a loan
and security agreement and certain other agreements relating to the loan
agreement with a group of lenders represented by Bank Austria Creditanstalt
Corporate Finance, Inc. ("Bank Austria"). The outstanding balance under this
credit facility as of May 1, 2000, was approximately $30.6 million.
Under the terms of the credit facility, the lenders have made available a
maximum aggregate principal amount at any time outstanding of $34.2 million,
which includes a term loan facility in the aggregate principal amount of $21.5
million, and a revolving credit facility in the maximum aggregate principal
amount at any time outstanding of $12.7 million, including, a letter-of-credit
sub-facility of up to $1.5 million. We use our credit facility to supplement
working capital.
We may borrow and repay under the revolving credit facility until June 1,
2004, subject to the terms and conditions of the credit facility. The term loan
facility is repayable in fifteen quarterly principal installments, with the
first fourteen installments repayable in accordance with the amortization
schedule set forth in the credit facility, and the final payment of all
principal amounts outstanding, being due and payable on June 1, 2004. The
credit facility also requires us to make certain mandatory prepayments,
including upon the offering of common stock, and allows us to make optional
prepayments. The credit facility terminates, and all amounts outstanding under
the credit facility are due and payable, on June 1, 2004.
The interest rate under the credit facility equals the base rate or the
eurodollar rate (each, as defined in the credit facility), as we may from time
to time elect. 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
percentage point. The eurodollar rate generally equals the quotient of the
offered rate quoted by Bank Austria in the interbank 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.
Our subsidiaries have guaranteed the payments and our other obligations
under the credit facility, and we and certain of our subsidiaries have granted
a security interest in substantially all assets, in favor of our lenders. We
have pledged the capital stock of certain of our subsidiaries to the lenders.
The credit facility contains certain restrictions on the conduct of our
business, including restrictions on incurring debt, declaring or paying any
cash dividends or any other payment or distribution on our capital stock, and
creating liens on our assets. We are required to maintain certain financial
covenants, including, a minimum fixed charge coverage ratio, a leverage ratio,
a senior leverage ratio, and an interest coverage ratio. We are also restricted
from incurring capital expenditures in excess of a specified amount and are
required to achieve minimum cash flows.
The occurrence of certain events or conditions described in the credit
facility constitute an "event of default," including:
o failure to make payment of principal or interest when due;
o failure to observe or perform certain affirmative covenants and other
covenants; or
o the occurrence of a vacancy in the offices of the chief executive or
chief financial officer which is not filled by a person reasonably
acceptable to the lenders.
For further information regarding our credit facility, see "OptiCare
Management's Discussions and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Also see "The Merger Agreement
and Related Agreements -- Credit Facility Restructuring."
82
<PAGE>
EMPLOYEES
We and our affiliates currently have approximately 925 employees,
including 110 executive or managerial personnel, 207 licensed ophthalmologists,
optometrists, and opticians and 148 ophthalmologist assistants. These amounts
include an aggregate of 259 part-time personnel, i.e., working fewer than 30
hours per week. We believe that our relations with our employees are good. We
are not a party to any collective bargaining agreement. Also see "Business of
Vision Twenty-One -- Employees" for information concerning employees of Vision
Twenty-One.
DESCRIPTION OF PROPERTIES
We have executive offices in Waterbury, Connecticut and Rocky Mount, North
Carolina. The Waterbury facility, which contains corporate offices, Managed
Care offices and an integrated eye health center, is leased under four separate
leases with remaining terms ranging from five to 13 years. Each of these leases
also has renewal options ranging from five to 20 years in total. The combined
base annual rent is $865,817 for a total of 47,200 square feet.
The Rocky Mount facilities, which contain executive offices, HMO offices
and an operations center, are adjacent facilities leased under four separate
leases with remaining terms of three to five years. The combined base rent for
these four facilities is $239,000 for a total of 33,900 square feet.
Each of the foregoing offices and certain of the additional offices
described below is leased from a party that is affiliated or associated with
one or more of our directors or executive officers. See "OptiCare Certain
Relationships and Related Transactions."
We lease 32 additional offices in the states of Connecticut, North
Carolina, Florida and Texas, principally for our eye health services and retail
optical operations. These leases have remaining terms of between one and 11
years. Many of these leases are also subject to renewal options. We believe our
properties are adequate and suitable for our business as presently conducted.
Also see "Business of Vision Twenty-One -- Properties" for information
concerning Vision Twenty-One's properties.
LEGAL PROCEEDINGS
OptiCare Eye Health Centers Physicians Action and Countersuits. Seven
physicians employed by OptiCare, P.C. commenced an action in January 1999 in
the Connecticut Superior Court complaining of inducements that led them to
affiliate with OptiCare Eye Health Centers. Shortly after the commencement of
the action, three of the plaintiffs withdrew from the lawsuit. The remaining
four plaintiffs seek damages for individual harm they claim to have suffered.
One plaintiff also purports to sue derivatively on behalf of OptiCare Health
Eye Centers for harm suffered by the stockholders. The defendants deny the
factual and legal validity of the claims asserted and have moved to dismiss the
complaint. The derivative portion of the complaint was dismissed on June 14,
1999. Dr Yimoyines, our Chairman, Chief Executive Officer and President, has
been named as a defendant in this action.
OptiCare Eye Health Centers and OptiCare P.C. instituted actions in
January and February, 1999, in the Connecticut Superior court against two
physicians for unfair trade practices, tortious interference and abuse of
process based on defendants' course of conduct that plaintiffs complain is
unlawfully designed to force plaintiffs to modify the defendants' employment
contracts. Defendants have moved to strike the complaint. OptiCare Eye Health
Centers and OptiCare, P.C. are opposing the motion to strike, and if successful
in their opposition intend to vigorously pursue their claims. We have also
brought a counterclaim against three of the physicians for anticipatory breach
of contract.The foregoing actions have been consolidated in Connecticut
Superior Court. These actions are in the early stages of discovery. We believe
that we will prevail in these actions. However, if the physicians prevail in
these actions, our business, financial condition and results of operations
could be materially adversely affected.
Missouri Action, Counterclaim and Related Put Option. PrimeVision Health
commenced an action (the "Missouri Action") in United States District Court for
the Eastern District of Missouri, in August 1998, seeking damages from an
ophthalmologist (the "Missouri Seller") who sold his
83
<PAGE>
ophthalmology practice to PrimeVision Health. PrimeVision Health has alleged
that the Missouri Seller falsely and fraudulently inflated the value of the
corporation he sold to PrimeVision Health, in the amount of approximately $2
million. The Missouri Seller has counterclaimed against PrimeVision Health,
for, among other things, enforcement of a put option, damages for allegedly
malicious prosecution and a declaration that his administrative services
agreement with PrimeVision Health is terminated and of no further force or
effect. The litigation is in its earliest stages.
As part of the purchase transaction, PrimeVision Health issued a put
option by which the Missouri Seller, at his election, may require PrimeVision
Health to purchase the balance of his ophthalmology practice, based on
substantially the same valuation which PrimeVision Health is challenging in
court. The exercise price that would be payable by PrimeVision Health under the
put option is approximately $4 million. In January 1999, the Missouri Seller
exercised the put option. PrimeVision Health has asserted to the Missouri
Seller that PrimeVision Health is not obligated to honor the put for the same
reasons that PrimeVision Health is seeking damages in the Missouri Action --
that the value of the corporation sold by the Missouri Seller to PrimeVision
Health was falsely inflated. As noted above, the Missouri Seller has
counterclaimed in the Missouri Action to enforce the put. We believe that we
will prevail in the pending Missouri Action and in any attempt to enforce the
put. If the Missouri seller were to prevail in this action, our business,
financial condition and results of operations could be materially adversely
affected.
Also see "The Merger -- Dispute with Block Buying Group."
84
<PAGE>
OPTICARE'S MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of our
directors and executive officers as of May 1, 2000. Each director will hold
office until the next annual meeting of stockholders or until his or her
successor has been elected and qualified. Our executive officers are appointed
by and serve at the discretion of the board of directors.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---- --- ---------
<S> <C> <C>
Dean J. Yimoyines, M.D. .......... 52 Chairman of the Board of Directors,
President and Chief Executive Officer
Steven L. Ditman ................. 45 Executive Vice President, Chief
Financial Officer and Director
Allan L.M. Barker, O.D. .......... 52 President of the Laser Correction and
Professional Services Division and
Director
Martin E. Franklin ............... 35 Director
John F. Croweak .................. 63 Director
Carl J. Schramm .................. 53 Director
Ian G.H. Ashken .................. 39 Director
D. Blair Harrold, O.D. ........... 53 President of Retail Optometry, North
Carolina Operations
Samuel B. Petteway ............... 44 President of the Managed Care
Division
Gordon A. Bishop ................. 51 President of the Buying Group
</TABLE>
Dr. Yimoyines has served as Chairman of the Board, Chief Executive Officer
and President since August 13, 1999. Dr. Yimoyines is a founder of OptiCare Eye
Health Centers and has served as the Chairman, President and Chief Executive
Officer of OptiCare Eye Health Centers since 1985. Dr. Yimoyines has been
instrumental in the development and implementation of OptiCare Eye Health
Centers business for nearly twenty years. He graduated with distinction from
the George Washington School of Medicine. He completed his ophthalmology
residency at the Massachusetts Eye and Ear Infirmary, Harvard Medical School.
He completed fellowship training in vitreoretinal surgery at the Retina
Associates in Boston. Dr. Yimoyines is a graduate of the OPM (Owner/President
Management) program at Harvard Business School and a Fellow of the American
Academy of Ophthalmology.
Mr. Ditman has served as Executive Vice President, Chief Financial Officer
and a Director since August 13, 1999. Mr. Ditman served as a Director of
OptiCare Eye Health Centers since July 1989 and the Chief Financial Officer and
Treasurer of OptiCare Eye Health Centers since March, 1992. Mr. Ditman has also
served as Chief Operating Officer of OptiCare Eye Health Centers since May,
1998. From October, 1986 until March, 1992, Mr. Ditman served as Director,
Chief Financial Officer and Treasurer of the Daytona Group and Drubner
Broadcasting. During the same period of time, Mr. Ditman also served as Chief
Financial Officer and Treasurer of The Drubner Investment Group. Mr. Ditman
served as Corporate Controller of Victor Electric Wire and Cable Corporation
from November, 1981 until October, 1986. Mr. Ditman served as a senior auditor
for KPMG Peat Marwick from 1977 to 1981. Mr. Ditman received his Bachelor of
Science in Accounting from Northeastern University in June 1977. Mr. Ditman
became a Certified Public Accountant in 1980 and was licensed in the State of
Rhode Island.
Dr. Barker is President of the Laser Correction and Professional Services
Division and has served as a Director since August 13, 1999. Dr. Barker has
been a senior executive officer and Director of Prime since 1996. He is a
licensed optometrist with 25 years experience in the eye care industry. From
85
<PAGE>
October, 1989 to July, 1996, Dr. Barker served as co-president of Consolidated
Eye Care, Inc., the parent company of AECC/Pearlman Buying Group and AECC Total
Vision Health Plan, Inc. Also during this period Dr. Barker served as vice
president and secretary of Optometric Eye Care Center, P.A. Dr. Barker received
his Doctor of Optometry degree in 1975 from Southern College of Optometry in
Memphis, Tennessee.
Mr. Franklin was a Director of PrimeVision Health from July, 1998 to
August 13, 1999. From February 1, 1997 through February 8, 2000, Mr. Franklin
has served as Chairman of the Board of Directors of Bolle Inc., an AMEX
company, which is a manufacturer, marketer and distributor of premium eyewear.
Mr. Franklin has been Chairman and Chief Executive Officer of Marlin Holdings,
Inc., the general partner of Marlin Capital, L.P., a private investment
partnership, since October, 1996. From May, 1996 until December, 1998, Mr.
Franklin served as Chairman and Chief Executive Officer of Lumen Technologies,
Inc., a NYSE company, which is a manufacturer and distributor of specialty
lighting equipment, and served as Executive Chairman from May, 1996 until
December, 1998. Mr. Franklin was Chairman of the Board and Chief Executive
Officer of Lumen's predecessor, Benson Eyecare Corporation from October, 1992
to May, 1996 and President from November, 1993 until May, 1996. Mr. Franklin
was non-executive Chairman and a director of Eyecare Products plc, a London
Stock Exchange Company, from December, 1993 until February, 1999. In addition,
Mr. Franklin has served as a director of Specialty Catalog Corp., a NASDAQ
listed company, since 1994 and of Corporate Express, Inc., a NASDAQ listed
company since March, 1999. Mr. Franklin also serves on the boards of a number
of privately held companies and charitable organizations. Mr. Franklin received
a B.A. in Political Science from the University of Pennsylvania in 1986.
Mr. Croweak has served as a Director since August 13, 1999. Mr. Croweak
was a Director of OptiCare Eye Health Centers from September, 1995 to August
13, 1999. Mr Croweak was Chairman of the Board of Directors of Anthem Blue
Cross and Blue Shield of Connecticut state chartered from August, 1997 until
December, 1999. From April 4, 1988 through August, 1997, Mr. Croweak was Chief
Executive Officer of Blue Cross and Blue Shield of Connecticut. Mr. Croweak
served as a director of Anthem Insurance Companies, Inc., a multi-state health
insurance company based in Indianapolis, Indiana, from August, 1997 until
March, 2000. He is also a director of United Illuminating, a diversified
utility operator based in New Haven, Connecticut and The New Haven Savings
Bank, a state chartered savings bank based in New Haven, Connecticut. Mr.
Croweak received a BBA degree from the University of Cincinnati in 1959
Mr. Schramm is President of Greenspring Advisors, Inc., a consulting and
merchant banking firm specializing in health care information founded in 1995.
From 1993 to 1995, Mr. Schramm served as Executive Vice President of Fortis,
Inc., an international insurance and financial services company, where he
directed American health insurance operations. From 1987 through 1992, Mr.
Schramm was President of the Health Insurance Association of America, the
national trade association of commercial health companies. Prior to entering
the insurance industry, Mr. Schramm was a professor of Health Policy and
Management at Johns Hopkins from 1972 to 1987. Mr. Schramm holds a Ph.D. in
Economics from the University of Wisconsin and received his legal education at
Georgetown University.
Mr. Ashken, A.C.A., has served as a Director since August 13, 1999. Mr.
Ashken has been Vice Chairman of Marlin Holdings, Inc., the general partner of
Marlin Capital, L.P., since October, 1996. Mr. Ashken served as Vice-Chairman
and Secretary of Bolle Inc., an AMEX company, which is a manufacturer, marketer
and distributor of premium eyewear, from December, 1998 through February 8,
2000. From February, 1997 until his appointment as Vice-Chairman, Mr. Ashken
served as Executive Vice President, Chief Financial Officer, Assistant
Secretary and a Director of Bolle Inc. Mr. Ashken was elected Executive Vice
President, Chief Financial Officer, Assistant Secretary and a Director of Lumen
Technologies, Inc., a NYSE company, which is a manufacturer and distributor of
specialty lighting equipment, from December, 1995 until December, 1998. Mr.
Ashken was Chief Financial Officer of Lumen's predecessor, Benson Eyecare
Corporation, and a director of Benson Eyecare from October, 1992 to May, 1996.
Mr. Ashken also served as Benson Eyecare's Executive Vice President from
October, 1994 to May, 1996; and, Assistant Secretary from December, 1993 to
86
<PAGE>
May, 1996. Mr. Ashken was a director of Eyecare Products plc, a London Stock
Exchange Company, from August, 1994 until in February, 1999. Mr. Ashken
received his B.A. (Hons) in Economics and Account from the University of
Newcastle in England.
Dr. Harrold has served as the President of Retail Optometry, North
Carolina Operations since August 13, 1999. Prior thereto, Dr. Harrold served as
a senior executive and director of PrimeVision Health since its acquisition of
Consolidated Eye Care, Inc. in July, 1996. Dr. Harrold founded Consolidated
Eyecare in 1989 and served as its Co-President until its acquisition by
PrimeVision Health. Dr. Harrold is a licensed optometrist, having graduated
from Ohio State University with a B.S. in physiological optics and a Doctor of
Optometry degree in 1971. Dr. Harrold has also served as President of
Optometric Eye Care Center, PA, a North Carolina professional association. Dr.
Harrold is a member of the American Optometric Association and the North
Carolina State Optometric Association and is also a Fellow in the American
Academy of Optometry.
Mr. Petteway has served as the President of the Managed Care Division
since August 13, 1999. Mr. Petteway has been President of PrimeVision Health's
managed care business operations since July, 1996 and, prior to PrimeVision
Health's acquisition of Consolidated Eye Care, Inc, the managed care business
operations of Consolidated Eyecare since 1989. Since October 1994, Mr. Petteway
has served as Chairman of the Board for Association of Eye Care Centers Total
Vision Health Plan, Inc. From April, 1995 through August 13, 1999, Mr. Petteway
served as the Chairman of the Board of AECC Total Vision Health Plan of Texas,
Inc., which are both owned by Prime. Prior to 1989, Mr. Petteway was President
of Strategic Health Services, providing consulting services to hospitals,
physicians, pharmacies and companies. Mr. Petteway graduated from the
University of North Carolina at Chapel Hill with a Bachelor of Science in
Pharmacy in 1979 and received a Masters in Business Administration with
Distinction from Campbell University in 1985.
Mr. Bishop has served as President of our Buying Group since August, 1999.
In that position, he has overall responsibility for our Buying Group and all
Connecticut retail optical operations. From June, 1998 to August, 1999, Mr.
Bishop directed the retail operations of OptiCare Eye Health Centers, Inc. Mr.
Bishop has over 30 years of experience in the optical industry, having served
in a variety of different capacities with different organizations in the United
States and Canada. From August of 1997 to April, 1998, he served as Vice
President of Operations for Public Optical. From July of 1994 to April of 1997,
he served as Operations Manager for Vogue Optical. From June of 1990 to July of
1994, he held positions of increasing responsibility with Standard Optical Ltd.
He ultimately held the position of Vice President of Operations for that
company. Mr. Bishop received his Business Administration Diploma from
Confederation College of Applied Arts and Technology and subsequently obtained
an Ophthalmic Dispensing Diploma from Ryerson Polytechnic University. He holds
a variety of eye care professional certifications and is certified by the
American Board of Opticianry and holds a Fellowship in the National Academy of
Opticianry.
INFORMATION CONCERNING MEETINGS OF OPTICARE'S BOARD AND COMMITTEES OF THE BOARD
OF DIRECTORS
Our board of directors currently has three committees, the audit
committee, the compensation committee and the stock plan committee. The audit
committee, among other things, recommends the selection of independent auditors
to the board of directors, reviews their reports to management, and meets from
time to time as they deem necessary or advisable to review our systems of
internal financial controls. The audit committee did not meet separately from
August 13, 1999 through December 31, 1999 but did act by unanimous written
consent. The members of the audit committee are Messrs. John F. Croweak, Ian
G.H. Ashken and Carl J. Schramm.
The compensation committee is responsible for establishing compensation
policy for senior management. The compensation committee held one meeting from
August 13, 1999 through December 31, 1999. The members of the compensation
committee are Messrs. John F. Croweak, Martin E. Franklin and Carl J. Schramm.
The stock plan committee is responsible for making awards of stock options
and other awards under the Company's Performance Stock Program and for
administering that Program and OptiCare's employee stock purchase plans. The
stock plan committee did not meet during 1999. The members of the stock plan
committee are Messrs. John F. Croweak and Carl J. Schramm.
The OptiCare Board held four meetings from August 13, 1999 through
December 31, 1999 and each of the directors attended at least 75% of the
meetings of the OptiCare Board and the meetings of the committees of the
OptiCare Board on which he served.
87
<PAGE>
EXECUTIVE COMPENSATION
The Executive Compensation discussion below for periods prior to the
closing of the mergers on August 13, 1999, includes executive compensation of
our directors and officers earned from PrimeVision Health and OptiCare Eye
Health Centers, as the case may be, and does not include any information
relating to Saratoga or Saratoga's officers and directors prior to the mergers.
SUMMARY COMPENSATION TABLE
The following table sets forth, for the fiscal years ended December 31,
1999, 1998 and 1997, compensation paid by us to the Chief Executive Officer and
to our four other most highly compensated executive officers whose total
compensation exceeded $100,000.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
-------------------------- ------------------------------------
All Other
Name and Principal Position (9) Year Salary ($) Bonus ($) Options (#) Compensation (8)
- ------------------------------------ ------ ------------ ----------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Dean J. Yimoyines, M.D. (1) 1999 403,650 62,152 325,000(7) 10,671
Chairman of the Board of 1998 360,537 139,756 286,450(6) 10,948
Directors, President and 1997 350,000 20,803 0 7,034
Chief Executive Officer
Steven L. Ditman (2) 1999 159,135 20,000 150,000(7) 2,700
Executive Vice President, 1998 145,673 32,000 72,977(6) 0
Chief Financial Officer, 1997 125,000 20,000 0 692
Director
Allan L.M. Barker, O.D. (3) 1999 263,161 0 0 5,000
President of Laser Correction 1998 305,028 271 0 5,160
and Professional Services Division 1997 299,839 0 0 4,750
and Director
D. Blair Harrold, O.D. (4) 1999 263,485 0 0 3,566
President of the Retail 1998 305,028 0 0 5,000
Optometry Division, North 1997 299,789 0 0 5,474
Carolina Operations
Samuel B. Petteway (5) 1999 294,590 63,868 45,000(7) 5,000
President of the Managed 1998 201,000 57,582 0 5,206
Care Division 1997 197,077 10,000 18,828(6) 4,750
</TABLE>
- ----------
(1) The information includes the aggregate compensation paid by OptiCare Eye
Health Centers and OptiCare P.C. for the services of Dr. Yimoyines.
(2) The information includes the compensation paid by OptiCare Eye Health
Centers for the services of Mr. Ditman.
(3) The information includes the aggregate compensation paid by PrimeVision
Health and Consolidated Eye Care for the services of Dr. Barker.
(4) The information includes the aggregate compensation paid by PrimeVision
Health and Consolidated Eye Care for the services of Dr. Harrold.
(5) The information includes the aggregate compensation paid by PrimeVision
Health and Consolidated Eye Care for the services of Mr. Petteway.
(6) All awards reflected represent options currently held by our executive
officers which were received in connection with the mergers on August 13,
1999 in exchange for options of OptiCare Eye Health Centers capital stock
or PrimeVision Health common stock, as the case may be.
88
<PAGE>
(7) Upon the closing of the mergers on August 13, 1999, we granted options to
purchase 325,000, 150,000 and 45,000 shares of common stock under our
Performance Stock Program to Dr. Yimoyines, Mr. Ditman and Mr. Petteway,
respectively.
(8) The executive officers were provided with certain group life, health,
medical and other non-cash benefits generally available to all salaried
employees and not included in this column pursuant to the rules
promulgated under the Exchange Act. The amounts shown include (i)
matching contributions by us under a 401(k) retirement savings plan
maintained by us for each of Messrs. Yimoyines $1,200, $1,200 and $1,125,
Ditman $0, $0 and $692, Barker $5,000, $5,160 and $4,750, Harrold $3,566,
$5,000 and $5,474 and Petteway $5,000, $5,206 and $4,750, for the years
1999, 1998 and 1997, respectively, (ii) Insurance premiums paid by us on
behalf of Dr. Yimoyines for disability insurance was $2,555 for each of
the years 1999, 1998 and 1997, (iii) Car allowance paid by us on behalf
of Dr. Yimoyines was $3,438 and $3,025 for the years 1999 and 1998,
respectively, and on behalf of Mr. Ditman of $2,700 for the year 1999,
(iv) Country Club dues paid by us on behalf of Dr. Yimoyines were $3,478,
$4,168 and $3,354 for the years 1999, 1998 and 1997, respectively.
(9) The Summary Compensation table does not include any information relating
to Thomas Cook who served as the Chief Executive Officer and President of
Saratoga prior to the mergers effected on August 13, 1999.
89
<PAGE>
OPTIONS GRANTED IN 1999
The following table sets forth information regarding options granted in
1999 and currently held by our Chief Executive Officer and each of the other
named executive officers. In accordance with the rules of the Commission, the
table sets forth the hypothetical gains or "option spreads" that would exist
for the options at the end of their terms. These gains are based on assumed
rates of annual compound stock price appreciation of our common stock of 5% and
10% from the date the options were granted to the end of the option terms.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL ANNUAL RATES OF
GRANTS STOCK
NUMBER OF PERCENTAGE OF PRICE APPRECIATION
SECURITIES TOTAL OPTIONS FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -------------------
NAME GRANTED (#) FISCAL 1999 SHARE DATE 5 % 10 %
- --------------------------------- ---------------- -------------- ----------- ----------- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
Dean J. Yimoyines, M.D. ......... 325,000(1) 45.1%(2) $ 5.85 8/09 0 $698,750
Steven L. Ditman ................ 150,000(1) 20.8%(2) $ 5.85 8/09 0 $322,500
Samuel B. Petteway .............. 45,000(1) 6.2%(2) $ 5.85 8/09 0 $ 96,873
</TABLE>
- ----------
(1) Granted under our Performance Stock Program. Date of grant was August 13,
1999. Initial exercise date is August 13, 2000; options vest in
installments over a period of four years. Excludes options to purchase
286,450, 72,977 and 18,828 shares of common stock which were received in
connection with the mergers on August 13, 1999 in exchange for options of
OptiCare Eye Health Centers capital stock or PrimeVision Health common
stock, as the case may be.
(2) The total options granted excludes options granted in connection with the
mergers on August 13, 1999.
AGGREGATED OPTION EXERCISES IN 1999 AND YEAR END OPTION VALUES
The following table summarizes certain information regarding option values
of our options as of December 31, 1999, held by the Chief Executive Officer and
each of the other named executive officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT 12/31/99 (#)(1) OPTIONS AT 12/31/99($)(1)
----------------------------- ----------------------------
NON- NON-
NAME EXERCISABLE EXERCISABLE EXERCISABLE EXERCISABLE
- --------------------------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Dean J. Yimoyines, M.D. ......... 143,224 468,226 $134,631 $134,631
Steven L. Ditman ................ 36,488 186,489 $ 34,299 $ 34,299
Samuel B. Petteway .............. 17,782 46,046 0 0
</TABLE>
- ----------
(1) Includes options received in exchange for options of OptiCare Eye Health
Centers capital stock or PrimeVision Health common stock, as the case may
be, as well as options issued in fiscal 1999 after the mergers.
COMPENSATION PLANS
We maintain the following plans for the benefit of employees, including
directors and executive officers:
o Performance Stock Program;
o Amended and Restated 1999 Employee Stock Purchase Plan;
o 2000 Professional Stock Purchase Plan;
o 401(k) plans; and
o health and other insurance plans.
90
<PAGE>
We do not currently maintain a defined benefit pension plan or other
actuarial retirement plan for our named executive officers or otherwise.
PERFORMANCE STOCK PROGRAM
OptiCare is asking its stockholders to approve an amendment to its
Performance Stock Program (the "Plan") to increase the number of shares of
OptiCare common stock authorized for issuance under the Plan by an additional
2,000,000, while maintaining the Program's percentage limitations.
For further information relating to the Plan and the proposal to amend the
Plan, see below "Proposal 3 -- Approval of Increase of Shares of Common Stock
under Performance Stock Program."
AMENDED AND RESTATED 1999 EMPLOYEE STOCK PURCHASE PLAN
Our 1999 Employee Stock Purchase Plan was adopted by our board of
directors on May 14, 1999 and approved by our stockholders on August 13, 1999.
The 1999 Employee Stock Purchase Plan was amended and restated by our board of
directors on March 27, 2000 in order to allow for the purchase of fractional
shares of common stock and to reduce the number of shares of common stock
available for issuance to the extent of our common stock issued under our 2000
Professional Employee Stock Purchase Plan, which plan is described below. The
Amended and Restated 1999 Employee Stock Purchase Plan (the "Employee Plan")
provides for a maximum of 450,000 shares of our common stock to be sold to
employees, which number shall be reduced by the number of shares of common
stock issued under the 2000 Professional Employee Stock Purchase Plan. No more
than 450,000 shares of common stock may be issued pursuant to these two plans
in aggregate. Authorized but previously unissued shares and treasury shares may
be issued under the Employee Plan up to the maximum aggregate limit.
The Employee Plan is administered by the compensation committee. The
compensation committee has the general authority to interpret the provisions of
the Employee Plan and adopt such rules as it deems necessary or desirable for
the administration of the Employee Plan.
The Employee Plan will terminate upon adoption by the board of a
resolution terminating the Employee Plan, or upon the sale of the maximum
aggregate number of shares of common stock available under the Employee Plan.
ELIGIBILITY
All of our employees and those of our subsidiaries, other than certain 5%
stockholders, are eligible to participate in the Employee Plan if they
customarily work at least 20 hours per week for at least five months in a year.
ELECTION TO PARTICIPATE
Eligible employees elect to participate in the Employee Plan by
contributing a portion of their compensation (not to exceed the lesser of 20%
of base pay or $21,250) to purchase shares of common stock under the Employee
Plan. Participating employees may change their elections at any time, but not
more than once in a calendar quarter.
PURCHASE PRICE
Employee contributions will be used to purchase shares of common stock as
of the last business day of each calendar quarter at a price equal to 85% of
the then fair market value of such shares. Only whole numbers of shares will be
purchased for each employee, with any excess contributions being carried over
to the next quarter.
2000 PROFESSIONAL EMPLOYEE STOCK PURCHASE PLAN
On March 27, 2000, the 2000 Professional Employee Stock Purchase Plan (the
"2000 Plan") was adopted and approved by our board of directors and the 2000
Plan became effective. The 2000 Plan
91
<PAGE>
allows for the participation of optometrists and ophthalmologists employed by
professional corporations affiliated with us through professional service
agreements. See "OptiCare Certain Relationships and Related Transactions."
The terms of this second plan are identical to the Employee Plan except
that (i) optometrists and ophthalmologists employed by professional
corporations affiliated to us may be eligible to participate in this plan and
(ii) this plan will not qualify as a plan adopted under Section 423 of the
Internal Revenue Code of 1986, as amended. The number of shares available for
issuance under the Employee Stock Purchase Plan and the 2000 Professional
Employee Stock Purchase Plan aggregate to 450,000 shares.
EMPLOYMENT AGREEMENTS WITH CERTAIN OFFICERS
The provisions of the employment agreements of Messrs. Yimoyines, Ditman,
Barker, Harrold and Petteway are summarized below.
Dean J. Yimoyines. The term of his employment agreement is three years,
expiring August 13, 2002, and it is automatically renewable for additional one
year terms unless either party gives six months notice. Dr. Yimoyines may
terminate his employment agreement without cause upon six months notice. Dr.
Yimoyines' base annual salary and guaranteed bonus is $410,000, and he may
receive performance-based bonuses as determined by the Board of Directors, up
to 100% of base salary plus guaranteed bonus, subject to the achievement of
goals established for each calendar year by the Board of Directors or the
Compensation Committee. Dr. Yimoyines is entitled to a disability benefit
consisting of full base salary and guaranteed bonus for the first six months of
a disability, and thereafter 65% of base salary, guaranteed bonus and
performance-based bonus earned as of the date of disability and to a life
insurance policy on his life in the amount of $1,500,000 payable to a
beneficiary designated by Dr. Yimoyines. If his employment is terminated on
account of disability or without cause by the company, or if the agreement is
not renewed at the end of the initial three year term, Dr. Yimoyines shall
receive a lump sum payment in an amount equal to three times total compensation
for the year prior to termination, plus continuation of all benefits for a
period of three years after termination. If (a) during the three year period
following a change in control, Dr. Yimoyines' duties are materially diminished,
his principal place of employment is moved more than 50 miles, or his
employment is terminated on account of disability or by the company without
cause or by now-renewal of the agreement, or (b) Dr. Yimoyines voluntarily
terminates his employment during the one year period following a change in
control, then Dr. Yimoyines shall receive severance pay equal to three times
total compensation for the year ended prior to the change in control. If Dr.
Yimoyines' employment is not terminated at our election; including a
termination on account of non-renewal after the initial 3-year term, then (1)
during the term of the agreement and for a period of 18 months after the date
of termination of employment, Dr. Yimoyines shall not engage in the practice of
any branch of ophthalmology or ophthalmic surgery in any capacity in
Connecticut or any portion of any other state where the company actively
conducts business; and (2) for the 12 month period following termination, Dr.
Yimoyines may not render services to any organization which is engaged in (a)
researching, developing, marketing or selling any eye wear or eye care product,
process or service or (b) management of an ophthalmic medical practice which
competes with any of our products, processes or services.
Steven L. Ditman. The term of his employment is three years expiring
August 13, 2002, renewable for one year terms, subject to termination by Mr.
Ditman without cause upon six months' notice. His base annual salary, excluding
the cost of certain perquisites, is $175,000, and he may receive
performance-based bonuses as determined by the Board of Directors, subject to
the achievement of goals established for each calendar year by the Board or the
Compensation Committee, up to 100% of base salary. If he becomes disabled, he
is entitled to full base salary for first three months, and thereafter 65% of
base salary and performance-based bonus earned as of the date of disability. He
is also entitled to a death benefit of $150,000. If (1) we do not renew Mr.
Ditman's agreement at the end of the initial 3-year term; (2) we terminate Mr.
Ditman's employment agreement without cause; (3) Mr. Ditman voluntarily
terminates his employment during the one year period
92
<PAGE>
following a change of control; or (4) during the three year period following a
change in control, Mr. Ditman's duties are materially diminished, his principal
place of employment is moved more than 50 miles, or his employment is
terminated by us without cause or by non-renewal of the agreement, then he
shall receive a lump sum payment equal to two times his total compensation for
the year prior to termination. During the term of the agreement and for a
period of 18 months after termination, subject to certain exceptions, Mr.
Ditman may not render services directly or indirectly to any organization which
is engaged in (1) researching, developing, marketing or selling any eye wear or
eye care product, process or service which competes with us, or (2) managing
the business practice of ophthalmologists, optometrists, or opticians.
Allan L.M. Barker and D. Blair Harrold. The term of each agreement is
seven years, expiring August 13, 2006, and is automatically renewable for
subsequent one year terms unless either party gives six month prior notice. The
employee may terminate the agreement without cause upon six months' notice.
Base annual salary is $150,000, subject to cost of living adjustments on the
third and sixth anniversary dates. Each employee may receive performance-based
bonuses as determined by the Board of Directors, subject to the achievement of
goals established for each calendar year by the Board or the Compensation
Committee, up to 100% of base salary. If the employee is disabled, he receives
full base salary for the first three months. The employee is entitled to
receive a death benefit of $150,000. If the employee is terminated by the
company without cause, he is entitled to a lump sum payment equal to the base
salary the employee would have received from the date of termination to the end
of the term, and continuation of benefits to the end of the term; if the
employee terminates his employment with us following a change in control, he is
entitled to a lump sum payment equal to one year of base salary. During the
term of the agreement and for a period of 18 months after termination, subject
to certain exceptions, the employee may not render services directly or
indirectly to any organization which is engaged in (1) researching, developing,
marketing or selling any eye wear or eye care product, process or service which
competes with us, or (2) managing the business practice of ophthalmologists,
optometrists, or opticians.
Samuel B. Petteway, President of the Managed Care division. The term of
the agreement is three years expiring August 13, 2002, and is automatically
renewable for subsequent one year terms unless either party gives six months
prior notice. Mr. Petteway may terminate the agreement without cause upon six
months' notice and we may terminate without cause upon 3 months' notice. His
base annual salary and guaranteed bonuses are: 1999: $221,000; 2000: $232,000;
2001: $243,000; 2002: $193,000. If the Managed Care division achieves specific
targets of net operating profit in each year, Mr. Petteway will receive
performance bonuses of $73,000 for 1999, and $77,000 for 2000. Thereafter, the
Board shall determine net operating profit goals for 2001 and 2002, and Mr.
Petteway's bonuses for those years shall be $2,000 and $77,000, respectively if
such goals are achieved. Mr. Petteway shall also receive bonuses equal to
certain percentages of the growth of net operating income of the Managed Care
division. These bonuses are capped at $41,200 for 2000, $17,500 for 2001 and
$19,300 for 2002. He may also earn additional bonuses if we achieve certain
goals. Mr. Petteway is entitled to disability benefits consisting of full base
salary bonuses for the first three months, and thereafter 65% of base salary
plus bonuses earned as of the date of disability and to death benefits of
$200,000. If the employee is terminated by us without cause or if employee
terminates his employment following a change of control, he is entitled to a
lump sum payment equal to 18 months' base salary. If the employee terminates
the agreement without cause, he is entitled to 12 months' base salary, payable
in monthly installments. During the term of the agreement and for 12 months
thereafter, the employee may not compete with our managed eye care business.
COMPENSATION OF DIRECTORS
Directors who are also employees do not receive any additional
compensation for their service as directors. All other directors receive a fee
of $1,000 per board meeting attended in person, and $500 per committee meeting
attended in person. The chairman of the audit committee, the compensation
committee and the stock plan committee, receives an additional payment of
$1,500 per year. We also reimburse directors for their expenses incurred in
connection with attendance at board and committee meetings, including travel
and lodging, if necessary.
93
<PAGE>
Each non-employee director receives options to purchase 10,000 shares of
common stock upon their election to the board (the "election options"), and
thereafter options to purchase 5,000 shares at the time of each annual meeting
of stockholders. All such options will vest in tranches of one-third of the
award on the first, second and third anniversaries of the awards. However, each
option granted to non-employee directors serving as of January 1, 2000 will
vest in tranches of one-third of the award on the sixth month, eighteenth month
and thirtieth month after the grant of award.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee was formed on August 13, 1999. Mr. Croweak, who
is currently a member of the compensation committee, has never been one of our
officers or employees. Dr. Durfee, who was the other member of the committee
until his resignation on January 17, 2000, served as the acting Chief Executive
Officer and Senior Vice President of PrimeVision Health from 1996 until the
closing of the mergers on August 13, 1999. Prior to the formation of the
compensation committee, all decisions regarding executive compensation,
salaries and incentive compensation for our employees and consultants were made
solely by the board of directors and executive officers of PrimeVision Health
and OptiCare Eye Health Centers, as the case may be. On January 18, 2000 Mr.
Schramm was appointed to the compensation committee to fill the vacancy left by
Dr. Durfee's resignation. Mr. Schramm has never been one of our officers or
employees. On March 27, 2000, Mr. Franklin was appointed to the compensation
committee. Mr. Franklin has never been one of our officers or employees.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law, our certificate of
incorporation, as amended, provides that no director will be personally liable
to us or our stockholders for monetary damages for breach of fiduciary duty as
a director, except for liability
o for any breach of the director's duty of loyalty to us or our
stockholders;
o for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
o under Section 174 of the Delaware General Corporation Law; and
o for any transaction from which the director derived an improper
personal benefit.
Our certificate of incorporation, as amended, and bylaws generally provide
that we must indemnify our directors and officers to the fullest extent
permitted by Delaware law, including payment in advance of a final disposition
of a director's or officer's expenses and attorneys' fees incurred in defending
any action, suit or proceeding. We believe that the provisions will assist us
in attracting and retaining qualified individuals to serve as directors.
We have entered into indemnification agreements with each of our
directors. These indemnification agreements provide for the indemnification by
us of our directors for liability for acts and omissions as directors. We
believe that indemnification agreements are necessary to attract and retain
qualified persons as directors.
We currently maintain an executive liability insurance policy which
provides coverage for directors and officers. Under this policy, the insurer
agreed to pay, subject to certain exclusions, for any claim made against any of
directors or officers for a wrongful act by any such director or officer.
There is no pending litigation or proceeding involving any of directors,
officers, employees or agent as to which indemnification is being sought other
than against Dean Yimoyines who is named as defendant in the OptiCare Eye
Health Center Physicians Action. See "Business of OptiCare -- Legal
Proceedings." The board of directors passed a resolution directing us to pay
for all his expenses.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
On December 6, 1999 a former Director of the Company, David A. Durfee,
filed an amendment to a Form 3 originally filed in August of 1999. The original
Form 3 was filed on a timely basis, but Dr. Durfee's beneficial share ownership
was inadvertently misstated. A Form 3 and a Form 4 filed by us on behalf of
another Director, Martin E. Franklin, were each several days late because of
confusion over the correct privacy code assigned to Mr. Franklin for purposes
of electronic filings on the EDGAR system. The Form 3 reflected Mr. Franklin's
beneficial ownership at the time he became a Director of the Company on August
13, 1999. The Form 4 reflected one transaction -- a purchase of common stock.
94
<PAGE>
REPORT ON EXECUTIVE COMPENSATION BY THE
COMPENSATION COMMITTEE AND STOCK PLAN COMMITTEE
The Compensation Committee is responsible for setting and administering
the policies which govern annual executive salaries, raises and bonuses. The
Stock Plan Committee is responsible for the award of stock options and other
awards under the Company's Performance Stock Program. The Compensation
Committee is composed of three members: Messrs. Croweak, Franklin and Schramm.
The Stock Plan Committee is composed of Messrs. Croweak and Schramm.
The policy of the Compensation Committee and the Stock Plan Committee is
to provide compensation to the chief executive officer and the company's other
executive officers reflecting the contribution of such executives to growth in
revenue and earnings, the implementation of strategic plans consistent with
long term growth objectives and the enhancement of stockholder value.
Contributions to the specific corporate and business unit objectives are
evaluated in setting compensation policy, including growth in revenue and
earnings in the company's three divisions, the development of new business
opportunities, including new opportunities in the company's laser vision
business, and other strategic initiatives. Executive compensation decisions are
generally made on a calendar year basis.
The company's compensation program consists of base salary, bonus and long
term incentive compensation comprised of the award of stock options and
restricted stock under the company's Performance Stock Program. No awards of
restricted stock have been made to executive officers of the Company as of the
date of this report, although such awards may be made in the future.
COMPANY PERFORMANCE AND CEO COMPENSATION
Prior to the mergers with OptiCare Eye Health Centers, Inc. and
PrimeVision Health, Inc. on August 13, 1999, the company's chief executive
officer and other executive officers were employed by either OptiCare Eye
Health Centers, Inc. or PrimeVision Health, Inc., and their compensation was
determined by those entities, including certain bonus payments. The bonuses of
certain executive officers were also determined in accordance with written
employment agreements described herein under "Employment Agreements with
Certain Officers." All bonuses paid to the Company's chief executive officer
and other executive officers for services performed in 1999 either related to
services provided to OptiCare Eye Health Centers, Inc. or PrimeVision Health,
Inc. as stand-alone entities prior to the mergers or were payments that were
required under written employment agreements in effect subsequent to the
mergers. Because the combined enterprise was in operation for only the last
four months of 1999, no bonuses were paid to the Company's chief executive
officer or other executive officers relating to this period, other than amounts
that were contractually required. The base salary paid to each of the company's
executive officers subsequent to the mergers on August 13, 1999 was in
accordance with the written employment agreements referenced above. For the
year 2000, bonuses will be determined in accordance with the policies of this
Committee described above and in reference to specific goals.
During 1999, the Board of Directors awarded stock options to Dr. Yimoyines
and certain of the other executive officers named in the table set forth above
entitled "Options Granted in 1999." These options were awarded in connection
with the mergers to (1) align executive interest with stockholder interest by
creating a direct link between compensation and stockholder return; (2) assure
that executives maintain a significant long-term interest in the company's
success; and (3) help retain key executives in a competitive market.
The Compensation Committee has considered the potential impact of Section
162(m) of the Internal Revenue Code on executive compensation. Section 162(m)
disallows a tax deduction for any publicly-held corporation for individual
compensation exceeding $1 million in any tax year for any executive officer,
unless compensation is based on performance and satisfies certain other
requirements. The company maintains executive cash compensation below the $1
million threshold, and the company believes that any options granted under the
Performance Stock Program to any of its executive officers will qualify as
performance-based compensation, to the extent that any of the
95
<PAGE>
same may result in compensation in excess of the threshold. Consequently, the
Compensation Committee does not believe that Section 162(m) will have any
impact on the deductibility to the company of any compensation paid to
executive officers. The Compensation Committee, however, reserves the right to
award non-deductible compensation in circumstances they deem appropriate.
Because of the uncertainty as to the application and interpretation of Section
162(m), no assurance can be given that compensation intended by the company to
satisfy the requirements for deductibility under Section 162(m), does in fact
do so.
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
John F. Croweak
Martin E. Franklin
Carl J. Schramm
STOCK PLAN COMMITTEE OF THE BOARD OF DIRECTORS
John F. Croweak
Carl J. Schramm
STOCKHOLDER RETURN PERFORMANCE GRAPH
The following graph compares the performance of OptiCare's common stock
with that of the CRSP NASDAQ Health Index (a published industry index), and the
American Stock Exchange Index, since August 16, 1999, which was the first day
on which OptiCare's common stock was publicly traded on the American Stock
Exchange and the first trading day after the closing of the mergers with
PrimeVision Health and OptiCare Eye Health Centers. The graph assumes that the
value of an investment in OptiCare's common stock in each index was $100 at
August 16, 1999. The stock price performance shown on the graph is not
necessarily indicative of future price performance.
[LINE CHART]
PLOT POINTS FOR PERFORMANCE GRAPH
<TABLE>
<CAPTION>
8/16/99 12/31/99
--------- -----------
<S> <C> <C>
OptiCare Health Systems, Inc. $100 $ 50.91
American Stock Exchange Index $100 $ 112.50
CSRP NASDAQ Health Index $100 $ 91.14
</TABLE>
96
<PAGE>
OPTICARE CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
OPTICARE, P.C. PROFESSIONAL SERVICES AND SUPPORT AGREEMENT
OptiCare Eye Health Centers has entered into a Professional Services and
Support Agreement with OptiCare P.C., a Connecticut professional corporation,
effective December 1, 1995. Pursuant to that agreement, OptiCare P.C. employs
medical personnel and performs all ophthalmology and optometry services at the
Company's facilities in Connecticut. We select and provide the facilities at
which the services are performed and we are the exclusive provider of all
administrative and support services for the facilities operated by OptiCare
P.C. pursuant to this agreement. We bill and receive payment for the services
rendered by OptiCare P.C. and in turn pays OptiCare P.C. a service fee pursuant
to a compensation plan mutually agreed to each year. The company owns all the
rights to the "OptiCare" name and under the terms of the agreement, if the
agreement with OptiCare P.C. is terminated, OptiCare P.C. must change its name
and discontinue using the OptiCare name. The agreement expires on December 1,
2000 and automatically renews for successive two year terms unless either party
terminates the agreement at least 180 days before the next renewal date. Dean
J. Yimoyines, M.D., our Chairman, Chief Executive Officer, and President, is
the sole stockholder of OptiCare, P.C.
OPTOMETRIC EYE CARE CENTER, P.A. PROFESSIONAL SERVICE AND SUPPORT AGREEMENT
Through one of our subsidiaries, we have entered into a Professional
Services and Support Agreement with Optometric Eye Care Center, P.A., a North
Carolina professional association, effective August 10, 1999. Pursuant to that
agreement, Optometric Eye Care Center employs optometrists and technical
personnel and performs all optometry services at our facilities in North
Carolina. We select and provide the facilities at which the services are
performed, and we provide all administrative and support services for the
facilities operated by Optometric Eye Care Center pursuant to this agreement.
We bill and receive payment for the services rendered by Optometric Eye Care
Center and in turn pay Optometric Eye Care Center a service fee pursuant to a
compensation plan mutually agreed to each year. We own all the rights to the
trade names used at the practice locations under the terms of the agreement. If
the agreement with Optometric Eye Care Center is terminated, Optometric Eye
Care Center must change its name to a name substantially dissimilar to our
trade names. The agreement expires in 15 years and automatically renews for
successive five-year terms unless either party terminates the agreement at
least 180 days before the next renewal date. Drs. Allan L.M. Barker, a member
of our board of directors and President of our Laser Correction and
Professional Services Division, and D. Blair Harrold, the President of Retail
Optometry, North Carolina Operations, own all the capital stock of Optometric
Eye Care Center.
CERTAIN LEASES
OptiCare Eye Health Centers is the tenant under a Lease Agreement dated
September 1, 1995 with O.C. Realty Associates Limited Partnership, as landlord.
The leased premises are located in New Milford, Connecticut and are used for
the practice of ophthalmology and optometry and incidental activities such as
the sale of eye glasses and corrective lenses. The term of the lease is 15
years. Under the Lease Agreement, during the first five years of the leasehold
term, OptiCare Eye Health Centers pays a minimum annual rental to O.C. Realty
Associates Limited Partnership of $50,400, subject to adjustment at the end of
the first five years and every five years thereafter plus all taxes,
assessments, utilities and insurance related to the property being leased. In
addition, OptiCare Eye Health Centers has guaranteed the mortgage of O.C.
Realty Associates Limited Partnership, the amount of which was approximately
$208,000 as of December 31, 1999. Dean J. Yimoyines, M.D., John Yimoyines,
brother of Dean Yimoyines, and Steven Ditman, our Executive Vice President, our
Chief Financial Officer and a director each owns a 4.11% interest in O.C.
Realty Associates Limited Partnership.
OptiCare Eye Health Centers is the tenant under a Lease Agreement dated
September 1, 1995 with French's Mill Associates, as landlord. The leased
premises are located in Waterbury, Connecticut and are used for the practice of
ophthalmology and optometry, an ambulatory surgery center, and
97
<PAGE>
incidental activities such as the sale of eye glasses and corrective lenses.
The term of the lease is fifteen years. Under the Lease Agreement, during the
first five years of the leasehold term, OptiCare Eye Health Centers pays annual
rental to French's Mill Associates of $665,000, subject to adjustment at the
end of the first five years and every five years thereafter. In addition,
OptiCare Eye Health Centers pays all taxes, assessments, utilities and
insurance related to the property being leased. Linda Yimoyines and John
Yimoyines, the wife and brother, respectively, of Dean Yimoyines, M.D., each
owns a 14.28% interest in French's Mill Associates.
OptiCare Eye Health Centers is the tenant under a Lease dated September
30, 1997 with French's Mill Associates II, LLP, as landlord. The leased
premises are located in Waterbury, Connecticut and are the location of our main
headquarters. The term of the lease is fifteen years, commencing on October 1,
1997. Under the lease, during the first five years of the leasehold term,
OptiCare Eye Health Centers pays a minimum annual rental to French's Mill
Associates II, LLP of $76,800, subject to adjustment at the end of the first
five years and every five years thereafter. In addition, OptiCare Eye Health
Centers pays all taxes, assessments, utilities and insurance related to the
property being leased. Linda Yimoyines and John Yimoyines each owns a 12.5%
interest in French's Mill Associates II, LLP.
O.N.B. Associates owns approximately a 25% interest in Cross Street
Medical Building Partnership, the landlord under a lease dated September 22,
1987 and a Lease Extension Agreement dated December 12, 1997 with Ophthalmic
Physicians and Surgeons, P.C., an entity that merged with and into OptiCare Eye
Health Centers in 1987. The term of the extension is three years, commencing on
March 1, 1998. The leased premises are located in Norwalk, Connecticut and are
used for the practice of ophthalmology and optometry, an ambulatory surgery
center, and incidental activities such as the sale of eyeglasses and corrective
lenses. The term of the lease is three years. Under the Lease, OptiCare Eye
Health Centers pays a minimum annual rental to Cross Street Medical Building
Partnership of $427,600. In addition, OptiCare Eye Health Centers pays all
taxes, assessments, utilities and insurance related to the property being
leased. Linda Yimoyines and John Yimoyines each own an 11% interest in O.N.B.
Associates and Steven Ditman, Chief Financial Officer and a director, owns a
1.5% interest in O.N.B. Associates.
OptiCare Eye Health Centers is also the tenant under a second Lease
Agreement dated September 1, 1995 with French's Mill Associates II, L.L.P. as
landlord. The leased premises are located in Waterbury, Connecticut and are
also part of OptiCare's main headquarters. The term of the lease is fifteen
years, commencing on September 1, 1995. Pursuant to the Lease Agreement, during
the first five years of the leasehold term, OptiCare Eye Health Centers pays a
minimum annual rental to French's Mill Associates II of $54,210, subject to
adjustment at the end of the first five years and every five years thereafter.
In addition, OptiCare Eye Health Centers pays all taxes, assessments, utilities
and insurance related to the property being leased.
Consolidated Eye Care, Inc. (currently "OptiCare Eye Health Network,
Inc.") is the tenant under a Lease Agreement dated March 1, 1997 with Drs. D.
Blair Harrold and Allan L. M. Barker. The leased premises are located in Rocky
Mount, North Carolina and are used for HMO offices. The term of the lease is
five years commencing on August 1, 1997. Under the lease, Consolidated Eye
Care, Inc. pays an annual rental of $13,500 and $14,850 during the first two
years and second two years respectively. In addition, Consolidated Eye Care,
Inc. pays all taxes, assessments, utilities, insurance and for certain repairs
related to the property being leased. Dr. Barker is a director and officer of
the company, and Dr. Harrold is an officer of the company.
Consolidated Eye Care, Inc. is the tenant under a Lease Agreement dated
March 1, 1997 with Drs. Harrold and Barker. The leased premises are located in
Rocky Mount, North Carolina and are used for HMO executive offices. The term of
the lease is five years commencing on May 1, 1997. Under the lease,
Consolidated Eye Care, Inc. pays an annual rental of $42,409 and $46,448 during
the first two years and second two years respectively. In addition,
Consolidated Eye Care, Inc. pays all taxes, assessments, utilities, insurance
and for certain repairs related to the property being leased.
98
<PAGE>
Consolidated Eye Care, Inc. is the tenant under a Lease Agreement dated
September 1, 1999 with Drs. Harrold and Barker. The leased premises are located
in Rocky Mount, North Carolina and are used as executive offices. The term of
the lease is five years commencing September 1, 1999. Under the lease,
Consolidated Eye Care, Inc. pays an annual rental of $40,000 during the first
year of the lease. Thereafter, the rental amount is adjusted annually in
accordance with the consumer price index. In addition, Consolidated Eye Care,
Inc. pays all taxes, assessments, utilities, insurance and for certain repairs
related to the property being leased.
Optometric Eye Care Centers, P.A., a North Carolina professional
association affiliated with the Company through a management agreement, is the
tenant under a Lease Agreement dated March 1, 1997 with Drs. Harrold and
Barker. The leased premises are located in Fayetteville, North Carolina and are
used for the practice of optometry and the sale of eye glasses and corrective
lenses. The term of the lease is five years commencing May 1, 1997. Under the
lease, Optometric Eye Care Centers, P.A. pays an annual rental of $96,000 and
$100,000 during the first two years and second two years respectively. In
addition, Optometric Eye Care Centers, P.A. pays all taxes, assessments,
utilities, insurance and for certain repairs related to the property being
released.
Optometric Eye Care Centers, P.A., is the tenant under a Lease Agreement
dated March 1, 1997 with Drs. Harrold and Barker. The leased premises are
located in Jacksonville, North Carolina and are used for the practice of
optometry and the sale of eye glasses and corrective lenses. The term of the
lease is four years commencing May 1, 1997. Under the lease, Optometric Eye
Care Centers, P.A. pays an annual rental of $59,752 during the first two years.
During the second two years Optometric Eye Care Centers, P.A. pays an annual
rental of $65,184 or 6% of net revenues, whichever is greater. In addition,
Optometric Eye Care Centers, P.A. pays all taxes, assessment, utilities,
insurance and for certain repairs related to the property being released.
Optometric Eye Care Centers, P.A., is the tenant under a Lease Agreement
dated June 1, 1996 with CS Investments, Inc. The lease premises are located in
Cary, North Carolina and are used for the practice of optometry and the sale of
eyeglasses and corrective lenses. The term of the lease is twenty years. Under
the lease, Optometric Eye Care Centers, P.A. pays an annual rental of $128,445
and an amount equivalent to six percent of the annual gross sales in excess of
$1.8 million. In addition, Optometric Eye Care Centers, P.A. pays all taxes,
assessment, utilities, insurance and for certain repairs related to the
property being released. Drs. Harrold and Barker each own a 20% interest in the
leased premises.
Optometric Eye Care Centers, P.A., is the tenant under a Lease Agreement
dated August 31, 1994 with Charles and Jean Zwerling. The lease premises are
located in Smithfield, North Carolina and are used for the practice of
optometry and the sale of eyeglasses and corrective lenses. The term of the
lease is five years commencing on September 1, 1994 with the option to renew
beginning September 1, 1999 for an additional five year period. Under the lease
Optometric Eye Care Centers, P.A. pays an annual rental of $52,800. Drs.
Harrold and Barker each own a 20% interest in the leased premises.
Optometric Eye Care Centers, P.A., is the tenant under a Lease Agreement
dated January 2, 1995 with John, Betty and Lillian Hearn. The lease premises
are located in Monroe, North Carolina and are used for the practice of
optometry and the sale of eyeglasses and corrective lenses. The term of the
lease is seven years commencing on January 2, 1995. Under the lease Optometric
Eye Care Centers, P.A. pays an annual rental of $45,600. In addition,
Optometric Eye Care Centers, P.A. pays all taxes, assessment, utilities,
insurance and for certain repairs related to the property being released. Drs.
Harrold and Barker each own a 25% interest in leased premises.
STOCK PURCHASE AGREEMENT AND CONSULTING AGREEMENT
Under the terms of a Stock Purchase Agreement dated as of October 15, 1997
among OptiCare Eye Health Centers and Oxford Health Plans, Inc. ("Oxford"),
Nazem OptiCare Partners, LP, Eugene
99
<PAGE>
W. Huang and Christopher Kaufman, as purchasers, OptiCare Eye Health Centers
sold, for an aggregate purchase price of $6,000,017 either Class A preferred
shares, or Class B preferred shares to Oxford, Nazem, OptiCare Partners, Huang
and Kaufman. In addition Oxford received warrants to purchase Class B shares.
Prior to the mergers, OptiCare Eye Health Centers, Oxford, Nazem OptiCare
Partners, Mr. Nazem, Mr. Huang and Mr. Kaufman were parties to a certain
Amended and Restated Stockholders Agreement (the "OptiCare Stockholders
Agreement"), dated as of October 15, 1997, that contained provisions such as
restrictions on transfers of shares, rights of first refusal, co-sale rights
and provisions relating to the election of directors. Pursuant to a Second
Amended and Restated Stockholders' Agreement entered into in connection with
the mergers, the OptiCare Stockholders Agreement was amended and restated so as
to terminate most of its provisions and to amend certain provisions relating to
restrictions of the employee/stockholders from competing with the company.
Prior to the mergers, OptiCare Eye Health Centers, Oxford, Nazem OptiCare
Partners, Mr. Huang and Mr. Kaufman were parties to a certain Registration
Rights Agreement (the "OptiCare Registration Rights Agreement"), dated as of
October 15, 1997, that provided for certain demand and piggyback registration
rights in favor of the stockholders parties thereto. The OptiCare Registration
Rights Agreement was terminated, effective as of the mergers. However, pursuant
to a Letter Agreement, dated August 9, 1999, between the company and Oxford,
the company agreed to continue the piggyback registration rights provided for
in the OptiCare Registration Rights Agreement with respect to the shares
issuable upon exercise of the warrants held by Oxford.
PARTICIPATING PROVIDER AGREEMENT
OptiCare Eye Health Centers is also a party to a participating provider
agreement with Oxford Health Plans, Inc., a holder of in excess of five percent
of our outstanding capital stock, under which OptiCare Eye Health Centers
provides medical services to the insured members of Oxford's insurance plans
and receives fees from Oxford for these services. This agreement may be
terminated by either party upon 90 days written notice.
SETTLEMENT WITH OPTOMETRIC EYE CARE CENTER, P.A.
In 1996, Drs. Allan L.M. Barker and D. Blair Harrold, majority
stockholders in Optometric Eye Care Center, P.A. and Consolidated Eye Care,
Inc., sold Consolidated to PrimeVision Health. At the same time, Drs. Barker
and Harrold became executive officers and directors of PrimeVision Health.
Consolidated and Optometric Eye Care had previously entered an administrative
services agreement which continued after the sale of Consolidated to
PrimeVision Health. Among other factors, the impending mergers of PrimeVision
Health and OptiCare Eye Health Centers prompted Drs. Barker and Harrold to
begin proceedings to terminate the administrative services agreement between
Consolidated (a subsidiary of PrimeVision Health at the time) and Optometric
Eye Care and to submit their resignations from PrimeVision Health forthwith. In
conjunction with these actions, Drs. Barker and Harrold submitted a Request for
Declaratory Ruling from the North Carolina Board of Examiners in Optometry and
instituted a lawsuit in North Carolina Superior Court, asking the court to
grant a Temporary Restraining Order, which was issued, enjoining, among other
things, the mergers.
On April 9, 1999, Drs. Harrold and Barker entered into a settlement
agreement among Optometric Eye Care, PrimeVision Health, Consolidated and the
other parties to the lawsuit, and the transactions called for in the settlement
agreement closed on August 13, 1999, at the same time as the mergers of
PrimeVision Health and OptiCare Eye Health Centers with the company. Following
are the material terms of this settlement agreement:
(1) Consolidated and Optometric Eye Care entered into a new 40-year
administrative services agreement with an initial 15 year term and five
automatic renewals for five years each. See above "Optometric Eye Care
Center, P.A. Professional Services and Support Agreement."
(2) $2.5 million was paid to Drs. Harrold and Barker.
100
<PAGE>
(3) PrimeVision Health issued additional shares of its common stock to Drs.
Barker and Harrold such that, together with shares previously owned, will
constitute 32% of PrimeVision Health's total common stock calculated on a
primary basis immediately prior to the mergers. This share grant satisfied
a note receivable in the amount of $364,896 plus accrued interest held by
Consolidated Eye Care and all other alleged claims.
(4) Drs. Harrold and Barker entered into new employment agreements with the
company that became effective on August 13, 1999, at the same time as the
closing of the mergers.
(5) In the event of the company's subsequent insolvency or bankruptcy, Drs.
Barker and Harrold will have the right to purchase six retail business
operations in North Carolina for three times the earnings before interest,
taxes, depreciation and amortization excluding the effect of all
extraordinary items and non-recurring charges. This right will be available
to Drs. Barker and Harrold only until such time as the aggregate market
value of their common stock is less than $7 million.
(6) Dr. Barker was named as one of our directors.
ARRANGEMENTS WITH MARLIN CAPITAL, L.P.
Pursuant to the terms of a stock purchase agreement, dated as of June 4,
1998, between PrimeVision Health and Marlin Capital, L.P., PrimeVision Health
sold to Marlin Capital (i) 8,000 shares of Prime Vision Health's Class A
Preferred Stock and (ii) warrants to purchase 1,333,333 shares of PrimeVision
Health's common stock for an aggregate purchase price of $8,000,000. Mr. Martin
E. Franklin, who is a current Director of OptiCare, is the Chairman, Chief
Executive Officer and principal stockholder of Marlin Holdings, Inc., which is
the general partner of Marlin Capital, L.P., a private investment partnership
since October 1996. Mr. Ian G.H. Ashken, who is a current Director of OptiCare,
is the Vice Chairman of Marlin Holdings, Inc.
In connection with the mergers, the 8,000 shares of Prime Vision Health
Class A Preferred Stock and warrants owned by Marlin Capital were exchanged as
follows:
o 2,000 shares of PrimeVision Health preferred stock and all the
warrants (as adjusted) were exchanged for 2,033,333 shares of
PrimeVision Health common stock, which in turn were exchanged in the
mergers for 638,059 shares of our common stock.
o 2,000 shares of PrimeVision Health preferred stock were exchanged for
a promissory note issued by us in the principal amount of $2,000,000,
having a three year term and bearing interest at the annual rate of
8%. This promissory note was cancelled in January, 2000 upon the
exchange of the note for 571,428 registered shares of our common stock
in connection with our offering of an aggregate of 3,571,428 shares of
common stock at a price of $3.50 per share. See "Business of OptiCare
-- Recent Developments."
o 4,000 shares of PrimeVision Health preferred stock were exchanged for
a convertible promissory note issued by us in the principal amount of
$4,000,000, having a three year term, and bearing interest at the
annual rate of 9% beginning on February 14, 2000. The note was
convertible into our common stock after August 13, 2000 at a
conversion price which is the greater of (x) the closing market price
on the first trading day after the mergers, or (y) 90% of the average
closing price of our common stock in the 20 trading days prior to
conversion. This note was paid in full in February, 2000 with a
portion of the proceeds of a common stock offering. See "Business of
OptiCare -- Recent Developments"
101
<PAGE>
OPTICARE PRINCIPAL STOCKHOLDERS
PRINCIPAL STOCKHOLDERS
As of May 1, 2000 there were 12,578,766 shares of our common stock
outstanding. The following table sets forth as of May 1, 2000 certain
information regarding the beneficial ownership of the common stock outstanding
(but without giving effect to the underwriters' exercise of the over-allotment
option) by (i) each person who is known to us to own 5% or more of our common
stock (the holdings of certain unrelated entities listed below are based on
shareholdings disclosed in their public filings), (ii) each of our directors,
(iii) our four other most highly compensated executive offices whose total
compensation exceeded $100,000 and (iv) all of our executive officers and
directors as a group. Unless otherwise indicated, each of the stockholders
shown in the table below has sole voting and investment power with respect to
the shares beneficially owned.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED
OFFERING (1) AFTER THE OFFERING (1)
------------------------ -----------------------
NAME OF EXECUTIVE OFFICERS, DIRECTORS
OR 5% STOCKHOLDERS SHARES PERCENT SHARES PERCENT
- ---------------------------------------------------------------- ------------ --------- ------------ --------
<S> <C> <C> <C> <C>
Oxford Health Plans (2) ........................................ 775,996 6.1% 775,996 4.2%
Bank Austria Creditanstalt Corporate Finance, Inc. (3) ......... 785,616 6.2% 785,616 4.2%
Marlin Capital, L.P. ........................................... 1,209,487 9.6% 1,209,487 6.5%
Martin E. Franklin(4) .......................................... 1,211,487 9.7% 1,211,487 6.5%
Ian G.H. Ashken (5) ............................................ 1,211,487 9.7% 1,211,487 6.5%
Palisade Capital Management .................................... 2,000,000 15.9% 2,000,000 10.8%
Allan L.M. Barker, O.D. (6) .................................... 665,056 5.3% 665,056 3.6%
D. Blair Harrold, O.D. ......................................... 660,505 5.3% 660,505 3.6%
Dean J. Yimoyines M.D. (7) ..................................... 393,149 3.1% 393,149 2.1%
Steven L. Ditman (8) ........................................... 38,488 * 38,488 *
Samuel B. Petteway (9) ......................................... 68,225 * 68,225 *
John F. Croweak ................................................ 2,000 * 2,000 *
Carl J. Schramm ................................................ 0 * 0 *
All executive officers and directors as a group (9
persons)(4)(5)(6)(7)(8)(9) .................................... 3,040,910 24.2% 3,040,910 16.4%
</TABLE>
- ----------
* Less than 1%
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of an individual to acquire them within 60 days upon the exercise of an
option are treated as outstanding for purposes of determining beneficial
ownership and the percent beneficially owned by such individual and for the
executive officers and directors as a group. Assumes the issuance of an
additional 6,000,000 shares in connection with the Merger in determining
the percentage for shares beneficially owned after the offering.
(2) Includes 337,514 shares subject to currently exercisable warrants. The
address of Oxford is 800 Connecticut Avenue, Norwalk, Connecticut 06854.
(3) Includes 418,803 shares of non-voting convertible preferred stock held by
Bank Austria. Also includes warrants to purchase 100,000 shares of either
common stock or non-voting convertible preferred stock. Does not give
effect to provisions which may be included in the preferred stock and
warrants, which, for bank regulatory purposes, will restrict Bank Austria
from beneficially owning in excess of 4.99% of our outstanding common
stock. The address of Bank Austria is Two Ravinia Drive, Suite 168,
Atlanta, Georgia 30346.
(4) Includes 1,209,487 shares of common stock held by Marlin Capital, L.P. Mr.
Martin E. Franklin, who is a director of the company, is the Chairman,
Chief Executive Officer and principal
102
<PAGE>
stockholder of Marlin Holdings, Inc. which is the general partner of Marlin
Capital, L.P. Mr. Franklin disclaims beneficial ownership of such shares.
The address of Marlin Capital, L.P. is 555 Theodore Fremd Ave., Rye, New
York 10584.
(5) Includes 1,209,487 shares of common stock held by Marlin Capital, L.P. Mr.
Ian G.H. Ashken is the Vice Chairman of Marlin Holdings, Inc., which is the
general partner of Marlin Capital, L.P. Mr. Ashken disclaims beneficial
ownership of such shares.
(6) Includes 552 shares of common stock held by Dr. Barker's son, as to which
Dr. Barker disclaims beneficial ownership.
(7) Includes 249,825 shares of common stock held by Linda Yimoyines, wife of
Dean J. Yimoyines, and 143,224 shares of common stock issuable upon the
exercise of outstanding options.
(8) Includes 36,488 shares of common stock issuable upon the exercise of
outstanding options held by Mr. Ditman.
(9) Includes 17,782 shares of common stock issuable upon the exercise of
outstanding options held by Mr. Petteway.
103
<PAGE>
INFORMATION ABOUT VISION TWENTY-ONE
VISION TWENTY-ONE MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL OVERVIEW
Since its inception, Vision Twenty-One has sought to develop and manage
local area eye care delivery systems ("LADSSM"). LADS involved 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, Vision
Twenty-One developed retail distribution channels for its LADS through
affiliating with retail optical chains and developed managed care distribution
channels for its LADS through contracting with local health plans and other
third party payers.
Vision Twenty-One's LADS operating revenue was primarily derived from a
wide range of service fees earned through strategic affiliations with eye care
clinics and retail optical locations and through ownership interests in
refractive surgery centers ("RSCs"), ambulatory surgery centers ("ASCs") and
retail optical chains. LADS also included the management of practices of
optometry and ophthalmology ("PPM"). The PPM business involved Vision
Twenty-One entering into long-term management agreements ("Management
Agreements") with professional associations or corporations pursuant to which
Vision Twenty-One was the sole provider of comprehensive management, business
and administrative services for the non-professional aspects of the
professional practices. The PPM segment represented a substantial portion of
Vision Twenty-One's business in 1999.
Vision Twenty-One also generated significant revenue from its buying group
division that provided benefits to its Affiliated Providers through the
consolidation and management of purchases of optical goods. In addition, Vision
Twenty-One generated significant revenue from its managed care division by
entering into capitated managed care contracts with third-party insurers and
payors and by administering indemnity fee-for-service plans.
During 1999, Vision Twenty-One began implementing a plan of divesting
itself of the PPM, retail optical chains and buying group businesses in order
to focus on expanding its refractive surgery, ambulatory surgery and managed
care businesses. The sales of the buying group division and retail optical
chains were completed in two individual transactions. The PPM divestiture
requires multiple transactions involving the sales of practice assets,
typically back to the doctors or their affiliates, and the termination of
Management Agreements. This divestiture program commenced late in the 4th
quarter of 1999 and is expected to be completed by June 30, 2000.
Vision Twenty-One 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 Vision Twenty-One 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 Vision Twenty-One were exchanged for common stock of Vision
Twenty-One. The principal executive office of Vision Twenty-One is located at
7360 Bryan Dairy Road, Suite 200, Largo, Florida 33777, and its telephone
number is (727) 545-4300.
MERGER AGREEMENT WITH OPTICARE HEALTH SYSTEMS
Vision Twenty-One's Board of Directors voted to explore a number of
strategic alternatives intended to maximize stockholder value. As a result, on
February10, 2000, Vision Twenty-One entered into an Agreement and Plan of
Merger and Reorganization ("Merger Agreement") with OptiCare Health Systems,
Inc. and OC Acquisition Corp. (collectively, "OptiCare"). The Merger will
combine the companies' refractive surgery, ambulatory surgery and managed care
businesses. Under the terms of the Merger Agreement, Vision Twenty-One's common
stock will be converted into OptiCare
104
<PAGE>
common stock at an initial exchange ratio of .402 shares of OptiCare common
stock for each share of Vision Twenty-One's common stock. At the initial
exchange ratio, approximately six million shares of OptiCare common stock would
be issued in exchange for 100% of the issued and outstanding common stock of
Vision Twenty-One. The final exchange ratio will be calculated prior to
closing, in part, on the basis of a subsequent determination of Vision
Twenty-One's consolidated balance sheet. The Merger will be accounted for as a
purchase and includes the assumption by OptiCare of approximately $60.0 million
of Vision Twenty-One's outstanding debt. The transaction is subject to certain
closing conditions, including, but not limited to, regulatory approvals, the
approval of the stockholders of both OptiCare and Vision Twenty-One, the
restructuring of certain debt obligations of OptiCare and Vision Twenty-One and
the raising by OptiCare of not less than $30.0 million of equity or mezzanine
capital.
DISPOSITION OF BUSINESSES
Vision Twenty-One has concentrated on developing it's LADs since late
1997. Over the past year, Vision Twenty-One has been analyzing certain business
units within such LADs and assessing the long-term strategic value of each
existing component. Effective August 31, 1999, Vision Twenty-One completed the
sale of Vision World, Stein Optical (a trade name of EyeCare One Corp.), and
The Eye DRx (the "Retail Optical Chains") to Eye Care Centers of America, Inc.
("ECCA"). ECCA is based in San Antonio, Texas and operates a national chain of
full-service retail optical stores. In connection with this transaction, Vision
Twenty-One received approximately $37.3 million in cash. Of the proceeds Vision
Twenty-One received at closing, approximately $30.8 million was applied as a
permanent pay down of its term debt credit facility, approximately $2.8 million
was paid down under its ongoing $7.5 million revolving credit facility,
approximately $2.4 million was used for costs and other obligations related to
the transaction and approximately $1.3 million was utilized to fund an escrow
arrangement between the parties relative to terms under the agreement. Based on
post-closing adjustments, the final sales price was approximately $31.8
million, and Vision Twenty-One has recorded a liability of approximately $4.0
million to ECCA, net of escrow, with respect to such post-closing adjustments.
Under the sale agreement, Vision Twenty-One indemnified one of its former
Managed Professional Associations for certain partnership obligations.
Accordingly, a charge of $0.2 million was recorded to loss on disposal of
discontinued operations in 1999. A net loss of approximately $3.2 million was
recorded on the transaction. Vision Twenty-One is currently in discussions with
ECCA regarding payment of the post-closing purchase price adjustment and has
reached an oral agreement that is conditioned upon consummation of the OptiCare
transaction. In the event the OptiCare transaction is not consummated for
whatever reason, there can be no assurance that Vision Twenty-One will be able
to pay the amounts owed to ECCA.
On June 4, 1999, Vision Twenty-One completed the sale of its buying group
division. Net proceeds of $4.3 million received by Vision Twenty-One were
primarily used to repay outstanding borrowings under Vision Twenty-One's credit
facilities.
EXIT FROM PHYSICIAN PRACTICE MANAGEMENT BUSINESS
On October 25, 1999, Vision Twenty-One announced its intent to exit the
business of managing optometry and ophthalmology practices. The details of the
plan were finalized in December 1999. This represented a crucial step in Vision
Twenty-One's strategy of redirecting its corporate resources towards the
development of refractive surgery and ambulatory surgery initiatives in these
same markets. Vision Twenty-One expects the majority of the affected physicians
to continue to be part of the Vision Twenty-One national eye care delivery
network and/or participate in its refractive and ambulatory surgery center
initiatives. The exit of the physician practice management ("PPM") business is
expected to be accomplished through the sale of the practice assets back to the
physicians or their affiliates, the termination of Management Agreements and
the restructuring of certain refractive surgery center facility access
agreements. The terms of each managed practice divestiture are subject to the
prior approval of the banks under Vision Twenty-One's credit facilities.
Accordingly, in 1999, Vision Twenty-One recorded a loss of $58.7 million, which
is net of an income tax benefit of
105
<PAGE>
$1.1 million, related to the expected sale of practice assets. As of March 31,
2000,Vision Twenty-One had sold 11 practices and received proceeds of
approximately $5.2 million.
As a result of the changes occurring in Vision Twenty-One's business,
including, but not limited to, the pending Merger with OptiCare, the
divestiture of large business units, the shift in operating focus, changes in
Vision Twenty-One's managed care business, Vision Twenty-One's exiting of the
PPM business and issues related to Vision Twenty-One's accessibility to future
working capital, the overall results should not necessarily be relied upon as
being indicative of future operating performance.
POSSIBLE DELISTING BY NASDAQ
On April 20, 2000 Vision Twenty-One received a letter from Nasdaq advising
Vision Twenty-One of a possible delisting of Vision Twenty-One from the Nasdaq
National Market due to Vision Twenty-One's failure to timely file its Form 10-K
with the Securities and Exchange Commission. Vision Twenty-One requested and
has received a hearing related to this matter which is scheduled for May 25,
2000. The delay in filing the Form 10-K was primarily attributable to Vision
Twenty-One's discontinued operations. As a result of Vision Twenty-One's
discontinued operations, Vision Twenty-One may experience difficulty in timely
filing its Form 10-Q for the firstquarter of fiscal 2000 although it currently
believes it will file within the time set forth in Rule 12b-25. In addition,
Vision Twenty-One will have to show NASDAQ that it meets the other listing
requirements and based upon current circumstances it is unlikely that it will
meet such requirements. While Vision Twenty-One believes it has reasonable
arguments in favor of its continued listing and it expects to seek a waiver of
such conditions through closing of the OptiCare transaction, there can be no
assurance that Vision Twenty-One's listing on the Nasdaq National Market will
continue following the date of the currently scheduled hearing.
ADDITIONAL OVERVIEW
As part of its PPM business, Vision Twenty-One entered into Management
Agreements with professional associations or corporations (the "Managed
Professional Associations") pursuant to which Vision Twenty-One was the sole
provider of comprehensive management, business and administrative services for
the non-professional aspects of the professional practices. Each managed
provider maintained full authority, control and responsibility over the
provision of professional care and services to its patients. Vision Twenty-One
did not provide professional care to patients nor did Vision Twenty-One employ
any of the ophthalmologists or optometrists, or any other professional health
care provider personnel, of the Managed Professional Association. The initial
term of the Management Agreement was typically 40 years. Under the majority of
Vision Twenty-One's Management Agreements, the management fees ranged from 20%
to 37% of the Managed Professional Associations' net revenues after deducting
from such revenues all expenses of the clinics other than those related to
stockholders of the Managed Professional Associations. This type of arrangement
was usually utilized in management relationships with ophthalmology practices.
Additionally, Vision Twenty-One had Management Agreements with management fees
ranging from 50% to 87% of net practice revenues where Vision Twenty-One was
required to pay generally all the expenses of the clinics with the exception of
professional salaries and benefits. Such arrangements were typically utilized
in management relationships with optometrists. The management fees earned by
Vision Twenty-One pursuant to these Management Agreements fluctuated depending
on the level of revenues and expenses of the Managed Professional Associations.
The Managed Professional Associations derive their revenues from professional
fees as well as fees received for the use of ASCs, RSCs and sales of optical
goods. The Managed Professional Associations receive payments from a
combination of sources including capitation payments from managed care
companies and government funded reimbursements (Medicare and Medicaid).
Managed care revenues are derived principally from fixed premium payments
received pursuant to its managed care contracts on a capitated or risk-sharing
basis. Vision Twenty-One also receives fees for the provision of certain
financial and administrative services related to its indemnity
106
<PAGE>
fee-for-service plans. Pursuant to its capitated managed care contracts, Vision
Twenty-One receives a fixed premium payment per-member-month for a
predetermined benefit level of eye care services, as negotiated between Vision
Twenty-One and the payer. Profitability of Vision Twenty-One'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. Vision Twenty-One receives a percentage of
collected medical billings for administering indemnity fee-for-service plans
for its Affiliated Providers. Although the terms and conditions of Vision
Twenty-One's managed care contracts vary considerably, they typically have a
one-year term.
Vision Twenty-One 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 Vision Twenty-One and further counseling on
appropriate clinical protocols. To further manage the risk of capitated managed
care contracts, Vision Twenty-One, 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). Vision Twenty-One targets these payments at a
range of 80% to 90% of total payments received pursuant to Vision Twenty-One's
capitated managed care contracts.
1998 ACQUISITIONS
In addition to the acquisitions described below, Vision Twenty-One
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 consisted of certain
non-medical and non-optometric assets, including accounts receivable, leases,
contracts, equipment and other tangible and intangible assets. Concurrently
with these acquisitions, Vision Twenty-One entered into Management Agreements
with the relatedprofessional 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, Vision Twenty-One purchased all of the
outstanding stock of The Complete Optical Laboratory, Ltd., Corp. located in
New Jersey which serviced Vision Twenty-One's New Jersey optometry clinics and
acquired substantially all of the business assets of a managed care company
located in Florida which serviced 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, Vision Twenty-One provided aggregate
consideration of approximately $20.1 million, consisting of approximately 1.0
million shares of common stock, approximately $13.5 million in cash and
promissory notes in the aggregate principal amount of $1.3 million, subject to
post-closing adjustments.
Vision Twenty-One 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 with this transaction, Vision Twenty-One paid $1.5 million in cash
and issued 235,366shares of common stock. In addition, Vision Twenty-One is
required to provide additional contingent consideration of up to $3.1 million
if certain post-acquisition targets are met.
Vision Twenty-One completed the acquisition of Vision World, Inc. ("Vision
World"), a retail optical chain located in Minneapolis, Minnesota, effective
June 30, 1998. Vision World consisted of 38 retail clinics and 30 optometrists.
In connection with this transaction, Vision Twenty-One paid $16.1 million in
cash, net of cash acquired. Vision World was sold effective August 31, 1999.
In March 1998, Vision Twenty-One completed a transaction with EyeCare One
Corp. ("EyeCare One") and Vision Insurance Plan of America, Inc. ("VIPA").
EyeCare One, operating under the trade name of Stein Optical, was a retail
optical chain consisting of 16 optometric retail locations in
107
<PAGE>
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 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, Vision
Twenty-One issued 1,109,806 shares of common stock, valued at approximately
$10.5 million. EyeCare One Corp. was sold effective August 31, 1999.
In January 1998, Vision Twenty-One 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, Vision Twenty-One paid $7.2
million in cash and issued 522,600 shares of common stock. In conjunction with
this acquisition, Vision Twenty-One entered into Management Agreements with the
Managed Professional Associations' stockholders. The Eye DRx was sold effective
August 31, 1999.
1997 ACQUISITIONS
During 1997, Vision Twenty-One completed the acquisition of the business
assets of one optometry clinic, 19 ophthalmology clinics, nine optical
dispensaries and five ASCs. Concurrent with these acquisitions, Vision
Twenty-One entered into 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, Vision Twenty-One acquired all of the issued and outstanding
stock of BBG-COA, Inc.("Block Vision"), LSI Acquisition, Inc. ("LSI") and MEC
Health Care, Inc.("MEC"). The Block Vision transaction is referred to herein as
the "Block Acquisition" and the LSI and MEC transactions are collectively
referred to herein as the "LaserSight Acquisitions". Vision Twenty-One 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 Block Acquisition and LaserSight Acquisitions, Vision
Twenty-One 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. In connection with the Block and 1997 Acquisitions, Vision
Twenty-One was required to provide additional contingent consideration to
certain sellers consisting of approximately 393,654 shares of common stock,
approximately $821,000 in cash and approximately $467,000 of common stock value
if specified post-acquisition performance targets were met.
In connection with the 1997 and 1998 Acquisitions, Vision Twenty-One
issued approximately 146,000 additional shares of common stock and
approximately $463,000 in cash in 1999.
1998 RESTRUCTURING PLAN AND CERTAIN ACCOUNTING MATTERS
Vision Twenty-One 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 consisted of a
number of specific projects, were designed to position Vision Twenty-One to
take full operational and economic advantage of various key acquisitions and
allow Vision Twenty-One to complete the consolidation and deployment of
necessary infrastructure for the future. The total restructuring and other
charges and business integration costs recorded in 1998 were $8.9 million. (See
Note 13 -- 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 included: 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, Vision Twenty-One also expensed other charges and related
business integration costs during the fourth quarter of 1998. These costs
represented incremental or redundant costs as well as internal costs that
resulted directly from the development and initial implementation of the
Restructuring Plan, but were required to be expensed as incurred. These other
charges and business integration costs totaled approximately $6.1 million in
1998 and consisted primarily of: a) write-offs related to exiting certain
108
<PAGE>
markets, b) write-offs of capitalized costs that would 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. Also included were
training costs, re-branding costs, relocation costs, retention payments, and
lease costs for facilities that were planned for closure.
Several unusual accounting items occurred in 1998 which specific costs
related thereto were 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 Vision Twenty-One's
previously disclosed intercompany reconciliation and other items totaling $3.6
million. The $3.6million consisted of $1.6 million of expenses related to the
results of Vision Twenty-One'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 Vision Twenty-One's
reconciliation of intercompany accounts, change in accounting for start-up and
software development costs and the change in accounting treatment for revenue
recognition regarding acquisition integration fees in 1998, Vision Twenty-One
restated its 1998 Form 10-Q's.
The unreconciled items referenced above required extensive analysis of the
financial statements from fiscal years 1996, 1997 and 1998 for many of Vision
Twenty-One's acquired entities, resulting in a delay in filing Vision
Twenty-One's 1998 Form 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.
109
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total revenues, certain
items in Vision Twenty-One's Consolidated Statements of Operations for the
periods indicated. As a result of the 1997 Acquisitions, the 1998 Acquisitions,
the 1999 divestitures and the planned exit of the PPM business, Vision
Twenty-One does not believe that the historical percentage relationships for
1997, 1998 and 1999 reflect Vision Twenty-One's expected future operations.
<TABLE>
<CAPTION>
1997 1998 1999
---------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Refractive and ambulatory surgery centers, net ...................... --% 3.5% 14.1%
Managed care ........................................................ 72.1 46.6 64.2
Buying group ........................................................ 27.9 49.9 21.7
----- ----- -----
Total revenue ...................................................... 100.0 100.0 100.0
----- ----- -----
Operating expenses:
Refractive and ambulatory surgery center operating expenses ......... -- 3.1 13.0
Medical claims ...................................................... 54.1 35.7 48.0
Cost of buying group sales .......................................... 26.4 47.4 20.7
General & administrative ............................................ 30.0 15.6 31.5
Depreciation & amortization ......................................... 2.0 2.1 3.4
Special items:
Restructuring and other charges (credits) .......................... -- 5.5 ( 1.6)
Start-up and software development costs ............................ -- 0.8 0.6
Merger costs ....................................................... -- 0.6 --
----- ----- -----
Total operating expenses ........................................... 112.5 110.8 115.6
----- ----- -----
Loss from operations ................................................. (12.5) (10.8) (15.6)
----- ----- -----
Amortization of loan fees ........................................... 0.7 0.3 2.7
Interest expense .................................................... 3.6 3.4 6.3
Gain on sale of assets, net ......................................... -- -- ( 0.6)
----- ----- -----
Loss from continuing operations before income taxes and minority
interest ........................................................... (16.8) (14.5) (24.0)
Income taxes ........................................................ -- -- --
Minority interest ................................................... -- -- 0.1
----- ----- -----
Loss from continuing operations ...................................... (16.8) (14.5) (24.1)
Discontinued operations:
Income from discontinued operations ................................ 18.4 9.4 4.4
Loss on disposal of discontinued operations ........................ -- -- (74.3)
Income (loss) before extraordinary items ............................ 1.6 ( 5.1) (94.0)
Extraordinary item-gain on sale of EyeCare One Corp. ................ -- -- 4.3
Extraordinary item-early extinguishment of debt ..................... ( 1.3) ( 1.6) --
----- ----- -----
Net income (loss) ................................................... 0.3% ( 6.7)% (89.7)%
===== ===== =====
Medical Claims Ratio ................................................ 75.1% 76.7% 74.8%
</TABLE>
110
<PAGE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues. Revenues decreased 25.1% from $118.0 million for the year ended
December 31, 1998 to $88.4 million for the year ended December 31, 1999.This
decrease was primarily due to Vision Twenty-One's sale of the buying group
division, offset by an increase in refractive eye laser and surgery center net
revenues attributable to certain of the 1998 Acquisitions and to internal
growth. Managed care revenues on a comparable basis increased 3.2% over 1998.
Refractive and Ambulatory Surgery Center Operating Expenses. As a
percentage of refractive and ambulatory surgery revenue, operating expenses of
the centers increased from 90.3% for the year ended December 31, 1998 to
91.8%for the year ended December 31, 1999. The increase is due, in large part,
to the costs associated with opening new refractive centers.
Medical Claims. Medical claims expense increased .7% from $42.2 million
for the year ended December 31, 1998 to $42.4 million for the year ended
December 31, 1999. Vision Twenty-One's medical claims ratio decreased from
76.7% for the year ended December 31, 1998 to 74.8% for the year ended December
31, 1999.The decrease was caused by a higher percentage of vision care wellness
contracts which typically have lower utilization rates than medical/surgical
contracts and improved performance in 1999 on vision care wellness contracts at
Block Vision. Vision Twenty-One terminated one of its managed care contracts
effective December 31, 1999. Medical claims expense consists of payments by
Vision Twenty-One 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. 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. Vision Twenty-One completed the sale of the buying group
division during the second quarter of 1999.
General and Administrative. General and administrative expenses increased
51.3% from $18.4 million for the year ended December 31, 1998 to $27.9million
for the year ended December 31, 1999. General and administrative expenses
consist mainly of salaries, wages and benefits related to management and
administrative staff located at Vision Twenty-One's corporate headquarters and
its managed care service centers as well as professional fees, advertising,
building and occupancy costs, operating lease expenses and other costs related
to the maintenance of a headquarters operation. The $9.5 million increase in
general and administrative expenses consisted primarily of severance costs of
approximately $1.1 million, headcount costs (officer, department managers and
contract labor) of approximately $2.1 million and professional fees (legal,
accounting, and consulting) of approximately $4.5 million. More than
$4.0million of the total increase has been specifically identified as
non-recurring due to known job eliminations, termination of a consulting
contract, and the one-time nature of the costs associated with the intercompany
accounts reconciliation effort. Management has been aggressively reducing staff
and related overhead expenses in an effort to bring overall general and
administrative expenses in line with the current run rate of the continuing
business. Professional fees are expected to remain high in the first six months
of 2000 as a result of: 1) the requirements of the PPM divestiture effort, 2)
activities required to resolve certain claims, 3) ongoing negotiations with
Vision Twenty-One's lenders, and 4) activities necessary to close the proposed
Merger with OptiCare.
Depreciation and Amortization. Depreciation and amortization expense
increased 21.9% from $2.5 million for the year ended December 31, 1998 to $3.0
million for the year ended December 31, 1999. As a percentage of revenues,
depreciation and amortization expense increased from 2.1% for the year ended
December 31, 1998 to 3.4% for the year ended December 31, 1999 due to the
reduction of revenues resulting from the sale of Vision Twenty-One's buying
group division.
The restructuring credit of approximately $1.4 million resulted from lease
termination costs of $0.9 million that were reversed out of the accrual as a
result of the sale of the Retail Optical Chains and approximately $0.5 million
of severance costs that were reversed out of the accrual as a result of
employee resignations and a change in estimate.
111
<PAGE>
Start-up and Software Development Costs. For the years ended December 31,
1998 and 1999, start-up costs relate to start-up activities associated
primarily with refractive surgery centers initiatives. For the year ended
December 31,1998, software development costs are associated with Vision
Twenty-One's implementation of the Great Plains accounting software system.
Merger Costs. Merger costs were incurred in 1998 as a result of the
pooling of interests method of accounting for the EyeCare One and VIPA
acquisitions and consisted primarily of professional fees.
Interest Expense. Interest expense increased 35.9% from $4.1 million for
the year ended December 31, 1998 to $5.6 million for the year ended December
31, 1999. The increase was caused by higher borrowing costs and an increase in
the average debt outstanding for year ended December 31, 1999 compared to the
year ended December 31, 1998. During 1999, Vision Twenty-One repaid $30.8
million of the outstanding term debt on its credit facilities as a result of
the sale of its Retail Optical Chains on August 31, 1999.
Gain on Sale of Assets. In connection with the sale of assets, Vision
Twenty-One realized a gain of $0.5 million.
Discontinued Operations. Discontinued operations represents the income
from Vision Twenty-One's Retail Optical Chains and PPM businesses previously
discussed. Vision Twenty-One's Retail Optical Chains were sold on August 31,
1999.Additionally, Vision Twenty-One has allocated a portion of its interest
expense to discontinued operations in 1998 and 1999 based on the net assets
attributed to the Retail Optical Chains operations.
Extraordinary Item. The sale of EyeCare One on August 31, 1999 resulted in
a gain of $3.8 million which was recorded as an extraordinary item for the year
ended December 31, 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues increased 354% from $26.0 million for the year ended
December 31, 1997 to $118.0 million for the year ended December 31, 1998. The
increase was caused primarily by 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 Vision
and MEC acquisitions, the addition of three capitated contracts and the
expansion of an existing contract which accounted for $36.2 million of the
increase. Managed care revenues on a comparable basis increased 35% over
1997levels for business units operated by Vision Twenty-One for the entire
year. Vision Twenty-One's revenue mix changed from 1997 to 1998, as a full year
of revenue was recognized for Vision Twenty-One's buying group in 1998 compared
to three months in 1997.
Refractive and Ambulatory Surgery Center Operating Expenses. Refractive
and ambulatory surgery center operating expenses increased from $0 for the year
ended December 31, 1997 to $3.7 million for the year ended December 31,
1998.Refractive and ambulatory surgery center operating expenses consisted of
salaries, wages and benefits of certain clinic staff, professional fees,
medical supplies, advertising, building and occupancy costs, operating lease
expenses and other general and administrative costs related to the operation of
RSCs and ASC's. This increase was caused primarily by the 1998 Acquisitions.
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. Vision Twenty-One's medical claims ratio increased 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 under
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
Vision Twenty-One 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.
112
<PAGE>
Cost of Buying Group Sales. Cost of buying group sales were incurred by
Vision Twenty-One 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. Vision Twenty-One
completed the sale of the buying division in 1999.
General and Administrative Expenses. General and administrative expenses
increased 136.1% from $7.8 million for the year ended December 31, 1997 to
$18.4 million for the year ended December 31, 1998. This increase was caused
primarily by the 1998 Acquisitions, staff necessary to support Vision
Twenty-One's retail optical division, practice management and managed care
businesses and increases in travel expenses, professional fees and occupancy
costs. General and administrative expenses consisted primarily of salaries,
wages and benefits related to management and administrative staff located at
Vision Twenty-One's corporate headquarters and its managed care service centers
as well as professional fees, advertising, building and occupancy costs,
operating lease expenses and other general and administrative costs related to
the maintenance of a headquarters operation. As a percentage of revenues,
general and administrative expenses decreased from 30.0% for the year ended
December 31,1997 to 15.6% for the year ended December 31, 1998. This decrease
was caused primarily by increased economies of scale resulting from Vision
Twenty-One'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 included approximately $0.5 million in intercompany amounts
which remained unreconciled at December 31, 1998 and were written off in 1998.
Depreciation and Amortization. Depreciation and amortization expense
increased 382.0% from $0.5 million for the year ended December 31, 1997 to $2.5
million for the year ended December 31, 1998. As a percentage of revenues,
depreciation and amortization expense remained relatively constant at 2.0% and
2.1% for the years ended December 31, 1997 and 1998, respectively.
Restructuring and Other Charges. Restructuring and other charges were
incurred as a result of Vision Twenty-One's Restructuring Plan previously
discussed.
Start-up and Software Development Costs. Start-up costs were incurred due
to Vision Twenty-One'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
center initiatives in 1998, and software development costs are associated with
Vision Twenty-One'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 337.3% from $0.9 million for
the year ended December 31, 1997 to $4.1 million for the year ended December31,
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.
Discontinued Operations. Income from discontinued operations for the year
ended December 31, 1998 represented the results of operations of Vision
Twenty-One's Retail Optical Chains and PPM businesses. Income from discontinued
operations for the year ended December 31, 1997 represented the results of
operations of EyeCare One and the PPM businesses. Vision Twenty-One's Retail
Optical Chains were sold effective August 31, 1999. Additionally, Vision
Twenty-One has allocated a portion of its interest expense to discontinued
operations in 1998 based on the net assets attributed to the Retail Optical
Chain operations.
Extraordinary Charges. Vision Twenty-One incurred extraordinary charges of
$1.9 million for the year ended December 31, 1998 in connection with amendments
to its credit facility. These extraordinary charges represented the write-off
of unamortized deferred loan costs.
LIQUIDITY AND CAPITAL RESOURCES
Vision Twenty-One has historically funded its working capital and capital
expenditure requirements primarily through institutional borrowings and private
debt and equity financings. Net
113
<PAGE>
cash used in operating activities for the year ended December 31, 1999 was $6.4
million as compared to net cash used in operating activities of $9.0 million
for the year ended December 31, 1998. The improvement in 1999 was attributable
to favorable working capital changes resulting from the collection of buying
group division receivables which were retained by Vision Twenty-One when the
division was sold. Cash consumed by operations before working capital changes
increased $2.5 million in 1999 due to significantly higher professional fees.
Net cash provided by investing activities for the year ended December 31,
1999 was $30.6 million and resulted primarily from the sales of Vision
Twenty-One's Retail Optical Chains and buying group division. This was offset
by purchases of medical equipment and office furniture related to Vision
Twenty-One's new laser surgery centers as well as purchases in the normal
course of business. Net cash used in investing activities for the year ended
December 31, 1998 was $48.7 million and resulted from payments for
acquisitions, medical equipment, office furniture and capitalized acquisition
costs.
Net cash used in financing activities for the year ended December 31,1999
was $24.1 million and was primarily attributable to payments on Vision
Twenty-One's credit facility as a result of the sales of Vision Twenty-One's
Retail Optical Chains and the buying group division. Net cash provided by
financing activities for the year ended December 31, 1998 was $53.2 million and
was primarily attributable to increased borrowings under Vision Twenty-One's
credit facilities.
On January 30, 1998, Vision Twenty-One entered into a five-year, $50.0
million credit agreement (the "Credit Agreement") with the Bank of Montreal as
agent (the "Agent") for a consortium of banks (the "Banks"). The Credit
Agreement, which was to mature in January 2003, provided Vision Twenty-One 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. Borrowings under the Credit Agreement were secured by a pledge of the
stock of substantially all of Vision Twenty-One's subsidiaries as well as the
assets of Vision Twenty-One and certain of its subsidiaries. Obligations under
the Credit Agreement were guaranteed by certain of Vision Twenty-One's
subsidiaries. The Credit Agreement contained negative and affirmative covenants
and agreements that placed restrictions on Vision Twenty-One regarding
disposition of assets, capital expenditures, additional indebtedness, permitted
liens and payment of dividends, as well as required the maintenance of certain
financial ratios. The interest rate on the Credit Agreement was, at the option
of Vision Twenty-One, 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, Vision Twenty-One used approximately $26.9 million of its available
borrowing to repay the outstanding balance under Vision Twenty-One's bridge
credit facility with Prudential Credit and related accrued interest and
transaction costs. As of June 30, 1998, Vision Twenty-One had used
approximately $48.3 million of its available borrowings under the Credit
Agreement.
On July 1, 1998, Vision Twenty-One entered into a restated $100.0 million
credit agreement (the "Restated Credit Agreement") with the Bank of Montreal as
agent for a consortium of banks. The Restated Credit Agreement was used, in
part, for early extinguishment of Vision Twenty-One's outstanding balance of
approximately $48.3 million under its prior Credit Agreement. The remaining
balance under the Restated Credit Agreement was used for working capital,
acquisitions and general corporate purposes. 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. At December 31, 1998,
approximately $81.6 million was outstanding under the Restated Credit
Agreement.
On February 23, 1999, Vision Twenty-One 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
114
<PAGE>
acquisitions and capital expenditures maturing in June 2003, and a $7.5 million
revolving credit facility maturing in June 2003. The First Amendment resulted
in a reduction of $10.0 million in the total borrowing capacity of Vision
Twenty-One. 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, Vision Twenty-One 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 and Restated
Credit Agreement"). The Second Amendment principally revised certain financial
covenants in connection with the credit facility which Vision Twenty-One was
previously unable to meet, terminated early Vision Twenty-One's unused portion
of its borrowing capacity relative to the acquisition component of the credit
facility which was scheduled to expire June 30, 1999 and waived Vision
Twenty-One's non-compliance with certain obligations under the Amended and
Restated Credit Agreement through the date thereof.
On August 30, 1999, Vision Twenty-One entered into a third amendment to
the Amended and Restated Credit Agreement (the "Third Amendment"). The Third
Amendment provided for the consent to the sale of Vision Twenty-One's Retail
Optical Chains to ECCA by the Banks and Agent as parties to the Amended and
Restated Credit Agreement, revised certain covenants and financial ratios and
waived Vision Twenty-One's non-compliance with certain obligations under the
Amended and Restated Credit Agreement through the date thereof. On August 31,
1999 the sale of Vision Twenty-One's Retail Optical Chains to ECCA was
consummated. Of the proceeds received by Vision Twenty-One, $30.8 million was
used to permanently reduce Vision Twenty-One's term loan borrowings and $2.8
million was used to reduce the outstanding balance under Vision Twenty-One's
$7.5 million revolving credit facility.
On November 12, 1999, Vision Twenty-One entered into a fourth amendment to
the Amended and Restated Credit Agreement (the "Fourth Amendment"). Pursuant to
the Fourth Amendment, a bridge loan facility of $3.0 million was made available
to Vision Twenty-One which was to mature on November 26, 1999. Waivers were
extended on a short-term basis regarding certain of Vision Twenty-One's
violations of loan covenants and repayment obligations.
On November 24, 1999, Vision Twenty-One entered into a fifth amendment to
the Amended and Restated Credit Agreement (the "Fifth Amendment"). Pursuant to
the Fifth Amendment, the repayment date for the bridge facility was extended,
and waivers with respect to violations of certain covenants including payment
of certain interest and principal amounts currently due were granted until
December 10, 1999.
On December 3, 1999, Vision Twenty-One entered into a sixth amendment to
the Amended and Restated Credit Agreement (the "Sixth Amendment"). Pursuant to
the Sixth Amendment, availability under the bridge loan facility was increased
from an aggregate of $3.0 million to an aggregate of $4.4 million, the
repayment date of the bridge loan facility was extended, and waivers for
violations of certain covenants and principal and interest payments due were
granted until January 31, 2000.
On December 10, 1999, Vision Twenty-One entered into a seventh amendment
to the Amended and Restated Credit Agreement (the "Seventh Amendment").
Pursuant to the Seventh Amendment, availability under the bridge loan facility
was increased to an aggregate of $9.4 million, the repayment date of the bridge
loan facility was extended until March 31, 2000 and waivers regarding
violations of certain covenants and payment obligations currently due were
granted until December 31, 1999. Pursuant to the Seventh Amendment, Vision
Twenty-One agreed to provide the Banks with a weekly operating budget and to
obtain approval from the Banks for all significant cash expenditures.
On December 29, 1999, the parties to the Amended and Restated Credit
Agreement executed a waiver letter (the "December Waiver"). The December Waiver
extended the waivers provided by the Seventh Amendment regarding violations of
certain covenants and payment obligations currently due until February 29,
2000while Vision Twenty-One explored the possibility of the sale of the entire
115
<PAGE>
business or a substantial portion of its assets. The December Waiver granted
Vision Twenty-One the ability to use a portion of the proceeds from the sale of
the physician practice management businesses to meet its "reasonable and
necessary" operating expenses until the sale of Vision Twenty-One was
consummated.
On February 29, 2000, the parties to the Amended and Restated Credit
Agreement executed a waiver letter (the "February Waiver"). The February Waiver
related to Vision Twenty-One's announcement that it had entered into a
definitive Merger Agreement with OptiCare and extended the waivers provided by
the Seventh Amendment until the earlier of March 24, 2000 or the termination of
the Merger Agreement with OptiCare pursuant to its terms.
On March 20, 2000, the parties to the Amended and Restated Credit
Agreement executed a waiver letter (the "March Waiver"). The March Waiver
extended (i) the waivers provided by the Seventh Amendment and the December and
February Waivers and (ii) the bridge facility due date, until the earlier of
April 14, 2000 or the termination of the Merger Agreement with OptiCare
pursuant to its terms.
On April 14, 2000, the parties to the Amended and Restated Credit
Agreement executed a waiver letter (the "April Waiver"). The April Waiver
extended (i) the waiver provided by the Seventh Amendment and the December,
February and March Waivers and (ii) the bridge facility due date until the
earlier of May 5, 2000 or the termination of the Merger Agreement with OptiCare
pursuant to its terms.
On May 5, 2000, the parties to the Amended and Restated Credit Agreement
executed a waiver letter (the "May Waiver"). The May Waiver extended (i) the
waiver provided by the Seventh Amendment and the December, February, March and
April Waivers and (ii) the bridge facility due date until the earlier of May
19, 2000 or the termination of the Merger Agreement with OptiCare pursuant to
its terms.
On November 20, 1997, Vision Twenty-One 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, Vision Twenty-One received a commitment from 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 that net proceeds from
Vision Twenty-One'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. Vision
Twenty-One borrowed $5.6 million and $6.5 million for use in funding the cash
portions of the Block Acquisition and LaserSight Acquisitions, respectively.
Additionally, Vision Twenty-One 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 Vision Twenty-One'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 Vision Twenty-One. The Bridge Credit Facility
contained negative and affirmative covenants and agreements which included
covenants requiring the maintenance of certain financial ratios. Vision
Twenty-One repaid its Bridge Credit Facility borrowings in full from available
proceeds under its Credit Agreement.
On August 18, 1997, Vision Twenty-One 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 Vision Twenty-One's
outstanding indebtedness and to provide funding for the acquisitions of
optometry and ophthalmology clinics and ASCs.
116
<PAGE>
In April 1997, Vision Twenty-One entered into a credit facility in the
aggregate amount of $4.9 million with Prudential Securities Group
Inc.("Prudential") pursuant to a note and warrant purchase agreement" (as
amended and restated, the "Note and Warrant Purchase Agreement"). The proceeds
from the borrowing were used to repay Vision Twenty-One'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, Vision
Twenty-One issued a senior note secured by all Vision Twenty-One'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 $10.00per share, the price of the common stock in the Initial
Public Offering. The number of shares of common stock covered by the warrants
and the exercise price were subject to adjustment under certain circumstances.
The Prudential Note was repaid by Vision Twenty-One from the net proceeds of
the Initial Public Offering.
In February 1997, Vision Twenty-One 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 had an exercise price of $6.00 per share.
The number of shares of common stock covered by the warrants and the exercise
price were subject to adjustment under certain circumstances. The
1997Subordinated Notes were repaid by Vision Twenty-One from the net proceeds
of the Initial Public Offering.
In December 1996, Vision Twenty-One 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 number of shares of common stock covered by the
warrants and the exercise price were subject to adjustment under certain
circumstances. The 1996 Subordinated Notes were repaid by Vision Twenty-One
from the net proceeds of the Initial Public Offering.
Vision Twenty-One 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, Vision Twenty-One entered into a five-year services
agreement with its Chief Medical Officer, a current director of Vision
Twenty-One, 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
immediately, and Vision Twenty-One 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 in the amount of $180,000. In
June 1999, Vision Twenty-One expanded its relationship with the individual to
strengthen its refractive care initiative and provided such individual with
options to acquire 100,000 shares at $3.69 per share with 100% vesting. Vision
Twenty-One recorded start-up cost of $0.2 million in the second quarter of 1999
in connection with such grant. In October 1996, Vision Twenty-One entered into
a five-year advisory agreement with an industry consultant who is the current
Chairman of the Board of Vision Twenty-One and issued 125,627 shares of
restricted common stock, which were to vest over the life of the advisory
agreement. These shares were valued at $2.77 per share or $349,000. Vision
Twenty-One 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. In June 1999, Vision Twenty-One
expanded its relationship with the individual to strengthen its refractive care
initiatives and provided such individual with options to acquire 100,000 shares
at $3.44 per share, with 100% vesting. Vision Twenty-One recorded start-up cost
of $0.1 million in the second quarter of 1999 in connection with such grant.
On June 11, 1999 Vision Twenty-One entered into Subscription Agreements
with an entity controlled by one of Vision Twenty-One's current directors and
with Vision Twenty-One's Chief
117
<PAGE>
Medical Officer, who is also a current director, for the purchase of Vision
Twenty-One's common stock. The aggregate proceeds received by Vision Twenty-One
of approximately $1.1 million were used for working capital purposes.
Vision Twenty-One 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 Vision Twenty-One's results of operations.
During the fourth quarter of 1999, Vision Twenty-One's liquidity was
adversely impacted by the announced exit from the PPM business as collection of
PPM management fee revenues during the negotiation process declined
significantly. However, during the first quarter of 2000, Vision Twenty-One
began completing the sale of the practice assets back to physicians or
affiliates. The resulting proceeds provided additional resources to fund
operations. As of March 31, 2000, Vision Twenty-One had sold eleven practices
and received proceeds of approximately $5.2 million. Management has been
aggressively reducing staff and related overhead spending, carefully managing
business unit operating cash flow and negotiating for the divestiture of the
remaining PPM businesses in an effort to further improve Vision Twenty-One's
liquidity position and restore profitability.
While Vision Twenty-One believes that the OptiCare transaction will
ultimately be consummated, there can be no assurance that it will. The failure
of the OptiCare transaction to be consummated could have a material adverse
effect on Vision Twenty-One. Vision Twenty-One has experienced significant
losses and is currently dependent upon the cooperation, approvals and
availability of waivers from the Banks as parties to its credit facility for
operating capital. If Vision Twenty-One is unable to consummate the Merger with
OptiCare, it would immediately need to obtain additional capital by offering
debt or equity securities to fund its operations. There can be no assurance
that such capital will be available, if at all, on a timely basis or on terms
acceptable to Vision Twenty-One. Furthermore, Vision Twenty-One would have to
obtain certain additional waivers with respect to its credit facility in order
to raise such capital, and there can be no assurance that such waivers would be
forthcoming. Should the Merger with OptiCare not occur, Vision Twenty-One is
not currently aware of, nor is it presently permitted to solicit under its
Merger Agreement with OptiCare, any other potential purchaser that could
acquire Vision Twenty-One under similar terms or in a satisfactory period of
time.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Vision Twenty-One is exposed to changes in interest rates primarily as a
result of borrowing activities under its Amended and Restated Credit Agreement,
which is used to maintain liquidity and fund Vision Twenty-One's business
operations. The nature and amount of Vision Twenty-One's debt may vary as a
result of future business requirements, market conditions and other factors.
The extent of Vision Twenty-One's interest rate risk is not quantifiable or
predictable because of the variability of future interest rates and business
financing requirements, but Vision Twenty-One does not believe such risk is
material. Vision Twenty-One did not use derivative instruments to adjust Vision
Twenty-One's interest rate risk profile in 1999.
118
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement/Prospectus and certain information provided
periodically in writing and orally by Vision Twenty-One's designated officers
and agents 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 term "Vision
Twenty-One," refers 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 Joint Proxy Statement/Prospectus 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 Vision
Twenty-One, its directors or officers with respect to, among other things:
(i) the consummation of the proposed Merger transaction contemplated
between Vision Twenty-One and OptiCare Health Systems, Inc. ("OptiCare");
(ii) Vision Twenty-One's financial prospects;
(iii) Vision Twenty-One's exit from the PPM business;
(iv) Vision Twenty-One's financing plans including Vision Twenty-One's
ability to meet its obligations under its current credit facility and
obtain satisfactory operating and working capital;
(v) trends affecting Vision Twenty-One's financial condition or
results of operations including its divestiture of business units;
(vi) Vision Twenty-One's operating strategy including the shift in
focus to managed care and refractive and ambulatory surgery center
businesses;
(vii) the impact on Vision Twenty-One of current and future
governmental regulations;
(viii) Vision Twenty-One's current and future managed care contracts
and the impact such contracts have on gross profit;
(ix) Vision Twenty-One's ability to maintain its relationships with
Affiliated Providers and Vision Twenty-One's ability to maintain strategic
relationships with selected retail optical companies;
(x) Vision Twenty-One's ability to grow its refractive and ambulatory
surgery center business;
(xi) Vision Twenty-One's ability to operate the managed care business
efficiently, profitably and effectively;
(xii) Vision Twenty-One's integration of systems and implementation of
cost savings and reduction plans;
(xiii) Vision Twenty-One's expected savings from the restructuring
programs;
(xiv) Vision Twenty-One's current and expected future revenue and the
impact of the consolidation of infrastructure and business divestitures may
have on Vision Twenty-One's future performance;
(xv) the expected growth of laser vision correction procedures and
return on invested capital;
(xvi) Vision Twenty-One's timely filing of Securities and Exchange Act
Reports; and
(xvii) the purported class action complaints and the Caremark and
Block Group actions filed against Vision Twenty-One.
119
<PAGE>
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) the inability to close the proposed Merger transaction with
OptiCare;
(ii) the inability of the conditions to the closing of the OptiCare
transaction to be satisfied, including, but not limited to, obtaining any
required consents, approvals of the stockholders of both companies, the
restructuring of the bank debt of Vision Twenty-One and OptiCare and
OptiCare obtaining the required financing;
(iii) Vision Twenty-One's inability to sell certain business units and
any potential losses arising therefrom;
(iv) Vision Twenty-One's inability to obtain sufficient cash from its
credit facility and business divestitures to fund Vision Twenty-One's
ongoing operations including severance obligations and contingent payment
obligations;
(v) Vision Twenty-One's loss of, changes in, or inability to keep, key
personnel, management or directors;
(vi) Vision Twenty-One's inability to close on agreements to unwind
its practice management agreements or to pay the purchase price adjustment
amounts owed to ECCA or otherwise enter into acceptable settlement
agreements;
(vii) any unexpected increases in or additional charges or losses
related to the unwinding of Vision Twenty-One's managed practices;
(viii) the continuation of operating and net losses being experienced
by Vision Twenty-One and increases in such losses;
(ix) any material inability to acquire additional sufficient capital
at a reasonable cost to fund Vision Twenty-One's continued operations or to
maintain compliance with its credit facility;
(x) the inability to maintain Vision Twenty-One's managed care
business;
(xi) any adverse changes in Vision Twenty-One's managed care business,
including but not limited to, the inability to renew existing managed care
contracts or obtain future contracts or maintain and expand Vision
Twenty-One's Affiliated Provider network;
(xii) Vision Twenty-One's inability to negotiate managed care
contracts with HMOs;
(xiii) Vision Twenty-One's inability to successfully and profitably
operate its managed care business or for existing managed care contracts to
positively impact gross profit;
(xiv) any adverse change in Vision Twenty-One's medical claims to
managed care revenue ratio;
(xv) changes in state and/or federal governmental regulations which
could materially affect Vision Twenty-One's ability to operate or
materially affect its ability to consummate the proposed transaction with
OptiCare;
(xvi) any adverse governmental or regulatory changes or actions,
including any healthcare regulations and related enforcement actions or the
inability to obtain required consents for the OptiCare transaction;
(xvii) the inability to maintain or obtain required licensure in the
states in which Vision Twenty-One operates;
(xviii) Vision Twenty-One's stock price and OptiCare's stock price and
events that may adversely impact OptiCare's business and it's ability to
consummate the Merger transaction with Vision Twenty-One;
120
<PAGE>
(xix) Vision Twenty-One's inability to successfully open, integrate
and profitably operate, RSCs and ASCs;
(xx) the degree current shortages in refractive surgery equipment
adversely impacts Vision Twenty-One's access to same;
(xxi) consolidation of Vision Twenty-One's competitors, poor operating
results by its competitors, or adverse governmental or judicial rulings
against Vision Twenty-One's competitors;
(xxii) Vision Twenty-One's inability to realize any significant
benefits, cost savings or reductions from its restructuring program;
(xxiii) Vision Twenty-One's inability to increase and expand vision
care and refractive surgery programs and other desired initiatives;
(xxiv) unexpected cost increases;
(xxv) Vision Twenty-One's inability to successfully defend against the
class action lawsuits, the Caremark lawsuit, the Block Group lawsuit or any
additional litigation that currently exists or may arise in the future;
(xxvi) Vision Twenty-One's inability to timely file its required
reports with the SEC or to maintain the listing of Vision Twenty-One common
stock on Nasdaq; and
(xxvii) other factors including those identified in Vision
Twenty-One's filings from time-to-time with the SEC.
Vision Twenty-One undertakes no obligation to publicly update or revise
forward-looking statements to reflect events or circumstances after the date of
this Joint Proxy Statement/Prospectus or to reflect the occurrence of
unanticipated events.
121
<PAGE>
BUSINESS OF VISION TWENTY-ONE
OVERVIEW
Vision Twenty-One, Inc. ("Vision Twenty-One") is a vision care company
that is currently focused on the management of refractive and ambulatory
surgery centers and the provision of managed care services.
Since its inception, Vision Twenty-One has sought to develop and manage
local area eye care delivery systems ("LADS(SM)"). LADS involved 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, Vision
Twenty-One developed retail distribution channels for its LADS through
affiliating with retail optical chains and developed managed care distribution
channels for its LADS through contracting with local health plans and other
third party payers.
Vision Twenty-One's LADS operating revenue was primarily derived from a
wide range of service fees earned through strategic affiliations with eye care
clinics and retail optical locations and through ownership interests in
refractive surgery centers ("RSCs"), ambulatory surgery centers ("ASCs") and
retail optical chains. LADS also included the management of practices of
optometry and ophthalmology ("PPM"). The PPM business involved Vision
Twenty-One entering into long-term management agreements ("Management
Agreements") with professional associations or corporations pursuant to which
Vision Twenty-One was the sole provider of comprehensive management, business
and administrative services for the non-professional aspects of the
professional practices. The PPM segment represented a substantial portion of
Vision Twenty-One's business in 1999.
Vision Twenty-One also generated significant revenue from its buying group
division that provided benefits to its Affiliated Providers through the
consolidation and management of purchases of optical goods. In addition, Vision
Twenty-One generated significant revenue from its managed care division by
entering into capitated managed care contracts with third-party insurers and
payers and by administering indemnity fee-for-service plans.
During 1999, Vision Twenty-One began implementing a plan of divesting
itself of the PPM, retail optical chains and buying group businesses in order
to focus on expanding its refractive surgery, ambulatory surgery and managed
care businesses. The sales of the buying group division and retail optical
chains were completed in two individual transactions. The PPM divestiture
requires multiple transactions involving the sales of practice assets,
typically back to the doctors or their affiliates, and the termination of
Management Agreements. This divestiture program commenced late in the 4th
quarter of 1999 and is expected to be completed by June 30, 2000.
Vision Twenty-One 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 Vision Twenty-One
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 Vision Twenty-One were exchanged for common stock of Vision
Twenty-One. The principal executive office of Vision Twenty-One is located at
7360 Bryan Dairy Road, Suite 200, Largo, Florida 33777, and its telephone
number is (727) 545-4300.
RECENT DEVELOPMENTS
Historically, Vision Twenty-One had concentrated on developing a wide
array of LADS and acquiring and managing multiple channels of distribution for
those services. During 1999, Vision Twenty-One shifted its strategic focus from
developing broad-based LADS and distribution to concentrating on the high
growth, high margin opportunities in the eye care industry such as the
development and management of refractive and ambulatory surgery centers and
managed care.
122
<PAGE>
Accordingly, Vision Twenty-One began analyzing its mix of business units within
the LADS operation and assessing the long-term strategic value of each existing
component. As a result, Vision Twenty-One sold its buying group division and
its retail optical chains and began divesting itself of the physician practice
management business. In addition, at the end of the year, Vision Twenty-One's
Board of Directors voted to explore a number of strategic alternatives intended
to maximize stockholder value, including the sale of all or part of Vision
Twenty-One. This subsequently resulted in the recently announced Merger
transaction with OptiCare Health Systems, Inc. ("OptiCare").
Merger with OptiCare. On February 10, 2000, Vision Twenty-One entered into
an Agreement and Plan of Merger and Reorganization ("Merger Agreement") with
OptiCare Health Systems, Inc. and OC Acquisition Corp. The Merger will combine
the companies' refractive surgery, ambulatory surgery and managed care
businesses. Under the terms of the Merger Agreement, Vision Twenty-One's common
stock will be converted into OptiCare common stock at an initial exchange ratio
of .402 shares of OptiCare common stock for each share of Vision Twenty-One's
common stock. At the initial exchange ratio, approximately six million shares
of OptiCare common stock would be issued in exchange for 100% of the issued and
outstanding common stock of Vision Twenty-One. The final exchange ratio will be
calculated prior to closing, in part, on the basis of a subsequent
determination of Vision Twenty-One's consolidated balance sheet. The Merger
will be accounted for as a purchase and includes the assumption by OptiCare of
approximately $60.0 million of Vision Twenty-One's outstanding debt. The
transaction is subject to certain closing conditions, including, but not
limited to, regulatory approvals, the approval of the stockholders of both
OptiCare and Vision Twenty-One, the restructuring of certain debt obligations
of OptiCare and Vision Twenty-One and the raising by OptiCare of not less than
$30.0 million of equity or mezzanine capital.
Exit of Physician Practice Management. On October 25, 1999, Vision
Twenty-One announced the adoption of a plan to substantially exit the business
of managing optometry and ophthalmology practices. This represented a crucial
step in Vision Twenty-One's strategy of redirecting its corporate resources
towards the development of refractive surgery and ambulatory surgery
initiatives in these same markets. Vision Twenty-One expects the majority of
the affected physicians to continue to be part of the Vision Twenty-One
national eye care delivery network and/or participate in its refractive and
ambulatory surgery center initiatives. The exit of the physician practice
management ("PPM") business is expected to be accomplished through the sale of
the practice assets back to the physicians or their affiliates, the termination
of Management Agreements and the restructuring of certain refractive surgery
center facility access agreements. The terms of each managed practice
divestiture are subject to the prior approval of the banks under Vision
Twenty-One's credit facilities.
The process of divesting itself of each PPM practice involves the
termination of the Management Agreement in place between Vision Twenty-One and
the practice, including the termination and release of the covenant not to
compete. In addition, each party releases the other from any and all rights,
duties and claims each may have against the other. All of Vision Twenty-One's
employees providing services at the practice's office locations are terminated
and are typically rehired immediately by the practice. Vision Twenty-One sells
to the practice all tangible assets located at the practice's office(s) and
assigns the rights to the practice's trade name and telephone numbers back to
the practice. The practice assumes the outstanding liabilities which were
incurred by Vision Twenty-One in connection with managing the practice, such as
accounts payable and accrued compensation. Where possible, Vision Twenty-One
assigns, and the practice assumes, certain identified executory contracts
entered into by Vision Twenty-One in the course of its provision of management
services to the practice, including real estate leases and equipment leases.
Certain equipment leases are not assignable by Vision Twenty-One in which
case Vision Twenty-One enters into equipment subleases with the practice under
substantially the same terms as are contained in Vision Twenty-One's lease.
Where practicable, Vision Twenty-One enters into a facility access agreement
with the practice and/or its physicians whereby the practice and its physicians
agree to continue to utilize Vision Twenty-One's surgery centers for the
treatment of their patients on a fee-per-procedure basis for a defined period
of time, typically one year. In consideration for the
123
<PAGE>
termination of the Management Agreement and the sale and assignment of the
practice assets, Vision Twenty-One typically receives at closing a combination
of cash and Vision Twenty-One common stock. The common stock is placed in
Vision Twenty-One's treasury and is expected to be canceled by Vision
Twenty-One.
Retail Optical Chains. Effective August 31, 1999, Vision Twenty-One
completed the sale of Vision World, Eye care One Corp. and The Eye DRx (the
"Retail Optical Chains") to EyeCare Centers of America, Inc. ("ECCA"). ECCA is
based in San Antonio, Texas and operates a national chain of full-service
retail optical stores. In connection with this transaction, Vision Twenty-One
received approximately $37.3 million in cash. Of the proceeds Vision Twenty-One
received at closing, approximately $30.8 million was applied as a permanent pay
down of its term debt credit facility, approximately $2.8 million was paid down
under its ongoing $7.5 million revolving credit facility, approximately $2.4
million was used for costs and other obligations related to the transaction and
approximately $1.3 million was utilized to fund an escrow arrangement between
the parties relative to terms under the agreement. Based on post-closing
adjustments, the final sales price was approximately $31.8 million, and Vision
Twenty-One has recorded a liability of approximately $4.0 million to ECCA, net
of escrow, with respect to such post-closing adjustments. Under the sale
agreement, Vision Twenty-One indemnified one of its former Managed Professional
Associations for certain partnership obligations. Accordingly, a charge of $0.2
million was recorded to loss on disposal of discontinued operations in 1999. A
net loss of approximately $3.2 million was recorded on the transaction. Vision
Twenty-One is currently in discussions with ECC regarding payment of the
post-closing purchase price adjustment and has reached an oral agreement that
is conditioned upon consummation of the OptiCare transaction. In the event the
OptiCare transaction is not consummated for whatever reason, there can be no
assurance that Vision Twenty-One will be able to pay the amounts owed to ECCA.
Discontinued Operations. As a result of Vision Twenty-One's announced plan
to exit the physician practice management business and its previously announced
and completed sale of the retail optical chain segment of its operation, Vision
Twenty-One has accounted for these business segments as discontinued
operations. Consequently, prior period financial statements have been restated
to reflect discontinued operations treatment for the results of these business
segments.
Buying Group. On June 4, 1999 Vision Twenty-One completed the sale of its
buying group division. Net proceeds of $4.3 million received by Vision
Twenty-One were primarily used to repay outstanding borrowings under Vision
Twenty-One's credit facilities.
Credit Facilities. On January 30, 1998, Vision Twenty-One entered into a
five-year, $50.0 million credit agreement (the "Credit Agreement") with the
Bank of Montreal as agent (the "Agent") for a consortium of banks (the
"Banks"). The Credit Agreement, which was to mature in January 2003, provided
Vision Twenty-One 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. Borrowings under the Credit Agreement were secured by a
pledge of the stock of substantially all of Vision Twenty-One's subsidiaries as
well as the assets of Vision Twenty-One and certain of its subsidiaries.
Obligations under the Credit Agreement were guaranteed by certain of Vision
Twenty-One's subsidiaries. The Credit Agreement contained negative and
affirmative covenants and agreements that placed restrictions on Vision
Twenty-One regarding disposition of assets, capital expenditures, additional
indebtedness, permitted liens and payment of dividends, as well as required the
maintenance of certain financial ratios. At the closing of the Credit
Agreement, Vision Twenty-One used approximately $26.9 million of its available
borrowing to repay the outstanding balance under Vision Twenty-One's bridge
credit facility with Prudential Securities Credit Corporation ("Prudential
Credit") and related accrued interest and transaction costs. By June 30, 1998,
Vision Twenty-One had used approximately $48.3 million of its available
borrowings under the Credit Agreement.
On July 1, 1998, Vision Twenty-One entered into a restated $100.0 million
bank credit agreement with the Banks (the "Restated Credit Agreement"). The
Restated Credit Agreement included a seven-year term loan of $70.0 million and
a $30.0 million five-year revolving credit and acquisition
124
<PAGE>
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. By December 31,1998, approximately $81.6 million was outstanding under
the Restated Credit agreement.
During the first eight months of 1999, Vision Twenty-One entered into
three amendments to its credit facilities. The amendments involved the
imposition of restrictions on borrowing capacity, increased borrowing costs,
covenant modifications and increased reporting requirements. They also included
waivers for non-compliance with certain obligations under the credit facilities
and consents to the sales of the buying group division and retail optical
chains. By September 1, 1999, approximately $46.0 million was outstanding under
its amended credit facilities (the "Amended and Restated Credit Agreement").
On June 11, 1999 Vision Twenty-One entered into Subscription Agreements
with an entity controlled by one of Vision Twenty-One's current directors and
with Vision Twenty-One's Chief Medical Officer, who is also a current director,
for the purchase of Vision Twenty-One's common stock. The aggregate proceeds
received by Vision Twenty-One of approximately $1.1 million were used for
working capital purposes.
In July 1999, Vision Twenty-One commenced discussions with Med Equity
Investors, LLC ("Med Equity") regarding a potential capital infusion, and on
October 25, 1999, Vision Twenty-One announced that it had entered into a
binding letter of intent for an equity investment of $35 million by Med Equity
Investors and Chase Capital Partners. The proposed transaction was to provide
for the issuance of 9% convertible preferred stock which, if converted, would
have resulted in dilution of Vision Twenty-One's common stock of approximately
25%. If not converted, the preferred stock would have been fully redeemable at
any time after December 31, 2005. The proceeds would have been used to reduce
borrowings under the Amended and Restated Credit Agreement and provide funding
for expansion of Vision Twenty-One's refractive surgery center business.
On November 12, 1999, discussions regarding the proposed equity infusion
were terminated, and Vision Twenty-One entered into a fourth amendment to the
Amended and Restated Credit Agreement that provided for a bridge loan facility
in the amount of $3.0 million to be made available to Vision Twenty-One which
was to mature on November 26, 1999. Waivers were extended on a short-term basis
regarding non-compliance with certain of Vision Twenty-One's loan covenants and
repayment obligations.
Over the ensuing seven weeks, three additional amendments to the Amended
and Restated Credit Agreement and a waiver letter were executed which increased
availability under the bridge loan facility to $9.4 million, extended until
March 31, 2000 the repayment date of the bridge loan facility and granted
waivers regarding non-compliance with certain covenants and repayment
obligations. Pursuant to the seventh amendment, Vision Twenty-One agreed to
provide the Banks with a weekly operating budget and to obtain approval from
the Banks for all significant cash expenditures. Pursuant to a waiver letter
dated as of December 29, 1999, Vision Twenty-One was granted the ability to use
a portion of the proceeds from the sale of the physician practice management
businesses to meet its "reasonable and necessary" operating expenses until the
sale of Vision Twenty-One was consummated.
Currently, the bridge loan facility is scheduled to mature on May 19, 2000
and waivers have been granted regarding certain covenants and repayment
obligations until such date. Vision Twenty-One has been aggressively reducing
overhead expenses, carefully managing business unit operating cash flows and
generating cash from the PPM divestiture program to improve its liquidity
position. A portion of the liquidity improvement has been used to fund
increased levels of professional fees which have been required to complete the
PPM divestitures, resolve certain claims, negotiate with its lenders and
complete the planned Merger with OptiCare. Although its liquidity position has
improved, Vision Twenty-One has experienced significant losses and is currently
dependent upon the cooperation, approvals and availability of waivers from the
banks as parties to its credit facilities for operating capital. If Vision
Twenty-One is unable to consummate the Merger with OptiCare, it would
125
<PAGE>
immediately need to obtain additional capital by offering debt or equity
securities to fund its operations. Furthermore, Vision Twenty-One would have to
obtain certain additional waivers with respect to its credit facility in order
to raise such capital, and there can be no assurance that such waivers would be
forthcoming.
Possible Delisting by Nasdaq. On April 20, 2000 Vision Twenty-One received
a letter from Nasdaq advising Vision Twenty-One of a possible delisting of
Vision Twenty-One from the Nasdaq National Market due to Vision Twenty-One's
failure to timely file its Form 10-K with the Securities and Exchange
Commission. Vision Twenty-One requested and has received a hearing related to
this matter which is scheduled for May 25, 2000. The delay in filing the Form
10-K was primarily attributable to Vision Twenty-One's discontinued operations.
As a result of Vision Twenty-One's discontinued operations, Vision Twenty-One
may experience difficulty in timely filing its Form 10-Q for the first quarter
of fiscal 2000 although it currently believes it will file within the time set
forth in Rule 12b-25. In addition, Vision Twenty-One will have to show NASDAQ
that it meets the other listing requirements and based upon current
circumstances it is unlikely that it will meet such requirements. While Vision
Twenty-One believes it has reasonable arguments in favor of its continued
listing and it expects to seek a waiver of such conditions through closing of
the OptiCare transaction, there can be no assurance that Vision Twenty-One's
listing on the Nasdaq National Market will continue following the date of the
currently scheduled hearing.
MANAGED CARE
As an increasing percentage of the population is covered by managed care
organizations, Vision Twenty-One 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 payers pursuant to which
services will be provided on a risk-sharing or capitated basis. Vision
Twenty-One 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 most of the contracts are terminable by either party on
sixty days notice.
Vision Twenty-One's typical contracts with third-party health benefits
payers (insurance companies and HMOs) provide that Vision Twenty-One will
arrange and pay for eye care services that are needed by the payer's members in
exchange for payment of a fixed premium 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, Vision
Twenty-One 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. Vision Twenty-One can directly
benefit by effectively managing costs and utilizing its relationships with its
Affiliated Providers. Because Vision Twenty-One assures the credentials of the
providers, establishes quality and utilization control systems and implements
payment arrangements with the providers, third-party payers are able to use
their limited resources in other areas where they have greater expertise. As of
March 31, 2000, Vision Twenty-One had managed care contracts and discount
fee-for-service plans covering approximately 4.9 million exclusively contracted
patient lives.
REFRACTIVE AND AMBULATORY SURGERY CENTERS
One of the highest growth areas of eye care services is the provision of
refractive surgery. This involves the utilization of a specialized laser to
correct common vision problems such a nearsightedness, farsightedness and
astigmatism. The most common procedure performed today is LASIK which uses an
excimer laser in a refractive surgery center ("RSC") and is performed on an
outpatient basis. Most other ophthalmic surgical procedures, including cataract
surgery, are also performed on an outpatient basis in an ambulatory surgery
center ("ASC"). ASC's are generally Medicare certified and designed to handle
invasive procedures as well as anesthesia. Vision Twenty-One provides various
operations and support services, equipment and facilities (RSCs or AACS) to
affiliated ophthalmologists in order that they may successfully provide these
surgical procedures.
126
<PAGE>
The primary business model employed by Vision Twenty-One involves owning
and/or managing the RSC or ASC where the surgery is performed. Vision
Twenty-One earns a facility access fee from the providers who perform the
procedures. Alternative models employed by Vision Twenty-One include: a)
providing only equipment, such as the excimer laser, on a fee-per-procedure
basis augmented in certain cases by specific support services and b) providing
management and support services for the surgery center on a negotiated fee
basis usually with a portion of the fee tied to profitability of the surgery
center. As of March 31, 2000, Vision Twenty-One had 7 RSC's and 6 ASC's under
one or more of these models.
MANAGEMENT AGREEMENTS
As part of its PPM business, Vision Twenty-One entered into Management
agreements with professional associations or corporations (the "Managed
Professional Associations") pursuant to which Vision Twenty-One was the sole
provider of comprehensive management, business and administrative services for
the non-professional aspects of the professional practices. Each managed
provider maintained full authority, control and responsibility over the
provision of professional care and services to its patients. Vision Twenty-One
did not provide professional care to patients nor did Vision Twenty-One employ
any of the ophthalmologists or optometrists, or any other professional
healthcare provider personnel, of the Managed Professional Association. The
initial term of the Management Agreement was typically 40 years. Under the
majority of Vision Twenty-One's Management Agreements, the management fees
ranged from 20% to 37% of the Managed Professional Associations' net revenues
after deducting from such revenues all expenses of the clinics other than those
related to stockholders of the Managed Professional Associations. This type of
arrangement was usually utilized in management relationships with ophthalmology
practices. Additionally, Vision Twenty-One had Management Agreements with
management fees ranging from 50% to 87% of net practice revenues where Vision
Twenty-One was required to pay generally all the expenses of the clinics with
the exception of professional salaries and benefits. Such arrangements were
typically utilized in management relationships with optometrists. The
management fees earned by Vision Twenty-One pursuant to these Management
Agreements fluctuated depending on the level of revenues and expenses of the
Managed Professional Associations.
As previously disclosed, Vision Twenty-One has adopted a plan to exit the
PPM business. See the discussion under "Recent Developments."
BUYING GROUP
The buying group division provided benefits to Affiliated Providers
through the consolidation and management of purchases of optical goods. Vision
Twenty-One aggregated Affiliated Provider purchase orders for optical goods and
submitted, on Vision Twenty-One purchase orders, the combined purchase orders
to suppliers for direct shipment to the Affiliated Providers. From the supplier
perspective, Vision Twenty-One was the purchaser and was responsible for
supplier payments. Vision Twenty-One assumed the credit risks of its Affiliated
Providers. Vision Twenty-One invoiced the Affiliated Providers for their
purchases and recognized buying group division revenues upon shipment of
merchandise by the suppliers. The business arrangements were terminable at any
time by Vision Twenty-One or its customers. As previously disclosed, Vision
Twenty-One sold this division in June 1999.
RETAIL OPTICAL CHAINS
In certain states, Vision Twenty-One owned and operated retail optical
chains. Revenues were generated from management and/or professional fees from
Affiliated Providers operating within or adjacent to the retail optical
locations and from the sale of optical goods such as eyeglasses and contact
lenses. As previously disclosed, Vision Twenty-One sold its retail optical
chains in August 1999.
127
<PAGE>
1998 TRANSACTIONS
In addition to the acquisitions described below, Vision Twenty-One
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 consisted of certain non-medical and non-optometric assets, including
accounts receivable, leases, contracts, equipment and other tangible and
intangible assets. Concurrently with these acquisitions, Vision Twenty-One
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, Vision Twenty-One purchased all of the outstanding stock of The
Complete Optical Laboratory, Ltd., Corp. located in New Jersey which serviced
Vision Twenty-One's New Jersey optometry clinics and acquired substantially all
of the business assets of a managed care company located in Florida which
serviced more than 82,700 patient lives. These acquisitions were accounted for
under the purchase method of accounting.
In September 1998, Vision Twenty-One completed the acquisition ofAmerican
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, Vision
Twenty-One completed the acquisition of Vision World, Inc., a retail optical
chain located in Minneapolis, Minnesota. Vision World, Inc. consisted of 38
retail clinics and 30 optometrists.
In March 1998, Vision Twenty-One completed a transaction with EyeCare One
Corp. ("EyeCare One") and Vision Insurance Plan of America, Inc. ("VIPA").
EyeCare One, operating under the trade name of Stein Optical, was a retail
optical chain consisting of 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 as a pooling of interests.
In January 1998, Vision Twenty-One completed the acquisition of The Eye
DRx, a retail optical chain of 19 retail clinics located in Bloomfield, New
Jersey.
1997 ACQUISITIONS
During 1997, Vision Twenty-One completed the acquisition of the business
assets of one optometry clinic, 19 ophthalmology clinics, nine optical
dispensaries and five ASCs. Concurrent with these acquisitions, Vision
Twenty-One entered into 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, Vision Twenty-One acquired all of the issued and outstanding
stock of BBG-COA, Inc. ("Block Vision"), LSI Acquisition, Inc. ("LSI") and MEC
Health Care, Inc. ("MEC"). The Block Vision transaction is referred to herein
as the "Block Acquisition" and the LSI and MEC transactions are collectively
referred to herein as the "LaserSight Acquisitions". Vision Twenty-One 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."
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 Vision Twenty-One operates
will not change significantly and adversely in the future. In general,
regulation of health care providers and companies is increasing.
128
<PAGE>
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 Vision Twenty-One will
be.
Every state imposes licensing requirements on ophthalmologists,
optometrists and opticians 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 Vision Twenty-One'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 Vision Twenty-One. Increasing budgetary pressures at
both the federal and state level and the rapidly escalating costs of healthcare
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. Vision Twenty-One
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 Vision Twenty-One.
The following is a description of some of the various laws that affect
Vision Twenty-One'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. Vision Twenty-One 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. Vision
Twenty-One 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.
In 1999, the Attorney General of North Carolina issued a formal opinion
that the following arrangements evidence improper control of a professional
entity by a management entity owned by non-professionals: percentage of revenue
management fees, ownership of patient records by the manager, restrictive
covenants prohibiting competition with the manager, the manager's right to
approve professional employment contracts, or an agreement by which the manager
is able to direct ownership interests in the practice entity to be transferred
to parties it selects. If this opinion is upheld and adopted in other states in
which Vision Twenty-One manages practices, it could require restructuring of
the management arrangements in a manner that has an adverse effect on Vision
Twenty-One.
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.
129
<PAGE>
The Florida Board of Medicine has determined that a management fee charged
by a publicly held national management company based upon a percentage of
revenue constitutes illegal fee-splitting, and this determination has been
affirmed by a Florida appellate court. In that particular case, the management
fee was based in part on a percentage of the increase in net revenues of the
practice after the management arrangement commenced. In a subsequent case, the
Florida Board affirmed a management fee based on a percentage of net revenues
with a monthly maximum of $10,000. It distinguished the prior case based on the
fact that the management company had no contractual obligation "to add patients
to the practice," and the presence of the fixed maximum fee. Vision Twenty-One
believes that its arrangements are also distinguishable from the first Board
ruling. However, there is a risk that Vision Twenty-One'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 Vision
Twenty-One'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 Vision Twenty-One'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. The
federal agency responsible for enforcing this law recently stated that
arrangements between ophthalmologists and optometrists for co-management of
patients may, in some cases, violate this law. Depending on the facts, such
violations could include the medical need for the arrangement and whether the
services performed by the optometrists are commensurate with the portion of the
fee received. The agency made clear that it was not questioning co-management
arrangements in and of themselves.
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 Vision Twenty-One believes that its
procedures are in compliance with such laws, there can be no assurance that
Vision Twenty-One 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 refractive and ambulatory surgery centers, the acquisition of
major equipment or the introduction of certain new services. There can be no
assurance that Vision Twenty-One will be able to obtain CONs which could affect
its ability to develop RSCs and ASCs. In addition, some states may require
Vision Twenty-One to obtain certain licenses to operate facilities including
refractive surgery centers. While Vision Twenty-One has no reason to believe
that it will be unable to obtain necessary facility licenses without
unreasonable expense or delay, there can be no assurance that it will be able
to obtain any required license.
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 Vision Twenty-One is required to
become licensed under these laws, the licensure process can be lengthy and time
consuming and, unless the regulatory authority permits Vision Twenty-One to
continue to operate while the licensure process is progressing, Vision
Twenty-One 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 regulation and other requirements which Vision
Twenty-One may not immediately be able to meet. Once licensed, Vision
Twenty-One 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
for a limited class of health services to be licensed as limited health service
plans. This avoids the need to be licensed as an insurer or HMO even if the
130
<PAGE>
managed care network's 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. Vision Twenty-One intends to seek such licenses in those states where
it is available for eye care networks. However, Vision Twenty-One 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 Vision Twenty-One'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 twenty-five percent of the provider's potential payments, the
network is also required to show that the providers have certain "stop loss"
financial protections 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 Vision Twenty-One to develop effective managed care networks in such
states.
Antitrust Laws. Vision Twenty-One'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 Vision Twenty-One to enter into business arrangements
with separate practice groups that compete in the same geographic market.
Electronic Record Privacy and Security Regulations. Recently proposed
federal regulations will, if finalized, strictly regulate health care providers
and plans that transmit health information electronically. Under the
regulations, providers and plans must limit access to health information to
employees who have a business need. They must install computer security
hardware and software to ensure that access is appropriately limited. Further,
a patient's written consent would be required to release personally
identifiable health information for any purpose other than treatment, payment
and certain specified purposes (e.g., public health). Patients are granted
rights to obtain an accounting of all disclosures of personally identifiable
information, access their health information upon request, and amend or correct
their health information. Providers and plans would have to adopt numerous
security and privacy policies to implement the regulations. They would also
have to identify a privacy official and a person responsible for security and
provide employee training programs regarding the security and privacy
requirements.
The privacy and security regulations are expected to be issued in final
form sometime this year. Providers and plans will have two years to comply with
the regulations. The regulations could have an adverse impact on the cost of
providing vision care-related services, including the types of services
furnished by Vision Twenty-One.
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 Vision Twenty-One
believes that its agreements and activities are in compliance with these laws,
Vision Twenty-One'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 a review of Vision Twenty-One's business arrangements
will not result in determinations that adversely affect Vision Twenty-One's
operations or that certain agreements between Vision Twenty-One and eye care
providers or third party payers will not be held in valid and unenforceable. In
addition, these laws and their interpretation vary from state to state. The
regulatory framework of certain jurisdictions may limit Vision Twenty-One's
expansion into, or ability to continue operations within, such jurisdictions if
Vision Twenty-One is unable to modify its operational structure to conform with
such regulatory framework. Any limitation on Vision Twenty-One's ability to
expand could have an adverse effect on Vision Twenty-One.
131
<PAGE>
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. Vision Twenty-One believes
that the economics 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 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 Vision Twenty-One, may become competitors. Increased competition could have
a material adverse effect on Vision Twenty-One's financial condition and
results of operations. The basis for competition includes service, price,
strength of Vision Twenty-One'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 Vision Twenty-One 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 to associated practices, and dedicate resources to an active sales team
focused exclusively on Vision Twenty-One's sales effort.
Refractive Surgery
The market for providing access to refractive surgery through utilization
of excimer lasers is highly competitive. Vision Twenty-One competes with laser
centers operated by local operators and eye surgeons who have purchased their
own lasers. Vision Twenty-One 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 ClearVision Laser
Centers, Inc., LCA Vision, Inc., NovaMed Eyecare Management, LLC, Vision
America, Inc., Gimbel Vision International, Inc., Lasik Vision Corp., ICON Eye
Laser Centers, OptiCare Health Systems, Inc., TLC The Laser Center, Inc. and
Laser Vision Centers, Inc. The services and equipment Vision Twenty-One offers
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
Vision Twenty-One does not experience significant seasonal fluctuations in
its business.
SERVICE MARKS
Vision Twenty-One believes that its trademarks and service marks are
important and, accordingly, has registered "Vision 21," "Vision Twenty-One"
with its design logo, "Eye Care for the 21st Century," "A Different Point of
View," "LADS" and "VIPA Vision Insurance Plan of America" with the United
States Patent and Trademark Office.
EMPLOYEES
At December 31, 1999, Vision Twenty-One had approximately 1,200 employees,
of which 81 were employed at Vision Twenty-One's headquarters, 97 were employed
by the managed care division, 126 by the refractive and ambulatory surgery
center division, and the remaining 896 were employed in Vision Twenty-One's PPM
business which is being discontinued. Vision Twenty-One believes that its
relationship with its employees is good.
132
<PAGE>
PROPERTIES
Vision Twenty-One's corporate headquarters are located in Largo, Florida
and consist of approximately 25,700 square feet. The lease for this facility
expires September 15, 2004. Vision Twenty-One believes that such facility is
adequate for its current needs.
Vision Twenty-One 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. Vision Twenty-One believes that the facility is adequate for Block
Vision's current needs.
Vision Twenty-One leased or subleased the clinic locations it managed
pursuant to the Management Agreements with the Managed Professional
Associations. As previously disclosed, Vision Twenty-One assigns, and each
practice assumes, the obligations under the real estate leases for the practice
location(s) being divested as part of the exit from the physician practice
management business.
Vision Twenty-One also leases and subleases the ASC and RSC facilities it
manages. Vision Twenty-One does not expect that the current ASCs and RSCs will
need to be expanded.
Vision Twenty-One also leases minimal, but adequate, facilities in certain
business regions for regional support.
LEGAL PROCEEDINGS
Except as described below, Vision Twenty-One is not a party to any
material litigation and is not aware of any threatened material litigation:
Vision Twenty-One, one of its executive officers who is also a director
and two former officers 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
Vision Twenty-One and the other defendants issued materially false and
misleading statements related to Vision Twenty-One'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
Vision Twenty-One'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. The purported class
action lawsuits 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 P. Block
(Case No. 99-138-CIV-T-25F), and one plaintiff's group was appointed lead
plaintiff by judicial order on May 6, 1999. This uncertified consolidated class
action seeks to hold Vision Twenty-One and one of its officers who is also a
director as well as two former officers liable for alleged federal securities
law violations based upon alleged misstatements and omissions in analyst
reports, trade journal articles, press releases and filings with the Securities
and Exchange Commission.
Pursuant to judicial orders, the lead plaintiffs filed an amended
consolidated complaint on August 14, 1999. On October 11, 1999, the lead
plaintiffs and Michael P. Block executed a stipulation dismissing without
prejudice the action against Mr. Block. The Defendants filed a motion to
dismiss the amended consolidated complaint on October 15, 1999. The lead
plaintiffs served answering papers on December 3, 1999. The motion to dismiss
remains under judicial review. Management of Vision Twenty-One is unable to
determine the impact, if any, that the resolution of the aforementioned
133
<PAGE>
uncertified consolidated class action lawsuit will have on the financial
position or results of operations of Vision Twenty-One. While it is impossible
to predict the outcome or impact of such litigation, Vision Twenty-One believes
it has substantial defenses to this matter and intends to assert them
vigorously.
On or about November 15, 1999, Caremark Rx, Inc. commenced an action in
the United States District Court, Middle District, against Vision Twenty-One.
The action alleges a breach by Vision Twenty-One of a promissory note and a
leased property agreement and is seeking approximately $950,000 in damages.
Vision Twenty-One has asserted defenses to the claim and has filed a
counter-claim for damages against Caremark Rx, Inc. for breach of contract and
unfair trade practices. Vision Twenty-One believes that Caremark Rx, Inc.'s
claims are without merit and intends to vigorously defend the lawsuit.
Block Buying Group, LLC (the "Block Group"), an entity owned by Michael P.
Block, the former president of Vision Twenty-One's Block Vision subsidiary, has
filed a civil action in Palm Beach County Circuit Court seeking to enjoin the
proposed Merger between Vision Twenty-One and OptiCare. Vision Twenty-One
previously sold its buying group division to the Block Group in June of 1999.
The Block Group has informed Vision Twenty-One that it believes that the
proposed Merger with OptiCare is in violation of the non-competition and
confidentiality provisions entered into in connection with the June 1999 sale
since OptiCare operates a buying group division which currently competes with
the Block Group. On April 21, 2000, the Block Group and Vision Twenty-One,
through counsel, have signed a stipulation to participate in expedited
arbitration in accordance with the terms and conditions of the June 1999 sale
and to jointly seek the completion of the arbitration on or before June 1,
2000, or as soon thereafter as reasonably possible. While it is impossible to
determine the eventual outcome of this action, Vision Twenty-One believes that
it has substantial defenses to this claim and intends to vigorously defend
itself. The consummation of the proposed Merger between Vision Twenty-One and
OptiCare is subject to certain conditions including resolution of this matter
to OptiCare's satisfaction. The failure to consummate the OptiCare transaction
would have a material adverse effect on Vision Twenty-One.
Vision Twenty-One has been named as a defendant in an action commenced in
the Superior Court of New Jersey on or about March 8, 2000. The action was
filed by five optometrists against Charles Cummins, O.D. and Elliot Shack, O.D.
("Cummins and Shack"), Vision Twenty-One, ECCA, Inc. and several other
defendants who have not been named nor identified. Vision Twenty-One previously
purchased certain non-optometric assets of Cummins and Shack in January 1998
which it subsequently sold to ECCA in August of 1999. The action alleges breach
of fiduciary duty, breach of covenant of good faith and fair dealing, breach of
contract and fraud in connection with purported partnership agreements the
optometrists had with Cummins and Shack and seeks an accounting and specific
performance as well as unspecified compensatory and punitive damages. Vision
Twenty-One believes it has substantial defenses to these claims and intends to
vigorously defend itself.
On or about November 1, 1999, The Source Buying Group, Inc. commenced an
action in the United States District Court for the Eastern District of
Pennsylvania against Block Vision, Inc. The action alleges a breach by Block
Vision of a promissory note and is seeking approximately $562,500 representing
the accelerated principal balance of the note which the plaintiff alleges is
due, together with interest and costs. In the alternative, the plaintiff is
seeking approximately $20,800 of interest allegedly due. On or about January
14, 2000, the action was transferred to the United States District Court for
the Southern District of Florida. Block Vision has asserted defenses to the
claim and has moved to compel arbitration. The plaintiff has filed an
opposition to Block Vision's motion for arbitration. Vision Twenty-One believes
that plaintiff's claims are without merit and intends to vigorously defend the
lawsuit.
134
<PAGE>
VISION TWENTY-ONE MANAGEMENT CONTINUING AFTER MERGER
The following table sets forth (i) the names, ages and positions of the
directors and executive officers of Vision Twenty-One who are expected to
become directors and executive officers of OptiCare after the Merger. Each
director is expected to hold the positions indicated following the consummation
of the Merger. The executive officers are expected to be appointed by and serve
at the discretion and pleasure of the OptiCare board of directors, subject to
the terms of any applicable agreements. The directors are expected to be
appointed to OptiCare's board of directors following the Merger and serve until
OptiCare's next annual meeting or until their earlier resignation, death or
removal.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- ----- ------------------------------------------
<S> <C> <C>
Bruce S. Maller .......... 46 Interim President of Laser Correction and
Director
Andrew Alcorn ............ 44 President of Managed Care Services
Division
</TABLE>
BRUCE S. MALLER, INTERIM PRESIDENT OF LASER CORRECTION AND DIRECTOR. Mr.
Maller is expected to serve as OptiCare's Interim President of Laser Correction
and as a Director on OptiCare's Board of Directors following the Merger. Mr.
Maller has served as a Chairman of the Board of Directors and Treasurer of
Vision Twenty-One since November 20, 1999 and as a Director since November 1996
and is a vision care consultant to Vision Twenty-One. He is the founder of, and
has been the President of, the BSM Consulting Group of Incline Village, Nevada
since 1978. BSM provides consulting services in the field of ophthalmology to
individual physicians and corporate clients such as Allergan, Inc. and Vision
Twenty-One. Mr. Maller has served as a Director of Gimbel Vision International,
Inc., a public company since 1996. Mr. Maller is a frequent lecturer for
various medical societies, including the American Academy of Ophthalmology and
the American Society of Cataract and Refractive Surgery. Mr. Maller also heads
BSM Healthcare Publications, which produces works related to the field of
medical practice management. Mr. Maller received his Bachelor of Arts degree
from the University of Colorado in 1975.
ANDREW ALCORN, PRESIDENT OF MANAGED CARE SERVICES DIVISION. Mr. Alcorn is
expected to serve as OptiCare's President of Managed Care Services Division
following the Merger. Mr. Alcorn has served as Senior Vice President of Vision
Twenty-One since August 1999 and has provided oversight of the Company's
managed care business unit since November 1999. Mr. Alcorn has also served in
various executive positions at Block Vision, Inc. since 1993 and currently
serves as Block Vision's President.
COMPENSATION OF EXECUTIVE OFFICERS
The following table is a summary of the compensation paid or accrued by
Vision Twenty-One for the last three fiscal years to Vision Twenty-One by each
executive officer of Vision Twenty-One who will become an executive officer of
OptiCare following the Merger.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------------- -------------
SECURITIES
UNDERLYING/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY $ OPTIONS COMPENSATION $
- -------------------------------- ------ ---------- ------------- ---------------
<S> <C> <C> <C> <C>
Andrew Alcorn
Senior Vice President ......... 1997 18,333 20,000 1,205
1998 220,000 10,000 8,600
1999 220,000 50,000 8,676(1)
</TABLE>
- ----------
(1) Amount represents an automobile allowance of $6,464 and matching 401K
contributions of $2,212.
135
<PAGE>
Vision Twenty-One and Andrew Alcorn are parties to an Employment Agreement
(the "Alcorn Employment Agreement"), pursuant to which Mr. Alcorn has agreed to
serve as Senior Vice President. The term of the Alcorn Employment Agreement is
two years, and is renewable for subsequent one-year terms by mutual agreement
of the parties. Under the Alcorn Employment Agreement, Mr. Alcorn will receive
an initial annual base salary of $225,000 which is subject to review by the
Compensation Committee of the Board of Directors at annual intervals and may be
adjusted from time to time as the Compensation Committee deems to be
appropriate. Under the Alcorn Employment Agreement, Mr. Alcorn has agreed to
devote his best efforts and substantially all of his business time and services
to the business and affairs of Vision Twenty-One. Mr. Alcorn will be eligible
for annual incentive bonuses, up to 40% of his annual base salary, in an amount
to be determined by the Compensation Committee of the Board of Directors to the
extent that Vision Twenty-One achieves certain performance measures set by the
Committee. Under the Alcorn Employment Agreement, Mr. Alcorn received
non-statutory stock options to purchase 50,000 shares of Common Stock pursuant
to Vision Twenty-One's Stock Incentive Plan. The options are exercisable at a
price of $3.50 per share. The shares vest pro rata on an equal basis over a
three-year period beginning December 31, 2000. Mr. Alcorn is also entitled to
receive such additional stock options or other stock awards under Vision
Twenty-One's Stock Incentive Plan to the extent the Compensation Committee
determines such awards to be appropriate. The Alcorn Employment Agreement
provides that in the event Mr. Alcorn's employment is terminated by Vision
Twenty-One other than (i) for cause, (ii) upon death or disability, or (iii)
upon voluntary termination by the employee, Mr. Alcorn will be entitled to
receive from Vision Twenty-One monthly payments equal to one-twelfth of the
employee's annual base salary for each month during the remaining term of the
Alcorn Employment Agreement, but not less than twelve months. The Alcorn
Employment Agreement provides that if Mr. Alcorn's employment is terminated
other than for cause within twelve months following a change of control of
Vision Twenty-One (as defined in the agreement), Vision Twenty-One shall pay
Mr. Alcorn twelve equal monthly payments of one-twelfth of the sum of such
employee's base salary plus his previous year's bonus, if any. The Alcorn
Employment Agreement also contains a covenant not to compete with Vision
Twenty-One for a period of twelve months following termination of employment.
BSM AGREEMENT
Vision Twenty-One entered into an agreement with BSM Consulting Group
("BSM") effective November 23, 1999. This agreement contracted with Mr. Maller
through BSM to be Chairman of the Board of Vision Twenty-One and to assume
overall control of the operations of Vision Twenty-One. The fees payable under
this agreement are up to $6,250 per week, plus expenses. The use of any other
BSM services other than Mr. Maller's time would be billed at customary rates
less a 20% discount. Additionally, Mr. Maller was awarded an additional 100,000
stock options in February 2000 to purchase Vision Twenty-One common stock that
vest on the earlier of (i) pro rata over the four quarters of fiscal 2000 or
(ii) upon the consummation of the Merger. The strike price would be based on
the 5 day average closing price prior to the date of grant.
136
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR 1999
The following table sets forth information regarding Vision Twenty-One
option grants during fiscal 1999 to each executive officer of Vision Twenty-One
who will become an executive officer of OptiCare after the Merger. In
accordance with the rules of the Commission, the table sets forth the
hypothetical gains or "option spreads" that would exist for the options at the
end of their ten year terms.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED
RATES OF STOCK PRICE APPRECIATION
FOR
ANNUAL INDIVIDUAL GRANTS OPTION TERM(1)
- ----------------------- ---------------------------------------------------------- --------------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE
NAME GRANTED FISCAL YEAR ($/SH) EXPIRATION DATE 0% 5% 10%
- ----------------------- ------------ -------------- ------------ ----------------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Andrew Alcorn ......... 50,000 5.2 3.50 May 31, 2009 $ .00 $49,000 $182,000
</TABLE>
- ----------
(1) Based upon Vision Twenty-One's closing stock price of $2.75 on December
31, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
The following table sets forth information regarding options exercised
during fiscal 1999, by each executive officer of Vision Twenty-One who will
become an executive officer or director of OptiCare after the Merger.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS AT OPTIONS AT
ACQUIRED DECEMBER 31, 1999 DECEMBER 31, 1999(2)
ON VALUE ----------------------------- -------------------------------
NAME EXERCISE(1) REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(3)
- ----------------------- ------------- ------------ ------------- --------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Andrew Alcorn ......... -- 12,500 67,500 $ .00 $ .00
</TABLE>
- ----------
(1) No options were exercised by any Vision Twenty-One executive officer
during fiscal year 1999.
(2) Based upon Vision Twenty-One's closing stock price of $2.75 at December
31, 1999.
(3) The unexercisable portion of shares issuable pursuant to stock options
were not in-the-money at December 31, 1999.
137
<PAGE>
VISION TWENTY-ONE PRINCIPAL STOCKHOLDERS
The following table sets forth, as of April 28, 2000, information as to
the beneficial ownership of Vision Twenty-One's Common Stock by (i) each person
known to Vision Twenty-One as having beneficial ownership of more than 5% of
Vision Twenty-One's Common Stock, (ii) each person serving Vision Twenty-One as
a director on such date and each nominee for director, (iii) each person
serving Vision Twenty-One as an executive officer on such date who qualifies as
a "named executive officer" as defined in Item 402(a)(3) of Regulation S-K
under the Securities Exchange Act of 1934, and (iv) all of the directors and
executive officers of Vision Twenty-One as a group.
<TABLE>
<CAPTION>
SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) BENEFICIALLY OWNED(2)
- ----------------------------------------------- ----------------------- ----------------------
<S> <C> <C>
Theodore N. Gillette(3) ....................... 298,158 2.0%
Peter J. Fontaine(4) .......................... 461,775 3.2
Richard L. Lindstrom, M.D.(5) ................. 810,833 5.5
Jeffrey I. Katz, M.D.(6) ...................... 589,474 4.1
Bruce S. Maller(7) ............................ 427,664 2.9
Howard Hoffmann(8) ............................ 26,574 *
Andrew Alcorn(9) .............................. 12,500 *
All directors and executive officers as a group
(6 persons) .................................. 2,626,978 17.5
</TABLE>
- ----------
* Less than one percent.
(1) Unless otherwise indicated, the address of each of the beneficial owners
identified is 7360 Bryan Dairy Road, Largo, Florida 33777.
(2) Based on 14,526,617 shares of Common Stock outstanding (excluding certain
contingent shares held in escrow in conjunction with certain
acquisitions). Pursuant to the rules of the Securities and Exchange
Commission (the "Commission"), certain shares of Common Stock which a
person has the right to acquire within 60 days of the date hereof
pursuant to the exercise of stock options are deemed to be outstanding
for the purpose of computing the percentage ownership of such person but
are not deemed outstanding for the purpose of computing the percentage
ownership of any other person.
(3) Includes (a) the 235,894 shares owned by the Gillette Family Limited
Partnership, a Nevada Limited Partnership, over which Mr. Theodore
Gillette has voting and investment control as the sole shareholder of the
corporate general partner, (b) 9,077 shares owned by Optometric
Associates of Florida, P.A. (c) 15,287 shares owned individually and (d)
38,000 shares owned by The Ted and Raena Gillette Foundation, which Mr.
Gillette has shared voting and investment control.
(4) Includes 460,442 shares owned by the Fontaine Industries Limited
Partnership over which Peter Fontaine has voting and investment control
and 1,333 shares issuable upon the exercise of stock options granted,
pursuant to Vision Twenty-One's 1996 Stock Incentive Plan, which have
vested and are fully exercisable.
(5) Includes (a) 111,333 shares issuable upon the exercise of stock options
granted pursuant to Vision Twenty-One's 1996 Stock Incentive Plan, which
have vested and are fully exercisable and (b) 130,136 shares held
individually of which 59,433 shares were purchased from the Company in a
private placement and (c) 569,364 shares owned by the Lindstrom Family
Limited Partnership II over which Dr. Lindstrom has voting and investment
control.
(6) Includes (a) 268,666 shares owned by JKK Holdings, LLP over which Dr.
Katz has voting and investment control of which 117,666 shares were
purchased from the Company in a private placement and (b) 150,306 shares
owned individually and (c) 100,000 shares held indirectly through Katz
family trusts and (d) 1,333 shares issuable upon the exercise of stock
options granted pursuant to Vision Twenty-One's 1996 Stock Incentive
Plan, which have vested and are fully exercisable and (e) includes 69,169
shares held in escrow pending conclusion of certain outstanding
contingencies related to an ASC acquisition.
(7) Includes (a) 108,976 shares owned by BSM Investment, Ltd. over which
Bruce Maller has voting and investment control and (b) 151,333 shares
issuable upon the exercise of stock options granted pursuant to Vision
Twenty-One's 1996 Stock Incentive Plan which have vested and are fully
exercisable and (c) 163,355 shares owned individually and (d) 4,000
shares held indirectly by Maller children and a family trust.
(8) Includes 26,574 shares issuable upon the exercise of stock options
granted pursuant to Vision Twenty-One's 1996 Stock Incentive Plan which
have vested and are fully exercisable.
(9) Includes 12,500 shares issuable upon the exercise of stock options
granted pursuant to Vision Twenty-One's 1996 Stock Incentive Plan which
have vested and are fully exercisable.
138
<PAGE>
VISION TWENTY-ONE CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth herein briefly describes transactions for the
past three fiscal years between Vision Twenty-One and its directors and
officers who are expected to become executive officers or directors of OptiCare
after the Merger.
Vision Twenty-One entered into a five-year Advisory Agreement in 1996 with
Mr. Bruce S. Maller, Chairman of the Board of Vision Twenty-One (the "Advisory
Agreement"), pursuant to which Mr. Maller renders certain advisory services to
Vision Twenty-One, including the identification and integration of eye care
practices and the provision of assistance to Vision Twenty-One with its
strategic planning, growth and development. In consideration for such services,
Vision Twenty-One issued to Mr. Maller 125,627 shares of Common Stock. The
shares issued to Mr. Maller pursuant to the Advisory Agreement are subject to
certain piggyback and demand registration rights. In 1995, Vision Twenty-One
also entered into a five-year services agreement with the BSM Consulting Group
("BSM"), a consulting company of which Mr. Maller is an employee and the sole
owner (the "BSM Services Agreement"), pursuant to which BSM agreed to provide
substantial consulting services to assist Vision Twenty-One with its
operational and management development. These agreements were terminated
effective November 23, 1999 with full vesting of any remaining restricted
shares. Payments earned by BSM under the BSM Services Agreement were
approximately $600,000, $720,000 and $420,000 in the years ended December 31,
1997, 1998 and 1999, respectively.
Vision Twenty-One entered into an agreement with BSM effective November
23, 1999. This agreement contracted with Mr. Maller through BSM to be Chairman
of the Board of Vision Twenty-One and to assume overall control of the
operations of the Company. The fees payable under this agreement are up to
$6,250 per week, plus expenses. The use of any other BSM services other than
Mr. Maller's time would be billed at customary rates less a 20% discount.
Additionally, Mr. Maller was awarded, on behalf of BSM, an additional 100,000
stock options in February 2000 to purchase Vision Twenty-One common stock that
vest on the earlier of (i) pro rata over the four quarters of fiscal 2000 or
(ii) upon the consummation of the Merger. The strike price would be based on
the 5 day average closing price prior to the date of grant.
In May 1999, Bruce Maller, a director of Vision Twenty-One, was granted
options to purchase 100,000 shares of Vision Twenty-One common stock at an
exercise price of $3.44 per share.
139
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF VISION TWENTY-ONE
COMMON STOCK AND OPTICARE COMMON STOCK
GENERAL
This section of the Joint Proxy Statement/Prospectus describes certain
differences between the rights of holders of Vision Twenty-One common stock and
OptiCare common stock. While we believe that the description covers the
material differences between the two, this summary may not contain all of the
information that is important to you. The identification of specific
differences is not meant to indicate that other equally or more significant
differences do not exist. You should carefully read this entire document and
the other documents we refer to for a more complete understanding of the
differences between being a stockholder of Vision Twenty-One and being a
stockholder of OptiCare.
OptiCare is a Delaware corporation subject to the provisions of the
Delaware General Corporation Law (the "Delaware General Corporation Law") and
Vision Twenty-One is a Florida corporation subject to provisions of the Florida
Business Corporation Act (the "Florida Business Corporation Act" or "FBCA").
Upon consummation of the Merger, stockholders of Vision Twenty-One who are
currently governed by Florida law, the FBCA, the Articles of Incorporation of
Vision Twenty-One (the "Vision Twenty-One Articles") and the by-laws of Vision
Twenty-One (the "Vision Twenty-One By-Laws") will become stockholders of
OptiCare and their rights as stockholders of OptiCare will be governed by the
Certificate of Incorporation of OptiCare (the "OptiCare Certificate"), the
Bylaws of OptiCare (the "OptiCare Bylaws"), the Delaware General Corporation
Law and Delaware law.
AUTHORIZED CAPITAL STOCK
OptiCare. The authorized capital stock of OptiCare consists of 50,000,000
shares of common stock (the "OptiCare Common Stock") and 5,000,000 shares of
preferred stock (the "OptiCare Preferred Stock"). As of the Record Date, there
were shares of OptiCare common stock outstanding.
Vision Twenty-One. The authorized capital stock of Vision Twenty-One
consists of 50,000,000 shares of common stock (the "Vision Twenty-One Common
Stock") and 10,000,000 shares of Preferred Stock (the "Vision Twenty-One
Preferred Stock"). As of the Record Date there were shares of Vision
Twenty-One common stock outstanding.
DIVIDENDS AND OTHER DISTRIBUTIONS
OptiCare. Under the Delaware General Corporation Law, OptiCare may, unless
otherwise restricted by the OptiCare Certificate, pay dividends in cash,
property or shares of capital stock out of surplus or, if no surplus exists,
out of net profits for the fiscal year in which declared or out of net profits
for the preceding fiscal year (provided that such payment will not reduce
capital below the amount of capital represented by classes of stock having
preference upon distribution of assets). The OptiCare Certificate does not
currently restrict the payment of dividends, and holders of OptiCare common
stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors in its absolute
discretion, subject to the payment of or dividends on OptiCare Preferred Stock.
The OptiCare Bylaws authorizes the OptiCare board to declare dividends on
OptiCare Preferred Stock. The OptiCare Bylaws authorizes the OptiCare board to
declare dividends on the capital stock at any regular or special meeting.
Before payment of such dividend, the OptiCare board must set aside a reserve
the OptiCare board deems proper to meet contingencies related to the payment of
such dividends.
Vision Twenty-One. The FBCA permits a corporation's board of directors to
make distributions to its stockholders so long as the corporation is not left
unable to pay its debts as they become due in the ordinary course of business,
or the corporation is not left with total assets that are less than the sum of
the corporation's total liabilities plus its obligations upon dissolution to
satisfy preferred stockholders whose preferential rights are superior to those
receiving the distribution. Under the
140
<PAGE>
FBCA, a corporation's redemption of its own capital stock is deemed to be a
distribution. The Vision Twenty-One Bylaws provide that the Vision Twenty-One
Board may from time to time declare and pay dividends on its outstanding shares
in cash, property, or its own shares pursuant to law and subject to provisions
of the Vision Twenty-One Articles. See "Summary of the Joint Proxy
Statement/Prospectus -- Dividend Policy."
DIRECTOR VACANCIES AND REMOVAL OF DIRECTORS
OptiCare. Pursuant to the Delaware General Corporation Law, any director
or the entire OptiCare board may be removed with or without cause by the
affirmative vote of a majority of the outstanding shares of OptiCare capital
stock entitled to vote in the election of directors. Under the OptiCare Bylaws,
any director may be removed, with or without cause, by the holders of a
majority of shares then entitled to vote at an election of directors; provided
that, if the OptiCare board is elected by class or classes or series thereof,
then the stockholders may remove the director only for cause. The OptiCare
Bylaws provide that any vacancy occurring on the OptiCare board may be filled
by the vote of a majority of directors remaining in office at the time of the
vacancy, even if less than a quorum. The successors may serve the remaining
terms of the replaced directors.
Vision Twenty-One. The FBCA entitles stockholders to remove directors
either for cause or without cause, unless the articles of incorporation provide
that removal may be for cause only. The Vision Twenty-One Articles provide that
a director may be removed only for cause by an affirmative vote of the holders
of a majority of the then outstanding shares of voting stock. The FBCA provides
that, unless the articles provide otherwise, vacancies arising on the board of
directors may be filled by a majority of the remaining directors, even if no
quorum remains, or by the stockholders. When directors are divided into
classes, vacancies may be filled by the stockholders or, if at least one
director remains in the class, by the remaining directors of that class. Where
a vacancy will be known to occur at some point in the future, it may be filled
in advance, although the new director will not take office until the vacancy
actually occurs. The Vision Twenty-One Bylaws provide that any vacancies on the
Vision Twenty-One Board that result from an increase in the number of directors
may be filled by the affirmative vote of a majority of the Board then in office
provided that a quorum is present. The Vision Twenty-One Bylaws also provide
that any other vacancies on the Vision Twenty-One Board may be filled by the
affirmative vote of a majority of the remaining directors though less than a
quorum. Directors elected to fill a vacancy are elected for the unexpired term
of his predecessor in office, or until the next election of one or more
directors by stockholders if the vacancy is caused by an increase in the number
of directors.
DUTIES OF DIRECTORS
OptiCare. The Delaware General Corporation Law does not contain a specific
provision elaborating on the duties of a board of directors with respect to the
best interests of the corporation. The scope of the fiduciary duties of the
Board of Directors of OptiCare is thus determined by the courts of Delaware. In
connection with business combination transactions, Delaware courts have
permitted directors to consider various constituencies provided that there be
some rationally related benefit to the stockholders.
Vision Twenty One. The FBCA imposes duties of care and loyalty on the
Board of Directors with respect to the best interests of the corporation.
Section 607.0830(1) provides that a director is required to exercise his or her
duties:
o In good faith;
o Under the care an ordinarily prudent person in a like position would
exercise under similar circumstances; and
o In a manner he or she reasonably believes to be in the best interests
of the corporation.
MEETINGS OF STOCKHOLDERS
OptiCare. Pursuant to the OptiCare Bylaws, a special meeting of the
stockholders may be called by the Chairman of the Board, the President, by the
OptiCare board, by written order of a majority
141
<PAGE>
of the OptiCare board or at the written request of stockholders owning a
majority of OptiCare common stock issued and outstanding and entitled to vote.
Special meetings of the holders of outstanding OptiCare Preferred Stock may be
called in the manner and for the purposes provided in the OptiCare board
resolutions providing for issue of the preferred stock. Under the OptiCare
Bylaws, the holders of stock having a majority of voting power entitled to vote
at any stockholders' meeting shall constitute a quorum at any meeting of
stockholders for the transaction of business.
Vision Twenty-One. Under the FBCA, a special meeting of stockholders may
be called by a corporation's board of directors or any other person authorized
to do so in the articles of incorporation or bylaws. Special meetings may also
be called on demand of at least 10% of all shares eligible to vote on the
matter to be considered, although this percentage may be increased in the
articles of incorporation to a maximum of 50%. The Vision Twenty-One Articles
provide that no business may be brought up by a stockholder at such meeting
except in accordance with certain provisions set forth in the Vision Twenty-One
Articles. Such provisions require a minimum amount of notice to the Company of
any such business and certain disclosures relating to the business intended to
be brought up.
STOCKHOLDER ACTION WITHOUT A MEETING
OptiCare. Under the OptiCare Bylaws, and according to Delaware General
Corporation law, any action which may be taken by the OptiCare stockholders at
any annual or special meeting of stockholders may be taken without a meeting
and without prior notice if a consent in writing, setting forth the action to
be so taken, is signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at meeting at which all shares entitled to vote were present and voted.
Vision Twenty-One. The FBCA provides that unless otherwise provided in the
articles of incorporation, actions which would be required or permitted to be
taken at an annual or special meeting of stockholders may be taken by the
written consent of the holders of shares constituting not less than the minimum
number of shares that would be necessary to take such action at a meeting of
stockholders. The Vision Twenty-One Articles do not contain any provision which
would modify the statutory provisions.
AMENDMENT OF CORPORATE CHARTER AND BYLAWS
OptiCare. Under the Delaware General Corporation Law, an amendment to the
certificate of incorporation generally requires the recommendation of the board
of directors, the approval of a majority of all shares entitled to vote
thereon, voting together as a single class, and the majority of the outstanding
stock of each class entitled to vote thereon as a class. Under the OptiCare
Certificate, the corporation may adopt, repeal, rescind, alter or amend the
OptiCare Certificate in accordance with the Delaware General Corporation Law.
Under the Delaware General Corporation Law, a corporation's board of
directors may amend the bylaws if its certificate of incorporation contains a
provision entitling the directors to amend the bylaws. Even if the certificate
of incorporation contains such a provision, the stockholders also have the
power to amend the bylaws. The OptiCare Certificate authorizes the OptiCare
board to adopt, repeal, rescind, alter or amend in any respect the OptiCare
Bylaws.
Vision Twenty-One. Amendments to the Vision Twenty-One Articles are
governed by the FBCA, which generally requires approval by a majority of
directors and by holders of a majority of the shares entitled to vote thereon.
However, the Vision Twenty-One Articles require the affirmative vote of at
least 80% of the votes entitled to vote thereon to amend provisions related to
(i) the classified board, (ii) the method of bringing up business at
stockholders' meetings; (iii) the limitations on the liability of directors,
(iv) indemnification of officers and directors and (v) the required vote to
amend the foregoing. Under the FBCA, bylaws may be amended by the directors or
the stockholders unless the articles of incorporation expressly provide that
only stockholders may do so. Bylaws adopted by the stockholders may provide
that they may not be amended or repealed by the directors.
142
<PAGE>
The Vision Twenty-One Bylaws may be repealed or amended and new bylaws may be
adopted at any meeting of the board of directors at which a quorum is present,
by the affirmative vote of a majority of the directors present at such meeting
(provided notice of the proposed alteration, amendment or repeal is contained
in the notice of the meeting), subject to repeal or change at any meeting of
the stockholders at which a quorum is present, by the affirmative vote of
holders of a majority of the shares present at such meeting (provided notice of
the proposed alteration, amendment or repeal is contained in the notice of the
meeting).
SALE OF ASSETS, MERGER AND CONSOLIDATION
OptiCare. Under the Delaware General Corporation Law, a sale, lease or
exchange of all or substantially all of the property or assets of OptiCare
requires approval first by the OptiCare Board and then by a majority of the
outstanding stock entitled to vote thereon.
A sale of less than substantially all of the assets of OptiCare, a merger
of OptiCare with a company in which it owns 90% or more of the outstanding
capital stock or reclassification of OptiCare's securities not involving an
amendment to the OptiCare certificate would not require stockholder approval.
Subject to the provisions of Section 203 of the Delaware General Law
described below under "State Antitakeover Statutes," no vote of the stockholder
of OptiCare would be required for mergers meeting the following requirements:
o OptiCare is the surviving corporation in a merger;
o the merger agreement does not amend the OptiCare certificate of
incorporation;
o each share of stock of OptiCare outstanding immediately before the
merger will be unchanged after the merger; and
o the number of shares of OptiCare common stock to be issued in the
merger (or to be issuable upon conversion of any convertible
instruments to be issued in the merger) will not exceed 20% of the
shares of OptiCare common stock outstanding immediately before the
merger.
The OptiCare Certificate authorizes OptiCare board to sell, lease or
otherwise dispose of any part of parts of the properties of OptiCare and to
cease to conduct the business connected therewith to the extent permitted by
the Delaware General Corporation Law.
Vision Twenty-One. With regard to the sale of assets, the FBCA provides
that a corporation may sell, lease, exchange, or otherwise dispose of all, or
substantially all, of its property (with or without the good will), otherwise
than in the usual and regular course of business, on the terms and conditions
and for the consideration determined by the board of directors, if the board of
directors proposes and its stockholders of record approve the proposed
transaction by a majority of all the votes entitled to be cast on the
transaction, unless the FBCA, the articles of incorporation, or the board of
directors requires a greater vote or a vote by voting groups.
Under the FBCA, after adopting a plan of merger, the board of directors of
each corporation party to the merger shall submit the plan of merger for
approval by its stockholders. For a plan of merger to be approved:
o the board of directors must recommend the plan of merger to the
stockholders, unless the board of directors determines that it should
make no recommendation because of conflict of interest or other
special circumstances and communicates the basis for its determination
to the stockholders with the plan, and
o the stockholders entitled to vote must approve the plan by each class
entitled to vote on the plan by a majority of all the votes entitled
to be cast on the plan by that class, unless the FBCA, the articles of
incorporation, or the board of directors requires a greater vote or a
vote by classes.
143
<PAGE>
The Vision Twenty-One Articles do not contain any provisions regarding
stockholder approvals of mergers and asset sales.
APPRAISAL RIGHTS
OptiCare. The Delaware General Corporation Law provides appraisal rights
for stockholders who dissent in a merger or consolidation, subject to certain
circumstances. Where the right of appraisal is available to a stockholder
objecting to such a transaction, appraisal is his or her exclusive remedy as a
holder of such shares against such transactions.
Vision Twenty-One. Under the FBCA, a stockholder of a Florida corporation,
with certain exceptions, has the right to dissent from, and obtain payment for
the fair value of his or her shares in the event of:
o a merger or consolidation to which the corporation is a party;
o a sale or exchange of all or substantially all of the corporation's
property other than in the usual and ordinary course of business;
o the approval of a control share acquisition;
o a statutory share exchange to which the corporation is a party as the
corporation whose shares will be acquired;
o an amendment to the articles of incorporation if the stockholder is
entitled to vote on the amendment and the amendment would adversely
affect the stockholder; and
o any corporate action taken to the extent that the articles of
incorporation provide for dissenters' rights with respect to such
action.
The FBCA further provides that unless a corporation's articles of
incorporation provide otherwise, which the Vision Twenty-One Articles do not, a
stockholder does not have dissenters' rights with respect to a plan of merger,
share exchange or proposed sale or exchange of property if the shares held by
the stockholder are either registered on a national securities exchange, or
designated as a national market system on an interdealer quotation system by
the National Association of Securities Dealers, Inc., or held of record by
2,000 or more stockholders.
CONFLICT-OF-INTEREST TRANSACTIONS
OptiCare. The Delaware General Corporation Law permits transactions
involving a Delaware corporation and an interested director or officer of that
corporation so long as
o the material facts are disclosed and a majority of disinterested
directors consents;
o the material facts are disclosed and a majority of shares entitled to
vote thereon consents; or
o the transaction is fair to the corporation at the time it is
authorized by the board of directors, a committee of the board, or the
stockholders.
The OptiCare certificate of incorporation and by-laws contain no provision
on conflict-of-interest transactions.
Vision Twenty-One. Section 607.0901 of the FBCA provides that the approval
of the holder of two-thirds of the voting shares of a company, other than the
shares beneficially owned by an Interested Stockholder (as defined below),
would be required to effectuate certain transactions, including without
limitation a merger, consolidation, certain sales of assets, certain sales of
shares, liquidation or dissolution of the corporation, and reclassification of
securities involving a corporation and an Interested Stockholder (an
"Affiliated Transaction"). An "Interested Stockholder" is defined as the
beneficial owner of more than 10% of the voting shares outstanding. The
foregoing special voting requirement is in addition to the vote required by any
other provision of the FBCA or any other provisions of Vision Twenty-One's
Articles. The special voting requirement does not apply in any of the following
circumstances:
144
<PAGE>
o the Affiliated Transaction is approved by a majority of the
corporation's disinterested directors;
o the Interested Stockholder has owned at least 80% of the corporation's
voting stock for five years;
o the Interested Stockholder owns more than 90% of the corporation's
voting shares;
o the corporation has not had more than 300 stockholders of record at
any time during the three years preceding the announcement of the
event;
o the corporation is an investment company registered under the
Investment Company Act of 1940;
o all of the following conditions are met: (i) the cash and fair value
of other consideration to be paid per share to all holders of voting
shares equals the highest per share price paid by the Interested
Stockholder, (ii) the consideration to be paid in the Affiliated
Transaction is in the same form as previously paid by the Interested
Stockholder (or certain alternative benchmarks if higher), (iii)
during the portion of the three years proceeding the announcement date
that the Interested Stockholder has been an Interested Stockholder,
except as approved by a majority of the disinterested directors, there
shall have been no default in payment of any full periodic dividends,
no decrease in common stock dividends, no increase in the voting
shares owned by the Interested Stockholder, (iv) during such three
year period no benefit to the Interested Stockholder in the form of
loans, guaranties or other financial assistance or tax advantages
provided by the corporation, and (v) unless approved by a majority of
the disinterested directors, a proxy shall have been mailed to holders
of voting shares at least 25 days prior to the consummation of the
Affiliated Transaction.
This section applies to any Florida corporation unless the articles of
incorporation or bylaws contain a provision expressly electing not to be
governed by this statute. Vision Twenty-One's Articles and By-Laws do not
contain a provision electing not to be governed by the statute.
LIMITATION ON DIRECTORS' LIABILITY
OptiCare. Section 102 of the Delaware General Corporation Law allows a
corporation to limit or eliminate the personal liability of directors to the
corporation and its stockholders for monetary damages for breach of fiduciary
duty as a director. However, this provision excludes any limitation on
liability:
o for any breach of director's duty of loyalty to the corporation or its
stockholders;
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o for intentional or negligent payment of unlawful dividends or stock
purchase or redemption; or
o for any transaction from which the director derived an improper
personal benefit.
The OptiCare certificate of incorporation provides for the limitations on
director's liability to the fullest extent permitted by such Section 102.
Vision Twenty-One. The FBCA provides that a director is not personally
liable for monetary damages to the corporation or any other person for any
statement, vote, decision, or failure to act, regarding corporate management or
policy unless the director breached or failed to perform his statutory duties
as a director and such breach or failure (a) constitutes a violation of
criminal law, unless the director had reasonable cause to believe his conduct
was lawful or had no reasonable cause to believe his conduct was unlawful, (b)
constitutes a transaction from which the director derived an improper personal
benefit, (c) results in an unlawful distribution, (d) in a derivative action or
an action by a stockholder, constitutes conscious disregard for the best
interests of the corporation or willful misconduct or (e) in a proceeding other
than a derivative action or an action by a stockholder,
145
<PAGE>
constitutes recklessness or an act or omission which was committed in bad faith
or with malicious purpose or in a manner exhibiting wanton and willful
disregard of human rights, safety or property.
The Vision Twenty-One Articles provide for limitations on director
liability to the fullest extent permitted under the FBCA.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
OptiCare. Section 145 of the Delaware General Corporation Law provides
that a corporation may indemnify its officers and directors who were or are a
party to any action, suit or proceeding by reason of the fact that he or she
was a director, officer, or employee of the corporation by, among other things,
a majority vote of a quorum consisting of directors who were not parties to
such action, suit, or proceeding, provided that such officers and directors
acted in good faith and in a manner they reasonably believed to be in or not
opposed to the best interests of the corporation.
The OptiCare Bylaws authorize indemnification of directors, officers,
employees and agents of OptiCare in a manner consistent with Section 145 of the
Delaware General Corporation Law. The OptiCare Bylaws prohibit indemnification
of persons adjudged to be liable to OptiCare unless a court determines
otherwise. The OptiCare Bylaws also authorize the corporation to purchase and
maintain insurance on behalf of any director, officer, employee or agent of
OptiCare for liability incurred by such individuals in their capacity as
director, officer, employee or agent of OptiCare. See "OptiCare's Management --
Limitation of Liability and Indemnification Matters."
Vision Twenty-One. The FBCA permits a corporation to indemnify officers,
directors, employees and agents for actions taken in good faith and in a manner
they reasonably believed to be in, or not opposed to, the best interests of the
corporation, and with respect to any criminal action, which they had no
reasonable cause to believe was unlawful. The FBCA provides that a corporation
may advance reasonable expenses of defense (upon receipt of an undertaking to
reimburse the corporation if indemnification is ultimately determined not to be
appropriate) and must reimburse a successful defendant for expenses, including
attorneys' fees, actually and reasonably incurred. The FBCA also permits a
corporation to purchase liability insurance for its directors, officers,
employees and agents. The FBCA provides that indemnification may not be made
for any claim, issue or matter as to which a person has been adjudged by a
court of competent jurisdiction to be liable to the corporation, unless and
only to the extent a court determines that the person is entitled to indemnity
for such expenses as the court deems proper.
The Vision Twenty-One Articles provide for indemnification for any present
or former director or officer to the fullest extent permitted by the law.
STATE ANTI-TAKEOVER STATUTES
OptiCare. Section 203 of the Delaware General Corporation Law prohibits a
"business combination" (as defined in Section 203, generally including mergers,
sales and leases of assets, issuances of securities and similar transactions)
by a corporation or a subsidiary with an "interested stockholder" (as defined
in Section 203, generally the beneficial owner of 15% or more of a
corporation's voting stock) within 3 years after the person (or entity) becomes
an interested stockholder, unless:
o prior to the person's becoming an interested stockholder, the business
combination or the transaction by which the person became an
interested stockholder is approved by the board of directors of the
target;
o at the close of the transaction when the interested stockholder became
an interested stockholder, he/she held at least 85% of the voting
stock of the corporation; or
o after the person becomes an interested stockholder, the business
combination is approved by the corporation's board and by the holders
of at least two-thirds of the outstanding voting stock of the
corporation, excluding shares held by the interested stockholder.
146
<PAGE>
Vision Twenty-One. The FBCA contains a control share acquisition statute
which provides that a person who acquires shares in an issuing public
corporation in excess of certain specified thresholds will generally not have
any voting rights with respect to such shares unless the voting rights are
approved by a majority of the shares entitled to vote, excluding interested
shares. This statute does not apply to acquisitions of shares of a corporation
if, prior to the pertinent acquisition of shares, the acquisition is approved
by the board of directors or the corporation's articles of incorporation or
bylaws provide that the corporation shall not be governed by the statute. This
statute also permits a corporation to adopt a provision in its articles of
incorporation or bylaws providing for the redemption by the corporation of such
acquired shares in certain circumstances. Unless otherwise provided in the
corporation's articles of incorporation or bylaws prior to the pertinent
acquisition of shares, in the event that such shares are accorded full voting
rights by the stockholders of the corporation and the acquiring stockholder
acquires a majority of the voting power of the corporation, all stockholders
who did not vote in favor of according voting rights to such acquired shares
are entitled to dissenters' rights to receive the fair value of their shares as
provided in the FBCA. Vision Twenty-One's Articles and Bylaws do not contain
any provisions with respect to this statute.
CLASSIFIED BOARD
OptiCare. Although the Delaware General Corporation Law permits staggered
boards of directors, OptiCare does not maintain a staggered board of directors.
Vision Twenty-One. The FBCA permits staggered boards of directors of up to
three separate classes if authorized in the articles of incorporation. The
Vision Twenty-One Articles provide for a classified board of directors.
DESCRIPTION OF OPTICARE'S CAPITAL STOCK
GENERAL
OptiCare is authorized to issue an aggregate of 55,000,000 shares of
capital stock, consisting of 50,000,000 shares of common stock, $0.001 par
value, and 5,000,000 shares of preferred stock, $0.001 par value. As of May 1,
2000, there were 12,578,766 shares of common stock outstanding, 418,803 shares
of preferred stock outstanding and 100,000 shares of preferred stock reserved
for issuance under an outstanding warrant.
PREFERRED STOCK
OptiCare's board of directors is authorized, without further stockholder
action, to issue up to 5,000,000 shares of preferred stock in one or more
series and to fix the voting rights, liquidation preferences, dividend rights,
repurchase rights, conversion rights, preemption rights, redemption rights and
other rights and preferences of each class or series of preferred stock.
Effective August 13, 1999, OptiCare's board of directors authorized a
class of preferred stock designated as the "Series A convertible preferred
stock." The total number of authorized shares of the Series A convertible
preferred stock is 550,000, of which 418,803 are issued and outstanding, and
100,000 are reserved for issuance pursuant to an outstanding warrant. Bank
Austria is currently the sole holder of the issued and outstanding preferred
stock and of the warrant. The principal terms of the Series A convertible
preferred stock are as follows:
Dividends: Dividends and other distributions, payable in cash or other
property, shall be paid on the Series A convertible preferred
stock equally, ratably and on parity with dividends and other
distributions paid on the common stock.
Liquidation: The Series A convertible preferred stock shall be preferred
upon liquidation over the common stock.
Conversion: Each share of Series A convertible preferred stock is
convertible at any time at the option of the holder thereof into
one fully paid non-assessable share of our common
147
<PAGE>
stock with certain limitations. In addition, we may cause the
conversion of all, but not less than all, the outstanding shares
of Series A convertible preferred stock into shares of common
stock provided that the common stock to be received upon such
conversion when aggregated with all other shares of common stock
currently or previously held by or currently issuable without
restrictions to each holder, would be equal to or less than 3%
of our then outstanding common stock.
Because OptiCare's certificate of incorporation authorizes "blank check"
preferred stock, the OptiCare Board, at any time in the future, could authorize
and issue, without stockholder approval, a new class or series of preferred
stock with terms which could have the effect of protecting incumbent management
from a takeover, or could result in a change of control of us to the holders of
such new class or series of preferred stock, or a new class or series of
preferred stock could have an adverse effect upon the value of the common
stock. The issuance of any series of preferred stock could adversely affect the
rights of the holders of OptiCare common stock by restricting dividends on,
diluting the power of, or impairing the liquidation rights of common stock, or
delaying or preventing a change in control of us. OptiCare has no present plans
to issue any additional shares of preferred stock, other than upon exercise,
(if any), of the warrant held by Bank Austria to purchase up to 100,000 shares
of the Series A convertible preferred stock.
COMMON STOCK
The holders of OptiCare common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders. The
holders of OptiCare common stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the board out of
funds legally available therefor. OptiCare does not anticipate paying dividends
on OptiCare common stock in the foreseeable future. See "Summary of the Joint
Proxy Statement/Prospectus -- Dividend Policy."
In the event of a liquidation, dissolution or winding up, the holders of
OptiCare common stock are entitled to share ratably in all assets remaining
after payment of liabilities and the liquidation preference and other amounts
owed to the holders of the preferred stock. Holders of common stock have no
preemptive rights or rights to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to
the common stock. All shares of common stock are, and the shares of common
stock to be outstanding upon completion of this offering will be, fully paid
and non-assessable.
TRANSFER AGENT
The transfer agent and registrar for OptiCare's common stock is
ChaseMellon Shareholder Services, L.L.C.
LIMITATION OF LIABILITY AND INDEMNIFICATION
OptiCare's certificate of incorporation contains provisions permitted
under the Delaware General Corporation Law relating to the liability of
directors. The provisions eliminate a director's liability for monetary damages
for a breach of fiduciary duty as a director, except for liability in certain
circumstances involving wrongful acts, such as the breach of a director's duty
of loyalty or acts or omissions which involve intentional misconduct or a
knowing violation of law. Further, OptiCare's certificate of incorporation and
our bylaws contain provisions to indemnify OptiCare's directors and officers to
the fullest extent permitted by the Delaware General Corporation Law. See
"OptiCare's Management -- Limitation of Liability and Indemnification Matters."
DELAWARE ANTI-TAKEOVER STATUTE
OptiCare is subject to Section 203 of the Delaware General Corporation
law, which, subject to certain exceptions, prohibits a publicly held Delaware
corporation from engaging in any "business combination" with any "interested
stockholder" for a period of three years following the date that such
stockholder became an interested stockholder, unless:
148
<PAGE>
o prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder, the interested
stockholder;
o upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction was commenced; and
o on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting
of stockholder, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock that is not owned by
the interested stockholder.
Section 203 defines "business combination" to include:
o any merger or consolidation involving the corporation and the
interested stockholder;
o any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
o subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
o any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder;
and
o the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledged or other financial benefits provided by
or through the corporation.
In general, Section 203 defines an "interested stockholder" as an entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
149
<PAGE>
ADDITIONAL MATTERS BEING SUBMITTED TO
A VOTE OF ONLY OPTICARE'S STOCKHOLDERS
PROPOSAL 2
TO ELECT EIGHT DIRECTORS
TO THE OPTICARE BOARD
The Certificate of Incorporation and Amended and Restated By-Laws of
OptiCare provide that the number of directors which shall constitute the whole
board of directors of OptiCare shall be fixed and determined by resolution of
the Board of Directors of OptiCare (the "OptiCare Board"). Effective at the
time of the Meeting, the number of directors which shall constitute the whole
OptiCare Board shall be fixed by the OptiCare Board at eight.
Directors of OptiCare are elected annually at a meeting of stockholders.
Their respective terms of office continue until the next annual meeting of
stockholders and until their successors have been elected and qualified in
accordance with OptiCare's Bylaws. There are no family relationships among any
of the directors, or nominees or executive officers of OptiCare.
[Unless otherwise specified, each proxy received will be voted for the
election as directors of the eight nominees named below to serve until the next
annual meeting of stockholders and until their successors shall have been duly
elected and qualified. Each of the nominees has consented to be named a nominee
in this Joint Proxy Statement/Prospectus and to serve as a director if elected.
Should any nominee become unable or unwilling to accept a nomination or
election, the persons named in the enclosed proxy will vote for the election of
a nominee designated by the OptiCare Board or will vote for such lesser number
of directors as may be prescribed by the OptiCare Board in accordance with the
Amended and Restated By-Laws of OptiCare.
OptiCare is now seeking stockholder approval for the election of the
following persons as directors of OptiCare:
Dean J. Yimoyines
Steven L. Ditman
Martin E. Franklin
Ian G.H. Ashken
Allan L.M. Barker
John F. Croweak
Carl J. Schramm
[ ]
All of the nominees named above are current directors of OptiCare, other
than [ ], who is the designee of Palisade Capital Management. For information
with respect to each of the nominees named above, see "OptiCare's Management"
except with respect to [ ] whose biographical information is set forth
below.]
[Palisade Designee], [ ]
Pursuant to the Merger Agreement, OptiCare has agreed to cause up to three
designees of Vision Twenty-One, with one such designee being an independent
director (the "Vision Twenty-One Appointees"), to be appointed to the OptiCare
Board upon consummation of the Merger. Accordingly, upon consummation of the
Merger it is intended that the OptiCare Board will be expanded to accommodate
the Vision Twenty-One Appointees. The Vision Twenty-One Appointee now known is
Bruce S. Maller.
For information concerning Bruce S. Maller, see "Vision Twenty-One
Management Continuing After Merger."
In the event that the Merger is not consummated, the Vision Twenty-One
Appointees will not serve as directors of OptiCare.
150
<PAGE>
In addition, it is contemplated that the holders of [ ] to be issued by
OptiCare in connection with the $30 million financing, will also be entitled to
appoint one director to serve on the OptiCare Board. See "The Merger Agreement
and Related Agreements -- The Financing."
[THE OPTICARE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR EACH OF THE
FOLLOWING DIRECTOR NOMINEES: DEAN J. YIMOYINES, STEVEN L. DITMAN, MARTIN E.
FRANKLIN, IAN G. H. ASHKEN, ALLAN L. M. BARKER, JOHN F. CROWEAK, CARL J.
SCHRAMM AND [ ].]
PROPOSAL 3
APPROVAL OF INCREASE OF SHARES OF COMMON STOCK UNDER
PERFORMANCE STOCK PROGRAM
OptiCare's stockholders are being asked to approve an amendment to
OptiCare's Performance Stock Program (the "Program"), that will increase the
maximum number of shares of common stock available for issuance by 2,000,000
shares, while maintaining the Program's existing percentage limitation. The
Program, as amended, will provide for the issuance of awards of an aggregate
maximum of up to the lesser of:
(a) 5,000,000 shares of common stock of OptiCare, or
(b) 15% of the sum of
(1) the number of shares outstanding at the time the limitation in
this clause (b) is calculated,
(2) the number of shares subject to options and performance shares
then outstanding, and
(3) the number of shares then available for future awards under the
Program.
No single individual may receive awards for more than 200,000 shares in
any subsequent calendar year.
The Performance Stock Program was adopted by the OptiCare Board on May 14,
1999, and approved by the OptiCare stockholders on August 13, 1999. The
amendment to the Program that is the subject of this Proposal was adopted by
the Board on May 9, 2000, subject to stockholder approval.
The proposed share increase will assure that a sufficient reserve of
OptiCare common stock is available under the Program to attract and retain the
services of employees, including the employees of Vision Twenty-One upon
consummation of the Merger, which is essential to OptiCare's long-term growth
and success. The limit on the annual share reserve increase is intended to
allow OptiCare to grant incentive stock options under the Federal tax rules
based on the increase.
The following is a summary of the principal features of the Program as
amended. The summary, however, does not purport to be a complete description of
all the provisions of the Program. Any OptiCare stockholder who wishes to
obtain a copy of the actual plan document may do so upon written request to the
Corporate Secretary at OptiCare's principal executive offices in Waterbury,
Connecticut.
GENERAL
Awards may be comprised of incentive stock options, nonqualified stock
options, restricted stock, performance shares or cash units, each as described
below.
The number of persons currently eligible for awards is approximately 925.
Authorized but previously unissued shares, treasury shares and shares forfeited
under the Program may be issued again under the Program up to the maximum
aggregate limit.
The Program provides for administration by either the compensation
committee, the board of directors or another committee appointed by the board
of directors to administer the Program (the
151
<PAGE>
"committee"). At this time, the stock plan committee administers the Program.
The committee has the general authority to interpret the provisions of the
Program and adopt such rules as it deems necessary or desirable for the
administration of the Program. The committee also handles the selection of
employees, consultants and other service providers who will participate in the
Program, and the determination of the size and terms of awards made under the
Program.
The Program will terminate upon adoption by the board of directors of a
resolution terminating the Program, or upon the award and vesting of the
maximum aggregate number of shares of common stock available under the Program.
NON-QUALIFIED AND INCENTIVE STOCK OPTIONS
The stock plan committee may designate options as either non-qualified
stock options (i.e., options not entitled to special tax benefits under the
Internal Revenue Code) or incentive stock options pursuant to Section 422 of
the Code. Incentive stock options may only be issued to employees and must be
issued at an option price no less than the fair market value of our common
stock on the date of the grant (and 110% of fair market value in the case of
10% stockholders). Subject to the foregoing, the price of the shares subject to
each option is set by the committee.
The exercise of options granted under the Program is subject to terms and
conditions set by the committee and set in the agreement evidencing each
option. The purchase price for the shares acquired upon exercise of the option
may be paid (a) in cash or by certified check, or (b) at the discretion of the
committee, by delivery of one or more stock certificates evidencing other
shares of our common stock with a fair market value equal to the option price,
or (c) by a combination of cash and common stock as described in clauses (a)
and (b).
The committee sets the expiration date of each option, but in the case of
incentive stock options, the expiration date may not be longer than ten years
from the date of the grant (or five years in the case of 10% stockholders).
All incentive stock options will terminate on the earlier of the
expiration date or one year following termination of employment due to
disability or death. Upon termination of employment for any reason other than
disability or death, all options will expire on the earlier of their expiration
date or ninety days following termination of employment, unless otherwise
provided in an applicable agreement or instrument. Non-qualified stock options
may be subject to the same provisions with respect to termination, or may
contain such other provisions as the committee determines.
Options are not transferable or assignable other than by will or the laws
of descent and distribution and are exercisable during the participant's
lifetime only by the participant, except that the committee may, in its sole
discretion, allow for transfers of awards (other than incentive stock options)
to other persons or entities.
RESTRICTED STOCK
An award of a share of restricted stock is an award to a participant of a
share of common stock generally conditioned upon the attainment of performance
goals established by the compensation committee for the performance period to
which the award relates and the continued employment or retention as a service
provider of the participant with us or any of our majority-owned subsidiaries
through the end of the performance period. During the performance period, the
participant has all of the rights of a stockholder, including the right to
receive dividends, except that the participant shall not have custody of the
shares of common stock nor the right to transfer ownership of the shares during
the performance period.
Generally, a participant's termination of employment or provision of
services to us prior to the end of the relevant performance period results in
forfeiture of an award of restricted stock, although the compensation committee
is authorized to determine that all or any portion of the award shall not be
forfeited. If a portion of a restricted stock award is forfeited, the
non-forfeited portion is reduced by the amount of any dividends previously paid
to the participant with respect to the forfeited portion.
152
<PAGE>
PERFORMANCE SHARES OR CASH UNITS
The committee may establish performance programs and grant awards of
performance shares or cash units pursuant to such programs. The committee will
establish performance goals and a schedule relating to such goals to determine
the performance awards to be granted to participants. At the completion of a
performance award period, the committee shall determine the award to be made to
each participant by multiplying the number of performance units granted to each
participant by a performance factor representing the degree of attainment of
the performance goals. Performance shares shall generally be paid in the form
of common stock, and cash units shall be paid in cash, provided that the
committee may pay performance shares in the form of cash at the request of a
participant.
THE EFFECT OF A CHANGE IN CONTROL
In the event of a change in control of OptiCare, as defined in the
Program, all awards will become fully vested and all options will become
immediately exercisable if the compensation committee so provides, if an award
so provides or if an employment agreement with a recipient of an award so
provides.
NEW PLAN BENEFITS
The grant of options under the Program is entirely within the discretion
of the committee. OptiCare cannot forecast the extent of option grants that
will be made in the future. As of May 1, 2000, options had been exercised
pursuant to the Program, options to purchase 1,301,192 shares were outstanding,
and 912,376 shares remained available for future grants. On August 13, 1999, an
aggregate of approximately 630,737 options (the "Substitution Options") were
granted to option holders of OptiCare Eye Health Centers and PrimeVision Health
in substitution for such options, which contained substantially identical terms
as the options substituted therefor, except for a change in the exercise price
and the number of shares for which options can be exercised to reflect the
mergers.
Information with respect to compensation paid and other benefits,
including options, granted in respect of the 1999 year to the Chief Executive
Officer and the Executive Officer Group is set forth below. Also see,
"OptiCare's Management." During 1999, excluding any Substitution Options,
325,000 stock options were awarded to OptiCare's Chief Executive Officer and
the other named executive officers. In 1999, excluding any Substitution
Options, 545,000 stock options under the Program were granted to all current
executive officers as a group and approximately 176,250 stock options were
granted to 16 employees and consultants, including all current officers who are
not executive officers. To date, stock options have been granted at exercise
prices which range from $2.56 per share to $63.73 per share.
In connection with the Merger, OptiCare has agreed to assume each
outstanding option to purchase shares (as disclosed to OptiCare) of Vision
Twenty-One common stock. At this time, in connection with the assumption of
such Vision Twenty-One options, OptiCare anticipates granting approximately
[ ] options to the former holders of Vision Twenty-One options under the
Program.
FEDERAL INCOME TAX CONSEQUENCES
Non-Qualified Stock Options.
o Holders of non-qualified stock options do not realize income as a
result of the grant of the non-qualified stock options, but normally
realize compensation income taxable at ordinary income rates upon the
exercise of a non-qualified stock option, to the extent that the fair
market value of the shares on the date of the exercise of the
non-qualified stock options exceeds the option exercise price paid.
153
<PAGE>
o In the case of an optionee subject to Section 16(b) of the Exchange
Act who has held non-qualified stock options for less than six months
and exercises such non-qualified stock options, the ordinary income
portion generally would be calculated using the fair market value of
the shares upon the lapse of the six-month period from the date of
grant of such non-qualified stock options rather than the fair market
value on the date of exercise, unless the optionee elects to recognize
income immediately upon exercise in accordance with Section 83 (b) of
the Code.
o OptiCare will be entitled to a tax deduction in an amount equal to the
amount that the optionee is required to include in ordinary income at
the time of such inclusion and will be required to withhold taxes on
such ordinary income.
o The optionee's initial tax basis for shares acquired upon the exercise
of a non-qualified stock option will be the option exercise price paid
plus the amount of ordinary income realized by the optionee. Any
appreciation in the value of such shares subsequent to the date such
ordinary income is recognized will qualify for long-term capital gains
treatment if held for more than 12 months.
Incentive Stock Options.
o Holders of incentive stock options will not be considered to have
received taxable income upon either the grant of an incentive stock
option or its exercise.
o Upon the sale or other taxable disposition of the shares of the common
stock so acquired, long-term capital gain normally will be recognized
in the full amount of the difference between the amount realized upon
such disposition and the option exercise price if no disposition of
the shares has taken place within either (a) two years from the date
of grant of the incentive stock option or (b) one year from the date
of transfer of the shares of the common stock to the optionee upon
exercise.
o If the shares of the common stock are sold or otherwise disposed of
before the end of the one-year or two-year periods, the difference
between the incentive stock option exercise price and the fair market
value of the shares of the common stock on the date of exercise of the
incentive stock option will be taxed as ordinary income; the balance
of the gain, if any, will be taxed as capital gain.
o If an optionee disposes of shares of the common stock before the
expiration of the one-year or two-year periods and the amount realized
is less than the fair market value of the shares at the date of
exercise, the optionee's ordinary income is limited to the amount
realized reduced by the option exercise price paid.
o OptiCare will be entitled to a tax deduction in regard to an incentive
stock option only to the extent the optionee has ordinary income upon
sale or other disposition of the shares of the common stock.
o If an optionee transfers shares of common stock acquired upon the
exercise of an incentive stock option to acquire other shares of the
common stock in connection with the exercise of another incentive
stock option, the optionee will recognize income on the transaction if
the transferred shares have not been held for the required holding
periods.
o The difference between the fair market value of the common stock on
the exercise date and the exercise price of an incentive stock option
is deemed to be a "tax preference" under the alternative minimum tax
rules of the Internal Revenue Code.
Restricted Stock.
o A recipient of restricted stock will recognize as additional
compensation taxable as ordinary income for federal income tax
purposes an amount equal to the fair market value of the stock at the
time of the lapse of restrictions on the stock plus the amount of any
dividends or other
154
<PAGE>
distributions not previously received and recognized as additional
compensation with respect to such stock, unless the recipient makes an
election to include such award in ordinary income at the time of
award.
o Unless such an election is made, a recipient subject to Section 16(b)
of the Exchange Act (i.e., officers, directors, and 10% stockholders
of OptiCare) who receives restricted stock will recognize ordinary
income at the later of the time of the lapse of restrictions or six
months after the date of the award.
o When a participant disposes of shares of common stock acquired under
the Program, any amount received in excess of the value of the shares
of common stock on which the participant was previously taxed will be
treated as long-term or short-term capital gain, depending upon the
holding period of the shares. If the amount received is less than that
value, the loss will be treated as long-term or short-term capital
loss, depending upon the holding period of the shares.
o OptiCare is entitled to claim a federal income tax deduction in the
same amount and at the same time as the recipient recognizes ordinary
income.
Performance Shares and Cash Units.
o A participant who receives a performance share or cash unit will
recognize ordinary compensation income when paid the performance share
(in an amount equal to the fair market value of the share when paid,
subject to the special six month rule for recipients subject to
Section 16(b) of the Exchange Act) or cash.
o Participants who elect to have performance shares or cash units
deferred in a performance share account will delay taxability until
amounts are paid with respect to such accounts.
o OptiCare will recognize a deduction when participants recognize
ordinary income. The amount of the combined company's deductions will
equal the amount of income recognized by the participants.
o When a participant disposes of shares of common stock acquired as a
performance share, or attributable to a performance share account, any
amount received in excess of the value of the shares of common stock
on which the participant was previously taxed will be treated as
long-term or short-term capital gain, depending upon the holding
period of the shares. If the amount received is less than that value,
the loss will be treated as long-term or short-term capital loss,
depending upon the holding period of the shares.
The OptiCare Board believes that it is in the best interests of OptiCare
to increase the shares authorized for issuance under its comprehensive equity
incentive program, which will provide a meaningful opportunity for officers,
employees and non-employee OptiCare Board members to acquire a substantial
proprietary interest in the enterprise and thereby encourage such individuals
to remain in OptiCare's service and more closely align their interests with
those of the stockholders.
THE OPTICARE BOARD RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE APPROVAL
OF THE AMENDMENT TO THE PERFORMANCE STOCK PROGRAM.
155
<PAGE>
PROPOSAL 4
RATIFICATION OF APPOINTMENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The firm of Deloitte & Touche LLP has audited the financial statements of
OptiCare for the year ended December 31, 1999. The Board of Directors desires
to continue the services of Deloitte & Touche LLP for the current year ending
December 31, 2000. Accordingly, the Board of Directors will recommend that
OptiCare stockholders ratify the appointment by the Board of Directors of the
firm of Deloitte & Touche LLP to audit the financial statements of OptiCare for
the current fiscal year. Representatives of that firm are expected to be
present at the Meeting, shall have the opportunity to make a statement if they
desire to do so and are expected to be available to respond to appropriate
questions. In the event the stockholders do not ratify the appointment of
Deloitte & Touche LLP, the appointment will be reconsidered by the Audit
Committee and the Board of Directors.
THE OPTICARE BOARD RECOMMENDS THAT OPTICARE STOCKHOLDERS VOTE FOR THE
RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP.
EXPERTS
The consolidated financial statements of OptiCare Health Systems, Inc. and
subsidiaries as of December 31, 1999 and for the year then ended included in
this Joint Proxy Statement/Prospectus have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein and are
included in reliance upon the report of such firm given their authority as
experts in accounting and auditing.
The combined financial statements of OptiCare Eye Health Centers, Inc. and
Affiliate as of December 31, 1998 and 1997, and for each of the three years in
the period ended December 31, 1998, included in this Joint Proxy
Statement/Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and are included in
reliance upon the report of such firm given their authority as experts in
accounting and auditing.
The consolidated financial statements of PrimeVision Health, Inc. and
Subsidiaries at December 31, 1998, and for each of the two years in the period
ended December 31, 1998, included in this Joint Proxy Statement/Prospectus have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon (which contains an explanatory paragraph describing conditions
that raise substantial doubt about Prime's ability to continue as a going
concern) appearing elsewhere herein, and are included in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of Vision Twenty-One, Inc. and
Subsidiaries at December 31, 1999 and 1998, and for each of the three years in
the period ended December 31, 1999, included in this Joint Proxy
Statement/Prospectus have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon (which contains an explanatory
paragraph describing conditions that raise substantial doubt about Vision
Twenty-One, Inc's ability to continue as a going concern as described in Note
17 to the consolidated financial statements) appearing elsewhere herein, and
are included in reliance upon such report given on the authority of such firm
as experts in accounting and auditing.
CHANGES OF INDEPENDENT ACCOUNTANTS
OptiCare's board of directors formally approved the appointment of
Deloitte & Touche LLP as its independent accountants on August 30, 1999, and at
the same time, the OptiCare board determined not to engage Ernst & Young LLP as
its independent accountants for the year ending December 31, 1999. Ernst &
Young LLP audited Saratoga's consolidated financial statements as of and for the
year ended December 31, 1998. The board of directors of Saratoga formally
approved the appointment of Ernst & Young LLP, of Dallas, Texas, as its
independent accountants to audit Saratoga's consolidated financial statements
for 1998 on March 29, 1999.
156
<PAGE>
The report of Ernst & Young LLP on Saratoga's consolidated financial
statements for 1998 contained no adverse opinion or disclaimer of opinion and
was not qualified or modified as to uncertainty, audit scope or accounting
principle. In connection with Ernst & Young LLP's audit of Saratoga's financial
statements for 1998, and through March 29, 1999, Ernst & Young LLP had no
disagreements with OptiCare or Saratoga on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Ernst & Young LLP,
would have caused them to make reference to those disagreements in their report
on Saratoga's consolidated financial statements for 1998. At Saratoga's
request, Ernst & Young LLP furnished a letter addressed to the Securities and
Exchange Commission stating that it agrees with the previous statements.
LEGAL MATTERS
The validity of the shares of OptiCare common stock offered by this Joint
Proxy Statement/Prospectus in connection with the Merger will be passed upon
for OptiCare by Kane Kessler, P.C. Legal matters pertaining to federal income
tax consequences in connection with the Merger will be passed upon by Shumaker,
Loop & Kendrick, LLP.
OTHER MATTERS
ANNUAL REPORT
A copy of OptiCare's 1999 Annual Report to Stockholders was sent to
stockholders of record on March 31, 2000. Any OptiCare stockholder who has not
received a copy of OptiCare's 1999 Annual Report to Stockholders and wishes to
do so should contact OptiCare's Corporate Secretary by mail at OptiCare Health
Systems, Inc, 87 Grandview Avenue, Waterbury, CT 06708, Attn: Corporate
Secretary.
DEADLINE FOR STOCKHOLDER PROPOSALS
Any proposal of an OptiCare stockholder intended to be presented at the
annual meeting of stockholders to be held in 2001 must be received by OptiCare
no later than , 2001 to be considered for inclusion in the Proxy
Statement and form of proxy for the 2001 annual meeting. Proposals must comply
with Rule 14a-8 and other applicable rules promulgated by the Securities and
Exchange Commission pursuant to the Exchange Act. Delivery of such proposals
should be by Certified Mail, Return Receipt Requested.
OTHER MATTERS
The OptiCare Board does not know of any other matters that may be
presented at its meeting, except for routine matters. If other business does
properly come before OptiCare's meeting, however, the persons named on the
accompanying proxy intend to vote on such matters in accordance with their best
judgment.
WHERE YOU CAN FIND MORE INFORMATION
OptiCare and Vision Twenty-One file annual, quarterly and special reports,
proxy statements and other information with the Securities and Exchange
Commission. Stockholders may read and copy any reports, statements or other
information filed by OptiCare or Vision Twenty-One at the Commission's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the Commission at 1-800-SEC-0330 for further information on the
public reference rooms. OptiCare's and Vision Twenty-One's and filings with the
Commission are also available to the public from commercial document-retrieval
services and at the Web site maintained by the Commission at
http://www.sec.gov.
157
<PAGE>
OptiCare has filed a registration statement with the Commission to
register the OptiCare common stock to be issued to Vision Twenty-One
stockholders in the Merger. This Joint Proxy Statement/Prospectus is a part of
that registration statement and constitutes a proxy statement and prospectus of
OptiCare in addition to being a proxy statement of Vision Twenty-One for use at
its special meeting.
OptiCare has supplied all information contained or incorporated by
reference in this Joint Proxy Statement/Prospectus relating to OptiCare, and
Vision Twenty-One has supplied all information contained or incorporated by
reference in this Joint Proxy Statement/Prospectus relating to Vision
Twenty-One.
Stockholders can obtain any of the documents incorporated by reference
through OptiCare, Vision Twenty-One or the Commission. Documents incorporated
by reference are available from OptiCare and Vision Twenty-One without charge,
excluding all exhibits. Stockholders may obtaindocuments incorporated by
reference in this Joint Proxy Statement/Prospectus by requesting them in
writing to the following addresses or by telephone:
<TABLE>
<S> <C>
OptiCare Health Systems, Inc. Vision Twenty-One, Inc.
Investor Relations Department Investor Relations Department
87 Grandview Avenue 7360 Bryan Dairy Road
Waterbury, CT 06708 Largo, Florida 33777
(203) 596-2236 (727) 545-4300, ext. 52103
</TABLE>
If you would like to request documents, please do so by , 2000 in order
to receive them before the meetings.
OPTICARE STOCKHOLDERS SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS TO VOTE ON
THE ISSUANCE OF OPTICARE COMMON STOCK AS CONTEMPLATED BY THE MERGER AGREEMENT.
VISION TWENTY-ONE STOCKHOLDERS SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN
OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS TO VOTE
ON THE MERGER AGREEMENT AND THE MERGER. NEITHER OPTICARE NOR VISION TWENTY-ONE
HAS AUTHORIZED ANYONE TO PROVIDE INFORMATION THAT IS DIFFERENT FROM WHAT IS
CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS. STOCKHOLDERS SHOULD NOT
ASSUME THAT THE INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS
IS ACCURATE AFTER THE DATE HEREAFTER, AND NEITHER THE MAILING OF THIS JOINT
PROXY STATEMENT/PROSPECTUS TO STOCKHOLDERS NOR THE ISSUANCE OF OPTICARE COMMON
STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
158
<PAGE>
INDEX TO FINANCIAL STATEMENTS
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Pro Forma Combined Financial Statements
Introduction ............................................................................. F-2
Pro Forma Combined Balance Sheet as of December 31, 1999 (unaudited) ..................... F-3
Pro Forma Combined Income Statement for the year ended December 31, 1999
(unaudited) ............................................................................. F-4
Notes to Pro Forma Combined Financial Statements ......................................... F-6
Annual Financial Statements
Reports of Independent Auditors .......................................................... F-8
Consolidated Balance Sheets as of December 31, 1999 and 1998 ............................. F-10
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and
1997 .................................................................................... F-11
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and
1997 .................................................................................... F-12
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1999, 1998 and 1997 ........................................................ F-13
Notes to Consolidated Financial Statements ............................................... F-14
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
Annual Financial Statements
Report of Independent Auditors ........................................................... F-30
Consolidated Balance Sheets as of December 31, 1998 and 1999 ............................. F-31
Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and
1999 .................................................................................... F-32
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1997, 1998 and 1999 ........................................................ F-33
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and
1999 .................................................................................... F-34
Notes to Consolidated Financial Statements ............................................... F-35
OPTICARE EYE HEALTH CENTERS, INC. AND AFFILIATE
Interim Financial Statements
Combined Balance Sheets as of June 30, 1999 (unaudited) and December 31, 1998 ............ F-56
Combined Statements of Operations for the six months ended June 30, 1999 and 1998
(unaudited) ............................................................................. F-57
Combined Statements of Cash Flows for the six months ended June 30, 1999 and 1998
(unaudited) ............................................................................. F-58
Notes to Combined Financial Statements ................................................... F-59
Annual Financial Statements
Report of Independent Auditors ........................................................... F-60
Combined Balance Sheets as of December 31, 1998 and 1997 ................................. F-61
Combined Statements of Operations for the years ended December 31, 1998, 1997 and 1996 F-62
Combined Statements of Shareholders' Equity for the years ended December 31, 1998,
1997 and 1996 ........................................................................... F-63
Combined Statements of Cash Flows for the years ended December 31, 1998, 1997 and
1996 .................................................................................... F-64
Notes to Combined Financial Statements ................................................... F-65
</TABLE>
F-1
<PAGE>
OPTICARE HEALTH SYSTEMS, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined balance sheet as of December
31, 1999 and the pro forma combined statement of operations for the year ended
December 31, 1999 give effect to (i) the proposed Merger between OptiCare and
Vision Twenty-One, accounted for under the purchase method of accounting, (ii)
the proposed private placement of convertible preferred equity and related use
of net proceeds, as a condition to the completion of the Merger, (iii) the
renegotiated credit agreement as a condition of the Merger, (iv) substantial
completion of the disposal of Vision Twenty-One's ophthalmology and optometry
practices, which appear as a discontinued operation in Vision Twenty-One's
historical financial statements, (v) the issuance of OptiCare common stock and
related use of proceeds as a result of a registered offering completed in
January 2000, (vi) the acquisition of Cohen Systems, Inc. on October 1, 1999
and (vii) the merger with OptiCare Eye Health Centers Inc., on August 13, 1999.
The historical financial information has been derived from the respective
historical financial statements of OptiCare and Vision Twenty-One, and should
be read in conjunction with these financial statements and the related notes
contained elsewhere herein.
The unaudited pro forma combined balance sheet assumes that each of the
Merger, the convertible preferred equity private placement, renegotiated credit
facility and common stock registered offering took place as of December 31,
1999.
The unaudited pro forma combined statement of operations combines
OptiCare's and VisionTwenty-One's historical statements of operations for the
year ended December 31, 1999 and gives effect to each of the Merger,
convertible preferred equity private placement, renegotiated credit facility,
the common stock registered offering and the acquisitions of OptiCare Eye
Health Centers, Inc. and Cohen Systems, Inc. (such acquisitions being referred
to herein as the "1999 Acquisitions") as if they had each occurred on January
1, 1999.
Pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
total estimated purchase cost of Vision Twenty-One has been allocated on a
preliminary basis to the assets and liabilities based on management's estimates
of their fair value with the excess cost over the net assets acquired allocated
to goodwill. Subsequent to closing, the assets purchased and liabilities
assumed will be fair valued and the necessary studies completed to ascribe
values to assets and identifiable intangibles, if any.
The unaudited pro forma combined information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the transactions had been
consummated at the dates indicated, nor is it necessarily indicative of future
operating results or financial position of the combined company.
F-2
<PAGE>
OPTICARE HEALTH SYSTEMS, INC.
PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
STOCK OFFERING
OPTICARE PRO FORMA OPTICARE
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------------ -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................ $ 2,921 $ -- $ 2,921
Accounts receivable, net ................. 10,557 -- 10,557
Inventories .............................. 3,029 -- 3,029
Discontinued operations .................. -- -- --
Other current assets ..................... 4,838 -- 4,838
-------- ----------- --------
TOTAL CURRENT ASSETS .................... 21,345 -- 21,345
-------- ----------- --------
Property and equipment, net .............. 9,679 -- 9,679
Intangible assets, net ................... 32,443 -- 32,443
Discontinued operations .................. -- -- --
Deferred taxes ........................... 951 -- 951
Other assets ............................. 2,322 -- 2,322
-------- ----------- --------
TOTAL ASSETS ........................... $ 66,740 $ -- $ 66,740
======== =========== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ......................... $ 7,619 $ -- $ 7,619
Accrued expenses and other ............... 9,576 -- 9,576
Current portion of long-term debt ........ 3,459 -- 3,459
Discontinued Operations .................. -- -- --
-------- ----------- --------
TOTAL CURRENT LIABILITIES .............. 20,654 -- 20,654
-------- ----------- --------
Long-term debt, less current portion ..... 39,689 (11,966)(a) 27,723
Discontinued operations .................. -- -- --
Other liabilities ........................ 1,123 -- 1,123
-------- ----------- --------
TOTAL LIABILITIES ...................... 61,466 (11,966) 49,500
Minority Interest ........................ -- -- --
STOCKHOLDERS' EQUITY (DEFICIT) ........... 5,274 11,966 (a) 17,240
-------- ----------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) .......... $ 66,740 $ -- $ 66,740
======== =========== ========
<CAPTION>
VISION MERGER
TWENTY-ONE PRO FORMA COMBINED
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------------ ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................ $ 5,032 $ -- $ 7,953
Accounts receivable, net ................. 2,663 -- 13,220
Inventories .............................. -- -- 3,029
Discontinued operations .................. 20,103 (20,103)(b) --
Other current assets ..................... 1,405 2,344 (c) 8,587
-------- ----------- ---------
TOTAL CURRENT ASSETS .................... 29,203 (17,759) 32,789
-------- ----------- ---------
Property and equipment, net .............. 5,132 -- 14,811
Intangible assets, net ................... 47,704 14,487 (c) 94,634
Discontinued operations .................. 2,135 (2,135)(b) --
Deferred taxes ........................... -- 14,899 (c) 15,850
Other assets ............................. 705 -- 3,027
-------- ----------- ---------
TOTAL ASSETS ........................... $ 84,879 $ 9,492 $ 161,111
======== =========== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ......................... $ 5,687 $ -- $ 13,306
Accrued expenses and other ............... 11,800 2,500 (c) 13,894
(9,982)(b)
Current portion of long-term debt ........ 62,167 (27,000)(d) 4,990
(33,636)(e)
Discontinued Operations .................. 6,657 (6,657)(b) --
-------- ----------- ---------
TOTAL CURRENT LIABILITIES .............. 86,311 (74,775) 32,190
-------- ----------- ---------
Long-term debt, less current portion ..... 113 33,636 (e) 61,472
Discontinued operations .................. 599 (599)(b) --
Other liabilities ........................ 196 -- 1,319
-------- ----------- ---------
TOTAL LIABILITIES ...................... 87,219 (41,738) 94,981
Minority Interest ........................ 410 -- 410
STOCKHOLDERS' EQUITY (DEFICIT) ........... (2,750) 29,230 (c) 65,720
27,000 (d)
(5,000)(b)
-------- ----------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) .......... $ 84,879 $ 9,492 $ 161,111
======== =========== =========
</TABLE>
F-3
<PAGE>
OPTICARE HEALTH SYSTEMS, INC.
PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OPTICARE VISION
PRO FORMA TWENTY-ONE PRO FORMA COMBINED
(FROM F-5) HISTORICAL ADJUSTMENTS PRO FORMA
-------------- -------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
NET REVENUES:
Laser correction and professional services ......... $ 8,335 $ 12,508 $ -- $ 20,843
Managed care services .............................. 31,153 56,744 -- 87,897
Other integrated services .......................... 90,136 19,151 (19,151)(f) 90,136
----------- ---------- ------------ -------------
Total net revenues ................................. 129,624 88,403 (19,151) 198,876
OPERATING EXPENSES:
Cost of product sales .............................. 45,357 21,572 (18,261)(f) 48,668
Medical claims expense ............................. 25,007 42,444 -- 67,451
Salaries, wages and benefits ....................... 39,594 18,847 (342)(f) 58,099
Selling, general and administrative ................ 13,754 15,853 (312)(f) 29,295
Depreciation and amortization ...................... 3,871 3,047 580 (g) 7,498
Interest ........................................... 2,351 7,953 (2,599)(h) 7,156
(549)(i)
----------- ---------- ------------ -------------
Total operating expenses ......................... 129,934 109,716 (21,483) 218,167
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES .................... (310) (21,313) 2,332 (19,291)
Income tax expense (benefit) ....................... (124) -- (7,592)(j) (7,716)
----------- ---------- ------------ -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ........................................ $ (186) $ (21,313) $ 9,924 $ (11,575)
=========== ========== ============ =============
Basic loss per share (1) ........................... $ (0.01) $ (0.72)
Basic weighted average shares outstanding .......... 12,543,557 6,000,000 (k) 18,543,557 (l)
</TABLE>
- ---------
(1) The combined pro forma loss per share reflects impact of $1,800 dividend
on the new convertible preferred equity.
F-4
<PAGE>
OPTICARE HEALTH SYSTEMS, INC.
PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OPTICARE
OPTICARE 1999 PRO FORMA PRO FORMA
HISTORICAL (1) ACQUISITIONS (2) ADJUSTMENTS (TO F-4)
---------------- ------------------ -------------------- --------------
<S> <C> <C> <C> <C>
NET REVENUES:
Laser correction and professional services ......... $ 4,061 $ 4,274 $ -- $ 8,335
Managed care services .............................. 24,425 6,728 -- 31,153
Other integrated services .......................... 66,147 20,477 3,512 (m) 90,136
---------- -------- ------------ -----------
Total net revenues ................................. 94,633 31,479 3,512 129,624
OPERATING EXPENSES:
Cost of product sales .............................. 41,182 4,175 -- 45,357
Medical claims expense ............................. 19,545 5,462 -- 25,007
Salaries, wages and benefits ....................... 20,073 15,939 3,512 (m) 39,594
70 (n)
Selling, general and administrative ................ 7,932 5,822 13,754
Depreciation and amortization ...................... 2,013 1,026 832 (o) 3,871
Interest ........................................... 3,248 169 (109)(p) 2,351
(957)(q)
---------- -------- ------------ -----------
Total operating expenses ......................... 93,993 32,593 3,348 129,934
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES .................... 640 (1,114) 164 (310)
Income tax expense (benefit) ....................... 289 (206) (207)(j) (124)
---------- -------- ------------ -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS ........................................ $ 351 $ (908) $ 371 $ (186)
========== ======== ============ ===========
Basic loss per share ............................... $ (0.05) $ (0.01)
Basic weighted average shares outstanding .......... 4,776,501 4,195,627 (r) 12,543,557
3,571,429 (s)
</TABLE>
- ---------
(1) The Company acquired OptiCare Eye Health Centers, Inc. on August 13, 1999
and Cohen Systems, Inc. on October 1, 1999, which were accounted for as
purchases. Accordingly, the results of operations of OptiCare Eye Health
Centers, Inc. and Cohen Systems, Inc. are included in the historical
results of operations since September 1, 1999 and October 1, 1999,
respectively, the deemed effective dates of the acquisitions for
accounting purposes.
(2) Represents the results of operations of OptiCare Eye Health Centers, Inc.
and Cohen Systems, Inc. from January 1, 1999 through their respective
purchase dates, in order to include a full year of operating results in
the pro forma statement of operations.
F-5
<PAGE>
OPTICARE HEALTH SYSTEMS, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
(a) Adjustment represents issuance of 3,571,429 shares of OptiCare
common stock and related use of net proceeds of $11,966, as a result
of the registered offering completed in January 2000, to reduce
long-term debt.
(b) Adjustment represents the disposal of Vision Twenty-One corporate
ophthalmology and optometry practices required to be completed as a
condition to the Merger. The disposals will generally be
accomplished through the sale of the practice assets back to the
physicians or their affiliates. The amounts are based upon completed
transactions and ongoing negotiations.
<TABLE>
<S> <C>
Cash to be received and used to pay accrued expenses ......... $ 9,982
Treasury stock to be acquired ................................ 5,000
-------
Total consideration .......................................... $14,982
=======
</TABLE>
(c) Adjustment to reflect the purchase of Vision Twenty-One via the
issuance of 6,000,000 shares of OptiCare's common stock with a fair
value of $21,480. The fair value of OptiCare's common stock issued
is based on the average closing price of OptiCare common stock on
February 10, 2000 (the day the merger was announced) and the three
days prior and subsequent to such date or $3.58 per share.
<TABLE>
<S> <C>
Common equity issued by OptiCare ........................ $21,480
Estimated fair value of net liabilities assumed ......... 7,750
-------
29,230
Estimated merger costs .................................. 2,500
-------
Excess .................................................. $31,730
=======
</TABLE>
The allocation of the excess is as follows:
<TABLE>
<S> <C>
Goodwill ..................................................... $14,487
Elimination of the valuation allowance related to
Vision Twenty-One's current deferred tax asset ............. 2,344
Elimination of the valuation allowance related to
Vision Twenty-One's non-current deferred tax asset ......... 14,899
-------
$31,730
=======
</TABLE>
In assessing the realizability of deferred tax assets of the combined
company, management considered whether it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. Management considered the scheduled reversal of deferred
tax assets, the availability of federal income tax carrybacks and
projected future taxable income. Based upon the combined company's
expected taxable profits, management's estimates of the combined
company's revenue growth and the anticipated efficiencies from the
combination, management believes it is more likely than not that
following the completion of the mergers, a portion of the combined
company's deferred tax assets will be realized. Accordingly, a
portion of the valuation allowances have been reversed, however, the
valuation allowance related to net operating losses of Vision
Twenty-One has not been reversed. Management will continue to review
the realizability of the deferred tax assets and assess the need for
a valuation allowance.
(d) Adjustment to reflect the issuance of $30,000 of convertible
preferred equity as a condition to the completion of the Merger. The
$27,000 proceeds from the sale of the convertible preferred equity,
net of $3,000 of issuance costs, will be used by OptiCare to pay
down senior bank debt.
F-6
<PAGE>
(e) Adjustment to reflect classification of bank debt as long-term based
on renegotiated terms of bank debt required as a condition to the
Merger.
(f) Adjustment to remove operating results of the Block Buying Group,
which was sold in August 1999.
(g) Adjustment to reflect amortization of goodwill recorded on the
purchase of Vision Twenty-One referenced in note (c) over an
estimated useful life of 25 years.
(h) Adjustment to reflect reduction in interest expense as a result of
the $27,000 paydown of long-term bank debt, with an average interest
rate of 9.625%, from the proceeds received in the preferred equity
private placement.
(i) Adjustment to reflect reduction in interest expense based upon
$33,761 of bank indebtedness using Opticare's 1999 average interest
rate of approximately 8%, based on the renegotiated credit facility,
instead of Vision Twenty-One's average historic rate of
approximately 9.625%.
(j) Adjustment to reflect estimated tax expense (benefit) at the
statutory rate of 40%.
(k) Adjustment to reflect issuance of the estimated number of shares of
OptiCare common stock to effect the Merger.
(l) Reconciliation of pro forma shares is as follows:
<TABLE>
<S> <C>
Opticare historical common stock outstanding as of
December 31, 1999 ................................... 8,972,128
Common stock issued as a result of private placement in
January 2000 ........................................ 3,571,429
Common stock issued to effect Merger .................. 6,000,000
---------
Total pro forma common shares outstanding ............. 18,543,557
==========
</TABLE>
(m) Adjustment to reflect the consolidation of optometric practice
revenues and physician compensation according to EITF 97-2 as a
result of the new administrative services agreement entered into in
connection with the PrimeVision Health and OptiCare Eye Health
Centers merger on August 13, 1999. Amount represents the optometric
practice revenues and physician compensation from January 1, 1999
through August 31, 1999.
(n) Represents amortization of prepaid compensation, recorded in
connection with the PrimeVision Health and OptiCare Eye Health
Centers mergers, for the period January 1, 1999 through August 31,
1999.
(o) Represents amortization of intangibles recorded in connection with
the 1999 Acquisitions for the period January 1, 1999 through the
respective purchase dates.
(p) Adjustment to reflect net reduction in interest expense associated
with the new credit facility negotiated with Bank Austria and other
financing transactions as a result of the PrimeVision Health and
OptiCare Eye Health Centers mergers.
(q) Adjustment to reflect reduction in interest expense associated with
the $11,966 reduction in long-term debt, as a result of the common
stock registered offering in January 2000, using OptiCare's 1999
average interest rate of approximately 8%.
(r) Adjustment to reflect issuance of OptiCare common stock related to
the 1999 acquisitions.
(s) Adjustment to reflect issuance of OptiCare common stock associated
with the registered offering in January 2000.
F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
OptiCare Health Systems, Inc.
Waterbury, Connecticut
We have audited the accompanying consolidated balance sheet of OptiCare
Health Systems, Inc. and subsidiaries (the "Company") as of December 31, 1999,
and the related consolidated statements of operations, cash flows and
stockholders' equity for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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
audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of OptiCare Health Systems, Inc.
and subsidiaries as of December 31, 1999, and the results of their operations
and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Hartford, Connecticut
March 24, 2000
F-8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Prime Vision Health, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Prime Vision
Health, Inc. and subsidiaries as of December 31, 1998 and the related
consolidated statements of operations, shareholders' (deficit) equity and cash
flows for each of the two years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Prime Vision Health, Inc. and subsidiaries as of December 31, 1998, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Prime Vision Health, Inc. and subsidiaries will continue as a going concern.
During 1998 and 1997 the Company incurred operating losses and had a working
capital deficiency at December 31, 1998. In addition, as more fully described
in Note 9, the Company was not in compliance with certain covenants of its loan
agreement with a bank at December 31, 1998. These conditions raised substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
May 7, 1999
Raleigh, NC
F-9
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 2,921 $ 5,956
Accounts receivable, net ........................................... 10,557 4,571
Inventories ........................................................ 3,029 1,360
Net current assets of discontinued operations ...................... -- 5,582
Income tax receivable .............................................. 755 1,089
Deferred income taxes, current ..................................... 2,579 1,499
Other current assets ............................................... 1,504 180
--------- ---------
Total current assets ............................................. 21,345 20,237
Property and equipment, net ......................................... 9,679 4,510
Deferred debt issuance costs, net ................................... 1,236 546
Intangible assets, net .............................................. 32,443 810
Deferred income taxes, non-current .................................. 951 123
Notes receivable from related parties, less current portion ......... 94 175
Other assets ........................................................ 992 155
--------- ---------
TOTAL ASSETS ........................................................ $ 66,740 $ 26,556
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ................................................... $ 7,619 $ 3,926
Claims payable ..................................................... 3,048 440
Accrued salaries and related expenses .............................. 2,171 3,100
Accrued expenses ................................................... 2,730 842
Interest payable ................................................... 310 1,394
Current portion of long-term debt .................................. 3,459 39,784
Current portion of capital lease obligations ....................... 110 92
Deferred income tax liability ...................................... 397 1,620
Other current liabilities .......................................... 810 --
--------- ---------
Total current liabilities ........................................ 20,654 51,198
Long-term debt, less current portion ................................ 39,689 192
Capital lease obligations, less current portion ..................... 193 202
Other liabilities ................................................... 930 454
--------- ---------
TOTAL LIABILITIES ................................................... 61,466 52,046
Commitments and contingencies (Notes 10 and 16)
Manditorily Redeemable preferred stock, $0.01 par value, 5,000,000
shares authorized, 8,000 shares issued and outstanding at
December 31, 1998 .................................................. -- 9,200
STOCKHOLDERS' EQUITY (DEFICIT):
Series A Convertible Preferred Stock, $.001 par value, 550,000
shares authorized; 418,803 and 0 shared issued and outstanding
at December 31, 1999 and 1998, respectively ........................ 1 --
Common Stock, $0.001 par value; 50,000,000 shares authorized;
8,972,128 and 2,325,125 shares outstanding at December 31, 1999
and 1998, respectively ............................................. 9 2
Additional paid-in-capital .......................................... 47,784 5,862
Accumulated deficit ................................................. (42,520) (40,554)
--------- ---------
Total stockholders' equity (deficit) ............................. 5,274 (34,690)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) .......................................................... $ 66,740 $ 26,556
========= =========
</TABLE>
See notes to consolidated financial statements
F-10
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
NET REVENUES:
Laser correction and professional services ...................... $ 4,061 $ -- $ --
Managed care services ........................................... 24,425 14,902 7,416
Other integrated services ....................................... 66,147 49,710 50,930
---------- ---------- ----------
Total net revenues ........................................... 94,633 64,612 58,346
---------- ---------- ----------
OPERATING EXPENSES:
Cost of product sales .......................................... 41,182 35,237 37,010
Medical claims expense ......................................... 19,545 10,994 4,993
Salaries, wages and benefits ................................... 20,073 9,275 9,130
Selling, general and administrative ............................ 7,932 5,996 5,196
Depreciation ................................................... 1,408 1,133 1,036
Amortization ................................................... 605 284 184
Interest ....................................................... 3,248 4,498 3,866
---------- ---------- ----------
Total operating expenses ..................................... 93,993 67,417 61,415
---------- ---------- ----------
Income (loss) from continuing operations
Before income taxes ............................................ 640 (2,805) (3,069)
Income tax expense (benefit) .................................... 289 434 (1,035)
---------- ---------- ----------
Income (loss) from continuing operations ........................ 351 (3,239) (2,034)
Discontinued Operations:
Income (loss) from discontinued operations, net of tax ......... -- (11,287) 629
(Loss) from disposal of discontinued operations, net
of tax ....................................................... (2,317) (23,564) --
---------- ---------- ----------
Net (loss) ...................................................... $ (1,966) $ (38,090) $ (1,405)
========== ========== ==========
(Loss) per common share: (Note 14)
Income (loss) from continuing operations:
Basic and diluted .............................................. $ (0.05) $ (2.54) $ (1.10)
========== ========== ==========
Net income (loss): ..............................................
Basic and diluted .............................................. $ (0.54) $ (17.99) $ (0.76)
========== ========== ==========
Weighted average common shares outstanding: .....................
Basic and diluted .............................................. 4,776,501 2,256,461 1,855,931
========== ========== ==========
</TABLE>
See notes to consolidated financial statements
F-11
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
------------ ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITES:
Net loss ......................................................... $ (1,966) $ (38,090) $ (1,405)
Less: net income (loss) from discontinued
operations ..................................................... (2,317) (34,851) 629
--------- --------- ---------
Net income (loss) from continuing operations ..................... 351 (3,239) (2,034)
Adjustments to reconcile net income (loss) from continuing
operations to net cash (used in) provided by operating
activities:
Depreciation ..................................................... 1,408 1,133 1,036
Amortization ..................................................... 605 284 184
Changes in operating assets and liabilities (excluding the effects
of acquired businesses):
Accounts receivable ............................................ 83 (480) (350)
Inventories .................................................... 222 913 611
Other current assets ........................................... 1,975 (1,808) (645)
Other assets ................................................... (1,350) 230 (49)
Accounts payable and accrued expenses .......................... (962) 3,276 4,357
Other current liabilities ...................................... (474) -- --
Other liabilities .............................................. (462) -- --
Cash provided by (used in) discontinued operations ............... (1,749) 1,899 (26,589)
--------- --------- ---------
Net cash provided by (used in) operating activities ............... (353) 2,208 (23,479)
--------- --------- ---------
INVESTING ACTIVITES:
Purchases of equipment ......................................... (1,871) (608) (1,851)
Cash acquired in mergers ....................................... 640 -- --
Cash received from discontinued operations disposals ........... 5,685
Cash used for acquisitions and related expenses ................ (5,637) -- --
--------- --------- ---------
Net cash (used in) investing activities ........................... (1,183) (608) (1,851)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from long-term bank debt .............................. 32,998 17 28,809
Proceeds from issuance of mandatorily redeemable preferred
stock ......................................................... -- 8,000 --
Payments on long-term debt ..................................... (34,173) (6,000) --
Payment of financing costs ..................................... (185) -- (300)
Payments on capital lease obligations .......................... (139) (139) (95)
--------- --------- ---------
Net cash provided by (used in) financing activities ............... (1,499) 1,878 28,414
--------- --------- ---------
Increase (decrease) in cash and cash equivalents .................. (3,035) 3,478 3,084
Cash and cash equivalents at beginning of year .................... 5,956 2,478 (606)
--------- --------- ---------
Cash and cash equivalents at end of year .......................... $ 2,921 $ 5,956 $ 2,478
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ............................................ $ 4,332 $ 3,987 $ 3,843
Cash paid for income taxes ........................................ $ 1,496 $ 2,155 $ 84
Assets of discontinued operations assumed by bank as a reduction
of debt .......................................................... $ 7,818 -- --
</TABLE>
See notes to consolidated financial statements
F-12
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS
------------------------ --------------------- PAID-IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) TOTAL
--------------- -------- ------------ -------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996 ......................... 3,966,771 $ 40 994,159 $ 1 $ 4,409 $ 234 $ 4,684
Issuance of shares of
common stock in
exchange for preferred
stock ...................... (3,966,771) (40) 502,080 (10) (50)
Purchase of minority
interest ................... 1 1
Issuance of stock warrant .... 115 115
Administrative Services
Agreement
renegotiation .............. (969) (969)
Issuance of common stock...... 674,087 1 2,169 2,170
Net loss for 1997 ............ (1,405) (1,405)
---- ------- ----- --------- --- -------- --------- ---------
Balance at December 31,
1997 ......................... -- -- 2,170,326 2 5,715 (1,171) 4,546
Issuance of stock warrant
in connection with the
issuance of redeemable
preferred stock ............ 1,293 1,293
Accretion of preferred
stock ...................... (1,293) (1,293)
Preferred stock dividends .... (1,200) (1,200)
Issuance of common stock 154,799 54 54
Net loss for 1998 ............ (38,090) (38,090)
---- ------- ----- --------- --- -------- --------- ---------
Balance at December 31,
1998 ......................... -- -- 2,325,125 2 5,862 (40,554) (34,690)
Preferred stock dividend ..... (600) (600)
Exercise of warrants ......... 69,124
Issuance of common stock
to bank as financing fees 156,900 960 960
Issuance of warrants to
bank as financing fees ..... 179 179
Issuance of preferred stock
to bank to reduce debt ..... 418,803 1 2,449 2,450
Exchange of redeemable
preferred stock ............ 638,060 1 3,799 3,800
New Administrative
Services Agreement ......... 873,903 1 5,352 5,353
Issuance of common stock 324,838 1,998 1,998
Saratoga merger .............. 225,000 130 130
OptiCare merger .............. 4,249,675 5 26,866 26,871
Fractional shares ............ (497) (11) (11)
Cohen Systems, Inc.
purchase ................... 110,000 800 800
Net loss for 1999 ............ (1,966) (1,966)
---- ------- ----- --------- --- -------- --------- ---------
Balance at December 31,
1999 ......................... 418,803 $ 1 8,972,128 $ 9 $ 47,784 $ (42,520) $ 5,274
========== ===== ========= === ======== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION
OptiCare Health Systems, Inc. and subsidiaries (the "Company") is an integrated
eye care services company focused on providing laser correction, managed care
and professional eye care services. The Company currently owns, operates and
develops laser and ambulatory surgery centers and provides systems, including
internet-based software solutions, to eye care professionals. The Company also
provides managed eye care services to health plans and operates integrated eye
health centers, retail optical stores and a buying group program.
The Company's current form is the result of two mergers (collectively the
"Merger") completed on August 13, 1999 by and among Saratoga Resources, Inc.
("Saratoga"), a Delaware corporation, PrimeVision Health, Inc. ("Prime") and
OptiCare Eye Health Centers, Inc. ("OptiCare"). In this transaction Prime
merged with Saratoga through a reverse acquisition by Prime of Saratoga (the
"Prime Merger") whereby Prime has acquired Saratoga at book value with no
purchase accounting adjustments. Upon consummation of the Prime Merger, each
share of Prime common stock was converted into the right to receive 0.3138
shares of Common Stock of the Company. Immediately following the Prime Merger,
OptiCare was acquired by Prime (the "OptiCare Merger"). Upon consummation of
the OptiCare Merger, each share of OptiCare capital stock was converted into
the right to receive 11.7364 shares of common stock of the Company or a total
of 4,249,675 shares.
In connection with the Merger, the Company's name changed to OptiCare Health
Systems, Inc., effective August 13, 1999.
For accounting purposes, Prime was the accounting acquirer and the surviving
accounting entity. Accordingly, the operating results of OptiCare have been
included in the accompanying consolidated financial statements since September
1, 1999, the deemed effective date of the acquisition for accounting purposes.
The impact of results from August 13, 1999 through August 31, 1999 are not
material to the consolidated financial statements. Financial results for
periods prior to September 1, 1999 are based solely upon the results reported
by Prime and its subsidiaries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries and OptiCare P.C. and Optometric Eye Care Centers
P.A. All intercompany accounts and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
The Company considers investments purchased with an original maturity of three
months or less when purchased to be cash equivalents.
RECEIVABLES
Receivables are stated net of allowances for doubtful accounts. Gross
receivables are stated net of contractual allowances and insurance
disallowances.
INVENTORIES
Inventories primarily consist of eyeglass frames, lenses, sunglasses, contact
lenses and surgical supplies. Inventories are valued at the lower of cost or
market, determined on the first-in, first-out (FIFO) basis.
F-14
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Leasehold improvements are being
amortized over the term of the lease or the life of the improvement, whichever
is shorter. Depreciation and amortization are provided primarily using the
straight-line method over the estimated useful lives of the respective assets
as follows:
<TABLE>
<CAPTION>
CLASSIFICATION ESTIMATED USEFUL LIFE
- ------------------------------------------------------- ----------------------
<S> <C>
Furniture, fixtures and equipment .......... 5 - 7 years
Leasehold improvements ..................... 3 - 10 years
Computer hardware and software ............. 3 - 5 years
</TABLE>
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs are being amortized on the interest method over
the term of the related debt and such amortization is included in interest
expense.
INTANGIBLE ASSETS
The Company uses the straight-line method to amortize intangible assets over
their estimated useful lives which range from 15 to 25 years. The Company's
management periodically evaluates the carrying value of its intangible assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Recoverability is based on
estimated future undiscounted cash flows from the use and ultimate disposition
of the asset.
LASER CORRECTION AND PROFESSIONAL SERVICES REVENUE
The Company owns and operates laser vision correction and ambulatory surgery
centers and sells a broad range of other management services to eye care
professionals. Revenue is recorded when the service is rendered at
contractually agreed upon rates.
MANAGED CARE REVENUE
The Company provides vision care services, through its managed vision care
business, as a preferred provider to HMOs, PPOs, third party administrators and
insurance indemnity programs. The contractual arrangements with these entities
operate under capitated programs, exclusive and non-exclusive fee-for-services,
preferred provider arrangements and other exclusive arrangements. Capitation
payments are accrued when they are due under the related contracts. Revenue
from non-capitated services is recognized when the services are provided and
the Company's customers are obligated to pay for such services.
OTHER INTEGRATED SERVICES REVENUE
A portion of the Company's ophthalmic and optometric eye care revenues are
reimbursements received from Medicare and other governmental programs and
insurance companies. The Company has agreements with third-party payors that
provide for payments to the Company at amounts different from its established
rates. Revenue is reported at the estimated net realizable amounts from
patients, third-party payors, and others for services rendered. The Company
recognizes revenue on product sales at the time of delivery to the customer.
MEDICAL CLAIMS EXPENSE
Claims expense is recorded as provider services are rendered and includes an
estimate for claims incurred but not reported.
F-15
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
INSURANCE OPERATIONS
The Company's managed vision care business includes a wholly-owned subsidiary
which is a licensed single service HMO in Texas (the "Texas HMO"). The Texas
HMO is subject to regulation and supervision by the Texas Department of
Insurance, which has broad administrative powers relating to standards of
solvency, minimum capital and surplus requirements, maintenance of required
reserves, payments of dividends, statutory accounting and reporting practices,
and other financial and operational matters. The Texas Department of Insurance
requires that stipulated amounts of paid-in-capital and surplus be maintained
at all times. Dividends generally are limited to the lesser of 10% of
statutory-basis capital and surplus or net income of the preceding year
excluding realized capital gains. At December 31, 1999, the amount of
restricted stockholders' equity was $500.
Under the Company's agreement with the Texas Department of Insurance, the
Company was required to pledge investments of $500 at December 31, 1999.
Reserves for estimated insurance losses are determined on a case by case basis
for reported claims, and on estimates based on company experience for loss
adjustment expenses and incurred but not reported claims. These liabilities
give effect to trends in claims severity and other factors which may vary as
the losses are ultimately settled. The Company's management believes that the
estimates of the reserves for losses and loss adjustment expenses are
reasonable; however, there is considerable variability inherent in the reserve
estimates. These estimates are continually reviewed and, as adjustments to
these liabilities become necessary, such adjustments are reflected in current
operations of the period of the adjustment.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" which requires an
asset and liability method of accounting for deferred income taxes. Under the
asset and liability method, deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis using enacted tax rates expected to apply to taxable
income in the years the temporary differences are expected to reverse.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" (APB No. 25), and related
interpretations, and provide the pro forma disclosure. Accordingly,
compensation cost for the stock options is measured as the excess, if any, of
the fair value of the Company's stock at the date of the grant over the amount
an employee must pay to acquire the stock.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
the disclosure of fair value information for certain assets and liabilities,
whether or not recorded in the balance sheet, for which it is practicable to
estimate that value. The Company has the following financial instruments: cash
and cash equivalents, accounts receivable, accounts payable, accrued
liabilities and long-term debt. The Company considers the carrying amount of
these items to approximate their fair values because of the short period of
time between the origination of such instruments and their expected realization
or their current market rate of interest.
F-16
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
CONCENTRATIONS OF CREDIT RISK
The Company's principal financial instrument subject to potential concentration
of credit risk is accounts receivable which are unsecured. The Company records
receivables from patients and third party payors related to eye health services
rendered. The Company does not believe that there are any substantial credit
risks associated with receivables due from governmental agencies and any
concentration of credit risk from other third party payors is limited by the
number of patients and payors. The Company does not believe that there are any
substantial credit risks associated with other receivables due from buying
group members or other customers.
ESTIMATES
In preparing financial statements, management is required to make estimates and
assumptions, particularly in determining the adequacy of the allowance for
doubtful accounts, insurance disallowances and managed care claims accrual,
that affect the reported amounts of assets and liabilities as of the balance
sheet date and results of operations for the year. Actual results could differ
from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified in order to conform to the
current year presentation.
RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended,which the Company is required to adopt effective January 1, 2001. SFAS
No. 133 will require the Company to record all derivatives on the balance sheet
at fair value. The Company believes that such adoption will not have a material
effect on its consolidated results of operations or financial position.
3. MERGERS
OPTICARE
The OptiCare merger, completed on August 13, 1999, was accounted for under the
purchase method of accounting, whereby the purchase price has been allocated to
estimated fair values of the assets acquired and liabilities assumed. Fair
values were based on valuations and other studies. The excess of the aggregate
purchase price (including expenses) of approximately $29,100 over the estimated
fair value of the net assets acquired was approximately $20,700. Of this
excess, approximately, $18,500 has been recorded as goodwill and is being
amortized on a straight-line basis over 25 years and approximately $2,200 has
been used to eliminate the valuation allowance related to Prime's deferred tax
assets. In addition, the Company recorded an intangible asset of approximately
$7,123 in connection with the separate acquisition of a new administrative
services agreement that is being amortized over 25 years.
COHEN SYSTEMS
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. The total purchase price of $1,550 was comprised of $750 in cash
and notes payable and 110,000 shares of common stock valued at approximately
$800. The Cohen Acquisition was accounted for under the purchase method of
accounting, whereby the purchase cost has been allocated to the fair value of
the assets acquired and liabilities assumed with the excess identified as
goodwill. Fair
F-17
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
values were based on valuations and other studies. The goodwill resulting from
this transaction was approximately $1,200 and is being amortized on a
straight-line basis over 25 years. The results of operations of Cohen Systems,
Inc. are included in the consolidated financial statements from the purchase
date.
The following is a summary of the unaudited pro forma results of operations of
the Company as if the Mergers and Cohen Acquisition had closed effective
January 1, of the respective periods below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net Revenues ............................................. $129,624 $ 105,653
Income (loss) from continuing operations ................. (1,359) (3,881)
Net income (loss) ........................................ (3,676) (38,732)
Income (loss) per common share from continuing operations:
Basic and diluted ....................................... $ (0.15) $ (0.43)
Net income (loss) per common share:
Basic and diluted ....................................... $ (0.41) $ (4.32)
</TABLE>
The unaudited pro forma information presented above 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
periods presented, nor does it intend to be a projection of future results.
4. DISCONTINUED OPERATIONS
On December 15, 1998, in recognition of significant losses and the fact that
the physician's practice management business model as operated by the Company
had been largely unsuccessful, the Company's Board of Directors decided to
reorganize and dispose of its ophthalmology operations and recorded an
estimated loss on disposal of $23,564 in 1998. The disposal of these operations
continued in 1999 through the cancellation of the administrative service
agreements with affiliated ophthalmologists and the repurchase of practice
assets by the physicians. During the three months ended June 30, 1999, the
Company revised its estimate of loss on the disposal of its ophthalmology
operations and accordingly recorded an additional loss of $2,317 net of tax of
$212. As of December 31, 1999 the disposal of these operations was
substantially complete.
Summarized information on the discontinued ophthalmology segment follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues ................................................... -- $ 69,442 $ 54,555
======== ========= ========
Income (loss) from discontinued operations before tax .......... -- (17,884) 1,041
Income tax expense (benefit) ................................... -- (6,597) 412
-------- --------- --------
Income (loss) from discontinued operations ..................... -- (11,287) 629
Income (loss) on disposal of discontinued operations ........... $ (2,317) (23,564) --
-------- --------- --------
Total income (loss) from discontinued operations ............... $ (2,317) $ (34,851) $ 629
======== ========= ========
Income (loss) per share from discontinued operations ........... $ (0.49) $ (15.45) $ 0.34
======== ========= ========
</TABLE>
F-18
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
5. 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 years
ended December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Laser correction and professional services .................. $ 4,061 $ -- $ --
Managed care services ....................................... 25,150 14,902 7,416
Other integrated services ................................... 78,227 68,949 67,065
--------- --------- ---------
Segment totals ............................................ 107,438 83,851 74,481
Elimination of inter-segment revenues ....................... (12,805) (19,239) (16,135)
--------- --------- ---------
Total net revenue ........................................... $ 94,633 $ 64,612 $ 58,346
========= ========= =========
Operating earnings (loss):
Laser correction and professional services .................. $ 2,080 $ -- $ --
Managed care services ....................................... 1,723 1,253 859
Other integrated services ................................... 2,985 1,857 1,158
--------- --------- ---------
Segment totals ............................................ 6,788 3,110 2,017
Depreciation ................................................ (1,408) (1,133) (1,036)
Amortization ................................................ (605) (284) (184)
Interest expense ............................................ (3,248) (4,498) (3,866)
Corporate ................................................... (887) -- --
--------- --------- ---------
Operating earnings (loss) from continuing operations ......... $ 640 $ (2,805) $ (3,069)
========= ========= =========
Assets:
Laser correction and professional services .................. $ 919 $ -- $ --
Managed care services ....................................... 7,564 4,548 2,165
Other integrated services ................................... 14,409 6,403 9,760
--------- --------- ---------
Segment totals ............................................ 22,892 10,951 11,925
Intangibles ................................................. 32,443 810 881
Discontinued operations ..................................... -- 5,582 69,474
Corporate, cash and other ................................... 11,405 9,213 4,118
--------- --------- ---------
Total ..................................................... $ 66,740 $ 26,556 $ 86,398
========= ========= =========
Capital expenditures:
Managed care services ....................................... $ 294 $ 196 $ 251
Other integrated services ................................... 1,504 412 1,600
--------- --------- ---------
Segment totals ............................................ 1,798 608 1,851
Corporate ................................................... 73 -- --
--------- --------- ---------
Total ..................................................... $ 1,871 $ 608 $ 1,851
========= ========= =========
</TABLE>
F-19
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
6. RECEIVABLES
Activity in the allowance for doubtful accounts consisted of the following for
the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period ............ $ 218 $ 227 $ 238
Allowances of acquired companies .......... 298 -- --
Additions charged to expense .............. 216 263 191
Deductions ................................ (106) (272) (202)
------ ------ ------
Balance at end of period .................. $ 626 $ 218 $ 227
====== ====== ======
</TABLE>
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Leasehold improvements ............................ $ 4,447 $ 2,085
Furniture and equipment ........................... 9,135 7,396
Computer hardware and software .................... 3,728 1,090
-------- --------
Total ............................................. 17,310 10,571
Accumulated depreciation and amortization ......... (7,631) (6,061)
-------- --------
Property and equipment, net ....................... $ 9,679 $ 4,510
======== ========
</TABLE>
8. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
---------- ---------
<S> <C> <C>
Goodwill .................................. $ 24,506 $1,022
Administrative services agreement ......... 7,123 --
Other ..................................... 2,145 533
-------- ------
Total ..................................... 33,774 1,555
Accumulated amortization .................. (1,331) (745)
-------- ------
Intangible assets, net .................... $ 32,443 $ 810
======== ======
</TABLE>
F-20
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
9. LONG-TERM DEBT
The details of the Company's long-term debt at December 31, 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Term note payable to bank in 15 quarterly principal amounts
Payable as follows: $375 from April 1, 2000 to October 1, 2000; $1,375
payable January 1, 2001; $1,000 from April 1, 2001 to October 1, 2002;
$1,500 from January 1, 2003 to October 1, 2003; $2,000 from January 1,
2004 to April 1, 2004. The 15th principal payment is payable for the
outstanding principal balance and is due and payable on June 1, 2004.
The interest rate equals the base rate or the eurodollar rate which was
8.4% at December 31, 1999. The term note is collateralized by
substantially all assets of the Company ....................................... $21,500 --
Revolving credit note to bank, due June 1, 2004, interest payable at the
base rate or the eurodollar rate and is collateralized by substantially all
assets of the Company. ........................................................ 11,500 --
Subordinated note payable due August 13, 2002, interest compounds
quarterly at a rate of 8.0%. (Paid January 2000) .............................. 2,000 --
Subordinated convertible promissory note payable due August 13, 2002.
Interest compounds quarterly at a rate of 9.0%. (cancelled January 2000) 4,000 --
Promissory notes payable due at various dates between 2000 and 2005.
Principal and interest payments are due monthly or annually. Interest is
payable at rates ranging from 5.5% to 9.5%. (net of discount of $133 at
December 31, 1999) ............................................................ 2,951 $ 226
Note payable from practice acquisition due in annual installments of $240
plus interest at 7.0% per year, through October 2003, collateralized by
specific assets of the Company. ............................................... 960 --
Other notes payable due through September 2001. ................................ 237 --
Term note payable to bank in 19 quarterly principal amounts of $1,200
from April, 1999 through July 1, 2001, then increasing to $2,000 or until
the obligation is paid in full, through January 1, 2004, with interest
payable in quarterly installments, collateralized by substantially all assets
of the Company. ............................................................... -- 31,821
Revolving credit note to bank, due May 1, 2002, interest payable quarterly,
collateralized by substantially all assets of the Company (net of
unamortized discount of $62). ................................................. -- 7,929
------- -------
Total .......................................................................... 43,148 39,976
Less current portion ........................................................... 3,459 39,784
------- -------
$39,689 $ 192
======= =======
</TABLE>
F-21
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
The following represents maturities of long-term debt by year and in the
aggregate:
<TABLE>
<S> <C>
2000 ............... $ 3,459
2001 ............... 4,852
2002 ............... 10,997
2003 ............... 6,272
2004 ............... 17,534
Thereafter ......... 34
-------
$43,148
=======
</TABLE>
On July 3, 1996, the Company entered into a loan and security agreement with a
bank (the "Old Credit Facility"). The agreement, as amended on November 25,
1996 and May 30, 1997, made available to the Company a revolving credit
facility permitting advances of up to $18,000 at any one time and term loans in
the aggregate principal amount of $32,000. As of December 31, 1998 the Company
was in default of certain restrictive covenants of the agreement and,
accordingly, all of the debt was classified as short-term at December 31, 1998.
In August 1999, in connection with the Merger, the Old Credit Facility was
repaid and the Company entered into a new loan agreement (the "Credit
Facility"). The Credit Facility made available to the Company a $21,500 term
loan and up to a $12,700 revolving loan facility secured by a security interest
in substantially all of the assets of the Company. As of December 31, 1999 the
Company had $800 of additional borrowing capacity available under its revolving
credit facility, net of a $400 letter of credit obligation. The outstanding
borrowings under the revolving loan facility and the term loan are individually
and collectively limited to specific available borrowing base amounts, as
defined in the agreement. The interest rate applicable to the credit facility
equals the base rate or the eurodollar rate (each as defined in the Credit
Facility), as the Company may from time to time elect, in accordance with the
provisions of the Credit Facility. The base rate is generally the higher of the
prime rate of the bank for domestic commercial loans in effect on such
applicable day, or 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 2.25%.
The Company is charged a commitment fee of one-half of one percent (1/2 of 1%)
per annum of the sum of the aggregate average daily unused amount of the
Company's revolving loan facility. During 1999, the Company's average borrowing
rate was approximately 8.60%.
The Credit Facility contains certain restrictions on the conduct of the
Company's business, including restrictions on: incurring debt, declaring or
paying any cash dividends or any other payment or distributions on capital
stock, and creating liens on the Company's assets. The Company is required to
maintain certain financial ratios, including, a minimum fixed charge coverage
ratio, a leverage ratio, a senior leverage ratio and an interest coverage
ratio. The Company is also restricted from incurring capital expenditures in
excess of a specified amount and is required to achieve minimum cash flows.
At December 31, 1999 and 1998, the Company was a guarantor of debt of related
parties in the amount of $208 and $299, respectively.
At December 31, 1999 and 1998, the Company had standby letters of credit
outstanding in the amount of $400 and $600, respectively.
10. LEASES
The Company leases certain furniture, machinery and equipment under capital
lease agreements that expire through 2004. The Company primarily leases its
facilities under cancelable and noncancelable operating leases expiring in
various years through 2011. Several facility leases have annual rental terms
comprised of base rent at the inception of the lease adjusted annually by a
contingent amount based, in
F-22
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
part, upon the increase in the consumer price index. Also, certain facility
leases contain provisions which provide for additional contingent rents based
on a stated percentage of sales. Rent expense charged to operations during the
years ended December 31, 1999, 1998 and 1997 was $3,010, $2,302 and $2,193 of
which $83 and $132 and $109, respectively, represent contingent rent expense.
Property and equipment includes the following amounts for capital leases at
December 31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Furniture, machinery and equipment .......... $ 1,393 $ 1,356
Less accumulated amortization ............... (1,037) (1,057)
-------- --------
$ 356 $ 299
======== ========
</TABLE>
Capital lease obligations of $147 and $219 were incurred for acquisition of new
equipment in 1999 and 1998, respectively. Amortization of capital leases is
included in depreciation and amortization expense.
Future minimum lease payments, by year and in the aggregate, under capital
leases and operating leases with remaining terms of one year or more consisted
of the following at December 31, 1999:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
2000 .................................. $ 110 $ 3,725
2001 .................................. 96 2,939
2002 .................................. 87 2,398
2003 .................................. 56 2,069
2004 .................................. 11 1,620
Thereafter ............................ -- 2,450
----- -------
Total minimum lease payments .......... 360 $15,201
=======
Amounts representing interest ......... (57)
-----
$ 303
=====
</TABLE>
11. 401(K) SAVINGS PLAN
The Company provides a defined contribution 401(k) savings plan to
substantially all employees who meet certain age and employment criteria.
Eligible employees are allowed to contribute a portion of their income in
accordance with specified guidelines. The Company matches a percentage of
employee contributions up to certain limits. Employer contributions are made on
a discretionary basis as authorized by the Board of Directors. Employer
contributions for the years ended December 31, 1999, 1998 and 1997 were $337,
$577 and $532, respectively.
12. RELATED PARTY TRANSACTIONS
The Company incurred rent expense and other fees of $123, $123 and $120 in
1999, 1998 and 1997, respectively, which was paid to certain doctors for the
use of equipment.
The Company incurred rent expense of $752, $450 and $347 in 1999, 1998 and
1997, respectively, which was paid to entities under common ownership,
primarily for the lease of facilities.
The Company has various notes receivable from related parties with interest
rate ranging from prime plus 1% to 9%, maturing from 1999 through 2006. The
total balance due under these notes receivable was $108 and $215 at December
31, 1999 and 1998, respectively, of which $14 and $40, respectively, has been
reflected as a current asset.
F-23
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
13. STOCKHOLDERS' EQUITY
MANDATORILY REDEEMABLE PREFERRED STOCK
In June of 1998, the Company issued 8,000 shares of redeemable, 8% cumulative
preferred stock, together with a stock purchase warrant enabling the holder to
purchase 1,333,333 shares of the Company's common stock, for $8,000. Under the
terms of the agreement, the preferred stockholders were entitled to receive a
guaranteed annual rate of return of 30% over the first four years of the
agreement. Accordingly, the Company recorded accrued dividends of $1,200 as of
December 31, 1998 and $600 in 1999.
The estimated fair value of the stock purchase warrant was $1,293 at the date
of issuance in June 1998. This value was determined using the Black-Scholes
pricing model with the following assumptions: risk free interest rate of 4.67%,
no dividend yield, volatility factor of .7604 and an expected life of five
years. Initially, this value was recorded as a discount to the redeemable
preferred stock balance with a corresponding credit to additional paid-in
capital. This discount was to be amortized through charges to retained earnings
over the initial redemption period of the preferred stock, seven years.
However, in light of Prime's violation of financial covenants in the preferred
stock agreement in 1998 and the corresponding acceleration of the redemption
period, the remaining unamortized balance of the warrant discount was fully
amortized at December 31, 1998.
In August 1999, immediately prior to the Merger, the redeemable preferred stock
and warrant were exchanged for $2,000 of subordinated long term debt, $4,000 of
convertible subordinated long term debt and 2,033,333 shares of Prime Vision
common stock, which in turn were exchanged in the merger for 638,069 shares of
common stock.
STOCK OPTION PLAN
Presented below is a summary of the status of the Company's stock options and
the related transactions for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
OPTIONS
OUTSTANDING RANGE
------------- -------------------
<S> <C> <C>
December 31, 1996 ........... 68,408 $4.78 - $15.93
Granted .................... 172,904 $6.37 - $63.74
Canceled ................... (471)
-------
December 31, 1997 ........... 240,841 $4.78 - $63.74
Granted .................... 2,981 $6.37 - $63.74
Canceled ................... (38,957)
-------
December 31, 1998 ........... 204,865 $4.78 - $63.74
Canceled ................... (145,346) $2.56 - $63.74
OptiCare converted ......... 533,969 $ 2.56
Granted .................... 721,250 $ 5.85
-------- -----------------
December 31, 1999 ........... 1,314,738 $2.56 - $63.74
--------- -----------------
</TABLE>
The Company's executive stock plan, approved by the Board of Directors in 1996,
provided for the granting of nonqualified incentive stock options with a
ten-year term. On August 13, 1999 options were granted to option holders of
OptiCare and Prime in substitution for existing options, which contained
substantially identical terms, except for a change in the exercise price and
the number of shares, which were adjusted to reflect the exchange ratio in
connection with the Merger.
Pro forma information regarding net loss and loss per share is required by SFAS
123, and has been determined as if the Company accounted for its employee stock
options granted subsequent to
F-24
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
December 31, 1995, under the fair value method of SFAS 123. The weighted
average fair value of the Company's stock options, calculated using the
Black-Scholes option pricing model, granted during 1999 was $3.15 per share.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ------------ ----------
<S> <C> <C> <C>
Risk free interest rate .......... 6.00% 4.67% 5.50%
Dividends ........................ -- -- --
Volatility factor ................ .5500 .7604 .6321
Expected Life .................... 5 years 8.27 years 5 years
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
------------ ------------- ------------
<S> <C> <C> <C>
Net income (loss):
As reported ........................... $ (1,966) $ (38,090) $ (1,405)
Pro forma ............................. $ (2,091) $ (38,110) $ (1,415)
Earnings per share -- basic and diluted:
As reported ........................... $ (0.54) $ (17.99) $ (0.76)
Pro forma ............................. $ (0.56) $ (18.00) $ (0.76)
</TABLE>
The following table summarizes in more detail information regarding the
Company's stock options outstanding at December 31, 1999.
<TABLE>
<CAPTION>
REMAINING
OUTSTANDING CONTRACTUAL OPTIONS
EXERCISE PRICE OPTIONS LIFE (IN YEARS) EXERCISABLE
- ---------------- ------------- ----------------- ------------
<S> <C> <C> <C>
$2.56 .......... 491,131 8.0 140,388
$4.78 .......... 37,028 1.6 37,028
$5.85 .......... 721,250 9.7 --
$6.37 .......... 10,201 8.9 10,201
$9.56 .......... 4,707 7.0 4,707
$12.75 ......... 10,201 8.9 10,201
$15.93 ......... 10,983 7.0 10,983
$19.12 ......... 10,196 8.9 10,196
$47.80 ......... 2,423 2.7 2,423
$63.73 ......... 16,618 7.5 16,618
------- -------
1,314,738 242,745
========= =======
</TABLE>
F-25
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
14. EARNINGS (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
Income (loss) from continuing operations applicable
to common stockholders:
Income (loss) from continuing operations .......... $ 351 $ (3,239) $ (2,034)
Accretion of redemption value of preferred stock
and preferred stock dividends ................... (600) (2,493) --
---------- ---------- ----------
Income (loss) from continuing operations applicable
to Common stockholders ............................ $ (249) $ (5,732) $ (2,034)
========== ========== ==========
Net income (loss) applicable to common
stockholders:
Net income (loss) ................................. $ (1,966) $ (38,090) $ (1,405)
Accretion of redemption value of preferred stock
and preferred stock dividends ................... (600) (2,493) --
---------- ---------- ----------
Net income (loss) applicable to common shareholders $ (2,566) $ (40,583) $ (1,405)
========== ========== ==========
Weighted average common shares outstanding ......... 4,776,501 2,256,461 1,855,931
========== ========== ==========
Income (loss) per common share from continuing
operations ........................................ $ (0.05) $ (2.54) $ (1.10)
========== ========== ==========
Net income (loss) per common share ................. $ (0.54) $ (17.99) $ (.76)
========== ========== ==========
</TABLE>
The weighted average common shares outstanding for all periods presented have
been adjusted to reflect the conversion associated with the Merger.
The following table reflects the potential common shares of the Company at
December 31, 1999, 1998 and 1997. These shares have been excluded from the
calculation of diluted earnings per share due to their antidilutive effect.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ ----------
<S> <C> <C> <C>
Options ............................................................ 1,314,738 652,855 767,500
Warrants ........................................................... 100,000 1,553,614 220,281
Common stock to be issued for convertible preferred stock .......... 418,803 -- --
Common stock to be issued for convertible debt ..................... 581,818 -- --
--------- --------- -------
Total ............................................................. 2,415,359 2,206,469 987,781
========= ========= =======
</TABLE>
F-26
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
15. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities consisted of the following
at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- -----------
<S> <C> <C>
Deferred tax liabilities:
Cash to accrual adjustment ....................... -- $ 1,604
Other ............................................ $ 397 16
------ --------
Total current deferred tax liabilities ............ 397 1,620
Other ............................................ -- 2
------ --------
Total noncurrent deferred tax liabilities ......... -- 2
------ --------
Total deferred tax liabilities .................... $ 397 $ 1,622
====== ========
Deferred tax assets:
Net operating loss carryforwards ................. $ 200 --
Discontinued operations .......................... -- $ 4,078
Accruals ......................................... 2,047 712
Allowance for bad debts .......................... 263 163
Other ............................................ 69 15
------ --------
Total current deferred tax assets ................. 2,579 4,968
Depreciation and amortization .................... 951 623
Other ............................................ -- 37
------ --------
Total noncurrent deferred tax asset ............... 951 660
Valuation allowance ............................... -- (4,006)
------ --------
Total deferred tax assets ......................... $3,530 $ 1,622
====== ========
</TABLE>
In 1998, management provided a valuation allowance to offset the potential tax
benefits of the Company's net deferred tax assets based on its assessment that
it is more likely than not that the entire deferred tax asset will not be
realized based on the Company's experience of cumulative, historical operating
losses. $2,200 of this valuation adjustment was used to reduce goodwill in
August 1999 in connection with the Merger and the balance was reversed against
deferred tax assets based upon a reassessment of temporary items.
F-27
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
The components of income tax expense (benefit) for the years ended December 31,
1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------ ------------
<S> <C> <C> <C>
Current:
Federal .................................... $ 325 $141 --
State ...................................... 66 20 --
------ ---- --------
Total current .............................. 391 161 --
------ ---- --------
Deferred:
Federal .................................... (85) 257 $ (984)
State ...................................... (17) 16 (51)
------ ---- --------
Total deferred ............................. (102) 273 (1,035)
------ ---- --------
Total income tax (benefit) expense ......... $ 289 $434 $ (1,035)
====== ==== ========
</TABLE>
A reconciliation of the tax provision at the U.S. Statutory Rate to the
effective income tax rate as reported is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Tax provision (benefit) at U.S. Statutory Rate .......... 34.0% (34.0%) (34.0%)
State income taxes, net of federal benefit .............. 5.0% ( 3.0%) ( 3.0%)
Non-deductible expenses ................................. 6.2% 4.3% 11.3%
Change in valuation allowance ........................... -- 48.2% ( 8.0%)
---- ----- -----
Effective income tax expense (benefit) rate ............. 45.2% 15.5% (33.7%)
==== ===== =====
</TABLE>
16. COMMITMENTS AND CONTINGENCIES
In connection with the Cohen Acquisition in 1999, the Company agreed to pay, as
additional consideration, a contingent payment of $200 based upon the
profitability from the operation of Cohen Systems, Inc. for the twelve month
period beginning October 1, 1999. The contingent payment, if any, shall be
payable in two $100 installments on October 31, 2000 and April 30, 2001. Any
such contingent payments will be recorded when earned, as goodwill as
additional purchase price consideration.
In connection with an ASA consummated in 1997 between the Company and an
ophthalmologist, the Company also entered into a related agreement which
granted the ophthalmologist the right, between the second and fourth
anniversary of the ASA, to require the Company to locate a third party to
purchase all of the outstanding shares of the ophthalmologist's practice for at
least $4,000 in either cash or stock, at the option of the ophthalmologist. In
January 1999, the ophthalmologist exercised his put option. The Company has
asserted that it is not obligated to honor the put and is seeking damages under
the assertion that the value of the ophthalmologist's practice sold to the
Company was falsely inflated. The ophthalmologist has counterclaimed to enforce
the put. The Company believes that it will prevail in the pending litigation
and in any attempt to enforce the put.
In the normal course of business, the Company is both a plaintiff and defendant
in lawsuits incidental to its current and former operations, some alleging
substantial claims. Such matters are subject to many uncertainties and outcomes
are not predicatable with assurance. Consequently, the ultimate aggregate
amount of monetary liability or financial impact with respect to these matters
at December 31, 1999 cannot be ascertained. Management is of the opinion that,
after taking into account the merits of defenses,
F-28
<PAGE>
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
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.
17. SUBSEQUENT EVENTS
In January 2000, the Company completed the sale of 3,571,429 registered shares
of common stock. The net proceeds from the stock offering were approximately
$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.
In February 2000 the Company entered into a definitive merger agreement with
Vision Twenty-One Inc., a publicly traded eye care company, whereby each
outstanding share of Vision Twenty-One Inc. common stock will be converted into
the right to receive 0.402 shares of the Company's common stock, which
conversion ratio is subject to adjustment as provided in the merger agreement.
The merger with Vision Twenty-One Inc. is subject to certain conditions
including, but not limited to, restructuring of certain debt obligations of the
Company, the Company obtaining financing and shareholder approval by each
party.
F-29
<PAGE>
REPORT OF INDEPENDENT AUDITORS
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, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended December 31,
1999. Our audits also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1998 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As more fully
described in Note 17, the Company has incurred recurring operating losses and
has a working capital deficiency. In addition, the Company has not complied
with certain covenants in connection with its credit agreement which have been
waived by the banks to the earlier of May 19, 2000 or the termination of a
merger agreement. Further, the Company is currently dependent upon the
cooperation, approvals and availability of waivers from the banks as parties to
its credit facilities for operating capital. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regards to these matters are also described in Note 17. The
consolidated financial statements and financial statement schedule do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that may result from the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Tampa, Florida
April 7, 2000, except for paragraph 2
of Note 16, as to which the date is
April 21, 2000 and except for paragraph
3 of Note 16, as to which the date is May 5, 2000
F-30
<PAGE>
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 1,514,670 $ 5,032,399
Accounts receivable due from:
Buying group members, net of allowances for doubtful accounts of
approximately $30,000 at December 31, 1998 ............................. 6,288,923 --
Physicians, patients and surgery centers ................................ 687,100 1,852,091
Managed health benefits payers .......................................... 1,573,799 810,606
Other ................................................................... 48,165 --
Prepaid expenses and other current assets ................................. 2,194,509 1,405,321
Current assets of discontinued operations ................................. 22,553,628 20,102,763
------------- -------------
Total current assets ................................................... 34,860,794 29,203,180
Fixed assets, net .......................................................... 4,076,940 5,131,658
Excess of purchase price over fair values of net assets acquired, net of
accumulated amortization of $1,910,826 and $3,500,266 at
December 31, 1998 and 1999, respectively .................................. 52,278,292 47,703,490
Deferred income taxes ...................................................... 6,300,000 --
Other assets ............................................................... 1,747,597 205,059
Restricted cash ............................................................ 500,000 500,000
Non current assets of discontinued operations .............................. 91,913,501 2,135,300
------------- -------------
Total assets ........................................................... $ 191,677,124 $ 84,878,687
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .......................................................... $ 4,855,197 $ 5,687,289
Medical claims payable .................................................... 4,713,995 4,870,837
Accrued expenses .......................................................... 3,576,486 4,327,040
Accrued compensation ...................................................... 692,154 1,848,511
Accrued restructuring charge .............................................. 2,796,000 663,305
Accrued acquisition costs ................................................. 165,752 --
Amount due to ECCA ........................................................ -- 4,031,870
Current portion of long-term debt ......................................... 1,969,345 58,135,205
Current portion of obligations under capital leases ....................... 55,523 90,292
Current liabilities of discontinued operations ............................ 9,402,156 6,657,260
------------- -------------
Total current liabilities .............................................. 28,226,608 86,311,609
Obligations under capital leases, less current portion ..................... 287,651 195,902
Long-term debt, less current portion ....................................... 81,217,396 112,500
Deferred income taxes ...................................................... 7,512,000 --
Long-term liabilities of discontinued operations ........................... 711,856 598,946
------------- -------------
Total liabilities ...................................................... 117,955,511 87,218,957
Minority interest .......................................................... -- 409,822
Stockholders' equity (deficit):
Preferred stock, $.001 par value; 10,000,000 shares authorized; no shares
issued .................................................................... -- --
Common stock, $.001 par value; 50,000,000 shares authorized;
15,067,025 (1998) and 15,616,854 (1999) shares issued and outstanding ..... 15,067 15,617
Additional paid-in capital ................................................. 89,196,292 92,981,946
Common stock to be issued (105,164 shares at December 31, 1998) ............ 1,053,664 --
Deferred compensation ...................................................... (300,435) (192,135)
Note receivable ............................................................ (172,984) (172,984)
Accumulated deficit ........................................................ (16,069,991) (95,382,536)
------------- -------------
Total stockholders' equity (deficit) ................................... 73,721,613 (2,750,092)
------------- -------------
Total liabilities and stockholders' equity (deficit) ................... $ 191,677,124 $ 84,878,687
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE>
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1997 1998 1999
--------------- ---------------- ------------------
<S> <C> <C> <C>
Revenues:
Refractive and ambulatory surgery centers, net .................. $ -- $ 4,084,052 $ 12,507,820
Managed care .................................................... 18,762,158 54,980,006 56,743,696
Buying group .................................................... 7,260,797 58,959,195 19,150,982
------------ ------------- --------------
26,022,955 118,023,253 88,402,498
Operating expenses:
Refractive and ambulatory surgery center operating
expenses ...................................................... -- 3,688,315 11,477,811
Medical claims .................................................. 14,090,250 42,159,210 42,444,111
Cost of buying group sales ...................................... 6,882,199 55,926,173 18,260,819
General and administrative ...................................... 7,807,133 18,433,625 27,889,302
Depreciation and amortization ................................... 518,683 2,500,383 3,046,922
Special items:
Restructuring and other charges (credits) ....................... -- 6,462,595 (1,413,389)
Start-up and software development costs ......................... -- 932,494 511,768
Merger costs .................................................... -- 717,835 --
------------ ------------- --------------
29,298,265 130,820,630 102,217,344
------------ ------------- --------------
Loss from operations ............................................. (3,275,310) (12,797,377) (13,814,846)
Amortization of loan fees ........................................ 178,677 314,208 2,400,831
Interest expense, net ............................................ 934,190 4,084,891 5,551,542
Gain on sale of assets, net ...................................... -- -- (517,841)
------------ ------------- --------------
Loss from continuing operations before income taxes and
minority interest ............................................... (4,388,177) (17,196,476) (21,249,378)
Income taxes ..................................................... -- -- --
Minority interest ................................................ -- -- (63,398)
------------ ------------- --------------
Loss from continuing operations .................................. (4,388,177) (17,196,476) (21,312,776)
Discontinued operations:
Income from discontinued operations, net of income tax
benefit of $3,017,000 in 1998 ................................. 4,794,399 11,127,191 3,951,838
Loss on disposal of discontinued operations, net of
income tax benefit of $1,096,931 in 1999 ...................... -- -- (65,722,430)
------------ ------------- --------------
Income (loss) before extraordinary items ......................... 406,222 (6,069,285) (83,083,368)
Extraordinary item--gain on sale of EyeCare One Corp. ............ -- -- 3,770,823
Extraordinary item--loss on early extinguishment of debt ......... (323,346) (1,885,512) --
------------ ------------- --------------
Net income (loss) ................................................ $ 82,876 $ (7,954,797) $ (79,312,545)
============ ============= ==============
Basic and diluted income (loss) per common share:
Loss from continuing operations ................................. $ (0.55) $ (1.20) $ (1.39)
Income from discontinued operations ............................. 0.60 0.78 0.26
Loss on disposal of discontinued operations ..................... -- -- ( 4.28)
------------ ------------- --------------
Income (loss) before extraordinary items ......................... 0.05 ( 0.42) ( 5.41)
Extraordinary item--gain on sale of EyeCare One Corp ............. -- -- 0.25
Extraordinary item--loss on early extinguishment of debt ......... ( 0.04) ( 0.13) --
------------ ------------- --------------
Net income (loss) per common share ............................... $ 0.01 $ (0.55) $ (5.16)
============ ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE>
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON
COMMON STOCK ADDITIONAL STOCK
------------------------- PAID-IN TO BE
SHARES AMOUNT CAPITAL ISSUED
-------------- ---------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 .......... 4,825,431 $ 4,825 $ 5,987,335 $ 5,905,965
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 ........................ -- -- -- --
Issuance of note receivable .......... -- -- -- --
Net income ........................... -- -- -- --
Reclassify undistributed earnings
in S corporation to additional
paid-in capital ..................... -- -- 604,787 --
Capital distribution ................. -- -- (598,280) --
--------- ------- ------------ -------------
Balance at December 31, 1997 .......... 13,529,892 $13,530 $ 76,416,476 $ --
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 ........................ -- -- -- --
Collection of note receivable ........ -- -- -- --
Net loss ............................. -- -- -- --
Capital distribution ................. -- -- (245,547) --
---------- ------- ------------ -------------
Balance at December 31, 1998 .......... 15,067,025 $15,067 $ 89,196,292 $ 1,053,664
Issuance of shares of common
stock for business
combinations ........................ 117,409 117 617,297 --
Issuance of shares of common
stock as additional
consideration for acquisitions
consummated in 1997 and
1998 ................................ 145,594 146 1,238,657 (1,053,664)
Sale of shares to directors .......... 177,099 177 1,062,671 --
Compensatory stock options
accounted for under SFAS 123 -- -- 443,956 --
Exercise of options .................. 71,204 71 291,651 --
Issuance of shares for employee
stock purchase plan ................. 38,523 39 131,422 --
Amortization of deferred
compensation ........................ -- -- -- --
Net loss ............................. -- -- -- --
---------- ------- ------------ -------------
Balance at December 31, 1999 .......... 15,616,854 $15,617 $ 92,981,946 $ --
========== ======= ============ =============
<CAPTION>
TOTAL
STOCKHOLDERS'
DEFERRED NOTE ACCUMULATED EQUITY
COMPENSATION RECEIVABLE DEFICIT (DEFICIT)
-------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 .......... $ (517,035) $ (164,075) $ (7,593,283) $ 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 -- -- 108,300
Issuance of note receivable .......... -- (11,409) -- (11,409)
Net income ........................... -- -- 82,876 82,876
Reclassify undistributed earnings
in S corporation to additional
paid-in capital ..................... -- -- (604,787) --
Capital distribution ................. -- -- -- (598,280)
---------- ----------- ------------- -------------
Balance at December 31, 1997 .......... $ (408,735) $ (175,484) $ (8,115,194) $ 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 -- -- 108,300
Collection of note receivable ........ -- 2,500 -- 2,500
Net loss ............................. -- -- (7,954,797) (7,954,797)
Capital distribution ................. -- -- -- (245,547)
---------- ----------- ------------- -------------
Balance at December 31, 1998 .......... $ (300,435) $ (172,984) $ (16,069,991) $ 73,721,613
Issuance of shares of common
stock for business
combinations ........................ -- -- -- 617,414
Issuance of shares of common
stock as additional
consideration for acquisitions
consummated in 1997 and
1998 ................................ -- -- -- 185,139
Sale of shares to directors .......... -- -- -- 1,062,848
Compensatory stock options
accounted for under SFAS 123 -- -- -- 443,956
Exercise of options .................. -- -- -- 291,722
Issuance of shares for employee
stock purchase plan ................. -- -- -- 131,461
Amortization of deferred
compensation ........................ 108,300 -- -- 108,300
Net loss ............................. -- -- (79,312,545) (79,312,545)
---------- ----------- ------------- -------------
Balance at December 31, 1999 .......... $ (192,135) $ (172,984) $ (95,382,536) $ (2,750,092)
========== =========== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE>
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1997
----------------
<S> <C>
OPERATING ACTIVITIES
Net income (loss) ............................................................ $ 82,876
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Net (gain) loss from discontinued operations ................................. (4,794,399)
Extraordinary item ........................................................... 323,346
Depreciation and amortization ................................................ 518,683
Amortization of loan fees .................................................... 178,677
Other amortization ........................................................... --
Non-cash compensation expense ................................................ 124,949
Gain on sale of assets, net .................................................. --
Interest accretion ........................................................... 50,260
Minority interest ............................................................ --
Changes in operating assets and liabilities, net of effects from business
combinations:
Accounts receivable, net .................................................... 107,017
Prepaid expenses and other current assets ................................... (626,605)
Other assets ................................................................ (260,262)
Accounts payable ............................................................ (2,743,964)
Medical claims payable ...................................................... (552,064)
Accrued expenses ............................................................ 1,415,303
Accrued compensation ........................................................ 142,024
Accrued restructuring charge ................................................ --
Accrued acquisition costs ................................................... (522,963)
Amount due to ECCA .......................................................... --
--------------
Net cash used in operating activities ....................................... (6,557,122)
INVESTING ACTIVITIES
Payments for fixed assets, net ............................................... (121,240)
Payments for acquisitions, net of cash acquired .............................. (35,452,640)
Payments for capitalized acquisition costs ................................... (6,170,767)
Net proceeds from sale of Block Buying Group ................................. --
Net proceeds from sale of Retail Optical Chains .............................. --
Other ........................................................................ (394,603)
--------------
Net cash provided by (used in) investing activities .......................... (42,139,250)
FINANCING ACTIVITIES
Net proceeds from sale of common stock ....................................... 42,850,000
Payments for offering costs .................................................. (4,385,413)
Proceeds from long-term debt ................................................. 33,913,727
Payments on long-term debt and capital lease obligations ..................... (19,261,978)
Proceeds from credit facility ................................................ 4,874,000
Payments on credit facility .................................................. (4,874,000)
Payments for financing fees .................................................. (717,882)
Payments to acquire treasury stock ........................................... --
Proceeds from sale of stock to directors ..................................... --
Sale of detachable stock purchase warrants and exercise of options ........... 550,778
Proceeds from sale of stock issued under an employee stock purchase plan ..... --
Proceeds from limited partner for minority interest .......................... --
Decrease in notes receivable, officers and shareholders ...................... 152,080
--------------
Net cash provided by (used in) financing activities .......................... 53,101,312
--------------
DISCONTINUED OPERATIONS
Operating activities ........................................................ 2,680,882
Investing activities ........................................................ (1,920,509)
Financing activities ........................................................ (1,718,198)
--------------
Cash provided by (used in) discontinued operations .......................... (957,825)
--------------
Increase (decrease) in cash and cash equivalents ............................. 3,447,115
Cash and cash equivalents at beginning of year ............................... 216,192
--------------
Cash and cash equivalents at end of year ..................................... $ 3,663,307
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest ....................................... $ 1,039,606
==============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Issuance of detachable stock purchase warrants ............................... $ 301,500
==============
Assets purchased under capital leases ........................................ $ 41,000
==============
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1999
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ............................................................ $ (7,954,797) $ (79,312,545)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Net (gain) loss from discontinued operations ................................. (11,127,191) 61,770,592
Extraordinary item ........................................................... 1,885,512 (3,770,823)
Depreciation and amortization ................................................ 2,500,383 3,046,922
Amortization of loan fees .................................................... 314,208 2,400,831
Other amortization ........................................................... 662,391 --
Non-cash compensation expense ................................................ 310,779 552,256
Gain on sale of assets, net .................................................. -- (517,841)
Interest accretion ........................................................... -- --
Minority interest ............................................................ -- 63,398
Changes in operating assets and liabilities, net of effects from business
combinations:
Accounts receivable, net .................................................... (1,576,141) 5,935,290
Prepaid expenses and other current assets ................................... (633,258) 789,188
Other assets ................................................................ 141,111 209,538
Accounts payable ............................................................ 799,089 832,092
Medical claims payable ...................................................... 1,158,800 156,842
Accrued expenses ............................................................ 1,319,557 (1,400,384)
Accrued compensation ........................................................ 361,337 1,156,357
Accrued restructuring charge ................................................ 2,796,000 (2,132,695)
Accrued acquisition costs ................................................... -- (165,752)
Amount due to ECCA .......................................................... -- 4,031,870
------------- -------------
Net cash used in operating activities ....................................... (9,042,220) (6,354,864)
INVESTING ACTIVITIES
Payments for fixed assets, net ............................................... (3,019,932) (2,321,789)
Payments for acquisitions, net of cash acquired .............................. (41,491,787) (614,469)
Payments for capitalized acquisition costs ................................... (3,445,854) (67,878)
Net proceeds from sale of Block Buying Group ................................. -- 4,340,103
Net proceeds from sale of Retail Optical Chains .............................. -- 29,281,327
Other ........................................................................ (709,882) --
------------- -------------
Net cash provided by (used in) investing activities .......................... (48,667,455) 30,617,294
FINANCING ACTIVITIES
Net proceeds from sale of common stock ....................................... -- --
Payments for offering costs .................................................. -- --
Proceeds from long-term debt ................................................. 124,684,112 15,832,397
Payments on long-term debt and capital lease obligations ..................... (67,301,133) (40,891,774)
Proceeds from credit facility ................................................ -- --
Payments on credit facility .................................................. -- --
Payments for financing fees .................................................. (2,771,822) (851,729)
Payments to acquire treasury stock ........................................... (1,548,084) --
Proceeds from sale of stock to directors ..................................... -- 1,062,848
Sale of detachable stock purchase warrants and exercise of options ........... 148,893 291,722
Proceeds from sale of stock issued under an employee stock purchase plan ..... -- 131,461
Proceeds from limited partner for minority interest .......................... -- 346,424
Decrease in notes receivable, officers and shareholders ...................... 2,500 --
------------- -------------
Net cash provided by (used in) financing activities .......................... 53,214,466 (24,078,651)
------------- -------------
DISCONTINUED OPERATIONS
Operating activities ........................................................ 6,385,746 7,560,404
Investing activities ........................................................ (1,788,750) (3,816,707)
Financing activities ........................................................ (2,250,424) (409,747)
------------- -------------
Cash provided by (used in) discontinued operations .......................... 2,346,572 3,333,950
------------- -------------
Increase (decrease) in cash and cash equivalents ............................. (2,148,637) 3,517,729
Cash and cash equivalents at beginning of year ............................... 3,663,307 1,514,670
------------- -------------
Cash and cash equivalents at end of year ..................................... $ 1,514,670 $ 5,032,399
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest ....................................... $ 5,490,964 $ 5,939,356
============= =============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Issuance of detachable stock purchase warrants ............................... $ -- $ --
============= =============
Assets purchased under capital leases ........................................ $ -- $ 21,140
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE>
VISION TWENTY-ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 Eye Care of Tampa Bay, Inc. (MCO).
Vision Twenty-One, Inc. is a vision care company that is currently focused
on the management of refractive and ambulatory surgery centers and the
provision of managed care services.
REFRACTIVE AND AMBULATORY SURGERY CENTERS
The Company owns, or operates under management agreements, refractive and
ambulatory surgery centers and provides various operational and support
services, equipment, and facilities to local ophthalmologists so that they may
perform refractive and other ophthalmic surgical procedures, including cataract
surgery. Refractive surgery utilizes a specialized laser to correct common
vision problems such as nearsightedness, farsightedness and astigmatism and is
typically performed in a refractive surgery center on an outpatient basis. Most
other ophthalmic surgical procedures, including cataract surgery, are also
performed on an outpatient basis in an ambulatory surgery center.
MANAGED CARE
The Company's managed care organization contracts with third-party health
benefits payers (insurance companies and HMOs) to provide eye care services
through a network of associated optometrists and ophthalmologists, retail
optical companies and ambulatory surgery centers. The Company's managed care
contracts involve the receipt by the Company of vision care premiums from
health benefits payers on a fixed amount per-patient-per- month or a percentage
of the premiums paid basis. The Company pays the health care providers and
bears the risk that the cost and utilization of eye care services by patients
may exceed the premiums received. Vision Twenty-One also has contracts for the
provision of certain financial and administrative services related to indemnity
insurance and fee-for-service plans.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities and requires the Company to recognize all derivatives as
either assets or liabilities on the balance sheet and measure them at fair
value. Gains and losses resulting from changes in fair value would be accounted
for depending on the use of the derivative and whether it is designated and
qualifies for hedge accounting.
F-35
<PAGE>
In June 1999, the FASB issued Statement of Financial Accounting Standards
No. 137, Accounting for Derivative Instruments and Hedging Activities- Deferral
of the Effective Date of FASB Statement No. 133 which defers the implementation
of SFAS 133 until years beginning after June 15, 2000. The Company does not
anticipate that the adoption of SFAS 133 will have a significant effect on its
results of operations or financial position.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States 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.
RECLASSIFICATION OF FINANCIAL STATEMENTS
During the fourth quarter of 1999, the Company announced its adoption of a
plan to exit from its physician practice management ("PPM") business. Effective
August 31, 1999, the Company consummated the sale of the retail optical chain
segment of its operations. Prior period financial statements have been restated
to show these divisions as discontinued operations.
REVENUE RECOGNITION
Refractive and Ambulatory Surgery Centers
Net revenues from refractive and ambulatory surgery centers are reported
at the estimated realizable amounts from patients, third-party payers and
others for services rendered. Revenue under certain third-party payer
agreements is subject to retroactive adjustments. Provisions for estimated
third-party payer adjustments are estimated in the period the related services
are rendered and are adjusted in future periods as final payments are
determined.
Managed Care
Managed care revenues are derived principally from monthly capitation
payments from health benefits payers 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 that
automatically renew and most of the contracts are terminable by either party on
sixty days notice.
Buying Group
The buying group division provided benefits to local optometrists and
ophthalmologists (the "Affiliated Providers") through the consolidation and
management of purchases of optical goods. The Company aggregated Affiliated
Provider purchase orders for optical goods and submitted, on Company purchase
orders, the combined purchase orders to suppliers for direct shipment to the
Affiliated Providers. From the supplier perspective, the Company was the
purchaser and was responsible for supplier payments. The Company assumed the
credit risks of its Affiliated Providers. The Company invoiced the Affiliated
Providers for their purchases and recognized buying group division revenues
upon shipment of merchandise by the suppliers.
MEDICAL CLAIMS PAYABLE
In accordance with the capitation contracts entered into with certain
managed health benefits payers, 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 to the
Company (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.
F-36
<PAGE>
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 a maturity of
three months or less when purchased to be cash equivalents.
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.
GOODWILL
In connection with certain of its business combinations, the Company
recognized the excess of the purchase price over the fair values of the net
assets acquired ("goodwill") from the business combinations, which is being
amortized on a straight-line method over 25 or 30 years.
Amortization expense with respect to Goodwill was approximately $289,000,
$1,630,000 and $1,737,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
IMPAIRMENT OF ASSETS
The Company utilizes 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") to determine whether any impairment of value exists
with respect to its fixed assets. In connection with its PPM business which the
Company is exiting (see Note 3), the Company previously recognized the value of
its long-term business management agreements ("Management Agreements") as
identifiable intangible assets. The Company previously utilized SFAS 121 to
determine whether any impairment of value existed with respect to its
Management Agreements. The previously recognized value of such Management
Agreements, net of accumulated amortization, was written off in the year ended
December 31, 1999 as a component of the Company's loss on disposal of
discontinued operations.
In accordance with SFAS 121, the Company reviews the carrying value of its
fixed assets at least quarterly on an entity-by-entity basis to determine if
facts and circumstances exist which would suggest that the fixed assets may be
impaired or that the useful life needs to be modified. Among the factors the
Company considers in making the evaluation are changes in the specific
companies' 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 fixed 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 fixed assets to fair value.
The Company utilizes Accounting Principles Board Opinion No. 17,
Intangible Assets ("APB 17") to determine whether any impairment exists with
respect to its goodwill. In the event that facts and circumstances indicate
that goodwill may be impaired, an evaluation of recoverability would be
performed. If such an evaluation is performed, the estimated future
undiscounted cash flows would be compared to the asset's carrying value to
determine if a write-down is required. The Company did not recognize any
impairment losses on goodwill during the years ended December 31, 1997, 1998
and
F-37
<PAGE>
1999. In connection with the sale of the buying group division of BBG-COA, Inc.
(see Note 4), the Company wrote off goodwill of approximately $3,675,000, which
is net of accumulated amortization of $174,000. Such amount was written off as
a component of the gain recognized on the sale of the buying group division.
CONCENTRATIONS OF CREDIT RISK
The Company has accounts receivable from physicians, patients and surgery
centers. The Company does not believe that there are any substantial credit
risks associated with those receivables. The Company does not require any form
of collateral from their physicians, patients or surgery centers.
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.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements under the
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25"). In 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("SFAS 123"), which is effective for fiscal years
beginning after December 15, 1995. Under SFAS 123, the Company may elect to
recognize stock-based compensation expense based on the fair value of the
awards or continue to account for stock-based compensation under APB 25 and
disclose in the financial statements the effects of SFAS 123 as if the
recognition provisions were adopted.
The Company accounts for any stock-based compensation arrangements not
specifically addressed by APB 25 under the fair value provisions of SFAS 123,
including options granted to non-employees. The pro forma disclosures required
by SFAS 123 are provided for all stock-based compensation arrangements 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.
3. DISCONTINUED OPERATIONS
Effective August 31, 1999, the Company completed the sale of Vision World,
EyeCare One Corp., and The Eye DRx (the "Retail Optical Chains") to Eye Care
Centers of America, Inc. ("ECCA"). ECCA is based in San Antonio, Texas and
operates a national chain of full-service retail optical stores. In connection
with this transaction, the Company received approximately $37,300,000 in cash.
F-38
<PAGE>
Of the proceeds the Company received at closing, approximately $30,800,000 was
applied as a permanent pay down of its term debt credit facility, approximately
$2,800,000 was paid down under its ongoing $7,500,000 revolving credit
facility, approximately $2,400,000 was used for costs and other obligations
related to the transaction and approximately $1,250,000 was utilized to fund an
escrow arrangement between the parties relative to terms under the agreement.
Based on post-closing adjustments, the final sales price was approximately
$31,800,000, and the Company has recorded a liability of approximately
$4,032,000 to ECCA, net of escrow, with respect to such post-closing
adjustments. In addition, Vision Twenty-One has indemnified one of its former
managed professional associations for certain partnership obligations.
Accordingly, a charge of $200,000 was recorded to loss on disposal of
discontinued operations in 1999. A net loss of approximately $3,250,000 was
incurred on the transaction.
On October 25, 1999, the Company announced its intent to exit the business
of managing optometry and ophthalmology practices. The details of the plan were
finalized in December 1999. The exit of the PPM business is being accomplished
through the sale of the practice assets back to the physicians or affiliates
and the termination of the Company's long-term business management agreements
with the physician practices. As a result, the Company has reclassified its
prior period financial statements to reflect the appropriate reporting for its
PPM business, as well as the Retail Optical Chains sold during 1999, as
discontinued operations. The Company expects to complete its exit of the PPM
business by June 30, 2000.
The operating results of these discontinued operations are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1998 1999
-------------- --------------- -----------------
<S> <C> <C> <C>
Revenues ............................................... $43,521,243 $105,393,811 $ 118,954,364
Operating expenses ..................................... 38,726,844 97,283,620 115,002,526
----------- ------------ -------------
Income from discontinued operations before income tax
benefit ............................................... 4,794,399 8,110,191 3,951,838
Income tax benefit ..................................... -- 3,017,000 --
----------- ------------ -------------
Income from discontinued operations .................... 4,794,399 11,127,191 3,951,838
----------- ------------ -------------
Loss on disposal ....................................... -- -- (66,819,361)
Income tax benefit ..................................... -- -- 1,096,931
----------- ------------ -------------
Net loss on disposal ................................... -- -- (65,722,430)
----------- ------------ -------------
Total income (loss) on discontinued operations ......... $ 4,794,399 $ 11,127,191 $ (61,770,592)
=========== ============ =============
</TABLE>
The net loss on disposal for the year ended December 31, 1999 includes the
loss on the sale of Vision World and The Eye DRx of approximately $7,021,000,
the estimated loss on exiting the PPM business of approximately $59,798,000 and
the income tax benefit of $1,097,000. The estimated loss on exiting the PPM
business of approximately $59,798,000 includes the write-off of the net assets
of the PPM business of approximately $74,780,000 net of estimated proceeds of
approximately $14,982,000. Estimated proceeds includes approximately 1,800,000
shares of the Company's Common Stock to be received as consideration. Since the
actual proceeds could differ from estimated proceeds, the actual loss on
exiting the PPM business could differ from the estimated loss recognized by the
Company.
The gain on sale of EyeCare One Corp. of approximately $3,771,000 is
reported as an extraordinary item for the year ended December 31, 1999 because
this entity previously was combined with the Company in a merger which was
accounted for using pooling of interests accounting. Since the sale of EyeCare
One Corp. to ECCA occurred within two years of the merger with the Company, the
gain is recorded as an extraordinary item. When the merger with EyeCare One
Corp. was completed in March 1998, the Company had not contemplated the sale of
EyeCare One Corp.
The operating expenses of the discontinued operations for the year ended
December 31, 1997, 1998 and 1999 include an allocation of interest expense and
amortization expense of intangible assets
F-39
<PAGE>
of approximately $808,000, $3,702,000, and $3,896,000, respectively.
Additionally, in connection with the permanent pay down of its term debt credit
facility, approximately $700,000 of capitalized loan costs were expensed and
included in operating expenses of the discontinued operations for 1999. The
interest expense allocated to discontinued operations was based on the net
assets attributed to the operations of the Retail Optical Chains in accordance
with the guidance in EITF 87-24, Allocation of Interest to Discontinued
Operations.
The assets and liabilities of the discontinued operations primarily
include cash, patient accounts receivable, fixed assets, accounts payable and
accrued liabilities.
4. BUSINESS COMBINATIONS
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 surgery center development, management and
consulting company located in New Jersey which operates eight ambulatory
surgery 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
contingent consideration of up to $3,100,000 if certain post-acquisition
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 amounted to approximately $3,000,000 and is being
amortized on a straight-line method over 25 years. The operating results of
American SurgiSite have been 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 ("Block
Vision") from Block Vision stockholders. Block Vision provided benefits to
Affiliated Providers through the consolidation and management of purchases of
optical goods through its buying group division and provides vision benefit
management services to health management organizations, preferred provider
organizations and other managed care entities through its managed care
division. The purchase price for Block Vision included 458,365 shares of the
Company's Common Stock valued at approximately $6,050,000, cash of
approximately $25,651,000 and the assumption of approximately $3,243,000 in
long-term debt. The acquisition was accounted for using 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 value of the net assets acquired amounted to approximately $34,000,000 and
is being amortized on a straight-line method over 30 years. The operating
results of Block Vision have been included in the Company's consolidated
financial statements since November 1, 1997. On June 4, 1999, the Company
completed the sale of the buying group division. Net proceeds of $4,340,000
received by the Company were primarily used to repay outstanding borrowings
under the Company's credit facilities. The Company recognized a gain on the
sale of the buying group division of approximately $665,000. Such amount was
classified in gain on sale of assets in the Company's consolidated statement of
operations for the year ended December 31, 1999.
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. ("LSI") from
LaserSight, Incorporated. MEC provides vision benefit management services to
health maintenance organizations, preferred provider organizations and other
managed care entities. LSI provided practice management services to an
ophthalmology practice in New Jersey. The purchase price for MEC and LSI
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 using the purchase method
of accounting, with the purchase price allocated to the fair value of the
F-40
<PAGE>
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 value of the net assets acquired amounted to approximately
$13,000,000 and is being amortized on a straight-line method over 30 years. The
operating results of MEC and LSI have been included in the Company's
consolidated financial statements since December 1, 1997. The practice
management services provided by LSI are being eliminated as part of the
discontinuance of the PPM business.
5. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
DESCRIPTION 1998 1999
- ----------- -------------- --------------
<S> <C> <C>
Medical equipment and office furniture ............... $ 4,640,283 $ 6,228,263
Leased equipment ..................................... 362,484 428,655
Leasehold improvements ............................... 178,400 706,643
------------ ------------
5,181,167 7,363,561
Less accumulated depreciation and amortization ....... (1,104,227) (2,231,903)
------------ ------------
$ 4,076,940 $ 5,131,658
============ ============
</TABLE>
Depreciation and amortization of fixed assets totaled approximately
$229,000, $870,000 and $1,310,000 in 1997, 1998 and 1999, respectively.
Amortization expense related to capital leases is included in depreciation and
amortization in the consolidated statements of operations.
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1999
---------------- ----------------
<S> <C> <C>
Revolving line of credit (limited to $7,500,000) due June 2003, bearing
interest at a rate equal to Base Rate plus 3.75% (12.25% at
December 31, 1999) ........................................................... $ 5,593,413 $ 7,134,415
Term loans, $40,700,000 due June 2005, $900,000 due June 2003, bearing
interest at a rate equal to Base Rate plus 3.75% (12.25% at
December 31, 1999) ........................................................... 75,970,272 41,622,572
Bridge facility (limited to $9,400,000) due May 2000, bearing interest at a
rate equal to Base Rate plus 3.75% (12.25% at December 31, 1999) ............. -- 7,972,400
Notes payable due through 2001, with interest at 8.50% at
December 31, 1999 ............................................................ 1,623,056 1,518,318
------------ -------------
83,186,741 58,247,705
Less current portion .......................................................... (1,969,345) (58,135,205)
------------ -------------
$ 81,217,396 $ 112,500
============ =============
</TABLE>
On January 30, 1998, the Company entered into a five-year, $50,000,000
credit agreement (the "Credit Agreement") with the Bank of Montreal as agent
(the "Agent") for a consortium of banks (the "Banks"). The Credit Agreement,
which was to mature in January 2003, 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. Borrowings
under the Credit Agreement were secured by a pledge of the stock of
substantially all of the Company's subsidiaries as well as the assets of the
Company and certain of its subsidiaries. Obligations under the Credit Agreement
were guaranteed by certain of the Company's subsidiaries. The Credit Agreement
F-41
<PAGE>
contained negative and affirmative covenants and agreements that placed
restrictions on the Company regarding disposition of assets, capital
expenditures, additional indebtedness, permitted liens and payment of
dividends, as well as required the maintenance of certain financial ratios. The
interest rate on the Credit Agreement was, 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 $26,900,000 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. As of June 30, 1998, the
Company had used approximately $48,300,000 of its available borrowings under
the Credit Agreement.
On July 1, 1998, the Company entered into a restated $100,000,000 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, for early extinguishment of the Company's outstanding balance of
approximately $48,300,000 under its prior Credit Agreement. The remaining
balance under the Restated Credit Agreement has been accessed in the past for
working capital, general corporate purposes and acquisitions. The Restated
Credit Agreement included a seven-year term loan of $70,000,000 and a
$30,000,000 five-year revolving credit 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. At December 31,
1998, approximately $81,600,000 was outstanding under the Restated Credit
Agreement.
On February 23, 1999, the Company entered into an amendment to the
Restated Credit Agreement (the "First Amendment"). The First Amendment provided
a $50,000,000 term loan maturing in June 2005 with quarterly principal payments
of one percent beginning in June 1999, a $20,000,000 term loan maturing in June
2003 with quarterly principal payments of approximately $1,300,000 beginning in
September 2000, a $12,500,000 term loan which was to be utilized for
acquisitions and capital expenditures maturing in June 2003, and a $7,500,000
revolving credit facility maturing in June 2003. The First Amendment resulted
in a reduction of $10,000,000 in the total borrowing capacity of the Company.
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 and Restated
Credit Agreement"). The Second Amendment principally revised certain financial
covenants in connection with the credit facility which the Company was
previously unable to meet, terminated early 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 and waived the Company's
non-compliance with certain obligations under the Amended and Restated Credit
Agreement through the date thereof.
On August 30, 1999, the Company entered into a third amendment to the
Amended and Restated Credit Agreement (the "Third Amendment"). The Third
Amendment provided for the consent to the sale of the Company's Retail Optical
Chains to ECCA by the Banks and Agent as parties to the Amended and Restated
Credit Agreement, revised certain covenants and financial ratios and waived the
Company's non-compliance with certain obligations under the Amended and
Restated Credit Agreement through the date thereof. Effective August 31, 1999,
the sale of the Company's retail optical chains to ECCA was consummated. Of the
proceeds received by the Company, $30,800,000 was used to permanently reduce
the Company's term loan borrowings and $2,800,000 was used to reduce the
outstanding balance under the Company's $7,500,000 revolving credit facility.
On November 12, 1999, the Company entered into a fourth amendment to the
Amended and Restated Credit Agreement (the "Fourth Amendment"). Pursuant to the
Fourth Amendment, a
F-42
<PAGE>
bridge loan facility of $3,000,000 was made available to the Company that was
to mature on November 26, 1999. Waivers were extended on a short-term basis
regarding certain of the Company's violations of loan covenants and repayment
obligations.
On November 24, 1999, the Company entered into a fifth amendment to the
Amended and Restated Credit Agreement (the "Fifth Amendment"). Pursuant to the
Fifth Amendment, the repayment date for the bridge facility was extended, and
waivers with respect to violations of certain covenants including repayments of
certain interest and principal amounts currently due were granted until
December 10, 1999.
On December 3, 1999, the Company entered into a sixth amendment to the
Amended and Restated Credit Agreement (the "Sixth Amendment"). Pursuant to the
Sixth Amendment, availability under the bridge loan facility was increased from
an aggregate of $3,000,000 to an aggregate of $4,400,000, the repayment date of
the bridge loan facility was extended, and waivers for violations of certain
covenants and principal and interest payment due were granted until January 31,
2000.
On December 10, 1999, the Company entered into a seventh amendment to the
Amended and Restated Credit Agreement (the "Seventh Amendment"). Pursuant to
the Seventh Amendment, availability under the bridge loan facility was
increased to an aggregate of $9,400,000, the repayment date of the bridge loan
facility was extended until March 31, 2000 and waivers for violations of
certain covenants and repayment obligations currently due were granted until
December 31, 1999. Pursuant to the Seventh Amendment, the Company agreed to
provide the Banks with a weekly operating budget and to obtain approval from
the Banks for all significant cash expenditures.
On December 29, 1999, the parties to the Amended and Restated Credit
Agreement executed a waiver letter (the "December Waiver"). The December Waiver
extended the waivers provided by the Seventh Amendment regarding violations of
certain covenants and repayment obligations currently due until February 29,
2000 while the Company explored the possibility of the sale of the business or
a substantial portion of its assets. The December Waiver granted the Company
the ability to use a portion of the proceeds from the sale of the physician
practice management businesses to meet its "reasonable and necessary" operating
expenses until the sale of the Company was consummated.
On February 29, 2000, the parties to the Amended and Restated Credit
Agreement executed a waiver letter (the "February Waiver"). The February Waiver
related to the Company's announcement that it had entered into a definitive
merger agreement with OptiCare Health Systems, Inc. ("OptiCare") and extended
the waivers provided by the Seventh Amendment until the earlier of March 24,
2000 or the termination of the merger agreement with OptiCare pursuant to its
terms (see Note 16).
On March 20, 2000, the parties to the Amended and Restated Credit
Agreement executed a waiver letter (the "March Waiver"). The March Waiver
extended (i) the waivers provided by the Seventh Amendment and the December
Waiver and February Waiver and (ii) the bridge facility due date, until the
earlier of April 14, 2000 or the termination of the merger agreement with
OptiCare pursuant to its terms.
On April 14, 2000, the parties to the Amended and Restated Credit
Agreement executed a waiver letter (the "April Waiver"). The April Waiver
extended (i) the waiver provided by the Seventh Amendment and the December,
February and March Waivers and (ii) the bridge facility due date until the
earlier of May 5, 2000 or the termination of the merger agreement with OptiCare
pursuant to its terms.
On May 5, 2000, the Company received an extension of waivers through May
19, 2000
(see Note 16).
Long-term debt outstanding under the Amended and Restated Credit Agreement
has been classified as short-term in the consolidated balance sheet at December
31, 1999, since the waivers received by the Company do not extend to at least
January 1, 2001.
F-43
<PAGE>
As of December 31, 1999, the aggregate principal maturities of long-term
debt, after giving effect to the aforementioned covenant violations, are as
follows:
<TABLE>
<S> <C>
2000 ............... $58,135,205
2001 ............... 112,500
2002 ............... --
2003 ............... --
2004 ............... --
Thereafter ......... --
-----------
$58,247,705
===========
</TABLE>
In connection with the 1998 amendments to the Company's Credit Agreement,
the Company incurred extraordinary charges of $1,885,512 for the year ended
December 31, 1998. These extraordinary charges represented the write-off of
unamortized deferred loan costs in connection with the early extinguishment of
debt.
Amortization of loan fees for the year ended December 31, 1999 includes
approximately $2,100,000 of capitalized loan costs that were expensed because
such costs provide no future economic benefit to the Company.
7. CAPITAL LEASE OBLIGATIONS
The Company leases equipment under non-cancelable 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:
2000 .................................................. $ 118,603
2001 .................................................. 117,035
2002 .................................................. 90,139
2003 .................................................. 2,794
---------
Total minimum lease payments .......................... 328,571
Less amount representing interest ..................... (42,377)
---------
Present value of minimum lease payments (including
current portion of $190,292) $ 286,194
=========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases its facilities and certain office equipment under
non-cancelable operating lease arrangements that expire at various dates, most
with options for renewal. As of December 31, 1999, future minimum lease
payments under non-cancelable operating leases with original terms of more than
one year are as follows:
<TABLE>
<S> <C>
2000 ................................. $ 4,452,000
2001 ................................. 4,200,000
2002 ................................. 2,527,000
2003 ................................. 1,194,000
2004 ................................. 841,000
Thereafter ........................... 709,000
-----------
Total minimum lease payments ......... $13,923,000
===========
</TABLE>
Included in total minimum lease payments is approximately $2,859,000 of
equipment lease obligations which are expected to be substantially offset by
subleases in connection with the Company's exit from the PPM business.
F-44
<PAGE>
Rent expense in 1997, 1998 and 1999 was approximately $220,000, $1,152,000
and $3,005,000, respectively.
ASSIGNED FACILITY LEASES
There are approximately forty facility leases which were assigned to ECCA
in connection with its purchase of the Retail Optical Chains where the Company
was not released from its liability under such leases (see Note 3). As
assignee, ECCA is responsible for the payment of rents to the various
landlords, and management is not aware of the existence of any payment or other
defaults under such leases which might give rise to a claim against the
Company.
PROFESSIONAL LIABILITY
The Company is 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 medical
malpractice claims pending against the Company.
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 20, 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 one of its officers,
who is also a director, as well as two former officers liable for alleged
federal securities law violations based upon alleged misstatements and
omissions in analyst reports, trade journal articles, press releases and
filings with the Securities and Exchange Commission.
Pursuant to judicial orders, the lead plaintiffs filed an amended
consolidated complaint on August 14, 1999. On October 11, 1999, the lead
plaintiffs and Michael P. Block executed a stipulation dismissing without
prejudice the action against Mr. Block. The Defendants filed a motion to
dismiss the amended consolidated complaint on October 15, 1999. The lead
plaintiffs served answering papers on December 3, 1999. The motion to dismiss
remains under judicial review. The Company believes that it has substantial
defenses to this matter and intends to assert them vigorously.
On or about November 15, 1999, Caremark Rx, Inc. commenced an action in
the United States District Court, Middle District, against the Company. The
action alleges a breach by the Company of a promissory note and a leased
property agreement and is seeking approximately $950,000 in damages. The
Company has asserted defenses to the claim and has filed a counter-claim for
damages against Caremark Rx, Inc. for breach of contract and unfair trade
practices. The Company believes that it has substantial defenses to this matter
and intends to assert them vigorously.
Block Buying Group, LLC (the "Block Group"), an entity owned by Michael
Block, the former president of the Company's Block Vision, Inc. subsidiary, has
filed a civil action in Palm Beach County Circuit Court seeking to enjoin the
proposed merger between the Company and OptiCare. The Company previously sold
its eye care buying group business to the Block Group in June of 1999. The
Block Group has informed the Company that it believes that the proposed merger
with OptiCare is in violation of the non-competition and confidentiality
provisions entered into in connection with the June 1999 sale since OptiCare
operates a buying group division which currently competes with the Block Group.
The consummation of the proposed merger between the Company and OptiCare is
F-45
<PAGE>
subject to certain conditions including resolution of this matter to OptiCare's
satisfaction. The failure to consummate the OptiCare transaction could have a
material adverse effect on the Company (see Notes 16 and 17). The Company
believes that it has substantial defenses to this matter and intends to assert
them vigorously.
The Company has been named as a defendant in an action commenced in the
Superior Court of New Jersey on or about March 8, 2000. The action was filed by
five optometrists against Charles Cummins, O.D. and Elliot Shack, O.D.
("Cummins and Shack"), the Company, ECCA, and several other defendants who have
not been named nor identified. The Company previously purchased certain
non-optometric assets of Cummins and Shack in January 1998 which it
subsequently sold to ECCA in August, 1999. The action alleges breach of
fiduciary duty, breach of covenant of good faith and fair dealing, breach of
contract and fraud in connection with purported partnership agreements the
optometrists had with Cummins and Shack and seeks an accounting and specific
performance as well as unspecified compensatory and punitive damages. The
Company believes that it has substantial defenses to this matter and intends to
assert them vigorously.
On or about November 1, 1999, The Source Buying Group, Inc. commenced an
action in the United States District Court for the Eastern District of
Pennsylvania against Block Vision. The action alleges a breach by Block Vision
of a promissory note and is seeking approximately $562,500 representing the
accelerated principal balance of the note which the plaintiff alleges is due,
together with interest and costs. In the alternative, the plaintiff is seeking
approximately $20,800 of interest allegedly due. On or about January 14, 2000,
the action was transferred to the United States District Court for the Southern
District of Florida. Block Vision has asserted defenses to the claim and has
moved to compel arbitration. The plaintiff has filed an opposition to Block
Vision's motion for arbitration. The Company believes that it has substantial
defenses to this matter and intends to assert them vigorously.
Management of the Company is unable to determine the impact, if any, that
the resolution of the aforementioned lawsuits will have on the financial
position or results of operations of the Company. However, there can be no
assurances that the resolution of the aforementioned lawsuits will not have a
material adverse effect on the Company and further contribute to its negative
financial operations (see Note 17).
OTHER
Laws and regulations governing the Medicare, Medicaid and other programs
are complex and subject to interpretation. In the opinion of management, the
Company is 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. 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.
9. INCOME TAXES
The Company did not have a current or deferred tax provision or benefit
for the years ended December 31, 1997, 1998 or 1999.
At December 31, 1998 and 1999, 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
F-46
<PAGE>
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 1998 1999
- ----------------------------------- ----------------- ----------------
<S> <C> <C>
Net operating losses ................................................... $ 5,274,000 $ 9,901,000
Restructuring charge ................................................... 1,116,000 250,000
Reserve on investment .................................................. 301,000 --
Accrued expenses ....................................................... 147,000 2,344,000
Book: tax differences in leases ........................................ 220,000 --
Difference in book: tax depreciation ................................... -- 2,268,000
Merger costs ........................................................... -- 1,636,000
Difference in book: tax amortization ................................... -- 10,256,000
Deferred loan costs .................................................... -- 782,000
Other .................................................................. 101,000 360,000
Valuation allowance .................................................... (859,000) (27,144,000)
------------- -------------
Total deferred tax assets ........................................... 6,300,000 653,000
------------- -------------
Identifiable intangible assets not deductible for tax purposes ......... 5,369,000 136,000
Merger costs ........................................................... 1,003,000 --
Accrual to cash conversions ............................................ 73,000 126,000
Difference in book: tax amortization ................................... 628,000 --
Deferred sales proceeds ................................................ -- 319,000
Other deferred tax liabilities ......................................... 439,000 72,000
------------- -------------
Total deferred tax liabilities ...................................... 7,512,000 653,000
------------- -------------
Net deferred taxes ..................................................... $ (1,212,000) $ --
============= =============
</TABLE>
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 a valuation allowance of $27,144,000 is necessary to offset
the deferred tax assets at December 31, 1999. The increase in the valuation
allowance for 1999 is $26,285,000.
Income taxes on continuing operations are different from the amount
computed by applying the United States statutory rate to income before income
taxes for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1997 1998 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Income tax expense (benefit) at the statutory rate ......... $ (1,492,000) $ (5,847,000) $ (7,246,000)
Permanent differences ...................................... 101,000 260,000 1,399,000
Effect of purchase price allocation ........................ 877,000 -- --
S corporation (income) loss ................................ (198,000) -- --
State taxes, net of federal benefit ........................ (148,000) (596,000) (624,000)
Other ...................................................... 77,000 (97,000) --
Change in valuation allowance .............................. 783,000 6,280,000 6,471,000
------------- ------------- -------------
Income taxes ............................................... $ -- $ -- $ --
============= ============= =============
</TABLE>
The Company has net operating loss carryforwards of approximately
$26,313,000 at December 31, 1999 that expire in various amounts from 2009 to
2019.
F-47
<PAGE>
10. STOCKHOLDERS' EQUITY (DEFICIT)
PUBLIC OFFERINGS
During 1997, the Company completed its initial public offering and a
secondary 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.
PRIVATE PLACEMENT
On June 11, 1999 the Company entered into Subscription Agreements with an
entity controlled by one of the Company's current directors and with the
Company's Chief Medical Officer, who is also a current director, for the
purchase of the Company's Common Stock. The aggregate proceeds received by the
Company of approximately $1.1 million were used for working capital purposes.
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 was 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 was
3,000,000. Compensation expense under SFAS No. 123 for the options issued to
non-employees was approximately $125,000, $202,000 and $444,000 for the years
ended December 31, 1997, 1998 and 1999, 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 1998 and 1999,
respectively: risk-free interest rates of 5.50% and 5.70%; a dividend yield of
zero; volatility factors of the expected market price of the Company's Common
Stock based on industry trends of .947 and .640; 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 years ended December
31, 1997, 1998 and 1999 would be approximately ($387,000) and ($0.05),
($8,931,000) and ($0.62) and ($80,897,000) and ($5.26), respectively.
F-48
<PAGE>
A summary of the Company's stock option activity and related information is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1998 1999
----------- ------------ -------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- ---------- ------------ ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of the year ......... 562,000 $ 4.48 940,799 $ 6.90 1,153,835 $ 7.12
Granted ................................... 381,465 10.33 313,865 8.46 1,476,472 3.91
Exercised ................................. (888) 3.11 (39,052) 3.44 (70,703) 4.10
Forfeited ................................. (1,778) 3.11 (61,777) 10.85 (269,440) 6.52
------- -------- ------- -------- --------- --------
Outstanding--end of year ................... 940,799 $ 6.90 1,153,835 $ 7.12 2,290,164 $ 5.27
======= ======== ========= ======== ========= ========
Exercisable at end of year ................. 107,999 $ 3.21 399,723 $ 6.16 1,012,035 $ 5.96
======= ======== ========= ======== ========= ========
Weighted-average fair value of options
granted during the year ................... $ 4.90 $ 5.30 $ 1.71
======== ======== ========
</TABLE>
Significant option groups outstanding at December 31, 1999 and related
price and life information are as follows:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
EXERCISE CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE
- -------------------------- ------------- ---------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$3.11-$5.48............... 1,679,411 $ 3.85 $ 8.96 571,330 $ 3.54
$6.00-$9.87............... 439,988 8.35 7.70 295,771 8.07
$10.00-$11.63............. 150,765 10.95 8.10 134,934 11.01
$13.20.................... 20,000 13.20 8.00 10,000 13.20
--------- -------- ------- --------
2,290,164 $ 5.27 1,012,035 $ 5.96
========= ======== ========= ========
</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 the Company's Chief Medical Officer whereby they would
be entitled to 233,760 shares of common stock as compensation over the term of
the Agreements. The Company recorded the issuance of the Common Stock at its
fair value on the dates of the Agreements and Grant. The expense was recognized
in 1996 for the Grant and over the related terms for the Agreements. For each
of the years ended December 31, 1997, 1998 and 1999, the Company amortized
approximately $108,000 of deferred compensation under the Agreements. Such
amount was capitalized and included in acquisition costs in 1997 and 1998 and
was expensed in 1999.
F-49
<PAGE>
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, 1999 is as follows:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF PRICE
WARRANTS GRANT DUE EXPIRATION DATE PER SHARE
- ----------------- ------------------------ ------------------------ -----------------
<S> <C> <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. The ESPP was approved by the
Company's shareholders at the 1999 Annual Shareholder Meeting. Eligible
employees may elect to withhold up to 10 percent of their salary to purchase
shares of the Company's Common Stock at a price 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. For the year
ended December 31, 1999, 38,523 shares were issued under the ESPP.
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 was available for dividends in 1999 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,
1999, approximately $129,000 of available letters of credit were outstanding to
satisfy VIPA's minimum shareholders' equity requirements.
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.
F-50
<PAGE>
11. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss
per share for loss from continuing operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1998 1999
----------------- ------------------ ------------------
<S> <C> <C> <C>
Numerator for basic and diluted loss per share
-- loss available to common stockholders ......... $ (4,388,177) $ (17,196,476) $ (21,312,776)
Denominator for basic and diluted loss per
share - weighted-average shares .................. 7,975,671 14,385,359 15,377,673
------------- -------------- --------------
Basic and diluted loss per share .................. $ (0.55) $ (1.20) $ (1.39)
============= ============== ==============
</TABLE>
There were no dilutive securities included in the computations of loss per
share in any of the years ended December 31, 1997, 1998 and 1999 because the
Company incurred a loss from continuing operations in all such years. Options
and warrants to purchase approximately 3,265,000 shares of Common Stock were
outstanding at December 31, 1999, but were not included in the computation of
diluted loss per share because the effect would have been anti-dilutive.
12. 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 years ended
December 31, 1998 and 1999, the expenses related to the Plan were approximately
$53,000 and $109,000, respectively. The expense to the Company related to the
Plan in 1997 was not material.
13. 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 were
composed of a number of specific projects, were expected to position the
Company to take full operational and economic advantage of recent acquisitions.
The Restructuring Plan was to 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 resulted in the elimination of over 100 positions throughout the
Company and were completed during 1999. The planned initiatives to be
undertaken as part of the Restructuring Plan included 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 was
composed of severance costs of approximately $1,914,000 and facility and lease
termination costs of approximately $882,000. The restructuring charge of
$2,796,000 for 1998 is included in restructuring and other charges (credits) in
the consolidated statements of operations.
For the year ended December 31, 1998, other charges included in
restructuring and other charges (credits) in the consolidated statements of
operations totaling approximately $3,667,000, included the write-off of certain
amounts due from shareholders of managed physician practices related to markets
which had been exited under the Restructuring Plan (approximately $1,911,000),
an impairment
F-51
<PAGE>
charge related to one business 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 would not be realized as a result of the Restructuring Plan (approximately
$573,000).
The accrued restructuring charge of $2,796,000 at December 31, 1998 was
reduced during 1999 as follows: severance costs of approximately $720,000 were
paid and charged to the accrual; severance costs of approximately $531,000 were
reversed out of the accrual as a result of employee resignations and a change
in estimate; and lease termination costs of $882,000 were reversed out of the
accrual as a result of the sale the Retail Optical Chains. The aforementioned
reversals of the accrued restructuring charge resulted in a credit to
restructuring and other charges (credits) of approximately $1,413,000 in the
Company's consolidated statement of operations for the year ended December 31,
1999.
A summary of restructuring and other charges (credits) as described above
is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ------------- ----------------
<S> <C> <C> <C>
Restructuring charge (credit) .................. $ -- $2,796,000 $ (1,413,389)
Write-off of certain receivables pertaining to
markets to be exited under the Restructuring
Plan .......................................... -- 1,910,402 --
Write-off of identified intangibles for practice
affiliations to be abandoned .................. -- 662,391 --
Professional fees incurred prior to December 31,
1998 in connection with the development of
the Restructuring Plan ........................ -- 521,000 --
Other charges or write-offs associated with the
Restructuring Plan ............................ -- 572,802 --
------- ---------- ------------
$ -- $6,462,595 $ (1,413,389)
======= ========== ============
</TABLE>
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
was included in general and administrative expenses in the consolidated
statements of operations. These business integration costs represented
incremental or redundant costs, as well as internal costs, that resulted
directly from the development and initial implementation of the Restructuring
Plan, but were required to be expensed as incurred. These business integration
costs consisted primarily of redundant employee costs and expenses for severed
employees through the date of severance, training costs, re-branding costs,
relocation costs, retention payments and lease costs for facilities that had
been planned for future closure.
14. 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 three segments: refractive and ambulatory surgery centers, managed care
and buying group. The refractive and ambulatory surgery centers segment
includes all activity related to refractive surgery centers and ambulatory
surgery centers. The managed care segment includes the operations consisting
primarily of Block Vision, MEC and the MCO. The buying group segment includes
the operations of the buying group division which was sold effective April 30,
1999. 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, including the Company's
restructuring and other charges (credits).
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.
F-52
<PAGE>
Summarized financial information concerning the Company's reportable segments
for 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1998 1999
----------------- ---------------- ------------------
<S> <C> <C> <C>
Revenues:
Refractive and ambulatory surgery centers ......... $ -- $ 4,084,052 $ 12,507,820
Managed care ...................................... 18,762,158 54,980,006 56,743,696
Buying group ....................................... 7,260,797 58,959,195 19,150,982
------------- ------------- --------------
Total segments ................................. 26,022,955 118,023,253 88,402,498
Corporate ......................................... -- -- --
------------- ------------- --------------
Total revenues ................................. $ 26,022,955 $ 118,023,253 $ 88,402,498
============= ============= ==============
Segment profit:
Refractive and ambulatory surgery centers ......... $ -- $ 438,239 $ 630,455
Managed care (a) .................................. 1,516,837 2,794,837 4,853,878
Buying group (b) .................................. 378,598 3,033,022 890,163
------------- ------------- --------------
Total segments ................................. 1,895,435 6,266,098 6,374,496
Corporate ......................................... (4,652,062) (8,450,168) (18,044,041)
------------- ------------- --------------
Total (loss) ................................... $ (2,756,627) $ (2,184,070) $ (11,669,545)
============= ============= ==============
Depreciation and amortization:
Refractive and ambulatory surgery centers ......... $ -- $ 111,856 $ 167,808
Managed care ...................................... 67,509 319,154 396,372
Buying group ....................................... -- -- 24,000
------------- ------------- --------------
Total segments ................................. 67,509 431,010 588,180
Corporate ......................................... 451,174 2,069,373 2,458,742
------------- ------------- --------------
Total depreciation and amortization ............ $ 518,683 $ 2,500,383 $ 3,046,922
============= ============= ==============
Interest expense, net:
Refractive and ambulatory surgery centers ......... $ -- $ -- 28,584
Managed care ...................................... 21,375 4,445 $ (64,122)
Buying group ...................................... -- -- 0
------------- ------------- --------------
Total segments ................................. 21,375 4,445 (35,538)
Corporate ......................................... 912,815 4,080,446 5,587,080
------------- ------------- --------------
Total interest expense ......................... $ 934,190 $ 4,084,891 $ 5,551,542
------------- ------------- --------------
Restructuring and other charges (credits):
Refractive and ambulatory surgery centers ......... -- -- --
Managed Care ...................................... -- -- --
Buying group ...................................... -- -- --
------------- ------------- --------------
Total segments ................................. -- -- --
Corporate ......................................... -- $ 6,462,595 $ (1,413,389)
------------- ------------- --------------
Total restructuring and other charges .......... -- $ 6,462,595 $ (1,413,389)
============= ============= ==============
Merger costs:
Refractive and ambulatory surgery centers ......... -- -- --
Managed care ...................................... -- -- --
Buying group ...................................... -- -- --
------------- ------------- --------------
Total segments ................................. -- -- --
Corporate ......................................... -- $ 717,835 $ --
------------- ------------- --------------
Total merger costs ............................. -- $ 717,835 $ --
============= ============= ==============
Extraordinary item:
Refractive and ambulatory surgery centers ......... -- -- --
Managed care ...................................... -- -- --
Buying group ...................................... -- -- --
------------- ------------- --------------
Total segments ................................. -- --
Corporate ......................................... $ 323,346 $ 1,885,512 $ (3,770,823)
------------- ------------- --------------
Total extraordinary item ....................... $ 323,346 $ 1,885,512 $ (3,770,823)
============= ============= ==============
</TABLE>
- ----------
(a) Managed care segment profit includes general and administrative
expenses related to the buying group division 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 of
optical products.
F-53
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Total assets:
Refractive and ambulatory surgery centers ......... $ 1,753,668 $ 4,900,535
Managed care ...................................... 6,211,105 6,083,683
Buying group ...................................... 6,288,923 --
------------ ------------
Total segments ................................. 14,253,696 10,984,218
------------ ------------
Corporate ......................................... 62,956,299 51,656,406
------------ ------------
Total assets of continuing operations .......... $ 77,209,995 $ 62,640,624
============ ============
</TABLE>
15. OTHER RELATED PARTY TRANSACTION
In 1996, 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, 1997, 1998
and 1999, the Company paid to the consulting company approximately $600,000,
$720,000 and $420,000, respectively. Included in accounts payable at December
31, 1999 was approximately $305,000 owed to the consulting company.
16. SUBSEQUENT EVENTS
On February 10, 2000, the Company entered into an Agreement and Plan of
Merger and Reorganization ("Merger Agreement") with OptiCare Health Systems,
Inc. and OC Acquisition Corp. The merger will combine the companies' refractive
surgery, ambulatory surgery and managed care businesses. Under the terms of the
Merger Agreement, the Company's Common Stock will be converted into OptiCare
common stock at an initial exchange ratio of .402 shares of OptiCare common
stock for each share of the Company's Common Stock. At the initial exchange
ratio, approximately six million shares of OptiCare common stock would be
issued in exchange for 100% of the issued and outstanding Common Stock of the
Company. The final exchange ratio will be calculated prior to closing in part
on the basis of a subsequent determination of the Company's Consolidated
Balance Sheet. The merger will be accounted for as a purchase and includes the
assumption by OptiCare of approximately $60,000,000 of the Company's
outstanding debt. The transaction is subject to certain closing conditions,
including, but not limited to, regulatory approvals, the approval of the
shareholders of both OptiCare and the Company, the restructuring of certain
debt obligations of OptiCare and the Company and the raising by OptiCare of not
less than $30,000,000 of equity or mezzanine capital.
On April 21, 2000, the Block Group and the Company, through counsel, have
signed a stipulation to participate in expedited arbitration in accordance with
the terms and conditions of the June 1999 sale and to jointly seek the
completion of the arbitration on or before June 1, 2000, or as soon thereafter
as reasonably possible.
On May 5, 2000, the parties to the Amended and Restated Credit Agreement
executed a waiver letter (the "May Waiver"). The May Waiver extended (i) the
waiver provided by the Seventh Amendment and the December, February, March and
April Waivers and (ii) the bridge facility due date until the earlier of May
19, 2000 or the termination of the merger agreement with OptiCare pursuant to
its terms.
17. ABILITY TO CONTINUE AS A GOING CONCERN
The Company incurred operating losses in each of the years ended December
31, 1998 and 1999. At December 31, 1999, the Company had negative working
capital and a deficit in stockholders' equity. Additionally, in 1999 the
Company violated a number of covenants in its Amended and Restated Credit
Agreement with its Banks and had not made certain required payments under the
F-54
<PAGE>
Amended and Restated Credit Agreement as of December 31, 1999. Because of the
covenant violations, the amounts due at December 31, 1999 under the Amended and
Restated Credit Agreement of approximately $56,729,000 has been classified as a
current liability in the Company's consolidated balance sheet at December 31,
1999.
The Company has undertaken a number of initiatives to address these
matters. As more fully described in Notes 6 and 16, the Company has received
waivers on the covenant violations and non-payment of amounts due under the
Amended and Restated Credit Agreement. However, such waivers expire upon the
earlier of May 19, 2000 or the termination of the Merger Agreement with
OptiCare pursuant to its terms. While the Agent and the Banks previously have
demonstrated a willingness to provide further waivers to the Company until the
merger with OptiCare can be completed, there can be no assurances that
additional waivers may be obtained. Under the terms of the Amended and Restated
Credit Agreement, the Banks have the right to demand full payment of the
amounts owed under the Amended and Restated Credit Agreement if such further
waivers are not granted to the Company. The Company's existing financial
resources may not be sufficient to enable the Company to repay the entire
amount outstanding under the Amended and Restated Credit Agreement if the Banks
require payment in 2000.
Recognizing the need for additional capital to implement its refractive
surgery strategy, the Company began to explore a number of strategic
alternatives in 1999. Those alternatives included potential capital infusions
as well as a sale of all or part of the Company. Exploration of those
alternatives led to the Company announcing its proposed merger with OptiCare
(see Note 16). If the merger is completed pursuant to the terms of the Merger
Agreement, then the Company's shareholders will receive shares in OptiCare and
OptiCare will assume approximately $60,000,000 of the Company's outstanding
debt. Management of the Company expects the merger to be completed in 2000;
however, there can be assurances that the merger will be completed. Termination
of the merger could have a material adverse effect on the Company's future
operations and financial position.
In connection with the Restructuring Plan, the discontinuance of the
Company's operations related to its Retail Optical Chains and PPM business and
the Company's plans to seek a potential buyer for all or part of the remaining
businesses, management undertook a number of initiatives to reduce its
corporate general and administrative expenses. The success of these initiatives
is expected to result in less general and administrative expenses in 2000 as
compared to prior years. Coupled with cash proceeds received from the sale of
practice assets back to the physicians (see Note 3) in connection with the
Company's exiting its PPM business, management believes that the Company will
generate sufficient cash flow to continue the Company's remaining operations
while negotiating the final terms of the OptiCare merger. However, there can be
no assurances that this strategy will be achieved.
All of these factors raise substantial doubt about the Company's ability
to continue as a going concern. The accompanying consolidated financial
statements do not reflect any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
F-55
<PAGE>
OPTICARE HEALTH CENTERS, INC. AND AFFILIATE
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, DECEMBER 31,
1999 1998
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 483,545 $ 938,927
Accounts receivable, net .......................................... 6,044,840 6,349,548
Inventory ......................................................... 1,762,922 1,717,964
Prepaid expenses and other assets ................................. 911,269 584,098
Deferred income taxes ............................................. 675,816 467,009
Income taxes receivable ........................................... 225,067 22,236
Advances to related parties ....................................... 128,072 117,951
------------ ------------
Total current assets ............................................ 10,231,531 10,197,733
PROPERTY AND EQUIPMENT, NET ........................................ 6,086,968 5,766,167
DEFERRED INCOME TAXES .............................................. 60,000 73,007
INTANGIBLE ASSETS, NET ............................................. 3,384,968 3,301,744
OTHER ASSETS ....................................................... 174,891 176,266
------------ ------------
TOTAL .............................................................. $ 19,938,358 $ 19,514,917
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................. $ 1,435,787 1,905,745
Accrued expenses .................................................. 2,407,542 1,384,638
Managed care claims ............................................... 1,858,560 1,405,644
Current maturities of long-term debt .............................. 2,255,235 2,183,826
------------ ------------
Total current liabilities ....................................... 7,957,124 6,879,853
------------ ------------
LONG-TERM DEBT, LESS CURRENT PORTION ............................... 1,070,104 1,135,462
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Class A convertible preferred stock (OptiCare) authorized 160,000
shares; Issued and outstanding 152,754 shares in 1999 and 1998, par
value $0.01 (liquidation value of $93.68 per share) ............... 1,527 1,527
Class B convertible preferred stock (OptiCare) authorized 640,000
Shares; issued and outstanding 220,824 shares in 1999 and 1998, par
value $0.01 (liquidation value of $93.68 per share) ............... 2,208 2,208
Common stock (OptiCare)-authorized 1,200,000 shares; none issued,
$0.01 par value ................................................... -- --
Common stock (OptiCare, P.C.)-authorized 100 shares; issued and
outstanding 100 shares in 1999 and 1998, no par value ............. -- --
Additional paid-in-capital (OptiCare) .............................. 12,942,190 12,942,190
Additional paid-in-capital (OptiCare, P.C.) ........................ 1,000 1,000
Retained earnings (deficit) ........................................ (2,035,795) (1,447,323)
------------ ------------
Total shareholders' equity ...................................... 10,911,130 11,499,602
------------ ------------
TOTAL .............................................................. $ 19,938,358 $ 19,514,917
============ ============
</TABLE>
See notes to combined financial statements
F-56
<PAGE>
OPTICARE EYE HEALTH CENTERS, INC. AND AFFILIATE COMBINED STATEMENTS OF
OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------
JUNE 30, JUNE 30,
1999 1998
--------------- ---------------
<S> <C> <C>
NET PATIENT REVENUE ............................... $ 15,861,264 $ 12,984,054
NET PATIENT REVENUE -- RELATED PARTY .............. 1,844,100 1,500,980
NET MANAGED CARE REVENUE .......................... 790,250 429,575
NET MANAGED CARE REVENUE -- RELATED PARTY ......... 4,060,597 1,090,100
------------ ------------
TOTAL NET REVENUE ................................. 22,556,211 16,004,709
------------ ------------
OPERATING EXPENSES:
Staff compensation ............................... 6,926,723 5,387,381
Physician compensation ........................... 4,596,161 4,199,046
Surgical eyecare supplies ........................ 2,772,806 2,024,814
General and administrative ....................... 2,162,477 1,647,493
Facility rental .................................. 1,366,149 1,135,533
Managed care claims .............................. 3,861,099 1,092,375
Depreciation and amortization .................... 765,600 510,000
Marketing ........................................ 528,809 391,802
Merger costs ..................................... 450,000 --
------------ ------------
Total operating expenses ....................... 23,429,824 16,388,444
------------ ------------
OPERATING INCOME (LOSS) ........................... (873,613) (383,735)
INTEREST INCOME (EXPENSE):
Interest income .................................. 14,900 80,806
Interest expense ................................. (122,074) (4,980)
------------ ------------
Net interest income (expense) .................. (107,174) 75,826
------------ ------------
LOSS BEFORE INCOME TAXES .......................... (980,787) (307,909)
INCOME TAX BENEFIT ................................ (392,315) (123,890)
------------ ------------
NET LOSS .......................................... $ (588,472) $ (184,019)
============ ============
</TABLE>
See notes to combined financials
F-57
<PAGE>
OPTICARE EYE HEALTH CENTERS, INC. AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
JUNE 30, JUNE 30,
1999 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................ $ (588,472) $ (184,019)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization ................................. 765,600 510,000
Deferred income taxes ......................................... (195,800) (87,024)
Changes in operating assets and liabilities:
Accounts receivable, net ..................................... 304,708 (1,043,298)
Inventory .................................................... (44,958) (183,000)
Prepaid expenses and other assets ............................ (327,171) (388,987)
Income taxes receivable ...................................... (202,831) (10,361)
Advances to related parties .................................. (10,121) (43,588)
Other non-current assets ..................................... 1,375 (61,768)
Accounts payable and other liabilities ....................... (469,958) 512,888
Accrued expenses ............................................. 1,022,904 (74,671)
Managed care claims .......................................... 452,916 396,003
------------ ------------
Net cash used in operating activities ...................... 708,192 (657,825)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................. (998,801) (1,003,503)
Contract acquisitions ........................................... (170,824) --
Practice acquisitions ........................................... -- (136,503)
------------ ------------
Net cash used in investing activities ...................... (1,169,625) (1,140,006)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt ............................ (193,949) (15,039)
Borrowings under line of credit ................................. 200,000 --
------------ ------------
Net cash provided by financing activities .................. 6,051 (15,039)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ........................ (455,382) (1,812,870)
CASH AND CASH EQUIVALENS, BEGINNING OF PERIOD .................... 938,927 4,901,666
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......................... $ 483,545 $ 3,088,796
============ ============
SUPPLEMENTAL INFORMATION:
Cash paid for:
Interest ...................................................... 93,062 --
============ ============
Income taxes .................................................. 3,600 30,010
============ ============
</TABLE>
See notes to combined financial statements.
F-58
<PAGE>
OPTICARE EYE HEALTH CENTERS, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1. BASIS OF PRESENTATION
The accompanying unaudited combined financial statements of OptiCare Eye
Health Centers, Inc. ("OptiCare") and OptiCare, P.C. (collectively "the
Company") for the six months ended June 30, 1999 and 1998 have been prepared in
accordance with generally accepted accounting principles for interim fianancial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation of the combined financial
statements have been included. The accompanying combined financial statements
should be read in conjunction with the combined financial statements and
footnotes for the year ended December 31, 1998. The results of operations for
the six month period ended June 30, 1999 are not necessarily indicative of the
results to be expected for the year ending December 31, 1999.
2. REVOLVING CREDIT AGREEMENT
In September 1997, the Company entered into a $3,000,000 unsecured
revolving line of credit agreement with a bank for the purpose of providing
working capital and financing acquisitions. The agreement matures on September
30, 1999 and bears interest, at the Company's option, at Prime or LIBOR plus
1.50%, with a 0.25 % annual commitment fee charged on the unused balance of the
facility. At June 30, 1999, the Company had advances of $2,000,000 outstanding
under this line of credit and was in compliance with the restrictive covenants
under the line of credit agreement.
3. SUBSEQUENT EVENTS
On August 13, 1999 Opticare, PrimeVison Health, Inc. ("Prime") and
Saratoga Resources, Inc. ("Saratoga"), a Delaware corporation, merged. In this
transaction Prime merged with Saratoga through a reverse acquisition by Prime
of Saratoga (the "Prime Merger"). Immediately following the Prime Merger,
OptiCare was acquired by Prime (the "OptiCare Merger"). Upon consummation of
the OptiCare Merger, each share of OptiCare capital stock was converted into
the right to receive 11.7364 shares of Saratoga common stock. For accounting
purposes, Prime was the accounting acquirer and the surviving accounting
entity.
F-59
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
OptiCare Eye Health Centers, Inc. and Affiliate
We have audited the accompanying combined balance sheets of OptiCare Eye
Health Centers, Inc. (OptiCare) and OptiCare, P.C. (an affiliated corporation),
which is under common ownership and common management (collectively, the
"Company"), as of December 31, 1998 and 1997, and the related combined
statements of operations, shareholders' equity and of cash flows for each of the
three years in the period ended December 31, 1998. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined 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, such combined financial statements present fairly, in all
material respects, the combined financial position of OptiCare and OptiCare,
P.C., as of December 31, 1998 and 1997, and the combined results of their
operations and their combined cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Hartford, Connecticut
March 26, 1999
F-60
<PAGE>
OPTICARE EYE HEALTH CENTERS, INC. AND AFFILIATE
COMBINED BALANCE SHEETS--DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
ASSETS --------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................. $ 938,927 $ 4,901,666
Accounts receivable, net (Note 1) .......................... 6,349,548 4,505,077
Inventory (Note 3) ......................................... 1,717,964 1,067,535
Prepaid expenses and other assets .......................... 584,098 323,665
Deferred income taxes (Note 10) ............................ 467,009 --
Income taxes receivable .................................... 22,236 --
Advances to related parties (Note 12) ...................... 117,951 129,137
------------ -----------
Total current assets ..................................... 10,197,733 10,927,080
PROPERTY AND EQUIPMENT, NET (Note 4) ........................ 5,766,167 3,433,772
DEFERRED INCOME TAXES (Note 10) ............................. 73,007 162,976
INTANGIBLE ASSETS, NET (Note 5) ............................. 3,301,744 262,130
OTHER ASSETS ................................................ 176,266 263,070
------------ -----------
TOTAL ....................................................... $ 19,514,917 $15,049,028
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................... $ 1,905,745 $ 995,859
Accrued expenses (Note 6) .................................. 1,384,638 1,378,587
Managed care claims (Note 1) ............................... 1,405,644 427,757
Deferred income taxes (Note 10) ............................ -- 66,760
Current maturities of long-term debt (Note 7) .............. 2,183,826 59,559
------------ -----------
Total current liabilities ................................ 6,879,853 2,928,522
------------ -----------
NONCURRENT LIABILITIES:
Long-term debt (Note 7) .................................... 1,135,462 168,516
------------ -----------
COMMITMENTS AND CONTINGENCIES (Notes 8 and 14)
SHAREHOLDERS' EQUITY (Note 9):
Class A convertible preferred stock (OptiCare) authorized
160,000 shares; issued and outstanding 152,754 shares in
1998 and 1997, par value $.01 (liquidation value of $93.68
per share) ............................................... 1,527 1,527
Class B convertible preferred stock (OptiCare) authorized
640,000 shares; issued and outstanding 220,824 and 220,424
shares in 1998 and 1997, respectively, par value $.01
(liquidation value of $93.68 per share)................... 2,208 2,204
Common stock (OptiCare)--authorized 1,200,000 shares; none
issued, $.01 par value.................................... -- --
Common stock (OptiCare, P.C.)--authorized 100 shares;
issued and outstanding 100 shares in 1998 and 1997, no par
value .................................................... -- --
Additional paid-in capital (OptiCare) ...................... 12,942,190 12,892,194
Additional paid-in capital (OptiCare, P.C.) ................ 1,000 1,000
Retained earnings (deficit) ................................ (1,447,323) (944,935)
------------ -----------
Total shareholders' equity ............................... 11,499,602 11,951,990
------------ -----------
TOTAL ....................................................... $ 19,514,917 $15,049,028
============ ===========
</TABLE>
See notes to combined financial statements.
F-61
<PAGE>
OPTICARE EYE HEALTH CENTERS, INC. AND AFFILIATE
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
NET PATIENT REVENUE ................................ $25,799,934 22,746,619 20,850,864
NET PATIENT REVENUE -- RELATED PARTY ............... 3,816,979 $ 2,527,402 $ 2,843,300
NET MANAGED CARE REVENUE ........................... 1,392,543 1,366,570 1,026,083
NET MANAGED CARE REVENUE -- RELATED PARTY .......... 3,735,173 601,660 --
----------- ----------- -----------
TOTAL NET REVENUE .................................. 34,744,629 27,242,251 24,720,247
----------- ----------- -----------
OPERATING EXPENSES:
Staff compensation ................................ 11,579,083 8,450,861 7,154,733
Physician compensation ............................ 8,599,689 8,200,965 7,751,549
Surgical and eyecare supplies ..................... 4,401,250 3,066,694 2,734,154
General and administrative ........................ 3,587,533 2,824,863 2,979,691
Facility rental (Note 12) ......................... 2,422,494 1,957,593 1,876,406
Managed care claims (Note 1) ...................... 3,063,902 1,087,964 748,431
Depreciation and amortization ..................... 1,063,074 644,683 547,280
Marketing ......................................... 968,346 620,266 634,472
----------- ----------- -----------
Total operating expenses ........................ 35,685,371 26,853,889 24,426,716
----------- ----------- -----------
OPERATING INCOME (LOSS) ............................ (940,742) 388,362 293,531
INTEREST INCOME (EXPENSE):
Interest income ................................... 133,775 75,506 7,525
Interest expense .................................. (60,298) (4,551) --
----------- ----------- -----------
Net interest income ............................. 73,477 70,955 7,525
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES .................. (867,265) 459,317 301,056
INCOME TAX PROVISION (BENEFIT) (Note 10) ........... (364,877) 132,600 158,252
----------- ----------- -----------
NET INCOME (LOSS) .................................. $ (502,388) $ 326,717 $ 142,804
=========== =========== ===========
</TABLE>
See notes to combined financial statements.
F-62
<PAGE>
OPTICARE EYE HEALTH CENTERS, INC. AND AFFILIATE
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
OPTICARE OPTICARE
CLASS A CLASS B OPTICARE
PREFERRED PREFERRED COMMON
STOCK STOCK STOCK
----------- ----------- ---------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 ................ $ -- $ -- $ 2,595,000
Exercise of warrants (Note 9) ............ -- -- 647,815
Net income ............................... -- -- --
------ ------ -------------
BALANCE, DECEMBER 31, 1996 ................ -- -- 3,242,815
Recapitalization in October 1997
(Note 9) ................................ 887 2,193 (3,242,753)
Sale of shares in October 1997 (Note 9)... 640 -- --
Repurchase of shares (Note 9) ............ -- -- (62)
Shares issued in connection with
Practice Acquisitions in December
1997 (Note 2) ........................... -- 11 --
Net income ............................... -- -- --
------ ------ -------------
BALANCE, DECEMBER 31, 1997 ................ 1,527 2,204 --
Shares issued in connection with
Practice Acquisitions in 1998 (Note 2)... 4
Net loss ................................. -- -- --
------ ------ -------------
BALANCE, DECEMBER 31, 1998 ................ $1,527 $2,208 $ --
====== ====== =============
<CAPTION>
OPTICARE OPTICARE P.C.
ADDITIONAL ADDITIONAL RETAINED
PAID-IN PAID-IN EARNINGS
CAPITAL CAPITAL (DEFICIT) TOTAL
-------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 ................ $ 3,301,131 $1,000 $ (1,414,456) $ 4,482,675
Exercise of warrants (Note 9) ............ 1,012,185 -- -- 1,660,000
Net income ............................... -- -- 142,804 142,804
----------- ------ ------------ -----------
BALANCE, DECEMBER 31, 1996 ................ 4,313,316 1,000 (1,271,652) 6,285,479
Recapitalization in October 1997
(Note 9) ................................ 3,239,673 -- -- --
Sale of shares in October 1997 (Note 9)... 5,783,498 -- -- 5,784,138
Repurchase of shares (Note 9) ............ (586,749) -- -- (586,811)
Shares issued in connection with
Practice Acquisitions in December
1997 (Note 2) ........................... 142,456 -- -- 142,467
Net income ............................... -- -- 326,717 326,717
----------- ------ ------------ -----------
BALANCE, DECEMBER 31, 1997 ................ 12,892,194 1,000 (944,935) 11,951,990
Shares issued in connection with
Practice Acquisitions in 1998 (Note 2)... 49,996 50,000
Net loss ................................. -- -- (502,388) (502,388)
----------- ------ ------------ -----------
BALANCE, DECEMBER 31, 1998 ................ $12,942,190 $1,000 $ (1,447,323) $11,499,602
=========== ====== ============ ===========
</TABLE>
See notes to combined financial statements.
F-63
<PAGE>
OPTICARE EYE HEALTH CENTERS, INC. AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------- --------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................ $ (502,388) $ 326,717 $ 142,804
Adjustments to reconcile net income (loss) to net cash used in
operations:
Depreciation and amortization .............................. 1,063,074 644,683 547,280
Deferred income taxes ...................................... (443,800) (299,724) (200,090)
(Gain) loss on disposal of fixed assets .................... -- (3,900) 6,321
Changes in operating assets and liabilities:
Accounts receivable, net .................................. (1,794,471) (944,865) (347,183)
Inventory ................................................. (250,475) (157,572) (91,510)
Prepaid expenses and other assets ......................... (260,433) (185,655) 15,308
Advances to related parties ............................... 11,186 (60,067) 40,823
Other noncurrent assets ................................... 19,521 (114,001) 17,766
Accounts payable and other liabilities .................... 648,134 119,004 (321,499)
Accrued expenses .......................................... 6,051 87,808 27,329
Managed care claims ....................................... 977,887 427,757 --
Income taxes payable ...................................... -- (190,096) 160,342
------------ ------------ ----------
Net cash used in operating activities ................... (525,714) (349,911) (2,309)
------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .......................... (2,622,856) (1,501,185) (986,640)
Proceeds from sale of fixed assets ........................... -- 3,900 16,156
Practice acquisitions ........................................ (2,554,610) (108,680) --
------------ ------------ ----------
Net cash used in investing activities ................... (5,177,466) (1,605,965) (970,484)
------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt ......................... (59,559) (14,364) (252,936)
Borrowings under line of credit .............................. 1,800,000 --
Net proceeds from issuance of stock .......................... -- 5,784,138 1,660,000
Cash used to repurchase stock ................................ -- (586,811) --
------------ ------------ ----------
Net cash provided by financing activities ............... 1,740,441 5,182,963 1,407,064
------------ ------------ ----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS .................................................. (3,962,739) 3,227,087 434,271
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR ......................................................... 4,901,666 1,674,579 1,240,308
------------ ------------ ----------
CASH AND CASH EQUIVALENTS, END OF YEAR ........................ $ 938,927 $ 4,901,666 $1,674,579
============ ============ ==========
SUPPLEMENTAL INFORMATION :
Cash paid for:
Interest ................................................... $ 29,531 $ 4,802 $ 13,807
============ ============ ==========
Income taxes ............................................... $ 130,550 $ 622,974 $ 185,000
============ ============ ==========
</TABLE>
See notes to combined financial statements.
F-64
<PAGE>
OPTICARE EYE HEALTH CENTERS, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Busines
OptiCare Eye Health Centers, Inc. ("OptiCare") and OptiCare, P.C. (collectively,
the "Company") operate in the eye health business providing general eye care,
optical services, outpatient ophthalmic surgery, consultative services for
complicated eye diseases and a managed care network throughout Connecticut.
OptiCare owns and operates the retail eyeglass and eyeglass manufacturing
business and the related assets. OptiCare P.C., was established for the purpose
of rendering ophthalmology and optometry services exclusively for OptiCare.
OptiCare, P.C. entered into a Professional Services and Support Agreement with
OptiCare effective December 1, 1995.
Basis of Presentation
The accompanying combined financial statements include the accounts of OptiCare
and OptiCare, P.C. Due to the related business activities, common management
control and the interdependence of the affiliated entities, combined financial
statements are presented because they are more meaningful. All significant
intercompany accounts and transactions have been eliminated in the combined
financial statements.
Estimates
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing financial statements, management is
required to make estimates and assumptions, particularly in determining the
adequacy of the allowance for doubtful accounts, insurance disallowances and
managed care claims accrual, that affect the reported amounts of assets and
liabilities as of the balance sheet date and results of operations for the year.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers investments purchased with an original maturity of three
months or less to be cash equivalents.
Receivables
Receivables are stated net of allowances for doubtful accounts which aggregated
$114,300 and $81,100 as of December 31, 1998 and 1997, respectively. Gross
receivables are stated net of contractual allowances and insurance
disallowances.
Inventories
Inventories are valued at the lower of cost or market, determined on the
first-in, first-out (FIFO) basis.
Intangible Assets
The Company uses the straight-line method to amortize intangible assets over
their estimated useful lives which range from 5 to 20 years. The Company's
management periodically evaluates the carrying value of its intangible assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Recoverability is based on
estimated future undiscounted cash flows from the use and ultimate disposition
of the asset.
F-65
<PAGE>
OPTICARE EYE HEALTH CENTERS, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Property and Equipment
Property and equipment consists of furniture, fixtures, equipment, leasehold
improvements and a vehicle and are recorded at cost. Leasehold improvements are
being amortized over the term of the lease or the life of the improvement,
whichever is shorter. Depreciation and amortization are provided primarily
using the straight-line method over the estimated useful lives of the
respective assets as follows:
<TABLE>
<CAPTION>
CLASSIFICATION ESTIMATED USEFUL LIFE
-------------- ---------------------
<S> <C>
Furniture, fixtures and equipment .......... 5--7 years
Leasehold improvements ..................... 3--20 years
Vehicle .................................... 5 years
</TABLE>
Stock-based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB No. 25), and related
interpretations. Accordingly, compensation cost for the stock options included
under the Company's 1997 Stock Option Plan is measured as the excess, if any,
of the fair value of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock.
Fair Value of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires
the disclosure of fair value information for certain assets and liabilities,
whether or not recorded in the balance sheet, for which it is practicable to
estimate that value. The Company has the following financial instruments: cash
and cash equivalents, receivables, accounts payable, accrued liabilities and
long-term debt. The Company considers the carrying amount of these items,
excluding long-term debt, to approximate their fair values because of the short
period of time between the origination of such instruments and their expected
realization. Refer to Note 7 for fair value disclosures of long-term debt.
Net Patient Revenue
The Company has agreements with third-party payors that provide for payments to
the Company at amounts different from its established rates. Net patient
revenue is reported at the estimated net realizable amounts from patients,
third-party payors, and others for services rendered.
Net Managed Care Revenue
Revenue is derived from monthly capitation payments from health benefits payors
which contract with the Company for the delivery of eye care services. The
Company records this revenue at contractually agreed-upon rates during the
period in which the Company is obligated to provide services to members.
Managed Care Claims Expense
Claims expense is recorded as provider services are rendered and includes an
estimate for claims incurred but not reported.
Malpractice Claims
The Company purchases insurance to cover medical malpractice claims. There are
known claims and incidents as well as potential claims from unknown incidents
that may be asserted from past services provided. Management believes that
these claims, if asserted, would be settled within the limits of insurance
coverage.
F-66
<PAGE>
OPTICARE EYE HEALTH CENTERS, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" which requires an
asset and liability method of accounting for deferred income taxes. Under the
asset and liability method, deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis using enacted tax rates expected to apply to taxable
income in the years the temporary differences are expected to reverse.
Reclassification
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.
2. ACQUISITIONS
The Company acquired seven optometric medical and retail optical practices in
1998 for $2,554,610 in cash, $50,000 in stock, and $1,375,000 in notes payable
for a total of $3,979,610 (see also Note 14). The Company acquired one
optometric medical and retail optical practice in 1997 for $108,680 in cash,
$142,467 in stock and $189,324 in notes payable for a total of $440,471. The
Company issued 400 shares and 1,140 shares of OptiCare Class B Preferred stock
in 1998 and 1997, respectively, in connection with these acquisitions.
The 1998 and 1997 acquisitions were accounted for as purchases. Accordingly,
the results of operations of the acquired practices are included in the
combined financial statements from the dates of acquisition and the assets and
liabilities of the acquired entities have been recorded at their estimated fair
values at the dates of acquisition. The excess of the purchase prices over the
estimated fair values of the net assets acquired in the amount of $2,993,752 in
1998 and $258,991 in 1997 is recorded as goodwill and is being amortized on a
straight-line basis over 20 years.
Assuming all of the aforementioned acquisitions had occurred on January 1,
1997, combined net revenues for the Company would have been $38,596,000 for
1998 and $33,023,000 for 1997. Combined net income (loss) for the Company would
have been $(378,000) and $429,000 for 1998 and 1997, respectively.
3. INVENTORY
Inventory as of December 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Surgical supplies ....................... $ 168,306 $ 130,484
Eye glasses and contact lenses .......... 1,455,067 851,167
Eye glasses work-in-process ............. 94,591 85,884
---------- ----------
Total ................................... $1,717,964 $1,067,535
========== ==========
</TABLE>
F-67
<PAGE>
OPTICARE EYE HEALTH CENTERS, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
4. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Equipment .......................................... $ 7,779,516 $ 7,586,877
Furniture and fixtures ............................. 2,193,960 1,024,896
Leasehold improvements ............................. 2,627,781 1,904,993
Vehicle ............................................ 21,853 21,352
------------ ------------
Total .............................................. 12,623,110 10,538,118
Accumulated depreciation and amortization .......... (6,856,943) (7,104,346)
------------ ------------
Property and equipment, net ........................ $ 5,766,167 $ 3,433,772
============ ============
</TABLE>
Depreciation expense was $968,461, $633,680 and $542,752 for the years ended
December 31, 1998, 1997 and 1996, respectively.
5. INTANGIBLE ASSETS
Intangible assets as of December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
--------------- -------------
<S> <C> <C>
Goodwill ........................................... $ 3,401,091 $ 434,147
Other intangibles .................................. 982,946 815,663
------------ ----------
Total .............................................. 4,384,037 1,249,810
Accumulated amortization ........................... (1,082,293) (987,680)
------------ ----------
Intangible assets, net ............................. $ 3,301,744 $ 262,130
============ ==========
</TABLE>
Amortization of the intangible assets for the years ended December 31, 1998,
1997 and 1996 was $94,613, $11,003 and $4,528, respectively.
6. ACCRUED EXPENSES
Accrued expenses as of December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Patient refunds .................................... $ 369,935 $ 213,300
Incentives ......................................... 310,395 266,419
Payroll ............................................ 262,596 567,447
Vacation ........................................... 251,744 287,703
Accrued interest ................................... 30,767 --
Other .............................................. 159,201 43,718
---------- ----------
Total .............................................. $1,384,638 $1,378,587
========== ==========
</TABLE>
F-68
<PAGE>
OPTICARE EYE HEALTH CENTERS, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
7. LONG-TERM DEBT
The details of the Company's long-term debt and the provisions thereof at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
Note payable due in quarterly payments of $3,100, including interest
at 6.69% per year, through June 2001, collateralized by specific
assets of the Company ............................................... $ 28,516 $ 38,751
Notes payable from acquisitions at various interest rates with various
maturities through September 2001, unsecured (see Note 2) ........... 290,772 189,324
Note payable from acquisition due in annual installments of $240,000
plus interest at 7.0% per year, through October 2003, collateralized
by specific assets of the Company (see Note 2) ...................... 1,200,000 --
Revolving line of credit, unsecured .................................. 1,800,000 --
---------- --------
Total ................................................................ 3,319,288 228,075
Less current maturities .............................................. 2,183,826 59,559
---------- --------
$1,135,462 $168,516
========== ========
</TABLE>
Required principal payments on the obligations discussed above as of December
31, 1998 are as follows:
<TABLE>
<S> <C>
1999 ................... $2,183,826
2000 ................... 327,731
2001 ................... 327,731
2002 ................... 240,000
2003 ................... 240,000
----------
Total .................. $3,319,288
==========
</TABLE>
Notes payable at December 31, 1998 and 1997 represent debt issued to employees
or employee shareholders in connection with practice acquisitions.
In September 1997, the Company obtained a $3,000,000 unsecured revolving line
of credit from a bank which matures on June 30, 1999 and bears interest, at the
Company's option, at Prime or LIBOR plus 1.50%. The interest rate on this line
of credit was 7.75% at December 31, 1998. Additionally, there is a 0.25%
commitment fee on the unused balance of the facility. The Company must comply
with various restrictive covenants in connection with its revolving line of
credit. The Company was in violation of certain covenants in 1998 and received
a waiver from the bank with respect to these violations.
The fair value of each of the Company's debt instruments approximated its
recorded value at December 31, 1998 and 1997, based on the Company's effective
current borrowing rate for debt with similar terms and remaining maturities.
8. LEASES
The Company leases facilities and certain equipment under several cancelable
and noncancelable operating leases expiring in various years through 2010.
Certain of the facility leases provide for renewal periods of up to 10 years,
at the option of the Company, and at rental payments as negotiated under the
respective leases (see Note 12).
Aggregate future minimum rental payments under noncancelable operating leases
as of December 31, 1998 are as follows:
F-69
<PAGE>
OPTICARE EYE HEALTH CENTERS, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------------
<S> <C>
1999 ........................ $1,864,613
2000 ........................ 1,308,274
2001 ........................ 780,211
2002 ........................ 657,471
2003 ........................ 427,689
Thereafter .................. 354,124
----------
Total ....................... $5,392,382
==========
</TABLE>
9. SHAREHOLDERS' EQUITY
All employee shareholders of OptiCare and OptiCare P.C. have executed a
"Shareholders' Agreement" with their respective entities. The agreements
provide, among other things, that no shareholder can dispose of their stock
without first offering the stock to the entity. The agreements also provide
that certain shareholders, who are also employees of OptiCare or OptiCare P.C.,
must offer their stock to the respective entity upon voluntary termination or
termination for cause, as defined in the agreement.
During 1996, Blue Cross and Blue Shield of Connecticut, Inc. exercised a
warrant to purchase 20,494 shares of Class D common stock, par value $31.64 per
share for a total price of $1,660,000.
On October 15, 1997, OptiCare underwent a recapitalization in connection with
the stock purchase and warrant agreements described below. The new equity
structure established three new classes of stock and canceled all of the
preexisting classes.
Outstanding shares of Class A and C common stock were converted one for one to
new Class B Convertible Preferred Stock, with the exception of 6,264 shares of
Class A common stock and 16,312 shares of Class C common stock. Outstanding
shares of Class B and D common stock, as well as the remaining 16,312 shares
Class C common stock, were all converted one for one to New Class A Convertible
Preferred Stock. Both Series A and B Preferred Shares are convertible into
common stock based on a one for one basis. Additionally, all preferred shares
shall be automatically converted into common stock in the event of an initial
public offering meeting certain qualifications as defined in the Certificate of
Incorporation.
Series A and B Preferred Shareholders are entitled to $93.68 per share plus any
unpaid dividends upon voluntary or involuntary liquidation. Upon liquidation,
Series A Preferred Shareholders shall be entitled to receive their liquidation
value per share before Series B Preferred Shareholders receive any
distributions. Additionally, Series B Preferred Shareholders shall be entitled
to receive their liquidation value per share before the common stockholders
receive any distributions in liquidation.
On October 15, 1997, OptiCare entered into a stock purchase agreement with a
group of investors (the "New Investors") which provided for the sale of 64,048
shares of New Class A Preferred Stock for $6,000,000 in cash, less expenses of
$215,862. Additionally, OptiCare entered into a warrant agreement which
resulted in the issuance of warrants to the New Investors to purchase 48,669
shares of New Class B Preferred Stock and to existing investors to purchase
12,353 shares of New Class B Preferred Stock. These warrants are exercisable at
a price of $93.68 per share of New Class B Preferred Stock and expire on
October 15, 2002. No warrants were exercised during 1998 or 1997.
In November 1997, OptiCare repurchased the remaining 6,264 shares of Class A
common stock from an employee shareholder for an aggregate price of $586,811.
On January 1, 1998 Opticare adopted the 1997 Stock Option Plan (the "Plan"),
which permits the granting of options to employees of OptiCare and OptiCare
P.C., which shall be either incentive stock options, as defined under Section
422 of the Internal Revenue code, or non-qualified options. The Company is
F-70
<PAGE>
OPTICARE EYE HEALTH CENTERS, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
authorized to grant 48,814 options under the Plan, which expire in 2008. The
options vest ratably over a four-year period. During 1998, 42,497 options were
granted at an exercise price of $30. No options were exercised or canceled
during 1998. The Company applies APB Opinion No. 25 and related interpretations
in accounting for its Plan. Accordingly, no compensation cost has been
recognized for stock options awarded under the Plan. Had compensation cost for
the Company's stock option plan been determined based on the fair value at
grant dates consistent with the methodology prescribed under SFAS No.123, the
Company's net loss for the year ended December 31, 1998 would have been
increased by an immaterial amount.
10. INCOME TAXES
The tax effects of significant items comprising the net deferred tax assets
(liabilities) as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- --------------
<S> <C> <C>
Current:
Cash to accrual conversion .................... $ -- $ (211,857)
Managed care claims ........................... 320,279 31,231
Vacation accrual .............................. 101,377 118,232
Other ......................................... 45,353 (4,366)
-------- ----------
Total net current assets (liabilities) ......... $467,009 $ (66,760)
======== ==========
Noncurrent:
Depreciation .................................. $ 45,814 $ 140,411
Other ......................................... 27,193 22,565
-------- ----------
Total net noncurrent assets .................... $ 73,007 $ 162,976
======== ==========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Management considers the scheduled reversal of
deferred tax assets, the availability of federal income tax carrybacks and
projected future taxable income. Based upon the level of historical taxable
income in 1998, 1997 and 1996 and projections for future taxable income over
the periods in which the deferred tax assets are deductible, management
believes it is more likely than not that all of the deferred tax assets will be
fully realized.
The provision (benefit) for income taxes for the years ended December 31, 1998,
1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal ................ $ 78,923 $ 336,054 $ 265,711
State .................. -- 96,270 92,631
---------- ---------- ----------
Total current .......... 78,923 432,324 358,342
========== ========== ==========
Deferred:
Federal ................ (339,100) (221,324) (144,090)
State .................. (104,700) (78,400) (56,000)
---------- ---------- ----------
Total deferred ......... (443,800) (299,724) (200,090)
---------- ---------- ----------
Total .................. $ (364,877) $ 132,600 $ 158,252
========== ========== ==========
</TABLE>
F-71
<PAGE>
OPTICARE EYE HEALTH CENTERS, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
A reconcilation from the Federal income tax provision (benefit) at the
statutory rate to the effective rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ----------- -----------
<S> <C> <C> <C>
Federal statutory rate .............................. $ (294,870) $ 156,167 $102,359
State income taxes, net of federal benefit .......... (52,036) 32,589 22,850
Other ............................................... (17,971) (56,156) 33,043
---------- --------- --------
$ (364,877) $ 132,600 $158,252
========== ========= ========
</TABLE>
11. RETIREMENT PLAN
The Company provides a defined contribution 401(k) savings plan (the "Plan"),
in which all full-time employees of the Company with at least one year of
service are eligible to participate. Eligible employees may contribute between
1% to 25% of their salary to the Plan subject to IRS limitations. The Company
provides a matching contribution of 25% of the employee contributions, whereby
only the first 3% of employee salaries are matched. The Company's contribution
to the Plan was $70,916, $55,909 and $40,077 for the years ended December 31,
1998, 1997 and 1996, respectively.
12. RELATED PARTY TRANSACTIONS
The Company has advanced funds to shareholders and employees which are
repayable under various arrangements. All advances are unsecured. Interest
income under these agreements was not significant during the years ended
December 31, 1998, 1997 and 1996.
In addition, the Company leases various facilities from several of its
shareholders and entities owned by several of its shareholders. Payments under
such leases approximated $1,528,000, $1,259,000 and $1,124,000 during the year
ended December 31, 1998, 1997 and 1996, respectively.
OptiCare, Inc. has guaranteed an obligation of O.C. Realty Associates, a
related party. The amount of such indebtedness at December 31, 1998, 1997 and
1996 was $221,853, $233,814 and $244,706, respectively, and is secured by the
assets of O.C. Realty Associates.
In connection with the stock purchase agreement, the Company also entered into
a consulting agreement with one of the New Investors. Under the terms of this
agreement this individual will provide management consulting services for a
period of 36 months beginning October 15, 1997.
The Company, in its normal course of business, has entered into various arm's
length managed care, ambulatory surgery center, and provider agreements with
its health care investors. Total net revenue earned from these related parties
was $7,552,152, $3,129,602, and $2,843,300 for the years ended December 31,
1998, 1997 and 1996, respectively.
13. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Medicare represented 25%, 29%, and 28% of total net revenue for the years ended
December 31, 1998, 1997 and 1996, respectively and 13% and 16% of accounts
receivable at December 31, 1998 and 1997, respectively. In addition, one other
customer/shareholder represented approximately 20%, 11% and 12% of total net
revenue during 1998 , 1997 and 1996, respectively and 29% and 22% of accounts
receivable at December 31, 1998 and 1997, respectively.
F-72
<PAGE>
OPTICARE EYE HEALTH CENTERS, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
14. CONTINGENCIES
In connection with the purchase of a practice in 1998, the Company agreed to
pay, as additional consideration for the acquisition of the assets, a
contingent payment based upon the profitability of the practice for the twelve
month period beginning November 1, 1998. The contingent payment, not to exceed
$320,000, is due in quarterly installments beginning on January 1, 2000 through
October 1, 2003 at an interest rate of 7%. Any such contingent payments will be
recorded, when earned, as goodwill as additional purchase price consideration.
The Company is involved in litigation in the normal course of business. The
Company is vigorously defending its position and, based on discussions with
outside counsel, believes it will prevail with respect to any outstanding
litigation. Therefore, no provision for loss has been recorded.
******
F-73
<PAGE>
APPENDICES
Appendix A -- Agreement and Plan of Merger
Appendix B -- Form of Irrevocable Proxy to Vote Stock of Vision Twenty-One,
Inc.
Appendix C -- Form of Irrevocable Proxy to Vote Stock of OptiCare Health
Systems, Inc.
Appendix D -- Legg Mason Fairness Opinion
Appendix E -- PaineWebber Fairness Opinion
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
AMONG
VISION TWENTY-ONE, INC.,
OC ACQUISITION CORP.
AND
OPTICARE HEALTH SYSTEMS, INC.
DATED AS OF FEBRUARY 10, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ARTICLE I
DEFINITIONS .......................................................................... A-1
SECTION 1.01 Certain Defined Terms ................................................... A-1
ARTICLE II
THE MERGER ........................................................................... A-6
SECTION 2.01 The Merger .............................................................. A-6
SECTION 2.02 Closing ................................................................. A-6
SECTION 2.03 Effective Time .......................................................... A-6
SECTION 2.04 Effect of the Merger .................................................... A-7
SECTION 2.05 Articles of Incorporation; Bylaws; Directors and Officers of Surviving
Corporation ........................................................................ A-7
ARTICLE III
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES ................................... A-7
SECTION 3.01 Conversion of Shares .................................................... A-7
SECTION 3.02 Exchange of Shares Other than Treasury Shares ........................... A-8
SECTION 3.03 Stock Transfer Books .................................................... A-10
SECTION 3.04 No Fractional Share Certificates ........................................ A-10
SECTION 3.05 Options to Purchase Company Common Stock ................................ A-10
SECTION 3.06 Unvested Stock .......................................................... A-11
SECTION 3.07 Certain Adjustments ..................................................... A-12
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF COMPANY ............................................ A-12
SECTION 4.01 Organization and Qualification; Subsidiaries ............................ A-12
SECTION 4.02 Articles of Incorporation and Bylaws .................................... A-13
SECTION 4.03 Capitalization .......................................................... A-13
SECTION 4.04 Authority Relative to This Agreement .................................... A-14
SECTION 4.05 No Conflict; Required Filings and Consents .............................. A-14
SECTION 4.06 Permits; Compliance with Laws ........................................... A-15
SECTION 4.07 SEC Filings; Financial Statements ....................................... A-15
SECTION 4.08 Absence of Certain Changes or Events .................................... A-16
SECTION 4.09 Employee Benefit Plans; Labor Matters ................................... A-16
SECTION 4.10 Certain Tax Matters ..................................................... A-19
SECTION 4.11 Contracts ............................................................... A-19
SECTION 4.12 Litigation .............................................................. A-20
SECTION 4.13 Environmental Matters ................................................... A-20
SECTION 4.14 Intellectual Property ................................................... A-20
SECTION 4.15 Taxes ................................................................... A-21
SECTION 4.16 Insurance ............................................................... A-22
SECTION 4.17 Properties .............................................................. A-23
SECTION 4.18 Affiliates .............................................................. A-23
SECTION 4.19 Opinion of Financial Advisor ............................................ A-23
SECTION 4.20 Brokers ................................................................. A-23
SECTION 4.21 Florida Business Corporation Law ........................................ A-23
SECTION 4.22 Business Activity Restriction ........................................... A-24
SECTION 4.23 Governmental Authorizations ............................................. A-24
SECTION 4.24 Gifts, Political Contributions, Unrecorded Funds ........................ A-24
SECTION 4.25 No Dissenters' Rights ................................................... A-24
SECTION 4.26 Board Recommendation .................................................... A-25
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT ................................ A-25
SECTION 5.01 Organization and Qualification; Subsidiaries ............... A-25
SECTION 5.02 Certificate of Incorporation and Bylaws .................... A-25
SECTION 5.03 Capitalization ............................................. A-25
SECTION 5.04 Authority Relative to This Agreement ....................... A-26
SECTION 5.05 No Conflict; Required Filings and Consents ................. A-26
SECTION 5.06 Permits; Compliance with Laws .............................. A-27
SECTION 5.07 SEC Filings; Financial Statements .......................... A-27
SECTION 5.08 Absence of Certain Changes or Events ....................... A-28
SECTION 5.09 Employee Benefit Plans; Labor Matters ...................... A-28
SECTION 5.10 Certain Tax Matters ........................................ A-29
SECTION 5.11 Contracts .................................................. A-30
SECTION 5.12 Litigation ................................................. A-31
SECTION 5.13 Environmental Matters ...................................... A-31
SECTION 5.14 Insurance .................................................. A-31
SECTION 5.15 Properties ................................................. A-31
SECTION 5.16 Opinion of Financial Advisor ............................... A-31
SECTION 5.17 Brokers .................................................... A-32
SECTION 5.18 No Interested Shareholders ................................. A-32
SECTION 5.19 Governmental Authorizations ................................ A-32
SECTION 5.20 Intellectual Property. ..................................... A-32
ARTICLE VI
COVENANTS ............................................................... A-33
SECTION 6.01 Conduct of Business by Company Pending the Closing ......... A-33
SECTION 6.02 Notices of Certain Events .................................. A-35
SECTION 6.03 Access to Information; Confidentiality ..................... A-35
SECTION 6.04 No Solicitation of Transactions ............................ A-35
SECTION 6.05 Tax-Free Transaction ....................................... A-37
SECTION 6.06 Control of Operations ...................................... A-37
SECTION 6.07 Further Action; Consents; Filings .......................... A-37
SECTION 6.08 Additional Reports ......................................... A-37
SECTION 6.09 Conduct of Business by Parent .............................. A-38
SECTION 6.10 Post Merger Directors and Officers ......................... A-39
SECTION 6.11 Bank Restructuring ......................................... A-39
SECTION 6.12 Disposition of Practices ................................... A-39
SECTION 6.13 Financing Commitments ...................................... A-40
SECTION 6.14 Standstill Agreement ....................................... A-40
SECTION 6.15 Voting ..................................................... A-40
SECTION 6.16 Waiver ..................................................... A-40
ARTICLE VII
ADDITIONAL AGREEMENTS ................................................... A-40
SECTION 7.01 Registration Statement; Joint Proxy Statement .............. A-40
SECTION 7.02 Stockholders' Meetings ..................................... A-42
SECTION 7.03 Affiliates ................................................. A-42
SECTION 7.04 Directors' and Officers' Indemnification and Insurance ..... A-42
SECTION 7.05 No Shelf Registration ...................................... A-43
SECTION 7.06 Public Announcements ....................................... A-43
SECTION 7.07 AMEX Listing ............................................... A-43
SECTION 7.08 Blue Sky ................................................... A-44
SECTION 7.09 Acquisition of Company Capital Stock ....................... A-44
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ARTICLE VIII
CONDITIONS TO THE MERGER ..................................................... A-44
SECTION 8.01 Conditions to the Obligations of Each Party to Consummate the
Merger ..................................................................... A-44
SECTION 8.02 Conditions to the Obligations of Company ........................ A-45
SECTION 8.03 Conditions to the Obligations of Parent ......................... A-45
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER ............................................ A-46
SECTION 9.01 Termination ..................................................... A-46
SECTION 9.02 Effect of Termination ........................................... A-47
SECTION 9.03 Amendment ....................................................... A-48
SECTION 9.04 Waiver .......................................................... A-48
SECTION 9.05 Termination Fee; Expenses ....................................... A-48
ARTICLE X
GENERAL PROVISIONS ........................................................... A-50
SECTION 10.01 Non-Survival of Representations and Warranties ................. A-50
SECTION 10.02 Notices ........................................................ A-50
SECTION 10.03 Severability ................................................... A-50
SECTION 10.04 Assignment; Binding Effect; Benefit ............................ A-51
SECTION 10.05 Incorporation of Exhibits ...................................... A-51
SECTION 10.06 Governing Law .................................................. A-51
SECTION 10.07 Waiver of Jury Trial ........................................... A-51
SECTION 10.08 Headings; Interpretation ....................................... A-51
SECTION 10.09 Counterparts ................................................... A-52
SECTION 10.10 Entire Agreement ............................................... A-52
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION, dated as of February 10,
2000 (as amended, supplemented or otherwise modified from time to time, this
"Agreement"), among OPTICARE HEALTH SYSTEMS, INC., a Delaware corporation
("Parent"), VISION TWENTY-ONE, INC., a Florida corporation ("Company"), and OC
ACQUISITION CORP., a Florida corporation and a direct wholly owned subsidiary
of Parent ("Merger Sub").
W I T N E S S E T H:
WHEREAS, the boards of directors of Parent and Company have determined
that it is advisable and in the best interests of their respective companies
and stockholders to enter into a business combination by means of the merger of
Merger Sub with and into Company (the "Merger") and have approved and adopted
this Agreement;
WHEREAS, concurrently with the execution of this Agreement and as an
inducement to Parent to enter into this Agreement, certain stockholders of
Company have granted an irrevocable proxy (referred to herein as the "Company
Stockholder Agreement") in the form attached hereto as Annex A;
WHEREAS, concurrently with the execution of this Agreement and as an
inducement to Company to enter into this Agreement, certain stockholders of
Parent have granted an irrevocable proxy (referred to herein as the "Parent
Stockholder Agreement") in the form attached hereto as Annex B;
WHEREAS, upon the terms and subject to the conditions of this Agreement
and in accordance with the Florida Business Corporation Act, as amended (the
"FBCA"), Parent will acquire all of the common stock of Company through the
merger of Merger Sub with and into Company; and
WHEREAS, for United States Federal income tax purposes, it is intended
that the Merger shall qualify as a tax-free reorganization under Section 368(a)
of the Internal Revenue Code of 1986, as amended (together with the rules and
regulations promulgated thereunder, the "Code"), and that this Agreement shall
be, and hereby is, adopted as a plan of reorganization for purposes of Section
368 of the Code;
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements set forth herein, and other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereto
hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01 Certain Defined Terms
Unless the context otherwise requires, the following terms, when used in
this Agreement, shall have the respective meanings specified below (such
meanings to be equally applicable to the singular and plural forms of the terms
defined):
"Adjusted Financial Statements" shall mean the Company's month-ending
balance sheet and statements of income and changes in stockholders' equity as
of the latest practicable date no earlier than forty-five (45) days prior to
the Exchange Ratio Adjustment Date (defined below), which financial statements
have been prepared in accordance with GAAP applied on a consistent basis
throughout the periods covered thereby; provided, however, that the financial
statements are subject to normal and recurring year-end adjustments and lack
footnotes and other presentation items. The "Exchange Ratio Adjustment Date"
shall be the fifth Business Day prior to the effective date of the Registration
Statement or such later date prior to the mailing of the Joint Proxy Statement
as the parties may mutually agree.
A-1
<PAGE>
"Affiliate" shall mean, with respect to any person, any other person that
controls, is controlled by or is under common control with the first person.
"Amex" shall mean the American Stock Exchange.
"ASCI Debt" shall mean the amount of "Contingent Consideration" payable to
American Surgicite Centers, Inc. pursuant to the Asset Purchase Agreement dated
as of September 1, 1998 among the Company and American Surgicite Centers, Inc.
"Bank Austria" shall mean Bank Austria Creditanstaldt Corporate Finance,
Inc.
"Bank Austria Credit Agreement" shall mean the Amended and Restated Loan
and Security Agreement dated as of August 13, 1999 among the Parent, certain of
the Parent Subsidiaries and the lenders named therein, and Bank Austria, as
Agent.
"Blue Sky Laws" shall mean state securities or "blue sky" laws.
"Business Day" shall mean any day on which the principal offices of the
SEC in Washington, D.C. are open to accept filings, or, in the case of
determining a date when any payment is due, any day on which banks are not
required or authorized by law or executive order to close in New York.
"Company Common Stock" shall mean the common stock, par value $.001 per
share, of the Company.
"Company Disclosure Schedule" shall mean the disclosure schedule delivered
by Company to Parent prior to the execution of this Agreement and forming a
part hereof.
"Company Intellectual Property" shall mean all patents (including, without
limitation, all U.S. and foreign patents, patent applications, patent
disclosures, and any and all divisions, continuations, continuations-in-part,
reissues, re-examinations and extensions thereof), design rights, trademarks,
trade names and service marks (whether or not registered), trade dress,
Internet domain names, copyrights (whether or not registered) and any renewal
rights therefor, sui generis database rights, statistical models, technology,
inventions, supplier lists, trade secrets, know-how, computer software programs
or applications in both source and object code form, databases, technical
documentation of such software programs ("Technical Documentation"),
registrations and applications for any of the foregoing and all other tangible
or intangible proprietary information or materials that were material to
Company's business or are currently used in Company's business in any product,
technology or process (i) currently being or formerly manufactured, published
or marketed by Company or (ii) previously or currently under development for
possible future manufacturing, publication, marketing or other use by Company
or (iii) used by the Company.
"Company Material Adverse Effect" shall mean any change in or effect on
the business of Company and the Company Subsidiaries that, individually or in
the aggregate (taking into account all other such changes or effects), is, or
is reasonably likely to be, materially adverse to the business, assets,
liabilities, financial condition or results of operations of Company and the
Company Subsidiaries, taken as a whole, except to the extent that any such
change in or effect results from (i) changes in general economic conditions or
changes affecting the industry generally in which Company operates (provided
that such changes do not affect Company in a materially disproportionate
manner); (ii) changes in trading prices for the Company's common stock; (iii)
disposition of Practices (as hereinafter defined), divestiture of Corporate
Optometry and termination of managed care contracts as specifically identified
on Schedule 4.08 of the Company Disclosure Schedule; (iv) ongoing professional
fees consistent with the level of professional fees incurred by the Company
during the period from January 10, 2000 to February 9, 2000; (v) Special
Charges that cause an adjustment to the Exchange Ratio per Section 3.01 hereto;
and (vi) the net writedown of certain assets associated with business
operations which are being discontinued.
"Company Stock Plans" shall mean the Company's 1996 and 1999 Stock
Incentive Plans for employees and the Company's Stock Option Plan for
Affiliated Professionals.
A-2
<PAGE>
"Competing Transaction" shall mean any of the following involving Company
(other than the Merger):
(i) any merger, consolidation, share exchange, business combination or
other similar transaction;
(ii) any sale, exchange, transfer or other disposition of 33% or more
of the assets of the Company and/or its subsidiaries, taken as a whole, in
a single transaction or series of transactions, including, but not limited
to, the assets or stock relating to MEC Healthcare Inc. ("MEC") or the
Company's laser vision division;
(iii) any tender offer or exchange offer for 33% or more of the
outstanding voting securities of the Company or the filing of a
registration statement under the Securities Act in connection therewith;
(iv) any person having acquired beneficial ownership or the right to
acquire beneficial ownership of, or any "group" (as such term is defined
under Section 13(d) of the Exchange Act) having been formed that
beneficially owns or has the right to acquire beneficial ownership of, 33%
or more of the outstanding voting securities of the Company other than in
connection with a Financing Transaction (as defined below);
(v) any person having acquired beneficial ownership or the right to
acquire beneficial ownership of, or any "group" (as such term is defined
under Section 13(d) of the Exchange Act) having been formed that
beneficially owns or has the right to acquire beneficial ownership of, 49%
or more of the outstanding voting securities of the Company from the
Company or any of the Company's Affiliates in connection with a transaction
(a "Financing Transaction") with the purpose of the Company obtaining
bonafide financing without the investor making such financing with the
intent of exercising control over the Company and/or management of the
Company other than as may be typical of a lender in a commercial financing
transaction;
"Confidentiality Agreement" shall mean the confidentiality agreement,
dated November 24, 1999, between Parent and Company.
"Corporate Optometry" shall mean an optometric practice owned or managed
by the Company as set forth on Section 6.12 of the Company Disclosure Schedule.
"$" shall mean United States Dollars.
"DGCL" shall mean the Delaware General Corporation Law, as amended.
"Earn-out Agreement" shall mean any merger, purchase, sale or other
business combination agreement between the Company and one or more third
parties pursuant to which the Company is obligated to pay cash or issue shares
of its capital stock subsequent to the date hereof as more specifically set
forth on Attachment 4 to Schedule 4.03 of the Company Disclosure Schedule.
"Environmental Law" shall mean any Law and any enforceable judicial or
administrative interpretation thereof, including any judicial or administrative
order, consent decree or judgment, relating to pollution or protection of the
environment or natural resources, including, without limitation, those relating
to the use, handling, transportation, treatment, storage, disposal, release or
discharge of Hazardous Material, as in effect as of the date hereof.
"Environmental Permit" shall mean any permit, approval, identification
number, license or other authorization required under or issued pursuant to any
applicable Environmental Law.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"Existing Credit Agreement" shall mean the Amended and Restated Credit
Agreement dated as of July 1, 1998 among the Company, the banks party thereto
and Bank of Montreal, as Agent, as amended.
A-3
<PAGE>
"Expenses" shall mean, with respect to any party hereto, all documented
out-of-pocket expenses (including, without limitation, all fees and expenses of
counsel, accountants, investment bankers, experts and consultants to a party
hereto and its affiliates) and internal costs at commercially reasonable rates
incurred by such party or on its behalf in connection with or related to the
authorization, preparation, negotiation, execution and performance of its
obligations pursuant to this Agreement and the consummation of the Merger, the
preparation, printing, filing and mailing of the Registration Statement and the
Joint Proxy Statement, the solicitation of stockholder approvals, the filing of
HSR Act notice, if any, and all other matters related to the transactions
contemplated hereby and the closing of the Merger.
"GAAP" means generally accepted accounting principles set forth from time
to time in the opinions and pronouncements of the Accounting Principles Board
and the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board (or agencies with
similar functions of comparable statute and authority within the U.S.
accounting profession), which are applicable to the circumstances as of the
date of determination.
"Governmental Entity" shall mean any United States Federal, state or local
or any foreign governmental, regulatory or administrative authority, agency or
commission or any court, tribunal or arbitral body.
"Governmental Order" shall mean any order, writ, judgment, injunction,
decree, stipulation, determination or award entered by or with any Governmental
Entity.
"Hazardous Material" shall mean (i) any petroleum, petroleum products,
by-products or breakdown products, radioactive materials, asbestos-containing
materials or polychlorinated biphenyls or (ii) any chemical, material or
substance defined or regulated as toxic or hazardous or as a pollutant or
contaminant or waste under any applicable Environmental Law.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, together with the rules and regulations promulgated
thereunder.
"IRS" shall mean the United States Internal Revenue Service.
"Intangible Assets" shall have the conventional accounting meaning in
compliance with GAAP.
"Knowledge" an individual will be deemed to have "Knowledge" of a
particular fact or other matter if such individual is actually aware of or
should reasonably be aware of such fact or other matter.
A Person (other than an individual) will be deemed to have "Knowledge" of
a particular fact or other matter if any individual who is serving, or who has
at any time served, as a director, officer, partner, manager, executor, or
trustee of such Person (or in any similar capacity) has, or at any time had,
Knowledge of such fact or other matter.
"Law" shall mean any Federal, state, foreign or local statute, law,
ordinance, regulation, rule, code, order, judgment, decree, other requirement
or rule of law of the United States or any other jurisdiction, and any other
similar act or law.
"Long-Term Indebtedness and Equivalents" shall mean, as reflected in the
Adjusted Financial Statements, the aggregate of (i) all of the Company's
long-term obligations, indebtedness or other liabilities of any kind or nature,
fixed or contingent, which in accordance with GAAP would be classified as a
long-term liability on the consolidated balance sheet of the Company and the
Company Subsidiaries, including, but not limited to obligations under capital
leases and deferred rent payables, (ii) the Purchase Adjustment Debt and (iii)
Special Charges, but excluding deferred tax liabilities.
"Merger" shall have the meaning ascribed to such term in the first Whereas
clause of this Agreement.
"NNM", shall mean the NASDAQ National Market.
A-4
<PAGE>
"Net Debt Equivalents" or "NDE" shall mean, as reflected in the Adjusted
Financial Statements, all of the Company's Long-Term Indebtedness and
Equivalents less the Company's cash, including any cash equivalents or
marketable securities and as otherwise having the conventional meaning in
compliance with GAAP.
"Net Worth" shall mean, as reflected in the Adjusted Financial Statements,
total shareholder's equity (including capital stock, additional paid-in capital
and retained earnings after deducting treasury stock) which would appear on the
balance sheet of the Company and the Company's Subsidiaries prepared on a
consolidated basis in accordance with GAAP.
"Ophthalmologist/Optometrist Employee" shall mean a licensed
ophthalmologist or optometrist employed by the Company or the Company
Subsidiaries or the Parent or the Parent Subsidiaries, as the case may be, or a
professional corporation to which the Company or the Company Subsidiaries or
the Parent or the Parent Subsidiaries as the case may be, provides services.
"Ophthalmology and Optometry Practices" shall mean any ophthalmology
and/or optometry practices owned or managed by the Company as set forth on
Section 6.12 of the Company Disclosure Schedule.
"Parent Common Stock" shall mean the common stock, par value $.001 per
share, of the Parent.
"Parent Disclosure Schedule" shall mean the disclosure schedule delivered
by Parent to Company prior to the execution of this Agreement and forming a
part hereof.
"Parent Material Adverse Effect" shall mean any change in or effect on the
business of Parent and the Parent Subsidiaries that, individually or in the
aggregate (taking into account all other such changes or effects), is, or is
reasonably likely to be, materially adverse to the business, assets,
liabilities, financial condition or results of operations of Parent and the
Parent Subsidiaries, taken as a whole, except to the extent that any such
change in or effect results from (i) changes in general economic conditions or
changes affecting the industry generally in which Parent operates (provided
that such changes do not affect Parent in a materially disproportionate manner)
and (ii) any changes in the trading price of Parent Common Stock.
"Parent Stock Plans" shall mean Parent's Performance Stock Program and the
Employee Stock Purchase Plan.
"Person" shall mean an individual, corporation, partnership, limited
partnership, limited liability company, limited liability partnership,
syndicate, person (including, without limitation, a "person" as defined in
Section 13(d)(3) of the Exchange Act), trust, association, entity or government
or political subdivision, agency or instrumentality of a government.
"Purchase Adjustment Debt" shall mean the amount which is claimed by Eye
Care Centers of America, Inc. to be owed to it through purchase price
adjustments and indemnities pursuant to the terms of the Asset Purchase
Agreement dated July 7, 1999 among the Company and Eye Care Centers of America,
Inc.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended,
together with the rules and regulations promulgated thereunder.
"Special Charges" shall mean, as reflected in the balance sheet of the
Adjusted Financial Statements, the aggregate liability of: any one time charges
and accruals (extraordinary or otherwise) relating to matters outside of the
ordinary course of business, including but not limited to, layoffs and
severance (including those individuals appropriately identified on Company
Disclosure Schedule 4.09), one time lease shutdowns, restructuring charges, the
net writedown of certain assets associated with business operations which are
being discontinued, the maximum amount of cash payable by the Company, or the
Parent after the Effective Time, as the case may be, which is reasonably likely
to be paid pursuant to the ASCI Debt and the Earn-out Agreements as of the
Exchange Ratio Adjustment
A-5
<PAGE>
Date, the Additional Premium Amount or the Excess Projected Cumulative Amount
(as defined in Section 7.04 (d)), as the case may be, and any accrued and
unpaid expenses incurred by the Company in connection with obtaining or
attempting to obtain such third party consent as agreed upon by the Parent and
the Company.
"Subsidiary" shall mean, with respect to any person, any corporation,
partnership, limited partnership, limited liability company, limited liability
partnership, joint venture or other legal entity of which such person (either
alone or through or together with any other subsidiary of such person) owns,
directly or indirectly, a majority of the stock or other equity interests, the
holders of which are generally entitled to vote for the election of the board
of directors or other governing body of such corporation or other legal entity.
"Tangible Net Worth" or "TNW" shall mean, as reflected in the Adjusted
Financial Statements, the Company's Net Worth less Intangible Assets.
"Tax" shall mean (i) any and all taxes, fees, levies, duties, tariffs,
imposts and other charges of any kind (together with any and all interest,
penalties, additions to tax and additional amounts imposed with respect
thereto) imposed by any Governmental Entity or taxing authority, including,
without limitation, taxes or other charges on or with respect to income,
franchises, windfall or other profits, gross receipts, property, sales, use,
capital stock, payroll, employment, social security, workers' compensation,
unemployment compensation or net worth; taxes or other charges in the nature of
excise, withholding, ad valorem, stamp, transfer, value-added or gains taxes;
license, registration and documentation fees; and customers' duties, tariffs
and similar charges; (ii) any liability for the payment of any amounts of the
type described in (i) as a result of being a member of an affiliated, combined,
consolidated or unitary group for any taxable period; and (iii) any liability
for the payment of amounts of the type described in (i) or (ii) as a result of
being a transferee of, or a successor in interest to, any Person or as a result
of an express or implied obligation to indemnify any person.
"Tax Return" shall mean any return, statement or form (including, without
limitation, any estimated tax reports or return, withholding tax reports or
return and information report or return) required to be filed with respect to
any Taxes.
ARTICLE II
THE MERGER
SECTION 2.01 The Merger
Upon the terms and subject to the conditions set forth in this Agreement,
and in accordance with the FBCA, at the Effective Time (as defined in Section
2.03), Merger Sub shall be merged with and into Company. As a result of the
Merger, the separate corporate existence of Merger Sub shall cease and Company
shall continue as the surviving corporation of the Merger as a wholly owned
subsidiary of Parent (the "Surviving Corporation").
SECTION 2.02 Closing
Unless this Agreement shall have been terminated and the Merger herein
contemplated shall have been abandoned pursuant to Section 9.01 and subject to
the satisfaction or waiver of the conditions set forth in Article VIII, the
consummation of the Merger shall take place as promptly as practicable (and in
any event within three Business Days) after satisfaction or waiver of the
conditions set forth in Article VIII, at a closing (the "Closing") to be held
at the offices of Kane Kessler, P.C., 1350 Avenue of the Americas, New York,
New York 10019, unless another date, time or place is mutually agreed to by
Parent and Company.
SECTION 2.03 Effective Time
At and after the time of the Closing, the parties shall cause the Merger
to be consummated by filing the articles of merger (the "Certificate of
Merger") with the Department of State of the State of Florida in such form as
required by, and executed in accordance with the relevant provisions of, the
FBCA (the date and time of such filing, or such later date and time as may be
set forth therein, being the "Effective Time").
A-6
<PAGE>
SECTION 2.04 Effect of the Merger
At the Effective Time, the effect of the Merger shall be as provided in
the applicable provisions of the FBCA. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the property,
rights, privileges, powers and franchises of Company and Merger Sub shall vest
in Company as the Surviving Corporation, and all debts, liabilities and duties
of Company and Merger Sub shall become the debts, liabilities and duties of
Company as the Surviving Corporation.
SECTION 2.05 Articles of Incorporation; Bylaws; Directors and Officers of
Surviving Corporation
Unless otherwise agreed by Parent and Company before the Effective Time,
at the Effective Time:
(a) the Articles of Incorporation and the Bylaws of Merger Sub in
effect immediately prior to the Effective Time shall be the Articles of
Incorporation and the Bylaws of the Surviving Corporation, until thereafter
amended as provided by Law and such Article of Incorporation or Bylaws;
provided, however, that Article I of the Certificate of Incorporation of
the Surviving Corporation shall be amended to read as follows: "The name of
the corporation is " " and the bylaws shall be amended to reflect such
name change;
(b) the officers of Merger Sub immediately prior to the Effective Time
shall serve in their respective offices of the Surviving Corporation from
and after the Effective Time, in each case until their successors are
elected or appointed and qualified or until their resignation or removal;
and
(c) the directors of Merger Sub immediately prior to the Effective Time
shall serve as the directors of the Surviving Corporation from and after
the Effective Time, in each case until their successors are elected or
appointed and qualified or until their resignation or removal.
ARTICLE III
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
SECTION 3.01 Conversion of Shares
(a) At the Effective Time, by virtue of the Merger, and without any
action on the part of Parent, Merger Sub, Company or the holders of any of
the following securities:
(i) each share of Common Stock, $.001 par value, of Company ("Company
Common Stock") issued and outstanding immediately before the Effective Time
(excluding those held in the treasury of Company and those owned by any
wholly owned subsidiary of Company) and all rights in respect thereof,
shall, forthwith cease to exist and be converted into and become
exchangeable for the right to receive 0.402 shares (the "Exchange Ratio")
of common stock, $.001 par value, of Parent ("Parent Common Stock");
(ii) each share of Company Common Stock held in the treasury of Company
or owned by any wholly owned subsidiary of Company immediately prior to the
Effective Time shall be canceled and retired and no shares of stock or
other securities of Parent, the Surviving Corporation or any other
corporation shall be issuable, and no payment or other consideration shall
be made, with respect thereto; and
(iii) each issued and outstanding share of capital stock of Merger Sub
shall be converted into and become one fully paid and nonassessable share
of common stock of the Surviving Corporation.
(b) notwithstanding anything to the contrary above, the Exchange Ratio
shall be adjusted and recalculated as of the Exchange Ratio Adjustment Date
in accordance with the following formula:
Exchange Ratio = 6,000,000 - (.25 (NDE - $54 Million)) +
(.125 (TNW - ($56) Million))
----------------------------------------
X
A-7
<PAGE>
where X represents the number of outstanding shares of Company Common Stock as
of the Exchange Ratio Adjustment Date.
(c) The Exchange Ratio shall be adjusted downward to account for the
maximum amount of shares of Company Common Stock, or Parent Common Stock after
the Effective Time, as the case may be, which are reasonably expected to be
issued pursuant to the Earn-out Agreements as of the Exchange Ratio Adjustment
Date, as mutually agreed upon by the Parent and the Company (the "Earn-out
Stock Amount").
(d) The Adjusted Financial Statements and/or the Earn-out Stock Amount
shall be reasonably satisfactory to Parent. Upon receipt by Parent of the
Adjusted Financial Statements and/or the Earn-out Stock Amount from the
Company, Parent shall accept or reject the Adjusted Financial Statements and/or
the Earn-out Stock Amount by written notice to the Company within three (3)
Business Days thereafter; failure to reject the Adjusted Financial Statements
and/or Earn-out Stock Amount, as applicable, within such period shall be deemed
conclusive acceptance of the Adjusted Financial Statements and/or the Earn-out
Stock Amount, as applicable. If Parent disputes the Adjusted Financial
Statements and/or the Earn-out Stock Amount, the parties will attempt to
resolve their differences jointly and the Company shall provide Parent
reasonable access to its appropriate records, including but not limited to, its
work papers, but if no resolution is reached within three (3) Business Days,
then the parties agree to submit the disputed items to an independent "Big 6"
accounting firm as may be mutually agreed upon by the respective accounting
firms of Parent and the Company, for determination within ten (10) Business
Days, which determination shall be conclusive for the purposes of this
Agreement. The cost of such mutually agreed accounting firm's determination
shall be borne equally by the Company and Parent.
SECTION 3.02 Exchange of Shares Other than Treasury Shares
(a) Exchange Agent. As of the Effective Time, Parent shall enter into an
agreement with a bank or trust company to act as exchange agent for the Merger
(the "Exchange Agent") as may be designated by Parent.
(b) Parent to Provide Common Stock and Cash. Promptly after the Effective
Time, Parent shall make available to the Exchange Agent for the benefit of the
holder of Company Common Stock: (i) Certificates of Parent Common Stock
("Parent Certificates") representing the number of whole shares of Parent
Common Stock issuable pursuant to Section 3.01(a) in exchange for shares of
Company Common Stock outstanding immediately prior to the Effective Time; (ii)
sufficient funds to permit payment in lieu of fractional shares pursuant to
Section 3.04 and (iii) any dividends or distributions to which holders of
shares of Company Common Stock may be entitled pursuant to Section 3.07.
(c) Exchange Procedures. The Exchange Agent shall mail to each holder of
record of certificates of Company Common Stock ("Company Certificates"), whose
shares were converted into the right to receive shares of Parent Common Stock
(and cash in lieu of fractional shares pursuant to Section 3.04) promptly after
the Effective Time (and in any event no later than three Business Days after
the later to occur of the Effective Time and receipt by Parent of a complete
list from the Company of the names and addresses of its holders of record): (i)
a letter of transmittal (which shall specify that delivery shall be effected,
and risk of loss and title to the Company Certificates shall pass, only upon
receipt of the Company Certificates by the Exchange Agent, and shall be in such
form and have such other provisions as Parent may reasonably specify); and (ii)
instructions for use in effecting the surrender of the Company Certificates in
exchange for Parent Certificates (and cash in lieu of fractional shares). Upon
surrender of a Company Certificate for cancellation to the Exchange Agent or to
such other agent or agents as may be appointed by Parent, together with such
letter of transmittal, duly completed and validly executed, and such other
documents as may be reasonably required by the Exchange Agent, the holder of
such Company Certificate shall be entitled to receive in exchange therefor a
Parent Certificate representing the number of whole shares of Parent Common
Stock that such holder has the right to receive pursuant to this Article III
and payment of cash in lieu of fractional shares which such holder has the
right to receive pursuant to Section 3.04, and the
A-8
<PAGE>
Company Certificate so surrendered shall forthwith be canceled. Until so
surrendered, each outstanding Company Certificate that, prior to the Effective
Time, represented shares of Company Common Stock will be deemed from and after
the Effective Time, for all corporate purposes other than the payment of
dividends and distributions, to evidence the ownership of the number of full
shares of Parent Common Stock into which such shares of Company Common Stock
shall have been so converted and the right to receive an amount in cash in lieu
of the issuance of any fractional shares in accordance with Section 3.04.
Notwithstanding any other provision of this Agreement, no interest will be paid
or will accrue on any cash payable to holders of Company Certificates pursuant
to the provisions of this Article III.
(d) Lost, Stolen or Destroyed Company Certificates. In the event any
Company Certificates shall have been lost, stolen or destroyed, the Exchange
Agent shall issue in exchange for such lost, stolen or destroyed Company
Certificates, upon the making of an affidavit of that fact by the holder
thereof, a Parent Certificate representing such shares of Parent Common Stock
(and cash in lieu of fractional shares) as may be required pursuant to this
Article III; provided, however, that Parent may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed Company Certificates to indemnify Parent against any claim
that may be made against Parent, the Surviving Corporation or the Exchange
Agent with respect to the Company Certificates alleged to have been lost,
stolen or destroyed.
(e) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions with respect to Parent Common Stock with a record date
after the Effective Time will be paid to the holder of any unsurrendered
Company Certificate with respect to the shares of Parent Common Stock
represented thereby until the holder of record of such Company Certificate
shall surrender such Company Certificate. Subject to the effect of applicable
escheat or similar laws, following surrender of any such Company Certificate,
there shall be paid to the record holder of the Parent Certificates issued in
exchange therefor, without interest, at the time of such surrender, the amount
of any such dividends or other distributions with a record date after the
Effective Time theretofore payable (but for the provisions of this Section
3.02(e)) with respect to such shares of Parent Common Stock.
(f) Transfer of Ownership. If any Parent Certificate is to be issued in a
name other than that in which the Company Certificate surrendered in exchange
therefor is registered, it will be a condition of the issuance thereof that the
Company Certificate so surrendered will be properly endorsed and otherwise in
proper form for transfer and that the person requesting such exchange will have
paid to Parent or any agent designated by it any transfer or other taxes
required by reason of the issuance of a Parent Certificate for shares of Parent
Common Stock in any name other than that of the registered holder of the
Company Certificate surrendered, or established to the satisfaction of Parent
or any agent designated by it that such tax has been paid or is not payable.
(g) Termination of Exchange Agent Funding. Any portion of funds (including
any interest earned thereon) or Parent Certificates held by the Exchange Agent
which have not been delivered to holders of Company Certificates pursuant to
this Article III within six months after the Effective Time shall promptly be
paid or delivered, as appropriate, to Parent, and thereafter holders of Company
Certificates who have not theretofore complied with the exchange procedures
outlined in and contemplated by this Section 3.02 shall thereafter look only to
Parent (subject to abandoned property, escheat and similar laws) only as
general creditors thereof for their claim for shares of Parent Common Stock,
any cash in lieu of fractional shares of Parent Common Stock and any dividends
or distributions (with a record date after the Effective Time) with respect to
Parent Common Stock to which they are entitled.
(h) No Liability. Notwithstanding anything to the contrary in this Section
3.02, none of the Exchange Agent, the Surviving Corporation or any party hereto
shall be liable to any person in respect of any shares of Parent Common Stock
or cash delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
(i) Expenses of Exchange Agent. Parent shall pay all charges and expenses
of the Exchange Agent incurred solely in connection with the transactions
contemplated by this Agreement, to the extent of $8,500, with any and all
charges and expenses above such amount being borne by the Company.
A-9
<PAGE>
SECTION 3.03 Stock Transfer Books
(a) At the Effective Time, the stock transfer books of Company shall each
be closed, and there shall be no further registration of transfers of shares of
Company Common Stock thereafter on the records of any such stock transfer
books. In the event of a transfer of ownership of shares of Company Common
Stock that is not registered in the stock transfer records of Company at the
Effective Time, a certificate or certificates representing the number of full
shares of Parent Common Stock into which such shares of Company Common Stock
shall have been converted shall be issued to the transferee together with a
cash payment in lieu of fractional shares, if any, in accordance with Section
3.04 hereof, and a cash payment in the amount of dividends, if any, in
accordance with Section 3.02(e) hereof, if the certificate or certificates
representing such shares of Company Common Stock is or are surrendered as
provided in Section 3.02(c) hereof, accompanied by all documents required to
evidence and effect such transfer and by evidence of payment of any applicable
stock transfer tax.
(b) Notwithstanding anything to the contrary herein, certificates
surrendered for exchange by any person constituting an affiliate of Company
shall not be exchanged until Parent shall have received from such person an
affiliate letter as provided in Section 7.03.
SECTION 3.04 No Fractional Share Certificates
No scrip or fractional share Parent Certificate shall be issued upon the
surrender for exchange of Company Certificates, and an outstanding fractional
share interest shall not entitle the owner thereof to vote, to receive
dividends or to any rights of a stockholder of Parent or of Surviving
Corporation with respect to such fractional share interest. As promptly as
practicable following the Effective Time, Parent shall deposit with the
Exchange Agent an amount in cash sufficient for the Exchange Agent to pay each
holder of Company Common Stock an amount in cash equal to the product obtained
by multiplying (i) the fractional share interest to which such holder would
otherwise be entitled (after taking into account all shares of Company Common
Stock held at the Effective Time by such holder) by (ii) the closing price for
a share of Parent Common Stock on the American Stock Exchange (the "AMEX") on
the last Business Day prior to the Effective Time. As soon as practicable after
the determination of the amount of cash, if any, to be paid to holders of
Company Common Stock with respect to any fractional share interests, the
Exchange Agent shall make available such amounts, net of any required
withholding Taxes, to such holders of Company Common Stock, subject to and in
accordance with the terms of Section 3.02 hereof.
SECTION 3.05 Options to Purchase Company Common Stock
(a) At or prior to the Effective Time, each of Company and Parent shall
take all action necessary to cause as of the Effective Time the assumption by
Parent of, or the reissuance by Parent of substitutes for, all of the following
which remain outstanding as of the Effective Time: (i) the options to purchase
Company Common Stock listed in the Company Disclosure Schedule, whether vested
or unvested, and issued under Company's Stock Plans; (ii) options to purchase
Company Common Stock listed in the Company Disclosure Schedule pursuant to
option agreements outside of the Company's Stock Plans; and (iii) the warrants
to purchase Company Stock listed in the Company Disclosure Schedule and issued
pursuant to warrant agreements, (collectively, the "Outstanding Options and
Warrants," and each an "Outstanding Option" or an "Outstanding Warrant"). To
the fullest extent permitted under applicable law and the applicable stock
option agreements, the Company Stock Plans and the warrant agreements, each of
the Outstanding Options and Outstanding Warrants shall be exchanged or
substituted without any action on the part of the holder thereof into an option
or warrant to purchase shares of Company Common Stock as of the Effective Time.
The number of shares of Parent Common Stock that the holder of an assumed or
substituted Outstanding Option or Outstanding Warrant shall be entitled to
receive upon the exercise of such option or warrant shall be the same number of
shares of Company Common Stock as the holder of such Outstanding Option or
Outstanding Warrant would have been entitled to receive pursuant to the Merger
had such holder exercised such option or warrant in full immediately prior to
the Effective Time. The price per share of Parent Common Stock after the
Effective Time shall be equal to (x) the aggregate exercise price for the
shares of Company Common Stock otherwise purchasable pursuant to such
Outstanding
A-10
<PAGE>
Option or Outstanding Warrant divided by (y) the Exchange Ratio. Other than as
set forth in the Outstanding Options and Warrants or as contemplated by this
Agreement, the assumption and substitution of options and warrants as provided
herein shall not give the holders of such options and warrants additional
benefits or additional vesting rights which they did not have immediately prior
to the Effective Time or relieve the holders of any obligations or restrictions
applicable to their options and warrants or the shares obtainable upon exercise
of their options and warrants. Only whole shares of Company Common Stock shall
be issued upon exercise of any Outstanding Option or Outstanding Warrant, and
no certificates or scrip representing fractional shares of Company Common Stock
and no cash in lieu of fractional shares shall be issued upon such exercise.
All fractional shares of Company Common Stock which a holder of any Outstanding
Option or Outstanding Warrant would otherwise be entitled to receive upon
exercise thereof shall be aggregated at the time of such exercise. If a
fractional share results from such aggregation, in lieu thereof such fraction
shall be rounded up to one whole share of Company Common Stock if it is
one-half or larger and shall be rounded down to zero and canceled without any
payment or distribution with respect thereto if it is less than one-half. Prior
to the Effective Time, Company and Parent shall take such additional actions,
if any, as are necessary under applicable law and the applicable agreements and
the Company Stock Plans to assure that each Outstanding Option and Outstanding
Warrant shall, from and after the Effective Time, represent only the right to
purchase, upon exercise, whole shares of Company Common Stock. Prior to the
Effective Time, the Board of Directors of the Company shall make the
determination that neither the Merger nor any of the other transactions
contemplated by this Agreement shall be deemed a "Change in Control" for
purposes of each of the employment agreements entered into by the Company other
than the employment agreements set forth on Section 3.05 of the Company
Disclosure Schedule.
Except as otherwise specifically identified in Section 3.05 of the Company
Disclosure Schedule, the assumption of the Outstanding Options and Warrants in
the Merger and their conversion into options and warrants for Parent Common
Stock will not result in any accelerated vesting of those options or warrants
or the shares purchasable thereunder and the vesting schedule in effect for
such Outstanding Options and Warrants immediately prior to the Effective Time
shall remain in full force after the assumption thereof by Parent.
It is the Parent's intention to roll such converted Outstanding Options
into options to purchase Parent Common Stock, as described above, pursuant to
either the Parent's Performance Stock Program or, at Parent's discretion or in
the event that Parent is unable to roll such converted options into the
Performance Stock Program, then Parent will assume the Company Stock Plans.
Upon such conversion, any options granted under the Performance Stock Program
to the former holders of Outstanding Options pursuant to the Company Stock
Plans shall, except to the extent provided above, in all respects be subject to
the terms, provisions and conditions of the Performance Stock Program and the
standard form of stock option agreement relating to such Performance Stock
Program except where the terms of the Performance Stock Program are contrary to
the rights of an option holder, whereupon in such instance the option holder
will retain his or her rights to such contrary terms; and provided further,
that such holders shall be deemed to have been granted such options as of the
date the original options were granted under the Company Stock Plans.
(b) As soon as practicable after the Effective Time, Parent shall file a
registration statement on Form S-8 or a successor form, under the Securities
Act with respect to the shares of Parent Common Stock subject to the
Outstanding Options, to the extent that Form S-8 or successor form, is
available to register the Outstanding Options, and shall use its reasonable
efforts to maintain the effectiveness of such registration statement or
registration statements (and maintain the current status of the prospectus or
prospectuses contained therein) for so long as the Outstanding Options remain
outstanding.
SECTION 3.06 Unvested Stock
At the Effective Time, any unvested shares of Company Common Stock,
including, but not limited to, any restricted stock, awarded to employees,
directors or consultants pursuant to any of the Company's plans or arrangements
and outstanding immediately prior to the Effective Time shall be
A-11
<PAGE>
converted into unvested shares of Parent Common Stock in accordance with the
Exchange Ratio and shall remain subject to the same terms, restrictions and
vesting schedule as in effect immediately prior to the Effective Time. All
outstanding rights which Company may hold immediately prior to the Effective
Time to repurchase unvested shares of Company Common Stock shall be assigned to
the Parent in the Merger and shall thereafter be exercisable by Parent upon the
same terms and conditions in effect immediately prior to the Effective Time,
except that the shares purchasable pursuant to such rights and the purchase
price payable per share shall be adjusted to reflect the Exchange Ratio.
SECTION 3.07 Certain Adjustments
If between the date of this Agreement and the Effective Time, the
outstanding shares of Parent Common Stock or Company Common Stock shall be
changed into a different number of shares by reason of any reclassification,
recapitalization, split-up, combination or exchange of shares, or any dividend
payable in stock or other securities shall be declared thereon with a record
date within such period, or the number of shares of Company Common Stock on a
fully diluted basis is in excess of that specified in Section 4.03 and
disclosed in Section 4.03 of the Company Disclosure Schedule (regardless of
whether such excess is a result of an additional issuance of capital stock or a
correction to such Sections), then the Exchange Ratio established pursuant to
the provisions of Section 3.01 shall be adjusted accordingly to provide to each
of Parent, on the one hand, and the holders of Company Common Stock in the
aggregate, on the other hand, the same economic effect as contemplated by this
Agreement prior to such reclassification, recapitalization, split-up,
combination, exchange, dividend or increase.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF COMPANY
Company hereby represents and warrants to Parent, subject to the
exceptions specifically disclosed in writing in the Company Disclosure
Schedule, all such exceptions to be referenced to a specific representation set
forth in this Article IV or to otherwise be clearly applicable to the
representations hereof not specifically referenced, that (it being understood
that for purposes of this Article IV, unless the context otherwise requires,
the term Company shall be deemed to include all of the Company's Subsidiaries:
SECTION 4.01 Organization and Qualification; Subsidiaries
(a) Company and each directly and indirectly owned subsidiary of Company
(the "Company Subsidiaries") has been duly organized and is validly existing
and in good standing (to the extent applicable) under the laws of the
jurisdiction of its incorporation or organization, as the case may be, and has
the requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as it is now being conducted. Except as
set forth in Section 4.01 of the Company Disclosure Schedule, Company and each
Company Subsidiary is duly qualified or licensed to do business, and is in good
standing (to the extent applicable), in each jurisdiction where the character
of the properties owned, leased or operated by it or the nature of its business
makes such qualification or licensing necessary, except for such failure to be
so qualified or licensed and in good standing that could not reasonably be
expected to have, individually or in the aggregate, a Company Material Adverse
Effect.
(b) Section 4.01 of the Company Disclosure Schedule sets forth, as of the
date of this Agreement, a true and complete list of each Company Subsidiary,
together with (i) the jurisdiction of incorporation or organization of each
Company Subsidiary and the percentage of each Company Subsidiary's outstanding
capital stock or other equity interests owned by Company or another Company
Subsidiary and (ii) an indication of whether each Company Subsidiary is a
"Significant Subsidiary" as defined in Regulation S-X under the Exchange Act.
Except as set forth in Section 4.01 of the Company Disclosure Schedule, neither
Company nor any Company Subsidiary owns an equity interest in any partnership
or joint venture arrangement or other business entity.
A-12
<PAGE>
SECTION 4.02 Articles of Incorporation and Bylaws
The copies of Company's articles of incorporation and bylaws, as amended
to date, previously provided to Parent by Company are true, complete and
correct copies thereof. Such articles of incorporation and bylaws are in full
force and effect. Company is not in violation of any of the provisions of its
certificate of incorporation or bylaws.
SECTION 4.03 Capitalization
(a) The authorized capital stock of Company consists of 50,000,000 shares
of Company Common Stock and 10,000,000 shares of preferred stock ("Company
Preferred Stock"). As of the date hereof, (i) 14,939,407 shares of Company
Common Stock are issued and outstanding, all of which are validly issued, fully
paid and nonassessable, (ii) no shares of Company Common Stock are held in the
treasury of Company, (iii) no shares of Company Common Stock are held by
Company Subsidiaries, (iv) 2,400,000 shares of Company Common Stock are
reserved for future issuance pursuant to the Company Stock Plans or pursuant to
option agreements outside of the Company Stock Plans (collectively, the
"Company Stock Options"), of which, as of December 31, 1999, 921,977 and
1,035,146 shares of Company Common Stock were reserved for future issuance
pursuant to unvested, outstanding and vested, outstanding, unexercised Company
Stock Options, respectively, and (v) no shares of Company Preferred Stock are
outstanding. The name of each holder of a Company Stock Option or a warrant,
the grant date of each Company Stock Option and warrant, and the number of
shares of Company Common Stock for which each Company Stock Option or warrant,
as the case may be, is exercisable and the exercise price of each Company Stock
Option or warrant, as the case may be, and the Company Stock Plans or other
agreement that such Company Stock Options or warrants are issuable under, are
set forth in Section 4.03 of the Company Disclosure Schedule. Except for (i)
shares of Company Common Stock issuable pursuant Company Stock Plans, and (ii)
shares issuable as specifically listed and indicated on Schedule 4.03 of the
Company Disclosure Schedule, there are no options, warrants or other rights,
agreements, arrangements or commitments of any character obligating Company or
any Company Subsidiary to issue or sell any shares of capital stock of, or
other equity interests in, Company or any Company Subsidiary. All shares of
Company Common Stock subject to issuance as aforesaid, upon issuance prior to
the Effective Time on the terms and conditions specified in the instruments
pursuant to which they are issuable, will be duly authorized, validly issued,
fully paid and nonassessable. Except as set forth in Section 4.03 of the
Company's Disclosure Schedule, there are no outstanding contractual obligations
of Company or any Company Subsidiary to repurchase, redeem or otherwise acquire
any shares of Company Common Stock or any capital stock of any Company
Subsidiary. Except as set forth in Section 4.03 of the Company's Disclosure
Schedule, each outstanding share of capital stock of each Company Subsidiary is
duly authorized, validly issued, fully paid and nonassessable and each such
share owned by Company or another Company Subsidiary is free and clear of all
security interests, liens, claims, pledges, options, rights of first refusal,
agreements, limitations on Company's or such other Company Subsidiary's voting
rights, charges and other encumbrances of any nature whatsoever. There are no
outstanding contractual obligations of Company or any Company Subsidiary to
provide funds to, guarantee indebtedness of, or make any material investment
(in the form of a loan, capital contribution or otherwise) in, any Company
Subsidiary or any other person, except as set forth in Section 4.03 of the
Company Disclosure Schedule.
(b) Schedule 4.03 correctly and completely sets forth each agreement or
obligation of the Company and/or any Company Subsidiary to issue additional
shares of Company Common Stock after the date hereof if certain conditions are
fulfilled, and correctly and completely sets forth the maximum number of shares
of Company Common Stock issuable with respect to each business combination or
otherwise listed in Schedule 4.03 of the Company Disclosure Schedule and any
registration rights related to such shares. Such shares are hereinafter called
"Earn-out Company Shares."
(c) Provided that the Merger becomes effective, the terms of each such
business combination require each person entitled to receive Earn-out Shares to
accept in lieu of Company Common Stock the number of shares of Parent Common
Stock that would be issuable in the Merger if such Company Common Stock were
outstanding immediately prior to the Effective time.
A-13
<PAGE>
(d) The terms of each such business combination require each person
entitled to receive Earn-out Shares to accept Earn-out Shares which have not
been registered under the Securities Act and further obligate such persons not
to sell, transfer, pledge, hypothecate or otherwise create any interest in the
Earn-out Shares without such registration or in a transaction except from the
registration requirements of the Securities Act and applicable state securities
laws.
(e) The consummation of the Merger will not trigger any anti-dilution
rights or price adjustment in connection with any Outstanding Options and/or
Warrants.
SECTION 4.04 Authority Relative to This Agreement
Company has all necessary corporate power and authority to execute and
deliver this Agreement to perform its obligations hereunder and thereunder and
to consummate the transactions contemplated hereby and thereby. The execution
and delivery of this Agreement by Company and the consummation by Company of
the transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action, and no other corporate
proceedings on the part of Company are necessary to authorize this Agreement or
to consummate the transactions contemplated hereby and thereby (other than,
with respect to the Merger, the approval of this Agreement by the holders of a
majority of the outstanding shares of Company Common Stock entitled to vote
with respect thereto at the Company Stockholders' Meeting (as defined in
Section 7.01), and the filing and recordation of the Certificate of Merger as
required by the FBCA). This Agreement has been duly executed and delivered by
Company and, assuming the due authorization, execution and delivery by the
other parties hereto and thereto, constitute legal, valid and binding
obligations of Company, enforceable against Company in accordance with their
terms, subject to the effect of any applicable bankruptcy, moratorium,
insolvency, reorganization or other similar law affecting the enforceability of
creditors' rights generally and to the effect of general principles of equity
which may limit the availability of remedies (whether in a proceeding at law or
in equity).
SECTION 4.05 No Conflict; Required Filings and Consents
(a) Except as set forth in Section 4.05 of the Company Disclosure
Schedule, the execution and delivery of this Agreement by Company do not, and
the performance by Company of its obligations hereunder and thereunder and the
consummation of the Merger will not, (i) conflict with or violate any provision
of the certificate of incorporation or bylaws of Company or any equivalent
organizational documents of any Company Subsidiary, (ii) assuming that all
filings and notifications described in Section 4.05(b) have been made and, to
the extent applicable approved, conflict with, violate, or constitute a default
in respect of any Governmental Authorization or Law applicable to Company or
any Company Subsidiary or by which any material property or material asset of
Company or any Company Subsidiary is bound or affected or (iii) result in any
breach of or constitute a material default (or an event which with the giving
of notice or lapse of time or both could reasonably be expected to become a
default) under, or give to others any right of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or other
encumbrance on any material property or asset of Company or any Company
Subsidiary pursuant to, any material note, bond, mortgage, indenture, contract,
agreement, lease, license, Company Permit (as defined below), franchise or
other instrument or obligation.
(b) Except as set forth in Section 4.05 of the Company's Disclosure
Schedule, the execution and delivery of this Agreement by Company do not, and
the performance by Company of its obligations hereunder and the consummation of
the Merger will not, require any material consent, approval, authorization or
permit of, or filing by Company with or notification by Company to, any
Governmental Entity, except pursuant to applicable requirements of the Exchange
Act, the Securities Act, Blue Sky Laws, the rules and regulations of the NNM,
state takeover laws, the premerger notification requirements of the HSR Act,
and the filing and recordation of the Certificate of Merger as required by the
FBCA.
A-14
<PAGE>
SECTION 4.06 Permits; Compliance with Laws
(a) Except as set forth in Section 4.06 of the Company Disclosure
Schedule, Company and the Company Subsidiaries are in possession of all
franchises, grants, authorizations, licenses, establishment registrations,
product listings, permits, easements, variances, exceptions, consents,
certificates, identification and registration numbers, approvals and orders of
any Governmental Entity necessary for Company or any Company Subsidiary to own,
lease and operate its properties or to offer or perform its services or to
develop, produce, store, distribute and market its products or otherwise to
carry on its business as it is now being conducted (collectively, the "Company
Permits"), except for Company Permits which could not reasonably be expected to
have a Company Material Adverse Effect, and, as of the date of this Agreement,
none of the Company Permits has been suspended or canceled nor is any such
suspension or cancellation pending or, to the knowledge of Company, threatened.
(b) Neither Company nor any Company Subsidiary is in conflict with, or in
default or violation of, (i) any Law applicable to Company or any Company
Subsidiary or by which any property or asset of Company or any Company
Subsidiary is bound or affected or (ii) any Company Permits, except for
conflicts, defaults or violations which could not reasonably be expected to
have a Company Material Adverse Effect. Section 4.06 of the Company Disclosure
Schedule sets forth, as of the date of this Agreement, all actions,
proceedings, investigations or surveys pending or, to the knowledge of Company,
threatened against Company or any Company Subsidiary or to the Company's
knowledge, without any independent investigation, pending or threatened against
any Ophthalmologist/Optometrist Employee, that could reasonably be expected to
result in the suspension or cancellation of any other material Company Permit.
Since January 1, 1998, neither Company nor any Company Subsidiary has received
from any Governmental Entity any written notification with respect to possible
conflicts, defaults or violations of Laws.
SECTION 4.07 SEC Filings; Financial Statements
(a) Except as disclosed in Section 4.07 of the Company Disclosure
Schedule, Company has timely filed all forms, reports, statements and documents
required to be filed by it (A) with the SEC and the NNM since November 1, 1996
(collectively, together with any such forms, reports, statements and documents
Company may file subsequent to the date hereof until the Closing, the "Company
Reports") and (B) with any other Governmental Entities. Except as disclosed in
Section 4.07 of the Company Disclosure Schedule, each Company Report (i) was
prepared in accordance with the requirements of the Securities Act, the
Exchange Act or the rules and regulations of the NNM, as the case may be, in
substantially all respects and (ii) did not at the time it was filed contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading. Except as disclosed in Section 4.07 of the Company Disclosure
Schedule, each form, report, statement and document referred to in clause (B)
of this paragraph was prepared in all material respects in accordance with the
requirements of applicable Law. No Company Subsidiary is subject to the
periodic reporting requirements of the Exchange Act or required to file any
form, report or other document with the SEC, the NNM, any other stock exchange
or any other comparable Governmental Entity.
(b) Except as disclosed in Section 4.07 of the Company Disclosure
Schedule, each of the consolidated financial statements (including, in each
case, any notes thereto) contained in the Company Reports was prepared in
accordance with U.S. GAAP (except as may be permitted by Form 10-Q under the
Exchange Act) applied on a consistent basis throughout the periods indicated
(except as may be indicated in the notes thereto) and each presented fairly, in
all material respects, the consolidated financial position of Company and the
consolidated Company Subsidiaries as at the respective dates thereof and for
the respective periods indicated therein, except as otherwise noted therein
(subject, in the case of unaudited statements, to normal and recurring
immaterial year-end adjustments).
A-15
<PAGE>
(c) Except as and to the extent set forth or reserved against on the
consolidated balance sheet of Company and the Company Subsidiaries as reported
in the Company Reports, including the notes thereto, none of Company or any
Company Subsidiary has any liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) that would be required to be
reflected on a balance sheet or in notes thereto prepared in accordance with
U.S. GAAP, except for immaterial liabilities or obligations incurred in the
ordinary course of business consistent with past practice since December 31,
1998, and except as set forth in Section 4.07 of the Company Disclosure
Schedule.
SECTION 4.08 Absence of Certain Changes or Events
Except as set forth in Section 4.08 of the Company Disclosure Schedules,
since September 30, 1999, Company and the Company Subsidiaries have conducted
their businesses only in the ordinary course consistent with past practice and,
since such date, there has not been (i) any material changes in or effect on
the business, assets, liabilities, financial condition or results of operations
of Company or the Company Subsidiaries, (ii) any event that could reasonably be
expected to prevent or materially delay the performance of Company's
obligations pursuant to this Agreement and the consummation of the Merger by
Company, (iii) any material change by Company in its accounting methods,
principles or practices, (iv) any declaration, setting aside or payment of any
dividend or distribution in respect of the shares of Company Common Stock or
any redemption, purchase or other acquisition of any of Company's securities,
(v) except for changes in the ordinary course of business consistent with past
practice, any increase in the compensation or benefits or establishment of any
bonus, insurance, severance, deferred compensation, pension, retirement, profit
sharing, stock option (including, without limitation, the granting or repricing
of stock options, stock appreciation rights, performance awards or restricted
stock awards), stock purchase or other employee benefit plan, or any other
increase in the compensation payable or to become payable to any employees,
officers, consultants or directors of Company or any Company Subsidiary, (vi)
any issuance or sale of any stock, notes, bonds or other securities other than
pursuant to the exercise of outstanding securities, or entering into any
agreement with respect thereto, or the issuances of options under the Company
Stock Plans, (vii) any amendment to the Company's certificate of incorporation
or bylaws, (viii) other than in the ordinary course of business consistent with
past practice, any (x) purchase, sale, assignment or transfer of any material
assets, (y) mortgage, pledge or existence of any lien, encumbrance or charge on
any material assets or properties, tangible or intangible except for liens for
Taxes not yet delinquent, or (z) waiver of any rights of material value or
cancellation or any material debts or claims, (ix) any incurrence of any
material liability (absolute or contingent), except for current liabilities and
obligations incurred in the ordinary course of business consistent with past
practice, (x) any incurrence of any damage, destruction or similar loss,
whether or not covered by insurance, materially affecting the business or
properties of Company or any Company Subsidiary, or (xi) any entering into any
transaction of a material nature other than in the ordinary course of business,
consistent with past practice.
SECTION 4.09 Employee Benefit Plans; Labor Matters
(a) The Company Disclosure Schedule lists each employee benefit fund,
plan, program, arrangement and contract (including, without limitation, any
"pension" plan, fund or program, as defined in Section 3(2) of ERISA, any
"employee benefit plan", as defined in Section 3(3) of ERISA and any plan,
program, policy, arrangement or contract providing for severance), whether
currently in effect or pursuant to which the Company or any Company Subsidiary
has any ongoing liability or obligation; medical, dental or vision benefits;
life insurance or death benefits; disability benefits, sick pay or other wage
replacement; vacation, holiday or sabbatical; pension or profit-sharing
benefits; stock options or other equity compensation; bonus or incentive pay or
other material fringe benefits) whether written or not ("Benefit Plans"),
maintained, sponsored or contributed to or required to be contributed to by
Company or any Company Subsidiary (the "Company Benefit Plans"). With respect
to each Company Benefit Plan, Company has delivered or made available to Parent
a true, complete and correct copy of (i) such Company Benefit Plan (or, if not
written, a written summary of its material terms) and the most recent summary
plan description, if any, related to such Company Benefit Plan, (ii) each trust
agreement or other funding arrangement relating to such Company
A-16
<PAGE>
Benefit Plan, (iii) the most recent annual report (Form 5500) filed with the
IRS with respect to such Company Benefit Plan (and, if the most recent annual
report is a Form 5500R, the most recent Form 5500C filed with respect to such
Company Benefit Plan), (iv) the most recent actuarial report or financial
statement relating to such Company Benefit Plan and (v) the most recent
determination letter, if any, issued by the IRS with respect to such Company
Benefit Plan and any pending request for such a determination letter. Neither
Company nor any Company Subsidiary nor, to the knowledge of Company, any other
person or entity, has any express commitment, whether legally enforceable or
not, to modify, change or terminate any Company Benefit Plan, other than with
respect to a modification, change or termination required by ERISA or the Code.
(b) Each Company Benefit Plan has been administered in all material
respects in accordance with its terms and all applicable laws, including ERISA
and the Code, and contributions required to be made under the terms of any of
the Company Benefit Plans as of the date of this Agreement have been timely
made or, if not yet due, have been properly reflected on the most recent
consolidated balance sheet filed or incorporated by reference in the Company
Reports prior to the date of this Agreement. With respect to the Company
Benefit Plans, no event has occurred and, to the knowledge of Company, there
exists no condition or set of circumstances in connection with which Company or
any Company Subsidiary could be subject to any liability (other than for
routine benefit liabilities) under the terms of, or with respect to, such
Company Benefit Plans, ERISA, the Code or any other applicable Law.
(c) Company on behalf of itself and each Company ERISA Affiliate (as
defined below) hereby represents that: (i) each Company Benefit Plan which is
intended to qualify under Section 401(a), Section 401(k), Section 401(m) or
Section 4975(e)(6) of the Code has received a favorable determination letter
from the IRS as to its qualified status, and each trust established in
connection with any Company which is intended to be exempt from federal income
taxation under Section 501(a) of the Code has received an opinion letter from
the IRS that it is so exempt or application for same is pending that is timely
filed with the IRS, and to Company's knowledge no fact or event has occurred
that is reasonably likely to materially adversely affect the qualified status
of any such Company Benefit Plan or the exempt status of any such trust; (ii)
to Company's knowledge there has been no prohibited transaction (within the
meaning of Section 406 of ERISA or Section 4975 of the Code and other than a
transaction that is exempt under a statutory or administrative exemption) with
respect to any Company Plan that could result in liability to the Company or a
Company Subsidiary and (iii) each Company Benefit Plan can be amended,
terminated or otherwise discontinued after the Effective Time in accordance
with its terms, without liability (other than (A) liability for ordinary
administrative expenses typically incurred in a termination event or (B) if the
Company Benefit Plan is pension benefit plan subject to Part 2 of Title I of
ERISA, liability for the accrued benefits as of the date of such termination
(if and to the extent required by ERISA)) to the extent that either there are
sufficient assets set aside in a trust or insurance contract to satisfy such
liability or such liability is reflected on the most recent consolidated
balance sheet filed or incorporated by reference in the Company Reports prior
to the date of this Agreement. No suit, administrative proceeding, action or
other litigation has been brought, or to the knowledge of Company is
threatened, against or with respect to any such Company Benefit Plan, including
any audit or inquiry by the Internal Revenue Service or United States
Department of Labor (other than routine benefits claims).
(d) No Company Benefit Plan is a multiemployer pension plan (as defined in
Section 3(37) of ERISA) or other pension plan subject to Title IV of ERISA and
neither the Company, any Company Subsidiary nor any other trade or business
(whether or not incorporated) that is under "common control" with Company or a
Company Subsidiary (within the meaning of ERISA Section 4001) or with respect
to which Company or any Company Subsidiary could otherwise incur liability
under Title IV of ERISA (a "Company ERISA Affiliate") has sponsored or
contributed to or been required to contribute to a multiemployer pension plan
or other pension plan subject to Title IV of ERISA. No material liability under
Title IV of ERISA has been incurred by Company, any Company Subsidiary or any
Company ERISA Affiliate that has not been satisfied in full, and no condition
exists that presents a material risk to Company or any Company Subsidiary of
incurring or being subject
A-17
<PAGE>
(whether primarily, jointly or secondarily) to a material liability thereunder.
None of the assets of Company or any Company Subsidiary is, or may reasonably
be expected to become, the subject of any lien arising under ERISA or Section
412(n) of the Code.
(e) With respect to each Benefit Plan required to be set forth in the
Disclosure Schedule that is subject to Title IV or Part 3 of Title I of ERISA
or Section 412 of the Code, (i) no reportable event (within the meaning of
Section 4043 of ERISA, other than an event that is not required to be reported
before or within 30 days of such event) has occurred or is expected to occur,
(ii) there was not an accumulated funding deficiency (within the meaning of
Section 302 of ERISA or Section 412 of the Code), whether or not waived, as of
the most recently ended plan year of such Benefit Plan; and (iii) there is no
"unfunded benefit liability" (within the meaning of Section 4001(a)(18) of
ERISA).
(f) Company has delivered to Parent true, complete and correct copies of
(i) all employment agreements with officers and all consulting agreements of
Company and each Company Subsidiary, (ii) all severance plans, agreements,
programs and policies of Company and each Company Subsidiary with or relating
to their respective employees, directors or consultants, and (iii) all plans,
programs, agreements and other arrangements of Company and each Company
Subsidiary with or relating to their respective employees, directors or
consultants which contain "change of control" provisions, and all such plans,
agreements, programs, and policies are specifically identified as such on
Section 4.09 of the Company Disclosure Schedule. Except as set forth on Section
4.09 of the Company Disclosure Schedule, no payment or benefit which may be
required to be made by Company or any Company Subsidiary or which otherwise may
be required to be made under the terms of any Company Benefit Plan or other
arrangement will constitute a parachute payment under Code Section 280(G)(1),
and the consummation of the transactions contemplated by this Agreement will
not, alone or in conjunction with any other possible event (including
termination of employment), (i) entitle any current or former employee or other
service provider of Company or any Company Subsidiary to severance benefits or
any other payment, compensation or benefit (including forgiveness of
indebtedness), and the amount such severance benefit or any other payment is
indicated in Section 4.04 of the Company Distribution Schedule except as
expressly provided by this Agreement, or (ii) accelerate the time of payment or
vesting, or increase the amount of compensation or benefit due any such
employee or service provider.
(g) Neither Company nor any Company Subsidiary is a party to, or has any
obligations under or with respect to, any collective bargaining or other labor
union contract applicable to persons employed by Company or any Company
Subsidiary and no collective bargaining agreement is being negotiated by
Company or any Company Subsidiary or any person or entity that may obligate the
Company or any Company Subsidiary thereunder. As of the date of this Agreement,
there is no labor dispute, strike, union organizing activity or work stoppage
against Company or any Company Subsidiary pending or, to the knowledge of
Company, threatened which may interfere with the respective business activities
of Company or any Company Subsidiary. As of the date of this Agreement, to the
knowledge of Company, none of Company, any Company Subsidiary, or any of their
respective representatives or employees has committed any unfair labor practice
in connection with the operation of the respective businesses of Company or any
Company Subsidiary, and there is no charge or complaint filed against Company
or any Company Subsidiary by or with the National Labor Relations Board or any
comparable Governmental Entity pending or threatened in writing.
(h) Except as required by Law, no Company Benefit Plan provides any of the
following retiree or post-employment benefits to any person: medical,
disability or life insurance benefits. To Company's knowledge, Company and the
Company ERISA Affiliates are in compliance with (i) the requirements of the
applicable health care continuation and notice provisions of the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") and the
regulations (including proposed regulations) thereunder and (ii) the applicable
requirements of the Health Insurance Portability and Accountability Act of
1996, as amended, and the regulations (including the proposed regulations)
thereunder.
(i) Since November 1, 1998, neither the Company nor any Company Subsidiary
has terminated any at-will employee other than pursuant to the forms of the
notice attached hereto as Schedules
A-18
<PAGE>
4.09(i)-1, 4.09(i)-2 or 4.09(i)-3. No single termination of at-will employees,
nor any group of terminations, constitutes a violation of any federal or state
law governing the closing of any plant or termination or winding-up of any
business.
SECTION 4.10 Certain Tax Matters
Neither Company, nor to Company's knowledge, any of its affiliates, has
taken or agreed to take any action (other than actions contemplated by this
Agreement) that could be expected to prevent the Merger from constituting a
"reorganization" under Section 368 of the Code. Company is not aware of any
agreement or plan to which Company or any of its affiliates is a party or other
circumstances relating to Company or any of its affiliates that could
reasonably be expected to prevent the Merger from so qualifying as a
reorganization under Section 368 of the Code.
SECTION 4.11 Contracts
(a) Section 4.11 of the Company Disclosure Schedule sets forth a list of
all material written and oral contracts or agreements relating to the Company
or any Company Subsidiary, including without limitation any: (i) contract
resulting in a commitment or potential commitment for expenditure or other
obligation or potential obligation, or which provides for the receipt or
potential receipt, involving in excess of One Hundred Thousand Dollars
($100,000) in any instance, or series of related contracts that in the
aggregate give rise to rights or obligations exceeding such amount, other than
contracts ("Customer Contracts") with health plans and providers, entered into
by the Company's managed care business in the ordinary course of business, (ii)
the twelve (12) largest Customer Contracts based upon revenues generated to the
Company; (iii) indenture, mortgage, promissory note, loan agreement, guarantee
or other agreement or commitment for the borrowing or lending of money or
encumbrance of assets involving more than One Hundred Thousand Dollars
($100,000) in each instance; (iv) agreement which restricts the Company from
engaging in any line of business or from competing with any other person; (v)
warranties made with respect to products manufactured, packaged, distributed or
sold or services provided by the Company; (vi) any agreement which terminates,
or gives another party the right to terminate such agreement, upon the
completion of the transaction contemplated by this Agreement; or (vii) any
other contract, agreement, instrument, arrangement or commitment that is
material to the condition (financial or otherwise), results of operation,
assets, properties, liabilities, business or prospects of the Company
(collectively, and together with all other agreements required to be disclosed
on the Company Disclosure Schedule the "Company Material Contracts"). The
Company has previously furnished to Parent true, complete and correct copies of
all written agreements, as amended, required to be listed on Section 4.11 of
the Company Disclosure Schedule.
(b) The Company Material Contracts are each in full force and effect and
are the valid and legally binding obligations of the Company and, to the best
of Company's knowledge, the other parties thereto, enforceable in accordance
with their respective terms, subject only to bankruptcy, insolvency or similar
laws affecting the rights of creditors generally and to general equitable
principles. Except as set forth in Section 4.11 of the Company Disclosure
Schedule, the Company has not received notice of its default under any of the
Company Material Contracts and no event has occurred which, with the passage of
time or the giving of notice or both, would constitute a default by the Company
thereunder. Except as set forth in the Company Disclosure Schedule, to the
Company's knowledge, none of the other parties to any of the Company Material
Contracts is in default thereunder, nor has an event occurred which, with the
passage of time or the giving of notice or both would constitute a default by
such other party thereunder. Except as set forth in Section 4.11 of the Company
Disclosure Schedule, the Company has not received notice of the pending or
threatened cancellation, revocation or termination of any of the Company
Material Contracts, nor are any of them aware of any facts or circumstances
which could reasonably be expected to lead to any such cancellation, revocation
or termination.
(c) Except as otherwise indicated on Section 4.11 of the Company
Disclosure Schedule, to the Company's knowledge, after due inquiry, the
continuation, validity and effectiveness of the Company Material Contracts
under the current terms thereof will in no way be affected by the consummation
of the transactions contemplated by this Agreement.
A-19
<PAGE>
(d) Section 4.11 of the Company Disclosure Schedule specifically
identifies a list of all contracts which contain any earn-out or contingency
provision with respect to issuances of Company Common Stock and/or any cash
payments by the Company or Company Subsidiaries.
(e) Section 4.11 of the Company Disclosure Schedule identifies all
agreements which restrict the Company from engaging in any line of business or
from competing with any other person.
SECTION 4.12 Litigation
Except as set forth in Section 4.12 of the Company Disclosure Schedule,
there is no suit, claim, action, proceeding or investigation pending or, to the
knowledge of Company, threatened against Company or any Company Subsidiary,
and, to the knowledge of Company, there are no existing facts or circumstances
that could reasonably be expected to result in a suit, claim, action,
proceeding or investigation. Except as set forth in Section 4.12 of the Company
Disclosure Schedule, Company is not aware of any facts or circumstances which
could reasonably be expected to result in the denial of insurance coverage
under policies issued to Company and Company Subsidiaries in respect of such
suits, claims, actions, proceedings and investigations. Except as set forth in
Section 4.12 of the Company Disclosure Schedule, neither Company nor any
Company Subsidiary is subject to any outstanding order, writ, injunction or
decree.
SECTION 4.13 Environmental Matters
Company and the Company Subsidiaries are in compliance with all material
applicable Environmental Laws and all Company Permits required by Environmental
Laws. All past noncompliance of Company or any Company Subsidiary with
Environmental Laws or Environmental Permits has been resolved without any
pending, ongoing or future material obligation, cost or liability. Neither
Company nor any Company Subsidiary has released a Hazardous Material at, or
transported a Hazardous Material to or from, any real property currently or
formerly owned, leased or occupied by Company or any Company Subsidiary, in
violation of any Environmental Law.
SECTION 4.14 Intellectual Property
(a) Section 4.14(a) of the Company Disclosure Schedule contains a true and
complete list of Company's and the Company's Subsidiaries patents, patent
applications, registered trademarks, trademark applications, trade names,
registered service marks, service mark applications, Internet domain names,
Internet domain name applications, copyright registrations and applications and
other filings and formal actions made or taken pursuant to Federal, state,
local and foreign laws by Company to protect its interests in Company
Intellectual Property, and includes details of all due dates for further
filings, maintenance, payments or other actions falling due in respect of
Company Intellectual Property within twelve (12) months of the Effective Time.
All of Company's patents, patent applications, registered trademarks, and
trademark applications, and registered copyrights remain in good standing with
all fees and filings due as of the date hereof. The Company has previously
provided Purchaser with a list of all other trademarks and service marks which
are material to the Company's business.
(b) Company has made all registrations that Company (including any of its
subsidiaries) is required to have made in relation to the processing of data,
and is in good standing with respect to such registrations with all fees due as
of the Effective Time duly made.
(c) Company Intellectual Property contains only those items and rights
which are: (i) owned by Company; (ii) in the public domain; or (iii) rightfully
used by Company pursuant to a valid and enforceable license or other agreement
(the "Company Licensed Intellectual Property"), the parties, date, term and
subject matter of each such license or other agreement (each, a "License
Agreement") being set forth on Section 4.14(c) of the Company Disclosure
Schedule. Company has all rights in Company Intellectual Property necessary to
carry out Company's current activities and, to the knowledge of the Company,
the Company's future activities to the extent such future activities are
already planned, including without limitation, to the extent required to carry
out such activities, rights
A-20
<PAGE>
to make, use, reproduce, modify, adopt, create derivative works based on,
translate, distribute (directly and indirectly), transmit, display and perform
publicly, license, rent and lease and, other than with respect to Company
Licensed Intellectual Property, assign and sell, Company Intellectual Property.
(d) The reproduction, manufacturing, distribution, licensing,
sublicensing, sale or any other exercise of rights in any Company Intellectual
Property, product, work, technology or process as now used or offered or
proposed for use, licensing or sale by Company does not infringe on any patent,
design right, trademark, trade name, service mark, trade dress, Internet domain
name, copyright, database, statistical model, technology, invention, supplier
list, trade secret, know-how, computer software program or application of any
person, anywhere in the World. The Company has not received notice of any
claims (i) challenging the validity, effectiveness or, other than with respect
to Company Licensed Intellectual Property, ownership by Company of any Company
Intellectual Property, or (ii) to the effect that the use, distribution,
licensing, sublicensing, sale or any other exercise of rights in any product,
work, technology or process as now used or offered or proposed for use,
licensing, sublicensing or sale by Company or its agents or use by its
customers infringes or will infringe on any intellectual property or other
proprietary or personal right of any person. To the knowledge of Company, no
such claims have been threatened by any person, nor are there any valid grounds
for any bona fide claim of any such kind. All of the rights within Company
Intellectual Property are enforceable and subsisting. To the knowledge of
Company, there is no unauthorized use, infringement or misappropriation of any
Company Intellectual Property by any third party, employee or former employee.
(e) Except as set forth in section 4.14 of the Company Disclosure
Schedule, Company is not, nor as a result of the execution or delivery of this
Agreement, or performance of Company's obligations hereunder, will Company be,
in violation of any material license, sublicense, agreement or instrument to
which Company is a party or otherwise bound, nor will execution or delivery of
this Agreement, or performance of Company's obligations hereunder, cause the
diminution, termination or forfeiture of any Company Intellectual Property.
(f) Section 4.14(f) of the Company Disclosure Schedule contains a true and
complete list of all software programs which are owned by the Company (the
"Company Software Programs"). Except as set forth in section 4.14 of the
Company Disclosure Schedule, Company owns full and unencumbered right and good,
valid and marketable title to the Company Intellectual Property and the Company
Software Programs which are material to the Company's business free and clear
of all mortgages, pledges, liens, security interests, conditional sales
agreements, encumbrances or charges of any kind.
(g) Except as set forth in Section 4.14 of the Company Disclosure
Schedule, the Company Software Programs (i) have been designed to ensure year
2000 compatibility, which includes, but is not limited to, date data century
recognition, and calculations that accommodate same century and multi-century
formulas and date values; (ii) operate and will operate in accordance with
their specifications prior to, during and after the calendar year 2000; and
(iii) shall not end abnormally or provide invalid or incorrect results as a
result of date data, specifically including date data which represents or
references different centuries or more than one century.
(h) Except as set forth in Section 4.14 of the Company Disclosure
Schedule, Company Intellectual Property is free and clear of any and all
mortgages, pledges, liens, security interests, conditional sale agreements,
encumbrances or charges of any kind.
(i) Except as set forth in the Company Disclosure Schedule, Company
(including its subsidiaries) does not owe any royalties or other payments to
third parties in respect of Company Intellectual Property. All royalties or
other payments set forth in the Company Disclosure Schedule that have accrued
prior to the Effective Time have been paid.
SECTION 4.15 Taxes
(a) Company and each of the Company Subsidiaries, and any consolidated,
combined, unitary or aggregate group for Tax purposes of which Company or any
Company Subsidiary is or has been a member, have properly completed and timely
filed all Tax Returns required to be filed by them and
A-21
<PAGE>
have paid all Taxes shown thereon to be due. Company has provided adequate
accruals in accordance with generally accepted accounting principles in its
latest financial statements included in the Company Reports for any Taxes that
have not been paid, whether or not shown as being due on any Tax Returns.
Company and the Company Subsidiaries have no material liability for unpaid
Taxes accruing after the date of the Company's latest financial statements
included in the Company Reports.
(b) There is (i) no material claim for Taxes that is a lien against the
property of Company or any Company Subsidiary or is being asserted against
Company or any Company Subsidiary other than liens for Taxes not yet due and
payable, (ii) no audit of any Tax Return of Company or any Company Subsidiary
being conducted by a Tax Authority; (iii) no extension of the statute of
limitations on the assessment of any Taxes granted by Company or any Company
Subsidiary and currently in effect, and (iv) no agreement, contract or
arrangement to which Company or any Company Subsidiary is a party that may
result in the payment of any amount that would not be deductible by reason of
Section 280G or Section 404 of the Code.
(c) There has been no change in ownership of Company or any Company
Subsidiaries that has caused the utilization of any losses of such entities to
be limited pursuant to Section 382 of the Code, and any loss carryovers
reflected on the latest financial statements included in the Company Reports
are properly computed and reflected.
(d) Except as set forth in Section 4.15 of the Company Disclosure
Schedule, Company and the Company Subsidiaries have not been and will not be
required to include any material adjustment in Taxable income for any Tax
period (or portion thereof) pursuant to Section 481 or 263A of the Code or any
comparable provision under state or foreign Tax laws as a result of
transactions, events or accounting methods employed prior to the Merger.
(e) Neither Company nor any Company Subsidiary has filed or will file any
consent to have the provisions of paragraph 341(f)(2) of the Code (or
comparable provisions of any state Tax laws) apply to Company or any Company
Subsidiary.
(f) Neither Company nor any Company Subsidiary is a party to any Tax
sharing or Tax allocation agreement nor does Company or any Company Subsidiary
have any liability or potential liability to another party under any such
agreement.
(g) Neither Company nor any Company Subsidiary has filed any disclosures
under Section 6662 or comparable provisions of state, local or foreign law to
prevent the imposition of penalties with respect to any Tax reporting position
taken on any Tax Return.
(h) Company and each Company Subsidiary has in its possession receipts for
any Taxes paid to foreign Tax authorities. Neither Company nor any Company
Subsidiary has ever been a "personal holding company" within the meaning of
Section 542 of the Code or a "United Sates real property holding corporation"
within the meaning of Section 897 of the Code.
SECTION 4.16 Insurance
Company and each Company Subsidiary is presently insured, and during each
of the past five calendar years has been insured, against such risks, as
companies engaged in a similar business would, in accordance with good business
practice, customarily be insured. The Company reasonably believes that the
policies of fire, theft, liability, medical malpractice, director and officer,
product liability and other insurance maintained with respect to the assets or
businesses of Company and Company Subsidiaries provide adequate coverage
against loss. Section 4.16 of the Company Disclosure Schedule sets forth a
complete and correct list as of the date hereof of all insurance policies
maintained by Company or the Company Subsidiaries, and Company has delivered to
Parent complete and correct copies of all such policies, together with all
riders and amendments thereto. All such policies are in full force and effect
and all premiums due thereon have been paid to the date hereof. Company and the
Company Subsidiaries have complied in all material respects with the terms of
such policies.
A-22
<PAGE>
SECTION 4.17 Properties
(a) Company and the Company Subsidiaries have good title, free and clear
of all material mortgages, liens, pledges, charges or other encumbrances to all
their material (individually or in the aggregate) tangible properties and
assets, real, personal or mixed, reflected in the Company's consolidated
financial statements contained in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, as being owned by Company and the
Company Subsidiaries as of the date thereof, other than (i) any properties or
assets that have been sold or otherwise disposed of in the ordinary course of
business since the date of such financial statements, (ii) liens disclosed in
the notes to such financial statements and (iii) liens arising in the ordinary
course of business after the date of such financial statements. All buildings,
and all fixtures, equipment and other property and assets that are material to
its business on a consolidated basis, held under leases or sub-leases by
Company or any Company Subsidiary are held under valid instruments enforceable
in accordance with their respective terms, subject to applicable laws of
bankruptcy, insolvency or similar laws relating to creditors' rights generally
and to general principles of equity (whether applied in a proceeding in law or
equity). Substantially all of Company's and the Company Subsidiaries' equipment
in regular use has been reasonably maintained and is in serviceable condition,
reasonable wear and tear excepted.
(b) Neither the Company nor any Company Subsidiary is obligated as a
lessee (which term as used herein includes sublessee and similar terms) under
any lease for real property, other than Company leases related to the Practices
(as defined in Section 6.12 hereof) and the leases set forth in Schedule 4.17
(the "Company Leases").
SECTION 4.18 Affiliates
Section 4.18 of the Company Disclosure Schedule sets forth the name of
each person who is, in Company's reasonable judgment, an affiliate (as such
term is used in Rule 145 under the Securities Act.
SECTION 4.19 Opinion of Financial Advisor
PaineWebber Incorporated ("PaineWebber") has delivered to the board of
directors of Company its written opinion to the effect that, as of the date
hereof, the Exchange Ratio is fair to the holders of shares of Company Common
Stock from a financial point of view (the "Paine Webber Fairness Opinion").
SECTION 4.20 Brokers
The Company has furnished to Parent or its counsel a true and complete
copy of letter agreements (the "Engagement Letters") between the Company and
its counsel and its financial advisor, such Engagement Letters being the only
agreements pursuant to which such firms would be entitled to any payment
relating to the transactions contemplated hereunder. Other than Paine Webber
and as set forth in Section 4.20 of the Company Disclosure Schedule, no broker,
financial advisor or investment banker or other person is entitled to any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Company or any of its Subsidiaries.
SECTION 4.21 Florida Business Corporation Law
For purposes of Section 607.0902 of the Florida Business Corporation Law,
the execution and delivery of this Agreement, the Stockholder Agreement and the
Purchase of shares of Company Common Stock or other securities issued by the
Company or by Parent and Merger Sub, including pursuant to the Stockholder
Agreement referred to in the preambles of this Agreement, will not constitute a
"control share acquisition" as defined in Section 607.0902(2) of the Florida
Business Corporation Law. Assuming Parent's representation in Section 5.18
hereof is true, to Company's knowledge, no other state takeover statute or
similar statute or regulation applies or purports to apply to the Merger, this
Agreement, , the Stockholders Agreements or the transactions contemplated by
this Agreement, and the Stockholders Agreements.
A-23
<PAGE>
SECTION 4.22 Business Activity Restriction
Except as set forth in Section 4.21 of the Company Disclosure Schedule,
there is no non-competition or other similar agreement, commitment, judgment,
injunction, order or decree to which Company or any subsidiary of Company is a
party or subject to that has or could reasonably be expected to have the effect
of prohibiting or impairing the conduct of business by Company. Except as set
forth in Section 4.21 of the Company Disclosure Schedule, Company has not
entered into any agreement under which Company is restricted in any material
respect from selling, licensing or otherwise distributing any of its technology
or products to, or providing services to, customers or potential customers or
any class of customers, in any geographic area, during any period of time or in
any segment of the market or line of business.
SECTION 4.23 Governmental Authorizations
The Company and, to the Company's Knowledge, without any independent
investigation, each Ophthalmologist/Optometrist Employee, possesses all
necessary licenses, franchises, permits and other governmental authorizations
(collectively, "Governmental Authorizations"), including, but not limited to
all licenses, franchises, permits and authorizations for the conduct of the
Company's business as now conducted (except for those Governmental
Authorizations the failure to possess individually or in the aggregate could
not reasonably be expected to have a Company Material Adverse Effect), all of
which are listed (with expiration dates, if applicable) on Section 4.23 of the
Company Disclosure. Except as set forth in Section 4.23 of the Company
Disclosure Schedule, the transactions contemplated by this Agreement will not
result in a default under or a breach or violation of, or adversely affect the
rights and benefits afforded by any licenses, franchises, permits or
authorizations, except for defaults, breaches or violations which individually
or in the aggregate could not reasonably be expected to have a Company Material
Adverse Effect. All licenses, franchises, permits and other authorizations are
valid and in full force and effect, except for those licenses, franchises,
permits and other Governmental Authorizations the failure to possess could not
reasonably be expected to have a Company Material Adverse Effect. The Company
and to the Company's Knowledge, without any independent investigation, each
Ophthalmologist/Optometrist Employee is currently in compliance therewith, and
the Company has not received any notice that any Governmental Entity is
considering challenging, revoking, canceling, restricting, conditioning or not
renewing any license, franchise, permit or other authorization, except for
those licenses, franchises, permits and other Governmental Authorizations the
failure of which to possess could not reasonably be expected to have a Company
Material Adverse Effect. Except as set forth in Section 4.23 of the Company
Disclosure Schedule, the Governmental Authorizations listed in Section 4.23 of
the Company Disclosure Schedule collectively constitute all of the Governmental
Authorizations necessary to permit the Company to lawfully conduct and operate
its business in the manner it currently conducts and operates such businesses
and to permit it to own and use its assets in the manner in which it currently
owns and uses such assets.
SECTION 4.24 Gifts, Political Contributions, Unrecorded Funds
Neither the Company nor, to the Company's Knowledge without independent
investigation, any agent, Employee or independent contractor of the Company
has, in connection with the business of the Company (i) made or agreed to make
any contribution, payment, or gift to any customer, supplier, landlord,
political candidate, governmental official, official of any health plan,
patient, employee, or agent where either the contribution, payment, or gift or
the purpose thereof was illegal under any law or regulation; (ii) established
or maintained any unrecorded fund or asset for any purpose or made any false
entries on its respective books and records for any reason; (iii) made or
agreed to make any contribution, or reimbursed any political gift or
contribution made by any other Person, to any candidate for federal, state, or
local public office in violation of any law or regulation; or (iv) submitted
any claim for services rendered or reimbursement for expenses to any Person
where the services were not actually rendered or the expenses were not actually
incurred.
SECTION 4.25 No Dissenters' Rights
The Company's Common Stock is designated as a national market system
security within the meaning of Section 607.1302 of the FBCA. The Company's
Articles of Incorporation or Bylaws do not provide the holders of any class or
series of capital stock of the Company with dissenters' rights under Section
607.1302 of the FBCA or any other applicable law.
A-24
<PAGE>
SECTION 4.26 Board Recommendation
The Board of Directors of the Company, at a meeting duly called and held,
has unanimously (i) approved this Agreement, (ii) determined that this
Agreement and the transactions contemplated hereby, including the Merger, are
in the best interests of the stockholders of the Company and (iii) resolved
subject to its fiduciary duties under applicable law to recommend that the
stockholders of the Company adopt this Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent hereby represents and warrants to Company, subject to the
exceptions specifically disclosed in the Parent Disclosure Schedule, all such
exceptions to be referenced to a specific representation set forth in this
Article V or to otherwise be clearly applicable to the representations hereof
not specifically referenced, that (it being understood that for purposes of
this Article V, unless the context otherwise requires, the term Parent shall be
deemed to include all of the Parent's Subsidiaries:
SECTION 5.01 Organization and Qualification; Subsidiaries
(a) Parent and each directly and indirectly owned subsidiary of Parent
(the "Parent Subsidiaries") has been duly organized and is validly existing and
in good standing (to the extent applicable) under the laws of the jurisdiction
of its incorporation or organization, as the case may be, and has the requisite
corporate power and authority to own, lease and operate its properties and to
carry on its business as it is now being conducted. Except as set forth in
Section 5.01 of the Parent Disclosure Schedule, Parent and each Parent
Subsidiary is duly qualified or licensed to do business, and is in good
standing (to the extent applicable), in each jurisdiction where the character
of the properties owned, leased or operated by it or the nature of its business
makes such qualification or licensing necessary, except for such failure to be
so qualified or licensed and in good standing that could not reasonably be
expected to have, individually or in the aggregate, a Parent Material Adverse
Effect.
(b) Section 5.01 of the Parent Disclosure Schedule sets forth, as of the
date of this Agreement, a true and complete list of each Parent Subsidiary,
together with (i) the jurisdiction of incorporation or organization of each
Parent Subsidiary and the percentage of each Parent Subsidiary's outstanding
capital stock or other equity interests owned by Parent or another Parent
Subsidiary and (ii) an indication of whether each Parent Subsidiary is a
"Significant Subsidiary" as defined in Regulation S-X under the Exchange Act.
Except as set forth in Section 5.01 of the Parent Disclosure Schedule, neither
Parent nor any Parent Subsidiary owns an equity interest in any partnership or
joint venture arrangement or other business entity that is material to the
business, assets, liabilities, financial condition or results of operations of
Parent and the Parent Subsidiaries, taken as a whole.
SECTION 5.02 Certificate of Incorporation and Bylaws
The copies of each of Parent's and Merger Subs, certificate of
incorporation and bylaws previously provided to Company by Parent are true,
complete and correct copies thereof. Such certificate of incorporation and
bylaws are in full force and effect. Parent is not in violation of any of the
provisions of its certificate of incorporation or bylaws.
SECTION 5.03 Capitalization
(a) The authorized capital stock of Parent consists of 50,000,000 shares
of Parent Common Stock and 5,000,000 shares of preferred stock ("Parent
Preferred Stock"). As of January 28, 2000 (which numbers are not materially
different on the date hereof), (i) 12,543,556 shares of Parent Common Stock are
issued and outstanding, all of which are validly issued, fully paid and
nonassessable, (ii) no shares of Parent Common Stock are held in the treasury
of Parent, (iii) no shares of Parent Common Stock are held by Parent
Subsidiaries, (iv) approximately 2,007,976 shares of Parent Common Stock are
reserved for future issuance pursuant to outstanding options and warrants to
purchase Parent Common Stock ("Parent Stock Options"), and (v) 418,803 shares
of Parent Preferred Stock are outstanding. Except as set forth in Section 5.03
of the Parent Disclosure Schedule or shares of Parent
A-25
<PAGE>
Common Stock issuable pursuant to the Parent Stock Plans, there are no options,
warrants or other rights, agreements, arrangements or commitments of any
character obligating Parent or any Parent Subsidiary to issue or sell any
shares of capital stock of, or other equity interests in, Parent or any Parent
Subsidiary. All shares of Parent Common Stock subject to issuance as aforesaid,
upon issuance prior to the Effective Time on the terms and conditions specified
in the instruments pursuant to which they are issuable, will be duly
authorized, validly issued, fully paid and nonassessable. Except as set forth
in Section 5.03 of the Parent Disclosure Schedule, there are no outstanding
contractual obligations of Parent or any Parent Subsidiary to repurchase,
redeem or otherwise acquire any shares of Parent Common Stock or any capital
stock of any Parent Subsidiary. Except as set forth in Section 5.03 of the
Parent Disclosure Schedule, each outstanding share of capital stock of each
Parent Subsidiary is duly authorized, validly issued, fully paid and
nonassessable and each such share owned by Parent or another Parent Subsidiary
is free and clear of all security interests, liens, claims, pledges, options,
rights of first refusal, agreements, limitations on Parent's or such other
Parent Subsidiary's voting rights, charges and other encumbrances of any nature
whatsoever.
(b) The consummation of the Merger will not trigger any anti-dilution
rights or price adjustment in connection with any options to purchase Parent
Common Stock.
SECTION 5.04 Authority Relative to This Agreement
Each of Parent and Merger Sub has all necessary corporate power and
authority to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by each of Parent and Merger Sub and the
consummation by Parent and Merger Sub of the transactions contemplated hereby
have been duly and validly authorized by all necessary corporate action, and no
other corporate proceedings on the part of Parent or Merger Sub are necessary
to authorize this Agreement or to consummate such transactions (other than the
approval of this Agreement and the Merger by the holders of a majority of the
outstanding shares of Parent Common Stock present at the Parent Shareholders'
Meeting and the consent of Parent as sole stockholder of Merger Sub). This
Agreement has been duly executed and delivered by each of Parent and Merger Sub
and, assuming the due authorization, execution and delivery by Company,
constitutes a legal, valid and binding obligation of each of Parent and Merger
Sub enforceable against Parent and Merger Sub in accordance with its terms.
SECTION 5.05 No Conflict; Required Filings and Consents
(a) The execution and delivery of this Agreement by Parent and Merger Sub
does not, and the performance by Parent and Merger Sub of their obligations
hereunder and the consummation of the Merger will not, except as set forth in
Section 5.05 of the Parent Disclosure Schedule, (i) conflict with or violate
any provision of the articles of incorporation or bylaws of Parent or any
equivalent organizational documents of any Parent Subsidiary, (ii) assuming
that all consents, approvals, authorizations and permits described in Section
5.05(b) have been obtained and all filings and notifications described in
Section 5.05(b) have been made, conflict with or violate any Law applicable to
Parent or any other Parent Subsidiary or by which any material property or
material asset of Parent or any Parent Subsidiary is bound or affected or (iii)
result in any material breach of or constitute a material default (or an event
which with the giving of notice or lapse of time or both could reasonably be
expected to become a default) under, or give to others any right of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or other encumbrance on any material property or asset of
Parent or any Parent Subsidiary pursuant to, any Parent Material Contract (as
defined below) or Parent Permit (as defined below).
(b) The execution and delivery of this Agreement by Parent and Merger Sub
does not, and the performance by Parent and Merger Sub of their obligations
hereunder and the consummation of the Merger will not, require any material
consent, approval, authorization or permit of, or filing by Parent with or
notification by Parent to, any Governmental Entity, except as set forth in
Section 5.05 of the Parent Disclosure Schedule or pursuant to applicable
requirements of the Exchange Act, the Securities Act, Blue Sky Laws, the rules
and regulations of the AMEX, state takeover laws, the premerger notification
requirements of the HSR Act, if any, and the filing and recordation of the
Certificate of Merger as required by the FBCA.
A-26
<PAGE>
SECTION 5.06 Permits; Compliance with Laws
Except as set forth in Section 5.06 of the Parent Disclosure Schedule,
Parent and the Parent Subsidiaries are in possession of all franchises, grants,
authorizations, licenses, establishment registrations, product listings,
permits, easements, variances, exceptions, consents, certificates,
identification and registration numbers, approvals and orders of any
Governmental Entity necessary for Parent or any Parent Subsidiary to own, lease
and operate its properties or to offer or perform its services or to develop,
produce, store, distribute and market its products or otherwise to carry on its
business as it is now being conducted (collectively, the "Parent Permits")
except for Parent permits which could not reasonably be expected to have a
Parent Material Adverse Effect, and, as of the date of this Agreement, none of
the Parent Permits has been suspended or canceled nor is any such suspension or
cancellation pending or, to the knowledge of Parent, threatened. Neither Parent
nor any Parent Subsidiary is in conflict with, or in default or violation of,
(i) any Law applicable to Parent or any Parent Subsidiary or by which any
material property or asset of Parent or any Parent Subsidiary is bound or
affected or (ii) any Parent Permits, except for conflicts, defaults or
violations which could not reasonably be expected to have a Parent Material
Adverse Effect. Section 5.06 of the Parent Disclosure Schedule sets forth, as
of the date of this Agreement, all actions, proceedings, investigations or
surveys pending or, to the knowledge of Parent, threatened against Parent or
any Parent Subsidiary that could reasonably be expected to result in the
suspension or cancellation of any other material Parent Permit. Except as set
forth in Section 5.06 of the Parent Disclosure Schedule, since August 13, 1999,
neither Parent nor any Parent Subsidiary has received from any Governmental
Entity any written notification with respect to possible conflicts, defaults or
violations of Laws.
SECTION 5.07 SEC Filings; Financial Statements
(a) Parent has timely filed all forms, reports, statements and documents
required to be filed by it (A) with the SEC and the AMEX since July 1, 1999
(collectively, together with any such forms, reports, statements and documents
Parent may file subsequent to the date hereof until the Closing, the "Parent
Reports") and (B) with any other Governmental Entities. Each Parent Report (i)
was prepared in accordance with the requirements of the Securities Act, the
Exchange Act or the AMEX, as the case may be, substantially in all respects and
(ii) did not at the time it was filed contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. Each form, report,
statement and document referred to in clause (B) of this paragraph was prepared
in all material respects in accordance with the requirements of applicable Law.
No Parent Subsidiary is subject to the periodic reporting requirements of the
Exchange Act or required to file any form, report or other document with the
SEC, the AMEX, any other stock exchange or any other comparable Governmental
Entity.
(b) Except as is provided in the Parent Reports, each of the consolidated
financial statements (including, in each case, any notes thereto) contained in
the Parent Reports was prepared in accordance with GAAP applied on a consistent
basis throughout the periods indicated (except as may be indicated in the notes
thereto) and each presented fairly, in all material respects, the consolidated
financial position of Parent and the consolidated Parent Subsidiaries as at the
respective dates thereof and for the respective periods indicated therein,
except as otherwise noted therein (subject, in the case of unaudited
statements, to normal and recurring immaterial year-end adjustments).
(c) Except as and to the extent set forth or reserved against on the
consolidated balance sheet of Parent and the Parent Subsidiaries as reported in
the Parent Reports, including the notes thereto, none of Parent or any Parent
Subsidiary has any liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) that would be required to be reflected on a
balance sheet or in notes thereto prepared in accordance with GAAP, except for
immaterial liabilities or obligations incurred in the ordinary course of
business consistent with past practice since June 30, 1999 that have not had or
could not reasonably be expected to have, individually or in the aggregate, a
Parent Material Adverse Effect.
A-27
<PAGE>
(d) Parent has furnished to Company copies of the unaudited consolidated
and consolidating balance sheets and statements of income, changes in
stockholders' equity, and cash flow as of and for the months ended October 31
and November 30, 1999 for the Parent and the Parent Subsidiaries (collectively,
the "Financial Statements"). The Financial Statements have been prepared in
accordance with GAAP applied on a consistent basis throughout the periods
covered thereby (except as may be indicted in the notes thereto), present
fairly, in all material respects, the consolidated financial condition of the
Parent and the consolidated Parent Subsidiaries as of such dates and the
results of operations of the Parent and the Parent Subsidiaries for such
periods provided, however, that the Financial Statements are subject to normal
and recurring immaterial year-end adjustments and lack footnotes and other
presentation items.
(e) Parent has sold 3,571, 428 shares of Parent Common Stock offered
pursuant to its Registration Statement on Form S-1 declared effective by the
SEC on January 19, 2000 at purchase price of $3.50 per share. As of the date
hereof, the net proceeds have been used by Parent in the manner described in
such Form S-1.
SECTION 5.08 Absence of Certain Changes or Events
Except as set forth in Section 5.08 of the Parent Disclosure Schedule,
since September 30, 1999, Parent and the Parent Subsidiaries have conducted
their businesses only in the ordinary course consistent with past practice and,
since such date, there has not been (i) any material changes in or effect on
the business, assets, liabilities, financial condition or results of operations
of Parent or the Parent Subsidiaries, (ii) any event that could reasonably be
expected to prevent or materially delay the performance of Parent's obligations
pursuant to this Agreement and the consummation of the Merger by Parent, (iii)
any material change by Parent in its accounting methods, principles or
practices, (iv) any declaration, setting aside or payment of any dividend or
distribution in respect of the shares of Parent Common Stock or any redemption,
purchase or other acquisition of any of Parent's securities, (v) except for
changes in the ordinary course of business consistent with past practice, any
increase in the compensation or benefits or establishment of any bonus,
insurance, severance, deferred compensation, pension, retirement, profit
sharing, stock option (including, without limitation, the granting or repricing
of stock options, stock appreciation rights, performance awards or restricted
stock awards), stock purchase or other employee benefit plan, or any other
increase in the compensation payable or to become payable to any employees,
officers, consultants or directors of Parent or any Parent Subsidiary, (vi) any
issuance or sale of any stock, notes, bonds or other securities other than
pursuant to the exercise of outstanding securities, or entering into any
agreement with respect thereto, or the issuances of options under the Parent
Stock Plans, (vii) any amendment to the Parent's certificate of incorporation
or bylaws, (viii) other than in the ordinary course of business consistent with
past practice, any (x) purchase, sale, assignment or transfer of any material
assets, (y) mortgage, pledge or existence of any lien, encumbrance or charge on
any material assets or properties, tangible or intangible except for liens for
Taxes not yet delinquent, or (z) waiver of any rights of material value or
cancellation or any material debts or claims, (ix) any incurrence of any
material liability (absolute or contingent), except for current liabilities and
obligations incurred in the ordinary course of business consistent with past
practice, (x) any incurrence of any damage, destruction or similar loss,
whether or not covered by insurance, materially affecting the business or
properties of Parent or any Parent Subsidiary, or (xi) any entering into any
transaction of a material nature other than in the ordinary course of business,
consistent with past practice.
SECTION 5.09 Employee Benefit Plans; Labor Matters
(a) The Parent Disclosure Schedule lists each material employee benefit
fund, plan, program, arrangement and contract (including, without limitation,
any "pension" plan, fund or program, as defined in Section 3(2) of ERISA, any
"employee benefit plan", as defined in Section 3(3) of ERISA and any plan,
program, policy, arrangement or contract providing for severance), whether
currently in effect or pursuant to which the Parent has any ongoing liability
or obligation; medical, dental or vision benefits; life insurance or death
benefits; disability benefits, sick pay or other wage replacement; vacation,
holiday or sabbatical; pension or profit-sharing benefits; stock options or
other equity
A-28
<PAGE>
compensation; bonus or incentive pay or other material fringe benefits) whether
written or not ("Benefit Plans"), maintained, sponsored or contributed to or
required to be contributed to by Parent or any Parent Subsidiary (the "Parent
Benefit Plans"). With respect to each Parent Benefit Plan, Parent has delivered
or made available to Company a true, complete and correct copy of (i) such
Parent Benefit Plan (or, if not written, a written summary of its material
terms) and the most recent summary plan description, if any, related to such
Parent Benefit Plan, (ii) each trust agreement or other funding arrangement
relating to such Parent Benefit Plan, (iii) the most recent annual report (Form
5500) filed with the IRS with respect to such Parent Benefit Plan (and, if the
most recent annual report is a Form 5500R, the most recent Form 5500C filed
with respect to such Parent Benefit Plan), (iv) the most recent actuarial
report or financial statement relating to such Parent Benefit Plan and (v) the
most recent determination letter, if any, issued by the IRS with respect to
such Parent Benefit Plan and any pending request for such a determination
letter. Neither Parent nor any Parent Subsidiary nor, to the knowledge of
Parent, any other person or entity, has any express commitment, whether legally
enforceable or not, to modify, change or terminate any Parent Benefit Plan,
other than with respect to a modification, change or termination required by
ERISA or the Code.
(b) Except as set forth in Section 5.08 of the Parent Disclosure Schedule,
Parent has delivered to Company true, complete and correct copies of (i) all
employment agreements with officers and all consulting agreements of Parent and
each Parent Subsidiary, (ii) all severance plans, agreements, programs and
policies of Parent and each Parent Subsidiary with or relating to their
respective employees, directors or consultants, and (iii) all plans, programs,
agreements and other arrangements of Parent and each Parent Subsidiary with or
relating to their respective employees, directors or consultants which contain
"change of control" provisions, and all such plans, agreements, programs, and
policies are specifically identified as such on Section 5.09 of the Parent
Disclosure Schedule. Except as set forth in Section 5.09 of the Parent
Disclosure Schedule, no payment or benefit which may be required to be made by
Parent or any Parent Subsidiary or which otherwise may be required to be made
under the terms of any Parent Benefit Plan or other arrangement will constitute
a parachute payment under Code Section 280(G)(1), and the consummation of the
transactions contemplated by this Agreement will not, (i) entitle any current
or former employee or other service provider of Parent or any Parent Subsidiary
to severance benefits or any other payment, compensation or benefit (including
forgiveness of indebtedness) or (ii) accelerate the time of payment or vesting,
or increase the amount of compensation or benefit due any such employee or
service provider.
(c) Neither Parent nor any Parent Subsidiary is a party to, or has any
obligations under or with respect to, any collective bargaining or other labor
union contract applicable to persons employed by Parent or any Parent
Subsidiary and no collective bargaining agreement is being negotiated by Parent
or any Parent Subsidiary or any person or entity that may obligate the Parent
or any Parent Subsidiary thereunder. As of the date of this Agreement, there is
no labor dispute, strike, union organizing activity or work stoppage against
Parent or any Parent Subsidiary pending or, to the knowledge of Parent,
threatened which may interfere with the respective business activities of
Parent or any Parent Subsidiary. As of the date of this Agreement, to the
knowledge of Parent, none of Parent, any Parent Subsidiary, or any of their
respective representatives or employees has committed any unfair labor practice
in connection with the operation of the respective businesses of Parent or any
Parent Subsidiary, and there is no charge or complaint filed against Parent or
any Parent Subsidiary by or with the National Labor Relations Board or any
comparable Governmental Entity pending or threatened in writing.
SECTION 5.10 Certain Tax Matters
(a) Neither Parent, nor to Parent's knowledge, any of its affiliates, has
taken or agreed to take any action (other than actions contemplated by this
Agreement) that could be expected to prevent the Merger from constituting a
"reorganization" under Section 368 of the Code. Parent is not aware of any
agreement or plan to which Parent or any of its affiliates is a party or other
circumstances relating to Parent or any of its affiliates that could reasonably
be expected to prevent the Merger from so qualifying as a reorganization under
Section 368 of the Code.
A-29
<PAGE>
(b) Parent and each of the Parent Subsidiaries, and any consolidated,
combined, unitary or aggregated group for Tax purposes of which Parent or any
Parent Subsidiary is or has been a member, have properly completed and timely
filed all Tax Returns required to be filed by them and have paid all Taxes
shown thereon to be due. Parent has provided adequate accruals in accordance
with generally accepted accounting principles in its latest financial
statements included in the Parent Reports for any Taxes that have not been
paid, whether or not shown as being due on any Tax Returns. Parent and the
Parent Subsidiaries have no material liability for unpaid Taxes accruing after
the date of the Parent's latest financial statements included in the Parent
Reports.
(c) There is (i) no material claim for Taxes that is a lien against the
property of Parent or any Parent Subsidiary or is being asserted against Parent
or any Parent Subsidiary other than liens for Taxes not yet due and payable,
(ii) no audit of any Tax Return of parent or any Parent Subsidiary being
conducted by a Tax Authority; (iii) no extension of the statute of limitations
on the assessment of any Taxes granted by Parent or any Parent Subsidiary and
currently in effect, and (iv) no agreement, contract or arrangement to which
Parent or any Parent Subsidiary is a party that may result in the payment of
any amount that would not be deductible by reason of Section 280G or Section
404 of the Code.
SECTION 5.11 Contracts
(a) Section 5.11 of the Parent Disclosure Schedule sets forth a list of
all material written and oral contracts or agreements relating to the Parent,
including without limitation any: (i) contract resulting in a commitment or
potential commitment for expenditure or other obligation or potential
obligation, or which provides for the receipt or potential receipt, involving
in excess of One Hundred Thousand Dollars ($100,000) in any instance, or series
of related contracts that in the aggregate give rise to rights or obligations
exceeding such amount, other than contracts with health plans and providers,
entered into by the Parent's managed care business in the ordinary course of
business, (ii) the twelve (12) largest customer contracts based upon revenues
generated to the Parent; (iii) indenture, mortgage, promissory note, loan
agreement, guarantee or other agreement or commitment for the borrowing or
lending of money or encumbrance of assets involving more than One Hundred
Thousand Dollars ($100,000) in each instance; (iv) agreement which restricts
the Parent from engaging in any line of business or from competing with any
other person; (v) warranties made with respect to products manufactured,
packaged, distributed or sold or services provided by the Parent; (vi) any
agreement which terminates, or gives another party the right to terminate such
agreement, upon the completion of the transaction contemplated by this
Agreement; or (vii) any other contract, agreement, instrument, arrangement or
commitment that is material to the condition (financial or otherwise), results
of operation, assets, properties, liabilities, business or prospects of the
Parent (collectively, and together with all other agreements required to be
disclosed on the Parent Disclosure Schedule the "Parent Material Contracts").
The Parent has previously furnished to Parent true, complete and correct copies
of all written agreements, as amended, required to be listed on Section 5.11 of
the Parent Disclosure Schedule.
(b) The Parent Material Contracts are each in full force and effect and
are the valid and legally binding obligations of the Parent and, to the best of
Parent's knowledge, the other parties thereto, enforceable in accordance with
their respective terms, subject only to bankruptcy, insolvency or similar laws
affecting the rights of creditors generally and to general equitable
principles. The Parent has not received notice of its default under any of the
Parent Material Contracts and no event has occurred which, with the passage of
time or the giving of notice or both, would constitute a default by the Parent
thereunder. To the Parent's knowledge, none of the other parties to any of the
Parent Material Contracts is in default thereunder, nor has an event occurred
which, with the passage of time or the giving of notice or both would
constitute a default by such other party thereunder. The Parent has not
received notice of the pending or threatened cancellation, revocation or
termination of any of the Parent Material Contracts, nor are any of them aware
of any facts or circumstances which could reasonably be expected to lead to any
such cancellation, revocation or termination.
(c) Except as otherwise indicated on Section 5.11 of the Parent Disclosure
Schedule, to the Parent's knowledge, after due inquiry, the continuation,
validity and effectiveness of the Parent Material Contracts under the current
terms thereof will in no way be affected by the consummation of the
transactions contemplated by this Agreement.
A-30
<PAGE>
SECTION 5.12 Litigation
There is no suit, claim, action, proceeding or investigation pending or,
to the knowledge of Parent, threatened against Parent or any Parent Subsidiary,
and, to the knowledge of Parent, there are no existing facts or circumstances
that could reasonably be expected to result in a suit, claim, action,
proceeding or investigation. Parent is not aware of any facts or circumstances
which could reasonably be expected to result in the denial of insurance
coverage under policies issued to Parent and Parent Subsidiaries in respect of
such suits, claims, actions, proceedings and investigations. Neither Parent nor
any Parent Subsidiary is subject to any outstanding order, writ, injunction or
decree.
SECTION 5.13 Environmental Matters
Parent and the Parent Subsidiaries are in material compliance with all
applicable Environmental Laws and all Parent Permits required by Environmental
Laws. All past noncompliance of Parent or any Parent Subsidiary with
Environmental Laws or Environmental Permits has been resolved without any
pending, ongoing or future material obligation, cost or liability. Neither
Parent nor any Parent Subsidiary has released a Hazardous Material at, or
transported a Hazardous Material to or from, any real property currently or
formerly owned, leased or occupied by Parent or any Parent Subsidiary, in
violation of any Environmental Law.
SECTION 5.14 Insurance
Parent and each Parent Subsidiary is presently insured, and during each of
the past five calendar years has been insured, against such risks, as companies
engaged in a similar business would, in accordance with good business practice,
customarily be insured. The Parent reasonably believes that the policies of
fire, theft, liability, medical malpractice, director and officer, product
liability and other insurance maintained with respect to the assets or
businesses of Parent and Parent Subsidiaries provide, adequate coverage against
loss. Parent has made available to Company a complete and correct list as of
the date hereof of all insurance policies maintained by Parent or the Parent
Subsidiaries, and has made available to Company complete and correct copies of
all such policies, together with all riders and amendments thereto. All such
policies are in full force and effect and all premiums due thereon have been
paid to the date hereof. Parent and the Parent Subsidiaries have complied in
all material respects with the terms of such policies.
SECTION 5.15 Properties
Parent and the Parent Subsidiaries have good title, free and clear of all
material mortgages, liens, pledges, charges or other encumbrances to all their
material tangible properties and material assets, real, personal or mixed,
reflected in the Parent's consolidated financial statements for the quarterly
period ended September 30, 1999, as being owned by Parent and the Parent
Subsidiaries as of the date thereof, other than (i) any properties or assets
that have been sold or otherwise disposed of in the ordinary course of business
since the date of such financial statements, (ii) liens disclosed in the notes
to such financial statements and (iii) liens arising in the ordinary course of
business after the date of such financial statements or disclosed in Section
5.15 of the Parent Disclosure Schedule. All buildings, and all fixtures,
equipment and other property and assets that are material to its business on a
consolidated basis, held under leases or sub-leases by Parent or any Parent
Subsidiary are held under valid instruments enforceable in accordance with
their respective terms, subject to applicable laws of bankruptcy, insolvency or
similar laws relating to creditors' rights generally and to general principles
of equity (whether applied in a proceeding in law or equity). Substantially all
of Parent's and the Parent Subsidiaries' equipment in regular use has been
reasonably maintained and is in serviceable condition, reasonable wear and tear
excepted.
SECTION 5.16 Opinion of Financial Advisor
Legg Mason Wood Walker, Incorporated ("Legg Mason") has delivered to the
board of directors of Parent its written opinion to the effect that, as of the
date hereof, the Exchange Ratio is fair to the holders of shares of Parent
Common Stock from a financial point of view (the "Legg Mason Fairness
Opinion").
A-31
<PAGE>
SECTION 5.17 Brokers
Except as set forth on Section 5.17 of Parent Disclosure Schedule, no
broker, finder or investment banker (other than Legg Mason and J.P. Morgan
Securities, Inc.) is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger based upon arrangements made by or on
behalf of Parent. Parent has heretofore made available to Parent true, complete
and correct copies of all agreements between Parent, on the one hand, and Legg
Mason and/or J.P. Morgan Securities, Inc., on the other hand, pursuant to which
such firms would be entitled to any payment relating to the Merger.
SECTION 5.18 No Interested Shareholders
To Parent's knowledge, neither the Company nor any "affiliate" or
"associate" of the Company is an "interested shareholder" as those terms are
defined in 607.0901 of the FBCA.
SECTION 5.19 Governmental Authorizations
The Parent and, to the Parent's knowledge, without any independent
investigation, each Ophthalmologist/Optometrist Employee, possesses all
necessary licenses, franchises, permits and other governmental authorizations
(collectively, "Governmental Authorizations"), including, but not limited to,
all licenses, franchises, permits and authorizations for the conduct of the
Parent's business as now conducted, except for those licenses, franchises,
permits and other governmental authorizations the failure of which to possess
could not reasonably be expected to have a Parent Material Adverse Effect.
Except as set forth in Section 5.19 of the Parent Disclosure Schedule, the
transactions contemplated by this Agreement will not result in a default under
or a breach or violation of, or adversely affect the rights and benefits
afforded by any material licenses, franchises, permits or authorizations,
except for those licenses, franchises, permits and other governmental
authorizations the failure of which to possess could not reasonably be expected
to have a Parent Material Adverse Effect . All such licenses, franchises,
permits and other authorizations are valid and in full force and effect, except
for those licenses, franchises, permits and other governmental authorizations
the failure of which to possess could not reasonably be expected to have a
Parent Material Adverse Effect. The Parent and to the Parent's knowledge,
without any independent investigation, each Ophthalmologist/Optometrist
Employee is currently in compliance therewith, and the Parent has not received
any notice that any Governmental Entity is considering challenging, revoking,
canceling, restricting, conditioning or not renewing any material license,
franchise, permit or other authorization except for those licenses, franchises,
permits and other governmental authorizations the failure of which to possess
could not reasonably be expected to have a Parent Material Adverse Effect.
SECTION 5.20 Intellectual Property.
The Parent and the Parent Subsidiaries have ownership of or rights to use
each patent, patent application, copyright (whether or not registered),
copyright application, trademark (whether or not registered), trademark
application, trade name, service mark, and other trade secret or proprietary
intellectual property owned by or used in and material to the business of the
Parent and the Parent Subsidiaries, taken as a whole (collectively, a "Parent
Intellectual Property"). The Parent has been provided with a list of all
patents, trademarks and copyrights and applications therefor owned by or
licensed to the Parent or any Subsidiary that are material to the conduct of
the business of the Parent and the Parent Subsidiaries, taken as a whole, as
now operated. To the Parent's Knowledge, none of the previous or current
development, manufacture, marketing or distribution of products or services of
or by the Parent or any Parent Subsidiary infringes the right of any other
person, except for any such infringements that, in the aggregate, have not
resulted in, and could not reasonably be expected to result in, a Parent
Material Adverse Effect. To the Parent's Knowledge, without any independent
investigation, no other person is infringing the rights of the Parent or any
Parent Subsidiary in any such Parent Intellectual Property, except for any such
infringements that, in the aggregate, have not resulted in, and could not
reasonably be expected to result in, a Parent Material Adverse Effect. To the
best of Parent's knowledge, Parent's material software and hardware are year
2000 compliant, except to the extent noncompliance should not or could not
reasonably be expected to cause a Parent Material Adverse Effect.
A-32
<PAGE>
ARTICLE VI
COVENANTS
SECTION 6.01 Conduct of Business by Company Pending the Closing
During the period from the date of this Agreement and continuing until the
earlier of the termination of this Agreement pursuant to its terms or the
Effective Time, Company shall not knowingly take any action a principal purpose
of which is, and the reasonably likely result of which would be, a material
delay in or interference with the consummation of the Merger.
Company agrees that, between the date of this Agreement and the Effective
Time, unless Parent shall otherwise agree in writing, and except as set forth
below or as a result of entering into this Agreement, (x) the respective
businesses of Company and the Company Subsidiaries shall be conducted only in,
and Company and the Company Subsidiaries shall not take any action except in,
the ordinary course of business consistent with past practice and (y) Company
shall use all commercially reasonable efforts to keep available the services of
such of the current officers, significant employees and consultants of Company
and the Company Subsidiaries and shall use commercially reasonable efforts to
preserve the current relationships of Company and the Company Subsidiaries with
such of the corporate partners, customers, suppliers and other persons with
which Company or any Company Subsidiary has significant business relations in
order to preserve substantially intact its business organization. By way of
amplification and not limitation, neither Company nor any Company Subsidiary
shall, between the date of this Agreement and the Effective Time, directly or
indirectly, do, or agree to do, any of the following without the prior written
consent of Parent and except as a result of entering into this Agreement or
except as set forth in Section 6.01 of the Company Disclosure Schedule:
(a) amend or otherwise change its certificate of incorporation or bylaws
or equivalent organizational documents;
(b) issue, sell, pledge, dispose of, grant, transfer, lease, license,
guarantee or encumber, or authorize the issuance, sale, pledge, disposition,
grant, transfer, lease, license or encumbrance of, (i) any shares of capital
stock of Company or any Company Subsidiary of any class, or securities
convertible into or exchangeable or exercisable for any shares of such capital
stock, or any options, warrants or other rights of any kind to acquire any
shares of such capital stock, or any other ownership interest (including,
without limitation, any phantom interest), of Company or any Company
Subsidiary, other than the issuance of shares of Company Common Stock pursuant
to the exercise of stock options theretofore outstanding as of the date of this
Agreement, or (ii) any material property or assets of Company or any Company
Subsidiary, including, but not limited to, the property or assets of MEC,
except providing products and services in the ordinary course of business
consistent with past practice;
(c) (i) except as to business interests in new refractive centers or
ambulatory surgical centers pursuant to the Company's business plan and after
written notice to Parent, acquire (including, without limitation, by merger,
consolidation, or acquisition of stock or assets) any interest in any
corporation, partnership, other business organization or person or any division
thereof; (ii) incur any indebtedness for borrowed money or issue any debt
securities or assume, guarantee or endorse, or otherwise as an accommodation
become responsible for, the obligations of any person (other than Company and
Company Subsidiaries) for borrowed money or make any loans or advances, other
than routine employee loans to employees other than Company officers (not to
exceed $1,000 to any individual), material to the business, assets,
liabilities, financial condition or results of operations of Company and the
Company Subsidiaries, taken as a whole, other than borrowing under the
Company's credit facility for use in operating the Company in the ordinary
course of business, or to pay or discharge debt or liabilities for an amount
less than reflected or reserved against on the Company Balance Sheet; (iii)
terminate, cancel or request any material change in, or agree to any material
change in, any Company Material Contract; (iv) make or authorize any capital
expenditure, other than capital expenditures in the ordinary course of business
consistent with past practice that have been included in the fiscal year 2000
budget ("Budget") delivered to Parent and disclosed in
A-33
<PAGE>
writing to Parent and that are not, in the aggregate, in excess of $75,000 for
Company and the Company Subsidiaries taken as a whole; or (v) enter into or
amend any contract, agreement, commitment or arrangement that, if fully
performed, would not be permitted under this Section 6.01(c);
(d) declare, set aside, make or pay any dividend or other distribution,
payable in cash, stock, property or otherwise, with respect to any of its
capital stock, except that any Company Subsidiary may pay dividends or make
other distributions to Company or any other Company Subsidiary;
(e) reclassify, combine, split, subdivide or redeem, purchase or otherwise
acquire, directly or indirectly, any of its capital stock;
(f) except as contemplated herein, amend or change the period (or permit
any acceleration, amendment or change) of exercisability of options granted
under the Company Stock Plans or other options and warrants, reprice any
options or warrants, or authorize cash payments in exchange for any Company
Stock Options granted under any of such plans;
(g) except in connection with the closing of the Practice Dispositions,
amend the terms of, repurchase, redeem or otherwise acquire, or permit any
Company Subsidiary to repurchase, redeem or otherwise acquire, any of its
securities or any securities of any Company Subsidiary or propose to do any of
the foregoing;
(h) enter into any contract or agreement, which, if entered into prior to
the date hereof, would be a Material Contract, amend or terminate any existing
Material Contract, or take any action which would terminate an existing
Material Contract, or would give any party to an existing Material Contract the
right to terminate such Material Contract;
(i) increase the compensation payable or to become payable to its
directors, officers, consultants or employees, except as required by the
agreements which are set forth in Section 6.01 of the Company Disclosure
Schedule, or grant any rights to severance or termination pay to, or enter into
any employment or severance agreement which provides benefits upon a change in
control of Company that would be triggered by the Merger with, any director,
officer, consultant or other employee of Company or any Company Subsidiary who
is not currently entitled to such benefits from the Merger, establish, adopt,
enter into or amend any collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other plan, agreement,
trust, fund, policy or arrangement for the benefit of any director, officer,
consultant or employee of Company or any Company Subsidiary, except to the
extent required by applicable Law, or enter into or amend any contract,
agreement, commitment or arrangement between Company or any Company Subsidiary
and any of Company's directors, officers, consultants or employees;
(j) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than (x) the payment, discharge or satisfaction in the ordinary course of
business and consistent with past practice of liabilities reflected or reserved
against on the consolidated balance sheet of Company and the consolidated the
Company Subsidiaries dated as of September 30, 1999 included in Company's
quarterly report on Form 10-Q for the period then ended (the "Company Balance
Sheet") but only to the extent reflected or to the extent of such reserves or
(y) incurred in the ordinary course of business since September 30, 1999 or (z)
to pay or discharge any such liability for an amount less than reflected or
reserved against on the Company Balance Sheet;
(k) except for accounting changes for discontinued business operations of
the Practice Dispositions and the Corporate Optometry businesses in accordance
with GAAP, make any change with respect to Company's accounting policies,
principles, methods or procedures, including, without limitation, revenue
recognition policies, other than as required by GAAP;
(l) make any material Tax election or settle or compromise any material
Tax liability; or
A-34
<PAGE>
(m) except as otherwise permitted in connection with this Agreement,
authorize or enter into any formal or informal agreement or otherwise make any
commitment to do any of the foregoing or to take any action which would make
any of the representations or warranties of Company contained in this Agreement
untrue or incorrect or result in any of the conditions to the Merger set forth
herein not being satisfied.
SECTION 6.02 Notices of Certain Events
Each of Parent and Company shall give prompt notice to the other of (i)
any notice or other communication from any person alleging that the consent of
such person is or may be required in connection with the Merger; (ii) any
notice or other communication from any Governmental Entity in connection with
the Merger; (iii) any actions, suits, claims, investigations or proceedings
commenced or, to its knowledge, threatened against, relating to or involving or
otherwise affecting Parent or the Parent Subsidiaries or Company or the Company
Subsidiaries, respectively, or that relate to the consummation of the Merger;
(iv) the occurrence of a default or event that, with the giving of notice or
lapse of time or both, will become a default under any Parent Material Contract
or Company Material Contract, respectively; and (v) any change that could
reasonably be expected to have a Parent Material Adverse Effect or a Company
Material Adverse Effect, respectively, or to delay or impede the ability of
either Parent or Company, respectively, to perform their respective obligations
pursuant to this Agreement and to effect the consummation of the Merger.
SECTION 6.03 Access to Information; Confidentiality
(a) Except as required pursuant to any confidentiality agreement or
similar agreement or arrangement to which Parent or Company or any of the
Parent Subsidiaries or the Company Subsidiaries is a party or pursuant to
applicable Law or the regulations or requirements of any stock exchange or
other regulatory organization with whose rules a party hereto is required to
comply, from the date of this Agreement to the Effective Time, Parent and
Company shall (and shall cause the Parent Subsidiaries and Company
Subsidiaries, respectively, to) (i) provide to the other (and its officers,
directors, employees, accountants, consultants, legal counsel, agents and other
representatives (collectively, "Representatives")) access at reasonable times
upon prior notice to its and its subsidiaries' officers, employees, agents,
properties, offices and other facilities and to the books and records thereof,
and (ii) furnish promptly such information concerning its and its subsidiaries'
business, properties, contracts, assets, liabilities and personnel as the other
party or its Representatives may reasonably request. All such investigations
and access shall be conducted in a manner as not to interfere unreasonably with
the business operations of the Company. No investigation conducted pursuant to
this Section 6.03 shall affect or be deemed to modify any representation or
warranty made in this Agreement.
(b) The parties hereto shall comply with, and shall cause their respective
Representatives to comply with, all of their respective obligations under the
Confidentiality Agreement with respect to the information disclosed pursuant to
this Section 6.03 or pursuant to the Confidentiality Agreement.
SECTION 6.04 No Solicitation of Transactions
(a) Except as provided in Section 6.04(b) below, Company shall not,
directly or indirectly, and shall cause its Representatives not to, directly or
indirectly, solicit, initiate or encourage (including by way of furnishing
nonpublic information), any inquiries or the making of any proposal or offer
(including, without limitation, any proposal or offer to its stockholders) that
constitutes, or may reasonably be expected to lead to, any Competing
Transaction, or enter into or maintain or continue discussions or negotiate
with any person in furtherance of such inquiries or to obtain a Competing
Transaction, or agree to or endorse any Competing Transaction, or authorize or
permit any of Company's Representatives or subsidiaries, or any Representative
retained by Company's subsidiaries, to take any such action; provided, however,
that nothing contained in this Section 6.04(a) shall prohibit the board of
directors of Company (i) from complying with Rule 14d-9 or 14e-2(a) promulgated
under the Exchange Act with regard to a tender or exchange offer not made in
violation of this Section 6.04(a) or (ii) prior to receipt of the approval by
the stockholders of Company of this
A-35
<PAGE>
Agreement and the Merger from providing information (subject to a
confidentiality agreement at least as restrictive as the Confidentiality
Agreement) in connection with, and negotiating, another unsolicited, bona fide
written proposal regarding a Competing Transaction that (x) Company's board of
directors shall have concluded in good faith, after considering applicable
state law, on the basis of the advice of independent outside counsel that such
action is necessary to prevent Company's board of directors from violating its
fiduciary duties to Company's stockholders under applicable law, and with
respect to which Company's board of directors shall have determined (based upon
the advice of Company's independent financial advisors) in the proper exercise
of its fiduciary duties to Company's stockholders that the acquiring party is
capable of consummating such Competing Transaction on the terms proposed, and
(y) Company's board of directors shall have determined in the proper exercise
of its fiduciary duties to Company's stockholders that such Competing
Transaction provides greater value to the stockholders of Company than the
Merger (based upon the written opinion of Company's independent financial
advisors that such Competing Transaction is superior from a financial point of
view) (any such Competing Transaction being referred to herein as a "Superior
Proposal"). Any violation of the restrictions set forth in this Section 6.04(a)
by any Representative of Company or any of its Subsidiaries, whether or not
such Person is purporting to act on behalf of Company or otherwise, shall be
deemed to be a breach of this Section 6.04(a) by Company. Company shall notify
Parent promptly if any proposal or offer, or any inquiry or contact with any
person with respect thereto, regarding a Competing Transaction is made, such
notice to include the identity of the person making such proposal, offer,
inquiry or contact, and the terms of such Competing Transaction, and shall keep
Parent apprised, on a current basis, no later than 24 hours after any change or
modification of any such Competing Transaction, of the status of such Competing
Transaction and of any modifications to the terms thereof. Company immediately
shall cease and cause to be terminated all existing discussions or negotiations
with any parties conducted heretofore with respect to a Competing Transaction.
Company shall not release any third party from, or waive any provision of, any
confidentiality or standstill agreement to which it is a party.
(b) Except as permitted by this Section 6.04(b), the Company's Board of
Directors shall not (i) withdraw, modify or change its approval or
recommendation of this Agreement, or propose publicly to withdraw, modify or
change the Merger or any of the transactions contemplated hereby, (ii) approve
or recommend or publicly propose to approve or recommend a Competing
Transaction, (iii) cause the Company to enter into any letter agreement, letter
of intent, agreement in principle or definitive agreement or similar agreement
providing for a Competing Transaction, or (iv) resolve to do any of the
foregoing, unless prior to the Company Stockholders' Meeting, the Company
receives an unsolicited proposal for a Competing Transaction and the Board of
Directors or the Company determines reasonably and in good faith, after due
investigation, that (a) such proposal is a Superior Proposal based upon the
written opinion of the Company's independent financial advisors that such
Competing Transaction is superior from a financial point of view, (b) the
Person making such Superior Proposal is reasonably capable of consummating such
Superior Proposal in a timely fashion and (c) based upon the advice of
independent outside counsel, the failure of the Board of Directors of the
Company to withdraw or modify its approval or recommendation of this Agreement
or the Merger, or approve or recommend such Superior Proposal, would be
inconsistent with its fiduciary duties under applicable law. In such case, the
Board may withdraw or modify its recommendation, and approve and recommend such
Superior Proposal, provided the Board of Directors of the Company (i) at least
five (5) Business Days prior to taking such action, provides to Parent written
notice of the Company's intention to accept the Superior Proposal, (ii) during
such period, gives parent a reasonable opportunity to propose modifications to
the Merger Consideration and negotiates such modifications in good faith with
the objective of allowing Parent to match the Superior Proposal and (iii) at
the end of such period, (A) reasonably and in good faith continues to believe
that the other proposal is a Superior Proposal, (B) simultaneously terminates
this Agreement, (C) concurrently causes the Company to enter into a definitive
acquisition agreement with respect to such Superior Proposal and (D)
concurrently pays to Parent the Termination Fee and Parent's Expenses as
provided in Section 9.05. Nothing contained in this Section 6.04(b) shall
prohibit the Company from taking and
A-36
<PAGE>
disclosing to its stockholders a position contemplated by Rule 14d-9 or Rule
14e-2(a) promulgated under the Exchange Act; provided that the Company does not
withdraw or modify its position with respect to the Merger or approve or
recommend a proposal for a Competing Transaction except as provided in this
Section 6.04(b).
SECTION 6.05 Tax-Free Transaction
From and after the date of this Agreement, each party hereto shall use all
reasonable efforts to cause the Merger to qualify, and shall not knowingly take
any actions or cause any actions to be taken which could reasonably be expected
to prevent the Merger from qualifying as a "reorganization" under Section
368(a) of the Code.
SECTION 6.06 Control of Operations
Nothing contained in this Agreement shall give Parent, directly or
indirectly, the right to control or direct the operations of Company and the
Company Subsidiaries prior to the Effective Time. Prior to the Effective Time,
Company shall exercise, consistent with the terms and conditions of this
Agreement, complete control and supervision over its operations.
SECTION 6.07 Further Action; Consents; Filings
(a) Upon the terms and subject to the conditions hereof, each of the
parties hereto shall use all reasonable efforts to (i) take, or cause to be
taken, all appropriate action, and do, or cause to be done, all things
necessary, proper or advisable under applicable Law or otherwise to consummate
and make effective the Merger, (ii) obtain from any Governmental Entity any
consents, licenses, permits, waivers, approvals, authorizations or orders
required to be obtained or made by Parent or Company or any of their respective
subsidiaries in connection with the authorization, execution and delivery of
this Agreement and the consummation of the Merger and (iii) make all necessary
filings, and thereafter make any other required or appropriate submissions,
with respect to this Agreement and the Merger required under (A) the rules and
regulations of the AMEX or the NNM, as the case may be, (B) the Securities Act,
the Exchange Act and any other applicable Federal or state securities Laws, (C)
the HSR Act, if any, and (D) any other applicable Law. The parties hereto shall
cooperate and consult with each other in connection with the making of all such
filings, including by providing copies of all such documents to the nonfiling
parties and their advisors prior to filing, and none of the parties shall file
any such document if any of the other parties shall have reasonably objected to
the filing of such document. No party shall consent to any voluntary extension
of any statutory deadline or waiting period or to any voluntary delay of the
consummation of the Merger at the behest of any Governmental Entity without the
consent and agreement of the other parties hereto, which consent shall not be
unreasonably withheld or delayed. The Parent shall not be required to divest
itself or the Company of any assets or business in order to obtain approval in
connection with the HSR Act or otherwise.
(b) Each of Company and Parent will give (or will cause their respective
subsidiaries to give) any notices to third persons, and use, and cause their
respective subsidiaries to use, reasonable efforts to obtain any consents from
third persons necessary, proper or advisable (as determined in good faith by
Parent with respect to such notices or consents to be delivered or obtained by
Company) to consummate the transactions contemplated by this Agreement.
SECTION 6.08 Additional Reports
Company and Parent shall each furnish to the other copies of any reports
of the type referred to in Sections 4.07 and 5.06, which it files with the SEC
on or after the date hereof, and Company and Parent, as the case may be,
covenant and warrant that as of the respective dates thereof, such reports will
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. Any
unaudited consolidated interim financial statements included in such reports
(including any related notes and schedules) will fairly present in all material
respects the financial position of Company and its consolidated subsidiaries or
Parent and its consolidated
A-37
<PAGE>
subsidiaries, as the case may be, as of the dates thereof and the results of
operations and changes in financial position or other information including
therein for the periods or as of the date then ended (subject, where
appropriate, to normal year-end adjustments), in each case in accordance with
past practice and U.S. GAAP consistently applied during the periods involved
(except as otherwise disclosed in the notes thereto).
SECTION 6.09 Conduct of Business by Parent
During the period from the date of this Agreement and continuing until the
earlier of the termination of this Agreement pursuant to its terms or the
Effective Time, Parent shall not knowingly take any action a principal purpose
of which is, and the reasonably likely result of which would be, a material
delay in or interference with the consummation of the Merger. Neither Parent
nor any Parent Subsidiary shall, between the date of this Agreement and the
Effective Time, directly or indirectly, do, or agree to do, any of the
following without the prior written consent of Company, except as a result of
entering into or as contemplated by this Agreement or except as set forth in
Section 6.09 of the Parent Disclosure Schedule:
(a) amend or otherwise change its certificate of incorporation or bylaws
or equivalent organizational documents;
(b) issue, sell, pledge, dispose of, grant, transfer, lease, license,
guarantee or encumber, or authorize the issuance, sale, pledge, disposition,
grant, transfer, lease, license or encumbrance of, (i) more than outstanding
20% of the shares of capital stock of Parent or any shares of capital stock of
a Parent Subsidiary of any class, or securities convertible into or
exchangeable or exercisable for any shares of such capital stock, or any
options, warrants or other rights of any kind to acquire more than 20% of the
outstanding shares of such capital stock or any other ownership interest
(including, without limitation, any phantom interest), of Parent or any Parent
Subsidiary, other than the issuance of shares of Parent common stock pursuant
to the exercise of stock options granted pursuant to the Parent Stock Plans, or
(ii) any material property or material assets of Parent or any Parent
Subsidiary, except providing products and services in the ordinary course of
business consistent with past practice;
(c) (i) an acquisition (including, without limitation, by merger,
consolidation, or acquisition of stock or assets) of any interest in any
corporation, partnership, other business organization or person or any division
thereof which would be considered a "Significant Subsidiary" of the Parent
(after taking into effect the Merger); (ii) except in connection with an
acquisition permitted pursuant to the foregoing clause (i), incur any material
indebtedness for borrowed money or assume, guarantee or endorse, or otherwise
as an accommodation become responsible for, the obligations of any person which
are material to the Parent (other than Parent and Parent Subsidiaries) for
borrowed money or make any loans or advances, material to the business, assets,
liabilities, financial condition or results of operations of Parent and the
Parent Subsidiaries, taken as a whole, other than borrowings under the Parent's
credit facility for use in operating the business; or (iii) enter into or amend
any contract, agreement, commitment or arrangement in which the Parent is
obligated to perform and, if fully performed, would not be permitted under this
Section 6.09(c);
(d) declare, set aside, make or pay any dividend or other distribution,
payable in cash, stock, property or otherwise, with respect to any of its
capital stock, except that any Parent Subsidiary may pay dividends or make
other distributions to Parent or any other Parent Subsidiary;
(e) reclassify, combine, split or subdivide any of its capital stock;
(f) amend or change the period (or permit any acceleration, amendment or
change) of exercisability of options granted under the Parent Stock Plans or
other options and warrants or take any action to reprice any such options and
warrants;
(g) authorize or enter into any formal or informal agreement or otherwise
make any commitment to do any of the foregoing or take any action which would
result in any of the conditions to the merger set forth herein not being
satisfied.
(h) take any action resulting in the delisting of Parent from the Amex;
and
A-38
<PAGE>
(i) take any action resulting in a Parent Material Adverse Effect.
SECTION 6.10 Post Merger Directors and Officers
The Board of Directors of Parent will take all actions necessary to
increase the number of members of the Board of Directors of Parent and to cause
three designees of the Company, with one such designee being an independent
director as determined under the new rules of the AMEX (the "Company
Nominees"), to be appointed to the Board of Directors of Parent as of the
Effective Time, each Company Nominee to hold office in accordance with the
Certificate of Incorporation and By-laws of Parent.
SECTION 6.11 Bank Restructuring
The Company and the Company's Subsidiaries will use commercially
reasonable efforts to enter into a Letter of Intent (the "Letter of Intent")
with Bank of Montreal (the "Company Bank") no later than forty-five (45) days
after the execution of this Agreement, which provides, among other things, that
each of the parties to the Existing Credit Agreement agrees to proceed in good
faith to amend the Existing Credit Agreement upon consummation of the Merger on
terms and provisions which in the aggregate are no less favorable to the
Company than those contained in Parent's existing credit facility with Bank
Austria and which are acceptable to each of Parent and the Company, and that
Parent is a third party beneficiary to the Letter of Intent, and the Company
shall use its commercially reasonable efforts to finalize the amendment in
accordance with the Letter of Intent. The Parent will use commercially
reasonable efforts to enter into a Letter of Intent (the "Bank Austria Letter
of Intent") with Bank Austria, no later than forty-five (45) days after the
execution of this Agreement, which provides, among other things, that each of
the parties to the Bank Austria Credit Agreement agrees to proceed in good
faith to amend the Bank Austria Credit Agreement upon consummation of the
Merger upon terms and provisions which are acceptable to each of Parent and the
Company, and Parent shall use its best efforts to finalize the amendment in
accordance with the Bank Austria Letter of Intent. The parties agree to
consolidate the loans into one senior credit facility with Company Bank and
Bank Austria serving as co-agents in the event the banks request the same.
SECTION 6.12 Disposition of Practices
The Company will use its commercially reasonable efforts to (i) complete
the termination of all of its management relationships with all of its
Ophthalmology and Optometry Practices (including the Corporate Optometry
practices), including any practice that the Company is obligated under a
contract or otherwise to purchase, all of which Ophthalmology and Optometry
Practices (including the Corporate Optometry practices) are set forth in
Section 6.12 of the Company Disclosure Schedule (the "Practices"); provided,
however, that such Practices shall not include for the purposes of this Section
6.12 the Company's Talbert operation in Arizona ("Talbert") if the Parent and
the Company agree in writing within 45 days from the date hereof to maintain
Talbert and (ii) transfer all of the assets and leases relating to the
Practices back to the Practices and cause or have an agreement which will cause
all of such Practices to assume all liabilities and obligations relating to
such Practices (collectively, the "Practice Dispositions"), on such terms which
are satisfactory to the Parent, pursuant to which the Company shall obtain
releases from the Practices containing language substantially the same as set
forth on Annex J hereto whereby the Company will be unconditionally and
irrevocably released and forever discharged from all rights, claims, demands,
obligations, liabilities and damages (collectively, the "Obligations"), whether
accrued or unaccrued, asserted or unasserted and whether known or unknown
relating to or in connection with the Company's arrangements and agreements
with the Practices which ever existed, now exist or may hereafter exist, except
with respect to any Obligations incurred after the Effective Time pursuant to
ongoing relationships with Practices approved by Parent. The Company will
cancel any options to purchase the Company's securities held by such Practices
or their stockholders, affiliates or related parties in connection with the
Practice Dispositions, effective no later than the date of the closing of such
Practice Dispositions. The net proceeds received by the Company in connection
with the Practice Dispositions will be used substantially by the Company to
reduce the amount outstanding under the Existing Credit Agreement and for
operations and the settlement of debts approved by the Company Bank and Parent.
A-39
<PAGE>
SECTION 6.13 Financing Commitments
The Parent will use its commercially reasonable efforts to enter into a
financing commitment ("Financing Term Sheet") on or before the date that is
forty-five (45) days from the date hereof, which commitment may be subject to
the exception, among others, that the investor shall be satisfied with the 1999
year-end audited financial statements of the Company, and which commitment
involves a Financing in an amount not less than Thirty Million Dollars
($30,000,000) (the "Financing") through the issuance of equity, equity linked
or subordinated debt securities in one or more public or private transactions,
which commitment terms shall be reasonably acceptable to Parent and Company,
and Parent shall use its commercially reasonable efforts to finalize the
Financing in accordance with such commitment.
SECTION 6.14 Standstill Agreement
The Company will use its commercially reasonable efforts to enter into a
Standstill Agreement (the "Standstill Agreement") with the Company Bank within
forty-five (45) days of the execution of this Agreement.
SECTION 6.15 Voting
Each of the stockholders who granted an irrevocable proxy pursuant to the
Company Stockholder Agreement and the Parent Stockholder Agreement, as the case
may be, will vote any shares of the Company's Common Stock held by them, or
which they have the right to vote, in favor of approval of the Merger, or the
issuance of shares in connection with the Merger, as the case may be, in
person, or by proxy.
SECTION 6.16 Waiver
The Company will use its commercially reasonable efforts to obtain, on or
before the date that is 45 days after the date of this Agreement, (i) a release
and waiver (the "Block Waiver") of all restrictions set forth in Section 10,
and any provisions related thereto, of that certain Asset Purchase Agreement,
dated June 4, 1999, among Block Vision Inc., Block Buying Group LLC and the
Company (the "Block Agreement") or (ii) a final nonappealable judgment from a
Florida court of competent jurisdiction holding that Section 10 of the Block
Agreement, and the provisions related thereto, are not enforceable against
Parent.
ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.01 Registration Statement; Joint Proxy Statement
(a) As promptly as practicable after the execution of this Agreement,
Parent and Company shall jointly prepare and shall file with the SEC a document
or documents that will constitute (i) the prospectus forming part of the
registration statement on Form S-4 of Parent (together with all amendments
thereto, the "Registration Statement"), in connection with the registration
under the Securities Act of Parent Common Stock to be issued to Company's
stockholders pursuant to the Merger and (ii) the joint proxy statement with
respect to the Merger relating to the special meetings of Company's
stockholders to be held to consider approval of this Agreement and the Merger
(the "Company Stockholders' Meeting") and of Parent's stockholders to be held
to consider approval of the issuance of Parent Common Stock (the "Share
Issuance") to Company's stockholders pursuant to the Merger (the "Parent
Stockholders' Meeting") (together with any amendments thereto, the "Joint Proxy
Statement"). Copies of the Joint Proxy Statement shall be provided to the AMEX
and the NNM in accordance with its rules. Each of the parties hereto shall use
all reasonable efforts to cause the Registration Statement to become effective
as promptly as practicable after the date hereof, and, prior to the effective
date of the Registration Statement, the parties hereto shall take all action
required under any applicable Laws in connection with the issuance of shares of
Parent Common Stock pursuant to the Merger. Parent or Company, as the case may
be, shall furnish all information concerning Parent or Company as the other
party may reasonably request in connection with such actions and the
preparation of the Registration Statement and the Joint Proxy Statement. As
promptly
A-40
<PAGE>
as practicable after the effective date of the Registration Statement, the
Joint Proxy Statement shall be mailed to the stockholders of Company and of
Parent. Each of the parties hereto shall cause the Joint Proxy Statement to
comply as to form and substance as to such party in all material respects with
the applicable requirements of (i) the Exchange Act, (ii) the Securities Act,
(iii) the rules and regulations of the AMEX and the NNM.
(b) The Joint Proxy Statement shall include (i) the approval of the Merger
and the recommendation of the board of directors of Company to Company's
stockholders that they vote in favor of approval of this Agreement and the
Merger, subject to the right of the board of directors of the Company to
withdraw its recommendation and recommend a Superior Proposal in compliance
with Section 6.04 of this Agreement, and (ii) the opinion of PaineWebber
referred to in Section 4.19. The Joint Proxy Statement shall include (A) the
approval of the Share Issuance and the recommendation of the board of directors
of Parent to Parent's stockholders that they vote in favor of approval of the
Share Issuance, and (B) the opinion of Legg Mason referred to in Section 5.16.
(c) No amendment or supplement to the Joint Proxy Statement or the
Registration Statement shall be made without the approval of Parent and
Company, which approval shall not be unreasonably withheld or delayed. Each of
the parties hereto shall advise the other parties hereto, promptly after it
receives notice thereof, of the time when the Registration Statement has become
effective or any supplement or amendment has been filed, of the issuance of any
stop order, of the suspension of the qualification of the Parent Common Stock
issuable in connection with the Merger for offering or sale in any
jurisdiction, or of any request by the SEC for amendment of the Joint Proxy
Statement or the Registration Statement or comments thereon and responses
thereto or requests by the SEC for additional information.
(d) None of the information supplied by Company for inclusion or
incorporation by reference in the Registration Statement or the Joint Proxy
Statement shall, at the respective times filed with the SEC or other regulatory
agency and, in addition, (A) in the case of the Joint Proxy Statement, at the
date it or any amendments or supplements thereto are mailed to stockholders of
Parent and Company, at the time of the Company Stockholders' Meeting, at the
time of the Parent Shareholders' Meeting and at the Effective Time and (B) in
the case of the Registration Statement, when it becomes effective under the
Securities Act and at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. If at any time prior
to the Effective Time any event or circumstance relating to Company or any
Company Subsidiary, or their respective officers or directors, should be
discovered by Company that should be set forth in an amendment or a supplement
to the Registration Statement or the Joint Proxy Statement, Company shall
promptly inform Parent. All documents that Company is responsible for filing
with the SEC in connection with the Merger will comply as to form in all
material respects with the applicable requirements of the rules and regulations
of the Securities Act and the Exchange Act.
(e) None of the information supplied by Parent for inclusion or
incorporation by reference in the Registration Statement or the Joint Proxy
Statement shall, at the respective times filed with the SEC or other regulatory
agency and, in addition, (A) in the case of the Joint Proxy Statement, at the
date it or any amendments or supplements thereto are mailed to stockholders of
Parent and Company, at the time of Company Stockholders' meeting, at the time
of the Parent Shareholders' Meeting and at the Effective Time and (B) in the
case of the Registration Statement, when it becomes effective under the
Securities Act and at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. If, at any time prior
to the Effective Time, any event or circumstance relating to Parent or any
Parent Subsidiary, or their respective officers or directors, should be
discovered by Parent that should be set forth in an amendment or a supplement
to the Registration Statement or the Joint Proxy Statement, Parent shall
promptly inform Company. All documents that Parent is responsible for filing
with the SEC in connection with the Merger will comply as to form in all
material respects with the applicable requirements of the rules and regulations
of the Securities Act and the Exchange Act.
A-41
<PAGE>
SECTION 7.02 Stockholders' Meetings
Company shall call and hold the Company Stockholders' Meeting and Parent
shall call and hold the Parent Stockholders' Meeting as promptly as practicable
after the date hereof for the purpose of voting upon the approval of this
Agreement and the Merger or the Share Issuance, as the case may be, pursuant to
the Joint Proxy Statement, and Company and Parent shall use all reasonable
efforts to hold the Parent Stockholders' Meeting and the Company Stockholders'
Meeting on the same day and as soon as practicable after the date on which the
Registration Statement becomes effective. Nothing herein shall prevent the
Company or the Parent from adjourning or postponing the Company Stockholders'
Meeting or the Parent Stockholders' Meeting, as the case may be, if there are
insufficient shares of Company Common Stock or Parent Common Stock, as the case
may be, necessary to conduct business at their respective meetings of the
stockholders. Unless Company's board of directors has withdrawn its
recommendation of this Agreement and the Merger in compliance with Section
6.04. Company shall use all reasonable efforts to solicit from its stockholders
proxies in favor of the approval of this Agreement and the Merger pursuant to
the Joint Proxy Statement and shall take all other action necessary or
advisable to secure the vote or consent of stockholders required by the FBCA or
applicable other stock exchange requirements to obtain such approval. Parent
shall use all reasonable efforts to solicit from its stockholders proxies in
favor of the Share Issuance pursuant to the Joint Proxy Statement and shall
take all other action necessary or advisable to secure the vote or consent of
stockholders required by the FBCA or applicable stock exchange requirements to
obtain such approval. Each of the parties hereto shall take all other action
necessary or, in the opinion of the other parties hereto, advisable to promptly
and expeditiously secure any vote or consent of stockholders required by
applicable Law and such party's certificate of incorporation and bylaws to
effect the Merger.
SECTION 7.03 Affiliates
(a) Company will use reasonable efforts to obtain an executed letter
agreement substantially in the form of Annex D hereto from (i) each person
identified in Section 4.18 of the Company Disclosure Schedule within 15 days
following the execution and delivery of this Agreement and (ii) from any person
who, to the knowledge of Company, may be deemed to have become an affiliate of
Company after the date of this Agreement and prior to the Effective Time as
soon as practicable after attaining such status. The foregoing notwithstanding,
Parent shall be entitled to place legends as specified in the Affiliate
Agreement on the certificates evidencing any of the Parent Common Stock to be
received by (i) any affiliate of Company or (ii) any person Parent reasonably
identifies (by written notice to Company) as being a person who is an
"affiliate" within the meaning of Rule 145 promulgated under the Securities
Act, and to issue appropriate stop transfer instructions to the transfer agent
for such Parent Common Stock, consistent with the terms of the Affiliate
Agreement, regardless of whether such person has executed Affiliate Agreement
and regardless of whether such person's name and address appear on Section 4.18
of the Company Disclosure Schedule.
SECTION 7.04 Directors' and Officers' Indemnification and Insurance
(a) Parent and the Merger Sub agree that all rights to indemnification,
advancement of expenses, exculpation, limitation of liability and any and all
similar rights now existing in favor of each present and former director,
officer, employee and agent of Company and each Company Subsidiary
(collectively, the "Indemnified Parties") as provided in the Company's present
charter or by-laws in effect on the date hereof, shall survive the Merger and
shall continue in full force and effect for a period of five years from the
Effective Time, which provisions shall not be amended, repealed or otherwise
modified for a period of five years from the Effective Time in any manner that
would affect adversely the rights thereunder of individuals who at any time
prior to the Effective Time were directors, officers, employees or agents of
the Company, unless such modification shall be required by law, and Parent
agrees to cause the Surviving Corporation to comply with its obligations
thereunder; provided, however, that in the event any claim or claims are
asserted or made within such five-year period, all rights to indemnification in
respect to any such claim or claims shall continue until the disposition of any
and all such claims.
A-42
<PAGE>
(b) In the event the Company or the Surviving Corporation or any of their
respective successors or assigns (i) consolidates with or merges into any other
person and shall not be the continuing or Surviving Corporation or entity of
such consolidation or merger or (ii) transfers a material amount of its
properties and assets to any person in a single transaction or a series of
transactions, then, and in each such case, Parent will make or cause to be made
proper provision so that the successors and assigns of the Company or the
Surviving Corporation, as the case may be, assume the indemnification
obligations described herein for the benefit of the Indemnified Parties as a
condition to such merger, consolidation or transfer becoming effective.
(c) The provisions of this Section 7.04 are (i) intended to be for the
benefit of, and will be enforceable by, each of the Indemnified Parties and
(ii) in addition to, and not in substitution for, any other rights to
indemnification or contribution that any such person may have by contract or
otherwise.
(d) Parent agrees, as soon as practicable after the Effective Time, to
cause the Surviving Corporation to use commercially reasonable efforts to
purchase tail coverage, if available, for the directors' and officers'
liability insurance policies currently maintained by Company covering a period
of five years after the Effective Time; provided, however, that in no event
shall Parent be required to expend in excess of $250,000 on the premium for
such five year tail coverage. To the extent that the premium for such tail
coverage exceeds $250,000, Surviving Corporation shall pay such additional
premium amount (the "Additional Premium Amount"). In the event that such tail
coverage is not available, the Surviving Corporation shall have no obligation
to purchase such tail coverage, but shall maintain in effect the Company's
directors' and officers' liability insurance policies in effect as of the date
hereof or, if not available, directors' and officers' liability insurance
policies covering the directors and officers of the Company (and their
respective heirs and executors, if such coverage may be obtained at no
additional cost), with coverages and other terms substantially as favorable to
such directors and officers as is currently in effect; provided, however, that
in no event shall the Surviving Corporation be required to expend in any one
year in excess of 150% of the annual premium currently paid by Company for such
coverage, which current premium amount is set forth in Section 7.04 of the
Company Disclosure Schedule, and if the premium for such coverage exceeds such
amount, Parent shall purchase a policy with the greatest coverage available for
such 150% of the annual premium; and provided, further, that the cumulative
annual premiums to be paid for such policies over a five-year period shall be
projected by Parent's insurance broker in good faith on or prior to the
Exchange Ratio Adjustment Date (the "Projected Cumulative Amount"). (The amount
by which the Projected Cumulative Amount exceeds $250,000 is herein referred to
as the "Excess Projected Cumulative Amount".)
SECTION 7.05 No Shelf Registration
Parent shall not be required to amend or maintain the effectiveness of the
Registration Statement for the purpose of permitting resale of the shares of
Parent Common Stock received pursuant hereto by the persons who may be deemed
to be "affiliates" of Company within the meaning of Rule 145 promulgated under
the Securities Act.
SECTION 7.06 Public Announcements
The initial press release concerning the Merger shall be a joint press
release and, thereafter, Parent and Company shall consult with each other
before issuing any press release or otherwise making any public statements with
respect to this Agreement or the Merger and shall not issue any such press
release or make any such public statement without the prior written approval of
the other, except to the extent required by applicable Law or the requirements
of the rules and regulations of the AMEX and the NNM, in which case the issuing
party shall use all reasonable efforts to consult with the other party before
issuing any such release or making any such public statement.
SECTION 7.07 AMEX Listing
Prior to the Effective Time, Parent shall file with the AMEX a
Notification Form for Listing of Additional Shares with respect to the Parent
Common Stock issued or issuable in connection with the Merger.
A-43
<PAGE>
SECTION 7.08 Blue Sky
Parent shall use all reasonable efforts to obtain prior to the Effective
Time all necessary permits and approvals required under Blue Sky Laws to permit
the distribution of the shares of Parent Common Stock to be issued in
accordance with the provisions of this Agreement.
SECTION 7.09 Acquisition of Company Capital Stock
Prior to the Effective Time, neither Parent, nor any of Parent
Subsidiaries or Affiliates will, nor will they assist or encourage others to,
directly or indirectly, acquire or attempt to acquire ownership of more than
five percent (5%) of the Company's capital stock.
Prior to the Effective Time, neither Company, nor any of Company
Subsidiaries or Affiliates will, nor will they assist or encourage others to,
directly or indirectly, acquire or attempt to acquire ownership of more than
five percent (5%) of Parent's capital stock.
ARTICLE VIII
CONDITIONS TO THE MERGER
SECTION 8.01 Conditions to the Obligations of Each Party to Consummate the
Merger
The obligations of the parties hereto to consummate the Merger are subject
to the satisfaction or, if permitted by applicable Law, waiver of the following
conditions:
(a) the Registration Statement shall have been declared effective by the
SEC under the Securities Act and no stop order suspending the effectiveness of
the Registration Statement shall have been issued by the SEC and no proceeding
for that purpose shall have been initiated by the SEC and not concluded or
withdrawn;
(b) this Agreement and the Merger shall have been duly approved by the
requisite vote of stockholders of Company in accordance with the FBCA and by
the requisite vote of the stockholders of Parent in accordance with the DGCL
and the rules of the AMEX;
(c) no court of competent jurisdiction shall have issued or entered any
order, writ, injunction or decree, and no other Governmental Entity shall have
issued any order, which is then in effect and has the effect of making the
Merger illegal or otherwise prohibiting its consummation;
(d) any waiting period (and any extension thereof) applicable to the
consummation of the Merger under the HSR Act or any other applicable
competition, merger control or similar Law shall have expired or been
terminated;
(e) all material consents, approvals and authorizations legally required
to be obtained to consummate the Merger shall have been obtained from all
Governmental Entities;
(f) the shares of Parent Common Stock to be issued in the Merger shall be
registered under the Securities Act and shall have been authorized for listing
on the AMEX, subject to notice of issuance;
(g) the Parent shall have entered into an amendment to its existing credit
agreement with Bank Austria having terms substantially in accordance with the
terms outlined in the Bank Austria Letter of Intent referred to in Section 6.11
hereof;
(h) the Parent shall have obtained not less then $30,000,000 from the
Financing pursuant to the terms contained in the Financing Term Sheet described
in Section 6.13;
(i) on or before Exchange Ratio Adjustment Date, all consents of third
parties required pursuant to the terms of any Company Material Contract and any
Parent Material Contract as a result of the Merger shall have been obtained
including those specified in Section 8.01(i) of the Parent Disclosure Schedule
and 8.01(i) of the Company Disclosure Schedule, except where the failure to
obtain, individually or in the aggregate, any such consent(s) could not
reasonably be expected to result in, individually or in the aggregate, a
Company Material Adverse Effect or Parent Material Adverse Effect, as the case
may be;
A-44
<PAGE>
(j) Shumaker, Loop & Kendrick, special counsel to Company, or such other
law firm or professional services firm reasonably acceptable to Parent
(including any "Big 6" accounting firm) shall have issued its opinion, such
opinion dated on the date of the Closing, addressed to Company, and reasonably
satisfactory to it and the Purchaser, based upon customary representations of
Company and Parent and customary assumptions, to the effect that the Merger
will constitute a "reorganization" within the meaning of Section 368(a) of the
Code (the "Tax Opinion"), which opinion shall not have been withdrawn or
modified in any material respect; provided, however, that if such firm does not
render such opinion, this condition shall nonetheless be deemed satisfied if
such opinion, dated as of the date of the Closing (k) The Company shall have
entered into the Letter of Intent with Company Bank within 45 days of the date
of this Agreement, is rendered by counsel to Parent or any "Big 6" accounting
firm; and
(k) The Company shall have entered into the Letter of Intent with the
Company Bank within 45 days of the date of this Agreement.
SECTION 8.02 Conditions to the Obligations of Company
The obligations of Company to consummate the Merger, or to permit the
consummation of the Merger are subject to the satisfaction or, if permitted by
applicable Law, waiver of the following further conditions:
(a) each of the representations and warranties of Parent contained in this
Agreement shall be true, complete and correct in all material respects (other
than representations and warranties subject to materiality or "material adverse
effect" qualifiers which shall be true, complete and correct in all respects)
both when made and on and as of the Effective Time as if made at and as of the
Effective Time (other than representations and warranties which address matters
only as of a certain date which shall be so true, complete and correct as of
such certain date), and Company shall have received a certificate signed by the
Chief Financial Officer of Parent on behalf of the Parent to such effect;
(b) Parent shall have performed or complied in all material respects with
all covenants required by this Agreement to be performed or complied with by it
on or prior to the Effective Time and Company shall have received a certificate
signed by the Chief Financial Officer of Parent on behalf of the Parent to that
effect; and
(c) There shall have been no Parent Material Adverse Effect since the date
of this Agreement.
SECTION 8.03 Conditions to the Obligations of Parent
The obligations of Parent to consummate the Merger are subject to the
satisfaction or waiver of the following further conditions:
(a) Each of the representations and warranties of Company contained in
this Agreement shall be true, complete and correct in all material respects,
(other than representations and warranties subject to materiality or "material
adverse effect" qualifiers which shall be true, complete and correct in all
respects) both when made and on and as of the Effective Time as if made at and
as of the Effective Time (other than representations and warranties which
address matters only as of a certain date which shall be so true, complete and
correct as of such certain date), and Parent shall have received a certificate
signed by the Chief Executive Officer on behalf of the Company of Company to
such effect;
(b) Company shall have performed or complied in all material respects with
all covenants required by this Agreement to be performed or complied with by it
on or prior to the date on which they are to be performed as specifically set
forth herein or the Effective Time, as applicable, and Parent shall have
received a certificate of the Chief Executive Officer signed by Company on
behalf of the Company to that effect;
(c) There shall have been no Company Material Adverse Effect since the
date of this Agreement;
(d) The Parent shall have executed, by the Exchange Ratio Adjustment Date,
agreements with each of Richard Lindstrom, M.D. and Bruce C. Maller which
provide for the continuation of services provided by them, upon terms which are
satisfactory to Parent;
A-45
<PAGE>
(e) On or before the Exchange Ratio Adjustment Date, the officers,
directors, and shareholders of Company listed on Annex E hereto (the "Company
Insiders") shall have entered into lock-up agreements in the form set forth as
Annex F hereto;
(f) The Company shall not have received any notice of default or notice of
any pending or threatened cancellation, revocation or termination or be aware
of any facts or circumstances which could reasonably be expected to lead to any
such cancellation, revocation, or termination under any of the Company's
managed care contracts which, after giving effect to any new managed care
business entered into after the date hereof (except for any contracts which
have been projected in any Company business plan for year 2000, previously
delivered to Parent), cause, or could reasonably likely cause, individually or
collectively, a material adverse effect on the Company's managed care business
as a stand alone business. The determination of the overall loss of managed
care business under this Section 8.03(f) shall be made without regard to any
disclosures contained in the Company Disclosure Schedule, except that no
account shall be taken of the loss of business under any managed care contracts
specifically identified under Section 4.08 of the Company Disclosure Schedule.
The Parent shall have received a certificate of the Chief Executive Officer of
the Company to such affect; and
(g) On or before the Exchange Ratio Adjustment Date, the Company shall
have divested all of its business and assets relating to the Corporate
Optometry practice and the Company shall have received from all of the
Corporate Optometry practices a release in substantially the form set forth on
Annex J hereto, except as the parties may otherwise agree in writing with
respect to Talbert.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.01 Termination
This Agreement may be terminated and the Merger may be abandoned at any
time prior to the Effective Time, notwithstanding any requisite adoption and
approval of this Agreement, as follows:
(a) by mutual written consent duly authorized by the boards of directors
of each of Parent and Company;
(b) by either Parent or Company, if the Effective Time shall not have
occurred on or before August 31, 2000; provided, however, that the right to
terminate this Agreement under this Section 9.01(b) shall not be available to
any party whose failure to fulfill any obligation under this Agreement shall
have principally caused, or resulted in, the failure of the Effective Time to
occur on or before such date;
(c) by either Parent or Company, if any Governmental Order, writ,
injunction or decree preventing the consummation of the Merger shall have been
entered by any court of competent jurisdiction and shall have become final and
nonappealable;
(d) by Parent, if (i) the board of directors of Company withdraws,
modifies or changes its recommendation of this Agreement or the Merger in a
manner adverse to Parent or its stockholders, (ii) the board of directors of
Company shall have recommended to the stockholders of Company a Competing
Transaction, (iii) the Company fails to comply with Section 6.04, (iv) a
Competing Transaction shall have been announced or otherwise publicly known and
the board of directors of Company shall have (A) failed to recommend against
acceptance of such by its stockholders (including by taking no position, or
indicating its inability to take a position, with respect to the acceptance by
its stockholders of a Competing Transaction involving a tender offer or
exchange offer), (B) failed to reconfirm its approval and recommendation of
this Agreement and the transactions contemplated hereby within 5 Business Days
after Parent requests in writing that such recommendation be reconfirmed or (C)
determined that such Competing Transaction was a Superior Proposal and takes
any of the actions allowed by clause (ii) of Section 6.04, or (v) the board of
directors of Company resolves to take any of the actions described above;
A-46
<PAGE>
(e) by Parent or Company, if (i) this Agreement and the Merger shall fail
to receive the requisite votes for approval at the Company Stockholders'
Meeting or any adjournment or postponement thereof or (ii) if the Share
Issuance shall fail to receive the requisite votes for approval at the Parent
Shareholders' Meeting or any adjournment or postponement thereof;
(f) by Parent, (i) upon a material breach of any representation or
warranty on the part of Company set forth in this Agreement, (ii) upon a
material breach of any covenant or agreement on the part of the Company set
forth in this Agreement or (iii) if any material representation or warranty of
Company shall have become untrue, incomplete or incorrect in any material
respect, in any case such that the conditions set forth in Section 8.03 would
not be satisfied (a "Terminating Company Breach"); provided, however, that if
such Terminating Company Breach is curable by Company through the exercise of
its reasonable efforts within 20 days and for so long as Company continues to
exercise such reasonable efforts, Parent may not terminate this Agreement under
this Section 9.01(f) during such 20 day period; and provided, further that the
preceding proviso shall not in any event be deemed to extend any date set forth
in paragraph (b) of this Section 9.01; or
(g) by Company, upon material breach of any representation, warranty,
covenant or agreement on the part of Parent set forth in this Agreement, or if
any material representation or warranty of Parent shall have become untrue,
incomplete or incorrect in any material respect, in either case such that the
conditions set forth in Section 8.02 would not be satisfied (a "Terminating
Parent Breach"); provided, however, that if such Terminating Parent Breach is
curable by Parent through the exercise of its reasonable efforts within 20 days
and for so long as Parent continues to exercise such reasonable efforts,
Company may not terminate this Agreement under this Section 9.01(g) during such
20 day period; and provided, further that the preceding proviso shall not in
any event be deemed to extend any date set forth in paragraph (b) of this
Section 9.01.
(h) by a party, if on or before the applicable date set forth in Article
VIII , any condition set forth in Article VIII which is required to be met on
or before such date has not been so met by the other party; provided, however,
that if such failed condition is curable by the other party through the
exercise of its reasonable efforts within 20 days and for so long as such other
party continues to exercise such reasonable efforts, the terminating party may
not terminate this Agreement under this Section 9.01(h); and provided, further
that the preceding proviso shall not in any event be deemed to extend any date
set forth in paragraph (b) of this Section 9.01;
(i) by the Company, pursuant to Section 6.04, in the event the Company has
complied with all the provisions of Section 6.04 and has determined to accept a
Superior Proposal; provided that the Company shall have provided Parent with
one Business Day's prior written notice of the Company's decision to so
terminate (the "Company Termination Notice"). The Company Termination Notice
shall indicate in reasonable detail the terms and conditions of such Superior
Proposal, including, without limitation, the amount and form of the proposed
consideration and whether such Superior Proposal is subject to any material
conditions.
In the event either party shall terminate this Agreement pursuant to
Section 9.01, neither Parent nor any of Parent's Subsidiaries will, nor will
they assist or encourage others to, directly or indirectly, for a period of two
(2) years after termination of this Agreement, acquire or attempt to acquire
ownership or more than five percent (5%) of the Company's capital stock.
The right of any party hereto to terminate this Agreement pursuant to this
Section 9.01 will remain operative and in full force and effect regardless of
any investigation made by or on behalf of any party hereto, any person
controlling any such party or any of their respective officers, directors,
representatives or agents, whether prior to or after the execution of this
Agreement.
SECTION 9.02 Effect of Termination
Except as provided in Section 9.05, in the event of termination of this
Agreement pursuant to Section 9.01 or otherwise, this Agreement shall forthwith
become void, there shall be no liability under this Agreement or otherwise on
the part of any party hereto or any of its affiliates or any of its
A-47
<PAGE>
or their officers or directors, and all rights and obligations of each party
hereto shall cease. No termination of this Agreement shall affect the
obligation of the parties contained in the Confidentiality Agreements, which
shall survive termination of this Agreement and remain in full force and effect
in accordance with their terms.
SECTION 9.03 Amendment
This Agreement may be amended by the parties hereto by action taken by or
on behalf of their respective boards of directors at any time prior to the
Effective Time; provided, however, that, after the approval of this Agreement
by the stockholders of Company, no amendment may be made that changes the
amount or type of consideration into which Company common stock will be
converted pursuant to this Agreement. This Agreement may not be amended except
by an instrument in writing signed by the parties hereto.
SECTION 9.04 Waiver
At any time prior to the Effective Time, any party hereto may (a) extend
the time for or waive compliance with the performance of any obligation or
other act of any other party hereto, (b) waive any inaccuracy in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance by the other party with any of the
agreements or conditions contained herein. Any such extension or waiver shall
be valid if set forth in an instrument in writing signed by the party or
parties to be bound thereby.
SECTION 9.05 Termination Fee; Expenses
(a) Except as set forth in this Section 9.05, all Expenses incurred in
connection with this Agreement and the Merger shall be paid by the party
incurring such Expenses, whether or not the Merger is consummated, except that
Parent and Company each shall pay one-half of all Expenses (other than
attorney's and accountant's fees and expenses) incurred solely for printing,
filing (with the SEC) and mailing the Registration Statement and the Joint
Proxy Statement and all SEC and other regulatory filing fees incurred in
connection with the Registration Statement and the Joint Proxy Statement and
any fees required to be paid under the HSR Act.
(b) In the event that (i) Company shall terminate this Agreement pursuant
to Section 9.01(i) or Parent shall terminate this Agreement pursuant to Section
9.01(d) or (ii) this Agreement shall be terminated (x) pursuant to Section
9.01(b) or (y) pursuant to Section 9.01(e)(i) as a result of the failure to
obtain the requisite approval of the Company stockholders and, in the case of
either (x) or (y), (A) at or prior to such termination, there shall exist or
have been proposed a Competing Transaction with respect to Company and (B)
within nine months after such termination, Company shall enter into a
definitive agreement with respect to any Competing Transaction or any Competing
Transaction involving Company shall be consummated, then, in the case of (i),
promptly after such termination, or in the case of (ii), concurrently with the
consummation of such Competing Transaction, Company shall pay to Parent an
amount in cash equal to the greater of Four percent (4%) of the "total
enterprise value" of the transactions contemplated by this Agreement or as
reflected in the Superior Proposal or the Competing Transaction, as the case
may be, (the "Termination Fee") plus Parent's Expenses. For purposes of this
Section 9.05, the term "total enterprise value" shall mean the purchase price
paid or offered to be paid, as the case may be, in such transaction, plus the
amount of any indebtedness and other liabilities of the Company assumed or
offered to be assumed, as the case may be, in this or such Competing
Transaction, as the case may be.
(c) In the event that Parent shall terminate this Agreement pursuant to
clause (i) of Section 9.01(f), then Company shall promptly reimburse Parent for
Parent's Expenses, and if, within nine months of such termination of this
Agreement, Company shall enter into a definitive agreement with respect to any
Competing Transaction (other than a Competing Transaction solely described in
clause (v) of the definition of such term) or any Competing Transaction (other
than a Competing Transaction solely described in clause (v) of the definition
of such term) involving Company shall be consummated, concurrently with the
consummation of such Competing Transaction (other than a Competing Transaction
solely described in clause (v) of the definition of such term), the Company
A-48
<PAGE>
shall pay to Parent an amount in cash equal to one-half of the Termination Fee
unless Company did not have Knowledge at the time that this Agreement was
entered into that such representation or warranty was incorrect or incomplete,
in which case Company shall not be obligated to such portion of the Termination
Fee, but shall nonetheless be obligated to pay Parent's Expenses as set forth
above.
(d) In the event that Parent shall terminate this Agreement pursuant to
clause (ii) of Section 9.01(f) (other than in connection with a breach of
Section 6.04 or Section 6.01(y) hereof, which are provided for below), then
Company shall promptly reimburse Parent for Parent's Expenses, and if, within
nine months of such termination of this Agreement, Company shall enter into a
definitive agreement with respect to any Competing Transaction (other than a
Competing Transaction solely described in clause (v) of the definition of such
term) or any Competing Transaction (other than a Competing Transaction solely
described in clause (v) of the definition of such term) involving Company shall
be consummated, concurrently with the consummation of such Competing
Transaction (other than a Competing Transaction solely described in clause (v)
of the definition of such term), the Company shall pay to Parent an amount in
cash equal to half of the Termination Fee.
(e) In the event that Parent shall terminate this Agreement pursuant to
clause (ii) of Section 9.01(f) in connection with a breach of Section 6.04,
then Company shall promptly reimburse Parent for Parent's Expenses, and if,
within nine months of such termination of this Agreement, the Company shall
enter into any agreement with respect to any Competing Transaction or any
Competing Transaction involving Company shall be consummated, concurrently with
the execution of any such agreement, or if there is no agreement, upon the
consummation of such Competing Transaction, the Company shall pay to Parent in
cash the Termination Fee.
(f) In the event that Parent shall terminate this Agreement pursuant to
clause (ii) of Section 9.01(f) in connection with a breach of Section 6.01(y),
then Company shall promptly reimburse Parent for Parent's Expenses.
(g) In the event that Parent shall terminate this Agreement pursuant to
clause (iii) of Section 9.01(f), then Company shall promptly reimburse Parent
for Parent's Expenses.
(h) In the event that Company shall terminate this Agreement pursuant to
Section 9.01(g), then Parent shall promptly reimburse Company for Company's
Expenses.
(i) Parent, Merger Sub and Company agree that the agreements contained in
this Article IX above are reasonable, are an integral part of the transaction
contemplated by this Agreement, and are the sole and exclusive remedies in law
or in equity for a termination or breach of this Agreement or otherwise in
connection with the transactions contemplated by this Agreement. The payments
provided for in this Section 9.05 are intended to establish liquidated damages
in the event of a termination or otherwise and are not intended as a penalty.
Accordingly, if Company or Parent fails to pay to Parent or Company, as the
case may be, any amounts due under Section 9.05(b), Section 9.05(c), or Section
9.05(d), Company or Parent, as the case may be, shall pay interest on such
amounts at the prime rate of Citibank, N.A. in effect on the date such payment
was required to be made.
(j) In the event that the Company does not enter into the Standstill
Agreement within 45 days following the date hereof, the Company shall promptly
reimburse Parent for Parent's Expenses;
(k) In the event that a dispute arises in connection with Section 9.04(c),
(d) and/or (e) hereof, such dispute shall be submitted for arbitration to the
American Arbitration Association ("AAA") in New York City in accordance with
the Commercial Rules of the American Arbitration Association; provided,
however, that such arbitrators shall apply the Delaware General Corporation Law
and applicable case law thereunder to the resolution of the dispute. The
decision of the AAA shall be final and binding upon the parties, and shall be
enforceable in any court of competent jurisdiction. Nothing in this provision
shall be construed to prohibit any party hereto from seeking interim equitable
relief in a court of competent jurisdiction pending submission of said dispute
to arbitration hereunder.
A-49
<PAGE>
ARTICLE X
GENERAL PROVISIONS
SECTION 10.01 Non-Survival of Representations and Warranties
The representations and warranties in this Agreement shall terminate at
the Effective Time or upon the termination of this Agreement pursuant to
Section 9.01, as the case may be.
SECTION 10.02 Notices
All notices, requests, claims, demands and other communications hereunder
shall be in writing and shall be given (and shall be deemed to have been duly
given upon receipt) by delivery in person, by telecopy or facsimile, by
registered or certified mail (postage prepaid, return receipt requested) or by
a nationally recognized courier service to the respective parties at the
following addresses (or at such other address for a party as shall be specified
in a notice given in accordance with this Section 10.02):
(a) if to Company:
Vision Twenty-One, Inc.
7360 Bryan Dairy Road
Largo, FL 33777
Attention: Theodore N. Gillette
Telecopier: (727) 547-4371
with a copy to:
Shumaker, Loop & Kendrick, LLP
101 E. Kennedy Blvd. Suite 2800
Tampa, FL 33602-0609
Attention: Darrell C. Smith, Esq.
Telecopier: (813) 229-1660
(b) if to Parent or Merger Sub:
OptiCare Health Systems, Inc.
87 Grandview Avenue
Waterbury, CT 06708
Attention: Stephen P. Fisher, General
Counsel
Telecopier: (203) 596-2227
with a copy to:
Kane Kessler, P.C.
1350 Avenue of the Americas
New York, New York 10019
Attention: Robert L. Lawrence, Esq.
Telecopier: (212) 245-3009
SECTION 10.03 Severability
If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of Law or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the Merger is
not affected in any manner materially adverse to any party. Upon such
determination that any term or other provision is invalid, illegal or incapable
of being enforced, the parties hereto shall negotiate in good faith to modify
this Agreement so as to effect the original intent of the parties as closely as
possible in a mutually acceptable manner to the fullest extent permitted by
applicable Law in order that the Merger may be consummated as originally
contemplated to the fullest extent possible.
A-50
<PAGE>
SECTION 10.04 Assignment; Binding Effect; Benefit
Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether by operation
of Law or otherwise) without the prior written consent of the other parties
hereto. Subject to the preceding sentence, this Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns. Notwithstanding anything contained in this
Agreement to the contrary, other than Section 7.04, nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the
parties hereto or their respective successors and permitted assigns any rights
or remedies under or by reason of this Agreement.
SECTION 10.05 Incorporation of Exhibits
The Parent Disclosure Schedule, the Company Disclosure Schedule and all
Exhibits attached hereto and referred to herein are hereby incorporated herein
and made a part of this Agreement for all purposes as if fully set forth
herein.
SECTION 10.06 Governing Law
ANY DISPUTE OR CLAIM BASED UPON, ARISING OUT OF OR RESULTING FROM THIS
AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF DELAWARE WITHOUT GIVING EFFECT TO ITS CHOICE OF LAWS
PRINCIPLES THEREOF DIRECTING THE APPLICATION OF ANY LAW OTHER THAN THAT OF
DELAWARE. COURTS WITHIN THE STATE OF DELAWARE WILL HAVE JURISDICTION OVER ALL
DISPUTES BETWEEN THE PARTIES HERETO ARISING OUT OF OR RELATING TO THIS
AGREEMENT AND THE AGREEMENTS, INSTRUMENTS AND DOCUMENTS CONTEMPLATED HEREBY;
PROVIDED, THAT THE EFFECTIVENESS AND EFFECT OF THE MERGER SHALL BE GOVERNED BY
THE LAWS OF THE STATE OF FLORIDA. THE PARTIES HEREBY CONSENT TO AND AGREE TO
SUBMIT TO THE JURISDICTION OF SUCH COURTS. EACH OF THE PARTIES HERETO WAIVES,
AND AGREES NOT TO ASSERT IN ANY SUCH DISPUTE, TO THE FULLEST EXTENT PERMITTED
BY APPLICABLE LAW, ANY CLAIM THAT (I) SUCH PARTY IS NOT PERSONALLY SUBJECT TO
THE JURISDICTION OF SUCH COURTS, (II) SUCH PARTY AND SUCH PARTY'S PROPERTY IS
IMMUNE FROM ANY LEGAL PROCESS ISSUED BY SUCH COURTS OR (III) ANY LITIGATION
COMMENCED IN SUCH COURTS IS BROUGHT IN AN INCONVENIENT FORUM OR IMPROPER VENUE.
SECTION 10.07 Waiver of Jury Trial
EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN
ANY PROCEEDING (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR ANY TRANSACTION OR AGREEMENT CONTEMPLATED HEREBY
OR THE ACTIONS OF ANY PARTY HERETO IN THE NEGOTIATION, ADMINISTRATION,
PERFORMANCE OR ENFORCEMENT HEREOF.
SECTION 10.08 Headings; Interpretation
The descriptive headings contained in this Agreement are included for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement. The parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties, and no presumption or burden of proof
shall arise favoring or disfavoring any party by virtue of the authorship of
any provisions of this Agreement.
A-51
<PAGE>
SECTION 10.09 Counterparts
This Agreement may be executed and delivered (including by facsimile
transmission) in one or more counterparts, and by the different parties hereto
in separate counterparts, each of which when executed and delivered shall be
deemed to be an original but all of which taken together shall constitute one
and the same agreement.
SECTION 10.10 Entire Agreement
This Agreement (including the Exhibits, the Parent Disclosure Schedule and
the Company Disclosure Schedule), together with all other agreements entered
into simultaneously herewith by the parties hereto and the Confidentiality
Agreements, constitute the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior agreements and understandings
among the parties with respect thereto. No addition to or modification of any
provision of this Agreement shall be binding upon any party hereto unless made
in writing and signed by all parties hereto.
A-52
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
A-53
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
OPTICARE HEALTH SYSTEMS, INC.
By: /s/ Dean J. Yimoyines
--------------------------------------
Name: Dean J. Yimoyines
Title: Chairman, President and CEO
VISION TWENTY-ONE, INC.
By: /s/ Bruce Maller
--------------------------------------
Name: Bruce Maller
Title: Board Chairman
OC ACQUISITION CORP.
By: /s/ Dean J. Yimoyines
--------------------------------------
Name: Dean J. Yimoyines
Title: President
A-54
<PAGE>
APPENDIX B
FORM OF
COMPANY STOCKHOLDER AGREEMENT
IRREVOCABLE PROXY
TO VOTE STOCK OF
VISION TWENTY-ONE, INC.
The undersigned stockholder of Vision Twenty-One, Inc., a Florida
corporation ("Company"), hereby irrevocably (to the full extent permitted by
the Florida Business Corporation Act) appoints the members of the Board of
Directors of OptiCare Health Systems, Inc. a Delaware corporation ("Parent"),
and each of them, or any other written designee of Parent, as the sole and
exclusive attorneys and proxies of the undersigned, with full power of
substitution and resubstitution, to vote and exercise all voting and related
rights (to the full extent that the undersigned is entitled to do so) with
respect to all of the shares of capital stock of Company that now are or
hereafter may be beneficially owned by the undersigned (excluding shares that
were purchased by the undersigned in the open market or are currently subject
to margin accounts) and any and all other shares or securities of Company
issued or issuable in respect thereof on or after the date hereof
(collectively, the "Shares") in accordance with the terms of this Irrevocable
Proxy. Upon the undersigned's execution of this irrevocable Proxy, any and all
prior proxies given by the undersigned with respect to any Shares are hereby
revoked and the undersigned agrees not to grant any subsequent proxies with
respect to the Shares until after the Expiration Date (as defined below). This
Irrevocable Proxy shall not apply to shares now held by the undersigned that
were purchased in the open market or are currently subject to margin accounts
as hereinafter set forth, which are subsequently sold or disposed of by the
brokerage firm holding such shares for the sole purpose of satisfying a margin
call.
This Irrevocable Proxy is irrevocable (to the extent provided in the
Florida Business Corporation Act), is coupled with an interest, including, but
not limited to, that certain Company Affiliate Agreement dated as of even date
herewith by and among Parent, and the undersigned, and is granted in
consideration of Parent entering into that certain Agreement and Plan of Merger
and Reorganization (the "Merger Agreement") by and among Parent and Florida
Merger Corp., a Florida corporation and a wholly owned subsidiary of Parent
("Merger Sub"), and Company which Merger Agreement provides for the merger of
Merger Sub with and into Company (the "Merger"). As used herein, the term
"Expiration Date" shall mean the earlier to occur of (i) such date and time as
the Merger shall become effective in accordance with the terms and provisions
of the Merger Agreement, and (ii) the date of termination of the Merger
Agreement.
The attorneys and proxies named above, and each of them are hereby
authorized and empowered by the undersigned, at any time prior to the
Expiration Date, to act as the undersigned's attorney and proxy to vote the
Shares, and to exercise all voting and other similar rights of the undersigned
with respect to the Shares (including, without limitation, the power to execute
and deliver written consents pursuant to the Florida Business Corporation Act),
at every annual, special or adjourned meeting of the stockholders of Company
and in every written consent in lieu of such meeting:
in favor of approval and adoption of the Merger Agreement and of the
transactions contemplated thereby.
The attorneys and proxies named above may not exercise this Irrevocable
Proxy on any other matter except as provided above. The undersigned stockholder
may vote the shares on all matters other than matters which have the purpose or
effect of impeding, delaying or hindering the consummation of any of the
transactions contemplated in the Merger Agreement.
All authority herein conferred shall survive the death or incapacity of
the undersigned and any obligation of the undersigned hereunder shall be
binding upon the heirs personal representatives, successors and assigns of the
undersigned.
B-1
<PAGE>
This Irrevocable Proxy is coupled with an interest as aforesaid and is
irrevocable.
Dated: February 9, 2000
-------------------------------------
(Signature of Stockholder)
-------------------------------------
(Print Name of Stockholder)
Shares beneficially owned:
shares of Company Common Stock
of which shares were purchased
in the open market and shares
are currently subject to margin
accounts with the firms of
B-2
<PAGE>
APPENDIX C
FORM OF
PARENT STOCKHOLDER AGREEMENT
IRREVOCABLE PROXY
TO VOTE STOCK OF
OPTICARE HEALTH SYSTEMS, INC.
The undersigned stockholder of OptiCare Health Systems, Inc., a Delaware
corporation ("Parent"), hereby irrevocably (to the full extent permitted by the
Delaware General Corporation Law) appoints the members of the Board of
Directors of Vision Twenty-One, Inc., a Florida corporation ("Company"), and
each of them, or any other written designee of Company, as the sole and
exclusive attorneys and proxies of the undersigned, with full power of
substitution and resubstitution, to vote and exercise all voting and related
rights (to the full extent that the undersigned is entitled to do so) with
respect to all of the shares of capital stock of Parent that now are or
hereafter may be beneficially owned by the undersigned (excluding shares that
were purchased by the undersigned in the open market or are currently subject
to margin accounts) and any and all other shares or securities of Parent issued
or issuable in respect thereof on or after the date hereof (collectively, the
"Shares") in accordance with the terms of this Irrevocable Proxy. Upon the
undersigned's execution of this irrevocable Proxy, any and all prior proxies
given by the undersigned with respect to any Shares are hereby revoked and the
undersigned agrees not to grant any subsequent proxies with respect to the
Shares until after the Expiration Date (as defined below). This Irrevocable
Proxy shall not apply to shares now held by the undersigned that were purchased
in the open market or are currently subject to margin accounts as hereinafter
set forth, which are subsequently sold or disposed of by the brokerage firm
holding such shares for the sole purpose of satisfying a margin call.
This Irrevocable Proxy is irrevocable (to the extent provided in the
Delaware General Business Corporation Law), is coupled with an interest, and is
granted in consideration of Company entering into that certain Agreement and
Plan of Merger and Reorganization (the "Merger Agreement") by and among Parent
and Florida Merger Corp., a Florida corporation and a wholly owned subsidiary
of Parent ("Merger Sub"), and Company which Merger Agreement provides for the
merger of Merger Sub with and into Company (the "Merger"). As used herein, the
term "Expiration Date" shall mean the earlier to occur of (i) such date and
time as the Merger shall become effective in accordance with the terms and
provisions of the Merger Agreement, and (ii) the date of termination of the
Merger Agreement.
The attorneys and proxies named above, and each of them are hereby
authorized and empowered by the undersigned, at any time prior to the
Expiration Date, to act as the undersigned's attorney and proxy to vote the
Shares, and to exercise all voting and other similar rights of the undersigned
with respect to the Shares (including, without limitation, the power to execute
and deliver written consents pursuant to the Delaware General Corporation Law),
at every annual, special or adjourned meeting of the stockholders of Parent and
in every written consent in lieu of such meeting:
in favor of approval and adoption of the Merger Agreement and of the
transactions contemplated thereby.
The attorneys and proxies named above may not exercise this Irrevocable
Proxy on any other matter except as provided above. The undersigned stockholder
may vote the shares on all matters other than matters which have the purpose or
effect of impeding, delaying or hindering the consummation of any of the
transactions contemplated in the Merger Agreement.
All authority herein conferred shall survive the death or incapacity of
the undersigned and any obligation of the undersigned hereunder shall be
binding upon the heirs personal representatives, successors and assigns of the
undersigned.
C-1
<PAGE>
This Irrevocable Proxy is coupled with an interest as aforesaid and is
irrevocable.
Dated: February 9, 2000
----------------------------------------
(Signature of Stockholder)
----------------------------------------
(Print Name of Stockholder)
Shares beneficially owned:
shares of Parent Common Stock of
which shares were purchased in the
open market and shares are currently
subject to margin accounts with the
firms of
C-2
<PAGE>
APPENDIX D
February 9, 2000
Board of Directors
OptiCare Health Systems, Inc.
87 Grandview Avenue
Waterbury, CT 06708
Members of the Board:
We have been advised that OptiCare Health Systems, Inc. ("OptiCare" or the
"Company") and Vision Twenty-One, Inc. ("Vision") have entered into an
Agreement and Plan of Merger dated as of February 9, 2000 (the "Agreement")
pursuant to which Vision will be merged with and into a subsidiary of OptiCare
with Vision shareholders receiving an aggregate of 6.0 million shares of
OptiCare common stock on terms and conditions more fully set out in the
Agreement (the transaction is referred to herein as the "Transaction").
You have requested our opinion (the "Opinion"), as investment bankers, as
to the fairness to OptiCare and its stockholders, from a financial point of
view, of the total consideration to be paid by OptiCare (including any debt
assumed) in the Transaction.
In rendering our Opinion we have, among other things:
(i) reviewed and analyzed draft copies of the Agreement, dated
February 9, 2000;
(ii) reviewed and analyzed audited consolidated financial statements
of OptiCare contained in a registration statement on Form S-1
(dated December 17, 1999) for the fiscal year ended December 31,
1998 and unaudited consolidated financial statements for the
quarter ended September 30, 1999;
(iii) reviewed and analyzed audited consolidated financial statements
of Vision contained on Form 10-K for the fiscal year ended
December 31, 1998 and unaudited condensed statements contained on
Form 10-Q for the quarters ended March 31, 1999, June 30, 1999,
and September 30, 1999;
(iv) reviewed and analyzed certain internal information, primarily
financial in nature, concerning the business and operations of
the Company prepared by the management of the Company, including
five-year financial projections;
(v) reviewed and analyzed certain internal information, primarily
financial in nature, concerning the business and operations of
Vision prepared by the management of Vision, including five-year
financial projections;
(vi) reviewed and analyzed certain publicly available information
concerning the Company and Vision;
(vii) reviewed the reported stock prices and trading values for
OptiCare Common Stock and Vision Common Stock;
D-1
<PAGE>
(viii) reviewed and analyzed financial and market data and operating
statistics relating to the Company and Vision and compared them
with similar information of selected public companies that we
deemed relevant to our inquiry;
(ix) reviewed the financial terms, to the extent publicly available,
of certain acquisition transactions involving companies we deemed
to be comparable to the Company and Vision;
(x) held meetings and discussions with certain officers and
employees of the Company and Vision concerning the past and
current operations, financial condition and prospects of the
Company and Vision; and
(xi) conducted such other financial studies, analyses and
investigations and considered such other information as we deemed
appropriate for the purposes of our Opinion.
In connection with our review, we have assumed and relied upon the
accuracy and completeness of all financial and other information supplied to us
by the Company and Vision or publicly available, and we have not independently
verified such information. We have further relied upon the assurances of the
managements of the Company and Vision that they are unaware of any facts that
would make the information provided to us incomplete or misleading. We also
have relied upon the managements of the Company and Vision, as to the
reasonableness and achievability of the financial projections (and the
assumptions and bases therein) provided to us for the Company and Vision,
respectively, and we have assumed that such projections have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of management as to the future operating performance of each
respective entity. Neither the Company nor Vision publicly discloses internal
management projections of the type provided to Legg Mason in connection with
Legg Mason's review of the Transaction. Such projections were not prepared with
the expectation of public disclosure. The projections were based on numerous
variables and assumptions that are inherently uncertain, including without
limitation, factors related to general economic and competitive conditions.
Accordingly, actual results could vary significantly from those set forth in
such projections. Legg Mason has relied on these forecasts and does not in any
respect assume any responsibility for their accuracy or completeness.
We have not been requested to make, and have not made, an independent
appraisal or evaluation of the assets, properties or liabilities of Vision and
we have not been furnished with any such appraisal or evaluation. Estimates of
values of companies and assets do not purport to be appraisals or necessarily
reflect the prices at which companies and assets may actually be sold. Because
such estimates are inherently subject to uncertainty, Legg Mason assumes no
responsibility for their accuracy.
We have not reviewed any of the books and records of Vision or assumed any
responsibility for conducting a physical inspection of the properties or
facilities of Vision. Also, our Opinion is based upon prevailing market
conditions and other circumstances and conditions existing and disclosed to us
on the date hereof. Furthermore, Legg Mason has expressed no opinion as to the
value of or the price or trading range at which shares of the Company will
trade in the future. We were not requested to, nor did we, solicit the interest
of any other party in acquiring interests in Vision or its assets. We have
assumed that the final Agreement will not differ in any material respect from
the draft Agreement we reviewed. We have also assumed the Transaction will be
consummated on the terms and conditions described in the Agreement, without any
waiver of material terms or conditions by the Company or Vision, and that
obtaining any necessary regulatory approvals or satisfying any other conditions
for consummation of the Transaction will not have an adverse effect on the
Company or Vision.
We have acted as financial advisor to the board of directors (the "Board")
of OptiCare and will receive a fee for our services. It is understood that this
letter is for the information of, and directed to, the Board in their
evaluation of the Transaction and our Opinion does not constitute a
recommendation to the Board as to how such Board should vote on the
Transaction. Additionally, our Opinion does not compare the relative merits of
the Transaction with those of any other transaction or business strategy which
were or might have been considered by the Board as alternatives to the
D-2
<PAGE>
Transaction and does not address the underlying business decision by the Board
to proceed with or effect the Transaction. This letter is not to be quoted or
referred to, in whole or in part, in any registration statement, prospectus, or
in any other document used in connection with the offering or sales of
securities, nor shall this letter be used for any other purposes, without the
prior written consent of Legg Mason; provided that this letter may be included
in its entirety in any joint proxy statement/prospectus of OptiCare and Vision
filed with the Securities and Exchange Commission in connection with the
Transaction.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the total consideration to be paid by OptiCare (including any
debt assumed) in the Transaction is fair to OptiCare and its stockholders from
a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker, Incorporated
----------------------------------------------
LEGG MASON WOOD WALKER, INCORPORATED
D-3
<PAGE>
APPENDIX E
February 9, 2000
Confidential
- ------------
Board of Directors
Vision Twenty-One, Inc.
7360 Bryan Dairy Road, Suite 200
Largo, FL 33777
Ladies and Gentlemen:
Vision Twenty-One, Inc. (the "Company"), OptiCare Health Systems, Inc.
(the "Acquiring Company") and OC Acquisition Corp., a wholly-owned subsidiary
of the Acquiring Company ("Sub"), propose to enter into an Agreement and Plan
of Merger and Reorganization (the "Agreement") pursuant to which the
acquisition of the Company by the Acquiring Company will be effected through a
merger of Sub with and into the Company, as a result of which the stockholders
of the Company will become stockholders of the Acquiring Company (the
"Merger"). As a result of the Merger, each share of the Company's common stock,
$.001 par value (the "Shares"), will be converted into the right to receive
0.402 fully paid and non-assessable shares of common stock, $.001 par value, of
the Acquiring Company (the "Exchange Ratio"). The Exchange Ratio is subject to
adjustment based on, among other things, (a) changes in the Company's Net Debt
Equivalents and Tangible Net Worth as of the Exchange Ratio Adjustment Date
from specified levels set forth in the Agreement, (b) the maximum amount of
Shares reasonably expected to be issued pursuant to the Earn-out Agreements as
of the Exchange Ratio Adjustment Date and (c) the status of the Company's
disposition of its Ophthalmology and Optometry Practices (each such capitalized
term used but not defined herein having the definition set forth in the
Agreement). In connection with the Merger, certain stockholders of the Company
and the Acquiring Company holding in the aggregate approximately 21.1% of the
Shares and 15.8% of the Acquiring Company's common stock, respectively, propose
to enter into irrevocable proxies permitting such stock to be voted for the
approval of the Merger.
You have asked us whether or not, in our opinion, the Exchange Ratio is
fair to the stockholders of the Company from a financial point of view.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed the Company's Annual Reports, Forms 10-K and related financial
information for the three fiscal years ended December 31, 1998; and the
Company's Form 10-Q and the related unaudited financial information for
the nine months ended September 30, 1999;
(2) Reviewed the Acquiring Company's Form S-4, Form S-1 and related
financial information for the predecessor company of the Acquiring
Company for the three fiscal years ended December 31, 1998; and the
Acquiring Company's Form 10-Q and the related unaudited financial
information for the nine months ended September 30, 1999;
(3) Reviewed certain information, including financial forecasts, relating
to the business, earnings, cash flow, assets and prospects of the
Company and the Acquiring Company, furnished to us by the Company and
the Acquiring Company, respectively;
E-1
<PAGE>
(4) Conducted discussions with members of senior management of the Company
and the Acquiring Company concerning their respective businesses and
prospects;
(5) Reviewed the historical market prices and trading activity for the
Shares and the Acquiring Company's common stock and compared them with
that of certain publicly traded companies which we deemed to be
relevant;
(6) Compared the financial position and results of operations of the
Company and the Acquiring Company with that of certain companies which
we deemed to be relevant;
(7) Compared the proposed financial terms of the transactions contemplated
by the Agreement with the financial terms of certain other mergers and
acquisitions which we deemed to be relevant;
(8) Reviewed a draft of the Agreement and Plan of Merger and Reorganization
dated February 9, 2000; and
(9) Reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as we
deemed necessary, including our assessment of general economic, market
and monetary conditions.
In preparing our opinion, we have relied on the accuracy and completeness
of all information publicly available, supplied or otherwise communicated to us
by the Company and the Acquiring Company, and we have not assumed any
responsibility to independently verify such information. With respect to the
financial forecasts examined by us, we have assumed that they were reasonably
prepared on bases reflecting the best currently available estimates and good
faith judgments of the management of the Company and the Acquiring Company,
respectively, as to the future performance of the Company and the Acquiring
Company, respectively. We have also relied upon assurances of the management of
the Company and the Acquiring Company, respectively, that they are unaware of
any facts that would make the information or financial forecasts provided to us
incomplete or misleading. We have not made any independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of the Company
or the Acquiring Company nor have we been furnished with any such evaluations
or appraisals. We have also assumed with your consent, that (i) the Merger will
be accounted for under the purchase method of accounting, (ii) the Merger will
be a tax-free reorganization and (iii) any material liabilities (contingent or
otherwise, known or unknown) of the Company and the Acquiring Company are as
set forth in the consolidated financial statements of the Company and the
Acquiring Company, respectively. You have advised us, and we have assumed with
your consent, that, based on the best currently available financial forecasts
of the management of the Company, the Exchange Ratio after all relevant
adjustments to be made as of the Exchange Ratio Adjustment Date is expected to
be 0.407.
This opinion is directed to the Board of Directors of the Company and does
not constitute a recommendation to any shareholder of the Company as to how any
such shareholder should vote on the Merger. This opinion does not address the
relative merits of the Merger and any other transactions or business strategies
discussed by the Board of Directors of the Company as alternatives to the
Merger or the decision of the Board of Directors of the Company to proceed with
the Merger.
No opinion is expressed herein as to the price at which the securities to
be issued in the Merger to the shareholders of the Company may trade at any
time. Our opinion is based on economic, monetary and market conditions existing
on the date hereof.
In the ordinary course of business, PaineWebber Incorporated may trade in
the securities of the Company and the Acquiring Company for our own account and
for the accounts of our customers and, accordingly, may at any time hold long
or short positions in such securities.
PaineWebber Incorporated is currently acting as financial advisor to the
Company in connection with the Merger and will be receiving a fee in connection
with the rendering of this opinion and upon consummation of the Merger.
E-2
<PAGE>
On the basis of, and subject to the foregoing, we are of the opinion that
the Exchange Ratio is fair to the stockholders of the Company from a financial
point of view.
This opinion has been prepared for the information of the Board of
Directors of the Company in connection with the Merger and shall not be
reproduced, summarized, described or referred to, provided to any person or
otherwise made public or used for any other purpose without the prior written
consent of PaineWebber Incorporated; provided, however, that this letter may be
reproduced in full in the Proxy Statement/Prospectus related to the Merger.
Very truly yours,
PAINEWEBBER INCORPORATED
/s/ PaineWebber Incorporated
------------------------------------------
E-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("Section 145")
permits indemnification of directors, officers, employees, agents and
controlling persons of a corporation under certain conditions and subject to
certain limitations. Section 145 empowers a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was a
director, officer or agent of the corporation or another enterprise if serving
at the request of the corporation. Depending on the character of the
proceeding, a corporation may indemnify against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with such action, suit or proceeding if the person
indemnified acted in good faith and in a manner he reasonably believed to be
in, or not opposed to, the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. In the case of an action by or in the right of the
corporation, no indemnification may be made with respect to any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the court of chancery or the
court in which such action or suit was brought shall determine that despite the
adjudication of liability such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Section 145
further provides that to the extent a director or officer of a corporation has
been successful in the defense of any action, suit or proceeding referred to
above or in the defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith. See "OptiCare's Management
- -- Limitation of Liability and Indemnification Matters."
Our certificate of incorporation and bylaws provide for the
indemnification of our directors, officers and our other authorized
representatives to the maximum extent permitted by the Delaware General
Corporation Law, as may be amended (but in the case of such amendment, only to
the extent that such amendment permits us to provide broader indemnification
rights than the law permitted the Corporation to provide prior to the
Amendment) against all expense, loss and liability (including, without
limitation, judgments, fines, amounts paid in settlement and reasonable
expenses, including attorneys' fees), actually and necessarily incurred or
suffered by such person in connection with the defense of or as a result of
such proceeding, or in connection with any appeal therein. Our certificate of
incorporation and bylaws permit us to purchase insurance for the
indemnification of directors, officers and employees to the full extent
permitted by the Delaware General Corporation Law.
The certificate of incorporation and bylaws provide that the right to
indemnification conferred in the bylaws are contract rights and the certificate
of incorporation includes the right to be paid by the corporation for expenses
incurred in defending any such proceeding in advance of its final disposition;
provided, however, that if the Delaware General Corporation Law requires, the
payment of such expenses incurred by a director or officer in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, shall be made only upon delivery to
the company of an undertaking by or on behalf of such director or officer, to
repay all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified under this bylaw or
otherwise.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following is a list of Exhibits filed as part of the Registration
Statement or incorporated by reference herein:
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 Joint Proxy
Statement/Prospectus).*
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 March 30, 2000.
3.4 Certificate of Designation with respect to the Registrant's Series A
Convertible Preferred Stock., as filed with the Delaware Secretary of
State on August 13, 1999, incorporated by reference to Exhibit 3.2 to
Registrant's report on Form 8-K filed on August 30, 1999.
3.5 Warrant agreement dated as of August 13, 1999 between the Registrant
and Bank Austria Creditanstalt Corporate Finance, Inc., incorporated
by reference to Exhibit 3.3 to the Registrant's report on Form 8-K
filed on August 30, 1999.
4.1 Performance Stock Program, incorporated herein by reference to
Exhibit 4.1 to the Registrant's Registration Statement on Form S-4,
registration no. 333-78501, first filed on May 14, 1999, as amended
(the "Registration Statement 333-78501).+
4.2 Amended and Restated 1999 Employee Stock Purchase Plan, incorporated
herein by reference to Exhibit 4.2 to the Registrant's Annual Report
on Form 10-K filed March 30, 2000.+
4.3 2000 Professional Employee Stock Purchase Plan, incorporated herein
by reference to Exhibit 4.3 to the Registrant's Annual Report on Form
10-K filed March 30, 2000.+
5.1 Opinion of Kane Kessler, P.C. regarding the legality of the
securities being issued.**
8.1 Opinion of Shumaker, Loop & Kendrick, LLP regarding certain tax
matters.**
10.1 Compromise and Settlement Agreement dated May 7, 1996, by and between
Saratoga Resources, Inc. a Delaware corporation, Saratoga Resources,
Inc., a Texas corporation, Lobo Operating, Inc., a Texas corporation,
Lobo Energy, Inc., a Texas corporation, Thomas F. Cooke, Joseph T.
Kaminski, Randall F. Dryer, and Internationale Nederlanden (U.S.)
Capital Corporation, incorporated by reference to Exhibit 1 to the
Registrant's Report on Form 8-K dated May 7, 1996.
10.2 Purchase and Sale Agreement dated May 7, 1996, by and between
Internationale Nederlanden (U.S.) Capital Corporation and Prime
Energy Corporation, incorporated by reference to Exhibit 2 to our
Report on Form 8-K dated May 7, 1996.
II-2
<PAGE>
10.3 Assignment and Bill of Sale dated May 7, 1996, by and between
Saratoga Resources, Inc., a Delaware corporation and Prime Energy
Corporation, incorporated by reference to Exhibit 3 to our Report on
Form 8-K dated May 7, 1996.
10.4 Settlement Agreement and Full and Final Release dated March 10, 1997,
by and between Saratoga Resources, Inc., a Delaware corporation,
Thomas F. Cooke, Randall F. Dryer, Dryer, Ltd., a Texas Family
Partnership and Joseph T. Kaminski, incorporated by reference to
Exhibit 1 to our Report on Form 8-K dated March 12, 1997.
10.5 Purchase and Sale agreement dated effective November 12, 1998,
between Saratoga Holdings I, Inc. and The Premium Group, incorporated
by reference to Exhibit 10.1 to the Registration Statement on Form
SB-2 of Saratoga Holdings I, Inc. filed with the SEC on December 1,
1998.
10.6 Service Agreement dated as of November 12, 1998, between Saratoga
Holdings and Premium Recoveries, Inc., incorporated by reference to
Exhibit 10.2 to the Registration Statement on Form SB-2 of Saratoga
Holdings I, Inc. filed on December 1, 1998.
10.7 Settlement agreement dated as of April 9, 1999, among PrimeVision
Health, Inc., Dr. Allan L.M. Barker, Dr. D. Blair Harrold, Optometric
Eye Care Center, P.A., Steven B. Waite, Bank Austria AG, and Bank
Austria Corporate Finance, Inc., incorporated by reference to Exhibit
10.8 to the Registration Statement 333-78501.
10.8 Vision care capitation agreement between OptiCare Eye Health Centers
and Blue Cross & Blue Shield of Connecticut, Inc. (and its
affiliates) dated October 23, 1999, incorporated by reference to
Exhibit 10.9 to the Registration Statement 333-78501.
10.9 Eye care services agreement between OptiCare Eye Health Centers and
Anthem Health Plans, Inc. (d/b/a Anthem Blue Cross and Blue Shield of
Connecticut), effective November 1, 1998, incorporated by reference
to Exhibit 10.10 to the Registration Statement 333-78501.
10.10 Contracting provider services agreement dated April 26, 1996, and
amendment thereto dated as of January 1, 1999, between Blue Cross and
Blue Shield of Connecticut, Inc., and OptiCare Eye Health Centers ,
incorporated herein by reference to Exhibit 10.11 to the Registration
Statement 333-78501.
10.11 Form of employment agreement between the Registrant and Dean J.
Yimoyines, M.D., effective August 13, 1999, incorporated herein by
reference to Exhibit 10.12 to the Registration Statement 333-78501.+
10.12 Form of employment agreement between the Registrant and Steven L.
Ditman, effective August 13, 1999, incorporated herein by reference
to Exhibit 10.13 to the Registration Statement 333-78501.+
10.13 Form of employment agreement between the Registrant and Dr. Allan
L.M. Barker, effective August 13, 1999, , incorporated herein by
reference to Exhibit 10.14 to the Registration Statement 333-78501.+
10.14 Form of employment agreement between the Registrant and Dr. D. Blair
Harrold, effective August 13, 1999, incorporated herein by reference
to Exhibit 10.15 to the Registration Statement 333-78501.+
II-3
<PAGE>
10.15 Employment Agreement between the Registrant and Samuel B. Petteway
dated August 9, 1999 incorporated by reference to Exhibit 10.11 to
the Registrant's report on Form 10-Q filed on November 15, 1999.+
10.16 Lease dated September 22, 1987 and lease extension agreement dated
December 12, 1997 by and between Cross Street Medical Building
partnership, as landlord, and Ophthalmic Physicians and Surgeons,
P.C., as tenant, for premises located at 40 Cross Street, Norwalk,
Connecticut incorporated herein by reference to Exhibit 10.16 to the
Registration Statement 333-78501.
10.17 Lease agreement dated September 1, 1995 by and between French's Mill
Associates, as landlord, and OptiCare Eye Health Centers as tenant,
for premises located at 87 Grandview Avenue, Waterbury, Connecticut
incorporated herein by reference to Exhibit 10.17 to the Registration
Statement 333-78501.
10.18 Lease agreement dated September 30, 1997 by and between French's Mill
Associates II, LLP, as landlord, and OptiCare Eye Health Centers Eye
Health Center P.C., as tenant, for premises located at 160 Robbins
Street, Waterbury, Connecticut (upper level), incorporated herein by
reference to Exhibit 10.18 to the Registration Statement 333-78501.
10.19 Lease agreement dated September 1, 1995 and amendment to lease dated
September 30, 1997 by and between French's Mill Associates II, LLP,
as landlord, and OptiCare Eye Health Centers Eye Health center P.C.,
as tenant, for premises located at 160 Robbins Street, Waterbury,
Connecticut (lower level), incorporated herein by reference to
Exhibit 10.19 to the Registration Statement 333-78501.
10.20 Lease agreement dated September 1, 1995 between O.C. Realty
Associates Limited Partnership, as landlord, and OptiCare Eye Health
Centers, as tenant, for premises located at 54 Park Lane, New
Milford, Connecticut, incorporated herein by reference to Exhibit
10.20 to the Registration Statement 333-78501.
10.21 Lease dated March 1, 1997 by and between HBIC, as landlord, and CEC,
as tenant, for premises located at 112-B Zebulon Court, Rocky Mount,
North Carolina, incorporated by reference to Exhibit 10.12 to the
Registrant's report on Form 10-Q filed on November 15, 1999.
10.22 Lease dated March 1, 1997 by and between D. Blair Harrold & Allan
L.M. Barker d/b/a Harrold Barker Investment Co. ("HBIC"), as
landlord, and Consolidated Eye Care, Inc. ("CEC"), a wholly-owned
subsidiary of PrimeVision Health, Inc., as tenant, for premises
located at 110 Zebulon Court, Rocky Mount, North Carolina,
incorporated by reference to Exhibit 10.13 to the Registrant's report
on Form 10-Q filed on November 15, 1999.
10.24 Form of health services organization agreement between PrimeVision
Health, Inc. and eye care providers, incorporated herein by reference
to Exhibit 10.21 to the Registration Statement 333-78501.
10.25 Professional services and support agreement dated December 1, 1995
between OptiCare Eye Health Centers and OptiCare P.C., a Connecticut
professional corporation, incorporated herein by reference to Exhibit
10.22 to the Registration Statement 333-78501.
II-4
<PAGE>
10.27 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.
10.28 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.
10.29 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.
10.30 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.
10.31 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.
10.32 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.
10.33 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 333-78501.
10.34 Subordinated Promissory Note of the Company dated August 13, 1999 in
the aggregate principal amount of $2,000,000, payable to Marlin
Capital, L.P., incorporated by reference to Exhibit 10.8 to the
Registrant's report on Form 10-Q filed on November 15, 1999.
10.35 Subordinated Convertible Promissory Note of the Company dated August
13, 1999 in the aggregate principal amount of $4,000,000, payable to
Marlin Capital, L.P., incorporated by reference to Exhibit 10.9 to
the Registrant's report on Form 10-Q filed on November 15, 1999.
10.36 Stock Purchase Agreement dated October 1 , 1999, among the Company,
Stephen Cohen, Robert Airola, Gerald Mandel and Reginald Westbrook
(excluding schedules and other attachments thereto), incorporated by
reference to Exhibit 10.10 to the Registrant's report on Form 10-Q
filed on November 15, 1999.
II-5
<PAGE>
10.37 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 Company's
Registration Statement on Form S-1, registration no. 333-93043, first
filed on December 17, 1999, as amended ("Registration Statement
333-93043").
10.38 Lease dated March 1, 1997, between the Registrant as tenant and Drs.
Blair Harrold and Allan L.M. Barker as landlord, covering premises
known as 579 Cross Creek Mall, Fayetteville, N.C., incorporated by
reference to Exhibit 10.39 to the Registration Statement 333-93043.
10.39 Lease dated March 1, 1997, between the Registrant as tenant and
Optometric Eye Care Center, P.A., as landlord, covering premises at
315-A Western Boulevard, Jacksonville, N.C., incorporated by
reference to Exhibit 10.40 to the Registration Statement 333-93043.
10.40 Employment agreement between the Registrant as employer and Gordon A.
Bishop, dated August, 13, 1999, incorporated by reference to Exhibit
10.41 to the Registration Statement 333-93043.+
10.41 Lease dated September 1, 1999, between the Registrant as tenant and
Harrold-Barker Realty, as landlord, covering premises located at 2325
Sunset Avenue, in Rocky Mount, N.C., incorporated by reference to the
Registration Statement 333-93043.
10.42 Professional Services and Support Agreement between the Registrant
and Optometric Eye Care Centers, P.A., incorporated by reference to
the Registration Statement 333-93043.
10.43 Lease Agreement dated June 1, 1996 by and between CS Investments,
Inc., as landlord and Optometric Eye Care Center, P.A. and
Consolidated Eye Care, Inc., as tenant, for premises located at
Cary, North Carolina.*
10.44 Lease Agreement dated August 31, 1994 by and between Charles S.
Zwerling and Jean S. Zwerling, as landlord and Optometric Eye Care
Center, P.A., as tenant for premises located in Smithfield,
North Carolina.*
10.45 A Lease Agreement dated January 2, 1995 by and between John W. Hearn,
Betty Hearn and Lillian Hearn, as landlord and Optometric Eye Care
Center, P.A., as tenant for premises are located in Monroe,
North Carolina.*
10.46 Form of Irrevocable Proxy to vote stock of Vision Twenty-One, Inc.
(incorporated by reference to Appendix B to the Joint Proxy
Statement/Prospectus).*
10.47 Form of Irrevocable Proxy to Vote Stock of OptiCare Health Systems,
Inc. (incorporated by reference to Appendix C to the Joint Proxy
Statement/Prospectus).*
16.1 Letter of Hein + Associates LLP regarding Change in Certifying
Accountants, incorporated by reference to Exhibit 16 of the Amendment
No. 1 filed April 6, 1999, of Registrant"s Current Report on Form 8-K
dated March 29, 1999.
16.2 Letter of Ernst & Young LLP regarding Change in Certifying
Accountants, incorporated by reference to Exhibit 16 of the Amendment
No. 2 filed September 17, 1999 of Registrant's Current Report on Form
8-K dated August 13, 1999.
21 List of Subsidiaries of the Registrant, incorporated by reference to
the Registration Statement 333-93043.*
II-6
<PAGE>
23.1 Consents of Deloitte & Touche LLP.*
23.2 Consent of Ernst & Young LLP with respect to the financial statements
of PrimeVision Health, Inc.*
23.3 Consent of Ernst & Young LLP with respect to the financial statements
of Vision Twenty-One, Inc.*
23.4 Consent of Kane Kessler, P.C. (included in Exhibit 5.1).**
23.5 Consent of Legg Mason Wood Walker, Incorporated.*
23.6 Consent of PaineWebber Incorporated*
23.7 Consent of Shumaker, Loop & Kendrick, LLP (included in Exhibit 8.1)**
24.1 Power of Attorney (included on the signature page)*
99.1 Form of OptiCare Proxy Card.*
99.2 Form of Vision Twenty-One Proxy Card.*
- ----------
+ Management or compensatory plan.
* Filed herewith.
** To be filed by Amendment.
(b) Financial Statement Schedules: Schedules have been omitted because they
are either not applicable or the required information has been disclosed in the
consolidated financial statements or the notes thereto.
(c) Opinion of Legg Mason Wood Walker, Incorporated, attached as Appendix D
to the Joint Proxy Statement/Prospectus which is part of this registration
statement. Opinion of PaineWebber, attached as Appendix E to the Joint Proxy
Statement/Prospectus which is part of this registration statement.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
II-7
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering;
(4) that, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof;
(5) that, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c) of the Securities Act, such reoffering prospectus will
contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition
to the information called for by the other items of the applicable form;
(6) that every prospectus (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to this Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof;
(7) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of Form S-4,
within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of this Registration Statement through the date of responding to the
request; and
(8) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in this Registration Statement when it
became effective.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described in Item 20 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in The City of Waterbury,
State of Connecticut, on this 11th day of May, 2000.
OPTICARE HEALTH SYSTEMS, INC.
By: /s/ Dean J. Yimoyines
------------------------------------
Dean J. Yimoyines, M.D.
Chairman, Chief Executive Officer
and President
II-9
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and/or officers of OptiCare Health Systems,
Inc. (the "Company"), hereby severally constitute and appoint Dean J.
Yimoyines, Chairman and Chief Executive Officer, and Steven L. Ditman, Chief
Financial Officer, and each of them individually, with full powers of
substitution and resubstitution, our true and lawful attorneys, with full
powers to them and each of them to sign for us, in our names and in the
capacities indicated below, the Registration Statement on Form S-4 filed with
the Securities and Exchange Commission, and any and all amendments to said
Registration Statement (including post-effective amendments), and any
registration statement filed pursuant to Rule 462(b) under the Securities Act
of 1933, as amended, in connection with the registration under the Securities
Act of 1933, as amended, of equity securities of the Company, and to file or
cause to be filed the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys, and each of them, full power and authority to do and
perform each and purposes as each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as each of them might or could do in person, and hereby ratifying and
confirming all that said attorneys, and each of them, or their substitute or
substitutes, shall do or cause to be done by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement to be signed by the following persons in the
capacities indicated on May 11, 2000:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Dean J. Yimoyines, M.D. Director, Chairman of the Board, Chief May 11, 2000
- ---------------------------- Executive Officer and President (Principal
Dean J. Yimoyines, M.D.
Executive Officer)
/s/ Steven L. Ditman Director, Executive Vice President and May 11, 2000
- ---------------------------- Chief Financial Officer (Principal Financial
Steven L. Ditman and Accounting Officer)
/s/ Martin E. Franklin Director May 11, 2000
- ----------------------------
Martin E. Franklin
/s/ Ian G.H. Ashken Director May 11, 2000
- ----------------------------
Ian G.H. Ashken
/s/ Allan L.M. Barker Director May 11, 2000
- ----------------------------
Allan L.M. Barker, O.D.
/s/ John F. Croweak Director May 11, 2000
- ----------------------------
John F. Croweak
/s/ Carl J. Schramm Director May 11, 2000
- ----------------------------
Carl J. Schramm
</TABLE>
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
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 Joint Proxy
Statement/Prospectus).*
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 March 30, 2000.
3.4 Certificate of Designation with respect to the Registrant's Series A
Convertible Preferred Stock., as filed with the Delaware Secretary of
State on August 13, 1999, incorporated by reference to Exhibit 3.2 to
Registrant's report on Form 8-K filed on August 30, 1999.
3.5 Warrant agreement dated as of August 13, 1999 between the Registrant
and Bank Austria Creditanstalt Corporate Finance, Inc., incorporated
by reference to Exhibit 3.3 to the Registrant's report on Form 8-K
filed on August 30, 1999.
4.1 Performance Stock Program, incorporated herein by reference to
Exhibit 4.1 to the Registrant's Registration Statement on Form S-4,
registration no. 333-78501, first filed on May 14, 1999, as amended
(the "Registration Statement 333-78501).+
4.2 Amended and Restated 1999 Employee Stock Purchase Plan, incorporated
herein by reference to Exhibit 4.2 to the Registrant's Annual Report
on Form 10-K filed March 30, 2000.+
4.3 2000 Professional Employee Stock Purchase Plan, incorporated herein
by reference to Exhibit 4.3 to the Registrant's Annual Report on Form
10-K filed March 30, 2000.+
5.1 Opinion of Kane Kessler, P.C. regarding the legality of the
securities being issued.**
8.1 Opinion of Shumaker, Loop & Kendrick, LLP regarding certain tax
matters.**
10.1 Compromise and Settlement Agreement dated May 7, 1996, by and between
Saratoga Resources, Inc. a Delaware corporation, Saratoga Resources,
Inc., a Texas corporation, Lobo Operating, Inc., a Texas corporation,
Lobo Energy, Inc., a Texas corporation, Thomas F. Cooke, Joseph T.
Kaminski, Randall F. Dryer, and Internationale Nederlanden (U.S.)
Capital Corporation, incorporated by reference to Exhibit 1 to the
Registrant's Report on Form 8-K dated May 7, 1996.
10.2 Purchase and Sale Agreement dated May 7, 1996, by and between
Internationale Nederlanden (U.S.) Capital Corporation and Prime
Energy Corporation, incorporated by reference to Exhibit 2 to our
Report on Form 8-K dated May 7, 1996.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
10.3 Assignment and Bill of Sale dated May 7, 1996, by and between
Saratoga Resources, Inc., a Delaware corporation and Prime Energy
Corporation, incorporated by reference to Exhibit 3 to our Report on
Form 8-K dated May 7, 1996.
10.4 Settlement Agreement and Full and Final Release dated March 10, 1997,
by and between Saratoga Resources, Inc., a Delaware corporation,
Thomas F. Cooke, Randall F. Dryer, Dryer, Ltd., a Texas Family
Partnership and Joseph T. Kaminski, incorporated by reference to
Exhibit 1 to our Report on Form 8-K dated March 12, 1997.
10.5 Purchase and Sale agreement dated effective November 12, 1998,
between Saratoga Holdings I, Inc. and The Premium Group, incorporated
by reference to Exhibit 10.1 to the Registration Statement on Form
SB-2 of Saratoga Holdings I, Inc. filed with the SEC on December 1,
1998.
10.6 Service Agreement dated as of November 12, 1998, between Saratoga
Holdings and Premium Recoveries, Inc., incorporated by reference to
Exhibit 10.2 to the Registration Statement on Form SB-2 of Saratoga
Holdings I, Inc. filed on December 1, 1998.
10.7 Settlement agreement dated as of April 9, 1999, among PrimeVision
Health, Inc., Dr. Allan L.M. Barker, Dr. D. Blair Harrold, Optometric
Eye Care Center, P.A., Steven B. Waite, Bank Austria AG, and Bank
Austria Corporate Finance, Inc., incorporated by reference to Exhibit
10.8 to the Registration Statement 333-78501.
10.8 Vision care capitation agreement between OptiCare Eye Health Centers
and Blue Cross & Blue Shield of Connecticut, Inc. (and its
affiliates) dated October 23, 1999, incorporated by reference to
Exhibit 10.9 to the Registration Statement 333-78501.
10.9 Eye care services agreement between OptiCare Eye Health Centers and
Anthem Health Plans, Inc. (d/b/a Anthem Blue Cross and Blue Shield of
Connecticut), effective November 1, 1998, incorporated by reference
to Exhibit 10.10 to the Registration Statement 333-78501.
10.10 Contracting provider services agreement dated April 26, 1996, and
amendment thereto dated as of January 1, 1999, between Blue Cross and
Blue Shield of Connecticut, Inc., and OptiCare Eye Health Centers ,
incorporated herein by reference to Exhibit 10.11 to the Registration
Statement 333-78501.
10.11 Form of employment agreement between the Registrant and Dean J.
Yimoyines, M.D., effective August 13, 1999, incorporated herein by
reference to Exhibit 10.12 to the Registration Statement 333-78501.+
10.12 Form of employment agreement between the Registrant and Steven L.
Ditman, effective August 13, 1999, incorporated herein by reference
to Exhibit 10.13 to the Registration Statement 333-78501.+
10.13 Form of employment agreement between the Registrant and Dr. Allan
L.M. Barker, effective August 13, 1999, , incorporated herein by
reference to Exhibit 10.14 to the Registration Statement 333-78501.+
10.14 Form of employment agreement between the Registrant and Dr. D. Blair
Harrold, effective August 13, 1999, incorporated herein by reference
to Exhibit 10.15 to the Registration Statement 333-78501.+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
10.15 Employment Agreement between the Registrant and Samuel B. Petteway
dated August 9, 1999 incorporated by reference to Exhibit 10.11 to
the Registrant's report on Form 10-Q filed on November 15, 1999.+
10.16 Lease dated September 22, 1987 and lease extension agreement dated
December 12, 1997 by and between Cross Street Medical Building
partnership, as landlord, and Ophthalmic Physicians and Surgeons,
P.C., as tenant, for premises located at 40 Cross Street, Norwalk,
Connecticut incorporated herein by reference to Exhibit 10.16 to the
Registration Statement 333-78501.
10.17 Lease agreement dated September 1, 1995 by and between French's Mill
Associates, as landlord, and OptiCare Eye Health Centers as tenant,
for premises located at 87 Grandview Avenue, Waterbury, Connecticut
incorporated herein by reference to Exhibit 10.17 to the Registration
Statement 333-78501.
10.18 Lease agreement dated September 30, 1997 by and between French's Mill
Associates II, LLP, as landlord, and OptiCare Eye Health Centers Eye
Health Center P.C., as tenant, for premises located at 160 Robbins
Street, Waterbury, Connecticut (upper level), incorporated herein by
reference to Exhibit 10.18 to the Registration Statement 333-78501.
10.19 Lease agreement dated September 1, 1995 and amendment to lease dated
September 30, 1997 by and between French's Mill Associates II, LLP,
as landlord, and OptiCare Eye Health Centers Eye Health center P.C.,
as tenant, for premises located at 160 Robbins Street, Waterbury,
Connecticut (lower level), incorporated herein by reference to
Exhibit 10.19 to the Registration Statement 333-78501.
10.20 Lease agreement dated September 1, 1995 between O.C. Realty
Associates Limited Partnership, as landlord, and OptiCare Eye Health
Centers, as tenant, for premises located at 54 Park Lane, New
Milford, Connecticut, incorporated herein by reference to Exhibit
10.20 to the Registration Statement 333-78501.
10.21 Lease dated March 1, 1997 by and between HBIC, as landlord, and CEC,
as tenant, for premises located at 112-B Zebulon Court, Rocky Mount,
North Carolina, incorporated by reference to Exhibit 10.12 to the
Registrant's report on Form 10-Q filed on November 15, 1999.
10.22 Lease dated March 1, 1997 by and between D. Blair Harrold & Allan
L.M. Barker d/b/a Harrold Barker Investment Co. ("HBIC"), as
landlord, and Consolidated Eye Care, Inc. ("CEC"), a wholly-owned
subsidiary of PrimeVision Health, Inc., as tenant, for premises
located at 110 Zebulon Court, Rocky Mount, North Carolina,
incorporated by reference to Exhibit 10.13 to the Registrant's report
on Form 10-Q filed on November 15, 1999.
10.24 Form of health services organization agreement between PrimeVision
Health, Inc. and eye care providers, incorporated herein by reference
to Exhibit 10.21 to the Registration Statement 333-78501.
10.25 Professional services and support agreement dated December 1, 1995
between OptiCare Eye Health Centers and OptiCare P.C., a Connecticut
professional corporation, incorporated herein by reference to Exhibit
10.22 to the Registration Statement 333-78501.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
10.27 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.
10.28 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.
10.29 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.
10.30 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.
10.31 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.
10.32 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.
10.33 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 333-78501.
10.34 Subordinated Promissory Note of the Company dated August 13, 1999 in
the aggregate principal amount of $2,000,000, payable to Marlin
Capital, L.P., incorporated by reference to Exhibit 10.8 to the
Registrant's report on Form 10-Q filed on November 15, 1999.
10.35 Subordinated Convertible Promissory Note of the Company dated August
13, 1999 in the aggregate principal amount of $4,000,000, payable to
Marlin Capital, L.P., incorporated by reference to Exhibit 10.9 to
the Registrant's report on Form 10-Q filed on November 15, 1999.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
10.36 Stock Purchase Agreement dated October 1 , 1999, among the Company,
Stephen Cohen, Robert Airola, Gerald Mandel and Reginald Westbrook
(excluding schedules and other attachments thereto), incorporated by
reference to Exhibit 10.10 to the Registrant's report on Form 10-Q
filed on November 15, 1999.
10.37 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 Company's
Registration Statement on Form S-1, registration no. 333-93043, first
filed on December 17, 1999, as amended ("Registration Statement
333-93043").
10.38 Lease dated March 1, 1997, between the Registrant as tenant and Drs.
Blair Harrold and Allan L.M. Barker as landlord, covering premises
known as 579 Cross Creek Mall, Fayetteville, N.C., incorporated by
reference to Exhibit 10.39 to the Registration Statement 333-93043.
10.39 Lease dated March 1, 1997, between the Registrant as tenant and
Optometric Eye Care Center, P.A., as landlord, covering premises at
315-A Western Boulevard, Jacksonville, N.C., incorporated by
reference to Exhibit 10.40 to the Registration Statement 333-93043.
10.40 Employment agreement between the Registrant as employer and Gordon A.
Bishop, dated August, 13, 1999, incorporated by reference to Exhibit
10.41 to the Registration Statement 333-93043.+
10.41 Lease dated September 1, 1999, between the Registrant as tenant and
Harrold-Barker Realty, as landlord, covering premises located at 2325
Sunset Avenue, in Rocky Mount, N.C., incorporated by reference to the
Registration Statement 333-93043.
10.42 Professional Services and Support Agreement between the Registrant
and Optometric Eye Care Centers, P.A., incorporated by reference to
the Registration Statement 333-93043.
10.43 Lease Agreement dated June 1, 1996 by and between CS Investments,
Inc., as landlord and Optometric Eye Care Center, P.A. and
Consolidated Eye Care, Inc., as tenant, for premises located at
Cary, North Carolina.*
10.44 Lease Agreement dated August 31, 1994 by and between Charles S.
Zwerling and Jean S. Zwerling, as landlord and Optometric Eye Care
Center, P.A., as tenant for premises located in Smithfield,
North Carolina.*
10.45 A Lease Agreement dated January 2, 1995 by and between John W. Hearn,
Betty Hearn and Lillian Hearn, as landlord and Optometric Eye Care
Center, P.A., as tenant for premises are located in Monroe,
North Carolina.*
10.46 Form of Irrevocable Proxy to vote stock of Vision Twenty-One, Inc.
(incorporated by reference to Appendix B to the Joint Proxy
Statement/Prospectus).*
10.47 Form of Irrevocable Proxy to Vote Stock of OptiCare Health Systems,
Inc. (incorporated by reference to Appendix C to the Joint Proxy
Statement/Prospectus).*
16.1 Letter of Hein + Associates LLP regarding Change in Certifying
Accountants, incorporated by reference to Exhibit 16 of the Amendment
No. 1 filed April 6, 1999, of Registrant"s Current Report on Form 8-K
dated March 29, 1999.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
16.2 Letter of Ernst & Young LLP regarding Change in Certifying
Accountants, incorporated by reference to Exhibit 16 of the Amendment
No. 2 filed September 17, 1999 of Registrant's Current Report on Form
8-K dated August 13, 1999.
21 List of Subsidiaries of the Registrant, incorporated by reference to
the Registration Statement 333-93043.*
23.1 Consents of Deloitte & Touche LLP.*
23.2 Consent of Ernst & Young LLP with respect to the financial statements
of PrimeVision Health, Inc.*
23.3 Consent of Ernst & Young LLP with respect to the financial statements
of Vision Twenty-One, Inc.*
23.4 Consent of Kane Kessler, P.C. (included in Exhibit 5.1).**
23.5 Consent of Legg Mason Wood Walker, Incorporated.*
23.6 Consent of PaineWebber Incorporated*
23.7 Consent of Shumaker, Loop & Kendrick, LLP, (included in Exhibit
8.1).**
24.1 Power of Attorney (included on the signature page)*
99.1 Form of OptiCare Proxy Card.*
99.2 Form of Vision Twenty-One Proxy Card.*
</TABLE>
- ----------
+ Management or compensatory plan.
* Filed herewith.
** To be filed by Amendment.
<PAGE>
EXHIBIT 10.43
STATE OF NORTH CAROLINA
COUNTY OF WAKE
THIS LEASE, made and entered into effective this 1st day of June, 1996, by and
among CS INVESTMENTS, INC., a corporation organized and existing under the laws
of North Carolina (hereinafter referred to as "Landlord"), and OPTOMETRIC EYE
CARE CENTER, P.A., a professional corporation organized and existing under the
laws of the State of North Carolina and CONSOLIDATED EYE CARE, INC., a
corporation organized and existing under the laws of the State of North Carolina
(hereinafter collectively referred to as "Tenant");
WITNESSETH:
Landlord hereby leases to Tenant and Tenant hereby takes and hires from
Landlord the real property, if any, more particularly described on Exhibit A
attached hereto and by this reference made a part hereof, and in consideration
of which Landlord and Tenant hereby covenant and agree upon the following terms
and conditions of said Lease:
1. PREMISES - The leased premises are more particularly described on
"Exhibit A" attached hereto and specifically incorporated herein by reference,
together with all improvements now or hereafter located thereon (the
"Premises").
2. CONSTRUCTIONS OF IMPROVEMENTS
A. Definitions: The following terms as used herein shall have the
following meanings:
(i) "Building shall mean a single story structure constructed
substantially in accordance with the plans and specifications,
attached hereto as Exhibit B and made a part hereof (hereinafter
referred to as "Plans") and containing approximately 5,288 square
feet of leasable area.
(ii) "Commencement Date" shall mean the date upon which the
"Improvements" are "Substantially Completed", and on which the
Landlord shall deliver possession of the Premises to Tenant.
(iii) "Improvements" shall mean the Building and all related paving,
outside lighting, landscaping, utility services and other work
contemplated herein.
(iv) "Substantially Completed" shall mean the Improvements have been
completed by Landlord substantially in accordance with Plans so as
to permit use and occupancy of the Premises for the purpose intended
by Tenant. The Premises shall not be Substantially Completed until
all of the following conditions have been satisfied: (a) the Town
of Cary or other appropriate governmental entity shall have issued
a Certificate of Occupancy or similar certificate indicating
completion, (b) the requirements of Paragraph 2 (D) shall have been
met, and (c) Landlord's architect shall have furnished to Tenant a
certificate to the effect that the Premises have been completed
substantially in accordance with the Plans.
B. Construction of Improvements. Landlord shall commence construction
of the
<PAGE>
Building and Improvements and shall complete the same as soon as
practicable.
Tenant acknowledges and agrees that the Plans comprise the extent of the
Landlord's obligations to construct the Improvements, and Tenant shall have no
authority to authorize change orders to the Plans. To the extent that the
Landlord shall consent to any change orders requested by the Tenant, any
additional expense arising out of such change orders shall be borne entirely by
the Tenant.
C. Completion of Improvements. Landlord shall notify Tenant at least twenty
(20) days prior to the date that the Building will be Substantially Completed.
Such notice shall state the date on which the Building will be Substantially
Complete and made available for occupancy by Tenant. Tenant shall have the right
to inspect the Premises prior to the date of delivery of possession and prepare
in cooperation with Landlord a "Punch List" setting forth any work which is not
in accordance with the Plans, and Landlord within thirty (30) days after receipt
of the Punch List shall complete and/or correct all items described therein to
the reasonable satisfaction of Tenant.
D. Utility Service. Prior to Substantial Completion of the Improvements,
Landlord shall have (i) obtained all easements and permits, approvals and
consents of all governmental and quasi-governmental authorities and utility
companies and (ii) constructed and installed conduits, wiring, lines, pipes,
mains, sanitary sewer systems as necessary to furnish adequate public water,
public sanitary sewer, light, heat and electricity service to the Premises in
accordance with the applicable laws, government codes, ordinances, regulations
and orders, and in accordance with the Plans.
3. TERM - The term of this Lease shall be for a period of twenty (20) years
commencing on the first day of the first calendar month following the
Commencement Date, and ending at midnight on the last day of the 180th month
thereafter.
In the event that the Premises shall be occupied by Tenant prior to the
Commencement Date, Tenant shall occupy the Premises prior to the beginning of
the term hereof as a tenant at will subject to all of the conditions of this
Lease inasmuch as such conditions are consistent with tenancy.
When the Commencement Date has been ascertained, Landlord and Tenant
immediately shall execute an addendum to this Lease stating the Commencement
Date of the term and, if a memorandum of lease referencing this Lease shall have
been recorded, such addendum shall be recorded and shall refer specifically to
the memorandum of lease as recorded.
4. EXTENDED TERMS - None.
5. RENT - Tenant shall pay to Landlord during the term of this Lease rent
in the amount of $24.29 per square foot per year, payable monthly in advance and
without notice or demand therefor on or before the 1st day of each month during
the term of this Lease. All rent hereunder shall be payable at the address of
Landlord specified in the paragraph herein entitled "NOTICE" or at such other
place as Landlord from time to time may designate. In the event that the
Premises shall be occupied by Tenant prior to the Commencement Date,
<PAGE>
Tenant shall pay to Landlord rent as provided above on a pro-rated basis based
upon the number of days so occupied by Tenant.
In addition to the foregoing rent, which shall hereinafter be referred to
as the "Base Rent", Tenant shall pay to Landlord as additional rent an amount
equivalent to six percent (6%) of the Tenant's annual gross sales (as "gross
sales" are hereinafter defined) in excess of $1.8 million, per year in, on or
from the Leased Premises. Said additional rent hereunder shall be computed on
the basis of each calendar year, any portion of a calendar year to be pro rated
on a monthly basis, and shall be due and payable, without notice or demand
therefor, sixty (60) days following the end of each such year during the initial
term of this Lease and any extension thereof.
Tenants shall keep complete and proper books, records, and accounts of the
gross sales (as such term is used herein), both for cash and on credit for each
separate department and concession at any time operated in or on the Leased
Premises, such books, records, and accounts including any sales tax reports that
Tenant may be required to furnish to any government or governmental agency, at
all reasonable times to be open to the inspection of the Landlord, Landlord's
auditor or other authorized representative or agent.
Within sixty (60) days after the end of each calendar year during the term
of this Lease, the first of which ends the 31st day of December, 1997, Tenant
shall furnish to Landlord a statement to be certified as correct by Tenant or an
employee or agent of Tenant authorized so to certify, which shall set forth the
gross sales of each department and concession operating in or on the Leased
Premises for the year just concluded, and the authorized deductions, if any,
therefrom and with each statement Tenant shall pay to Landlord the amount of the
percentage rental which is payable by Tenant as shown thereby. If Tenant shall
at any time cause an audit of Tenant's business relative to the Leased Premises
to be made by a certified public accountant, Tenant shall furnish Landlord with
a copy of such audit without any cost to Landlord. Landlord, not more often than
once in any calendar year, shall have the right to cause an audit of the
business of Tenant to be made by a certified public accountant of Landlord's own
selection; and if the statements of gross sales previously made by Tenant to
Landlord shall be found to be more than three percent (3%) less than the amount
of Tenant's gross sales shown by such audit, Tenant immediately shall pay the
cost of such audit as well as the additional rental therein shown to be payable
by Tenant to Landlord; otherwise, the cost of such audit shall be paid by
Landlord. Tenant will be furnished with a copy of any such annual audit which
Landlord may cause to be made.
The acceptance by Landlord of any money paid to Landlord by Tenant as
percentage rent hereunder for the Lease Premises as shown by any statement
furnished by Tenant shall not be an admission of the accuracy of such statement,
or of the sufficiency of the amount of such rent payment, but Landlord shall be
entitled to question the sufficiency of the amount of any such rental payment or
the accuracy of the statement or statements furnished by Tenant to justify the
same any time within three (3)
<PAGE>
years after receipt of such rental payment. For the purpose of enabling Landlord
to check the accuracy of any such statement or statements, and the sufficiency
of any rental payments made in accordance therewith, Tenant shall for such
period of three (3) years after submission to Landlord of any such statement
keep safe and intact all of Tenant's records, books, accounts, and other data
which in any way bear on or are required to establish in detail Tenant's gross
sales and any authorized deductions therefrom as shown by any such statement,
and shall on request make the same available to Landlord, Landlord's auditor,
representative or agent for examination at any time during such three (3) year
period.
Percentage payment of Tenant's gross sales to Landlord shall be deemed and
considered as a rental cost for the Leased premises, and it is expressly
understood by the parties hereto that this provision is strict rental only, and
shall in no way be considered or construed as creating the legal relationship of
a partnership, as provided by North Carolina General Statute Section
59-37(4)(b), or any other relationship other than landlord and tenant, and it is
further expressly understood that Landlord is in no way responsible for any
losses which Tenant may sustain at any time.
The term "gross sales" as used herein shall mean and refer to the total
amount of the dollar value, exclusive of the amount of North Carolina Sales Tax
or Federal Excise Tax paid or payable thereon, of all sales of merchandise and
services and all revenues of every kind and character derived from, arising out
of or payable on an account of the business and all business transactions
conducted at or from the Leased Premises by Tenant, or by an concessionaires,
licensees, assignees or sublesses of Tenant, both for cash and on credit,
including all orders for merchandise or services taken or sold at or from the
Leased Premises or filled or delivered from any other place or location. The
amount of the dollar value of bona fide refunds or credit granted for return
merchandise shall be charged as a credit in reduction of the amount of gross
sales for the period in which such refund shall have been made. All credit sales
shall be included in the amount of gross sales for the month of sale and no
adjustment shall be made if the account is not collected.
6. TAXES - Tenant shall be responsible for and shall pay all ad valorem
taxes and assessments imposed by any lawful authority upon the Premises
including all ad valorem taxes and assessments imposed by any lawful authority
upon any personal property located in or upon the Premises during the term of
this Lease. Such taxes and assessments shall be prorated on a calendar year
basis for any period hereunder less than a full calendar year. On demand by
Landlord, Tenant shall furnish Landlord with satisfactory evidence of payment.
If Landlord's lender requires Landlord to impound ad valorem taxes on a
periodic basis during the term, Tenant, on notice from Landlord indicating such
requirement, shall pay to Landlord such sum towards its liability under this
paragraph and on such periodic basis as may be required by Landlord's lender.
All taxes and assessments hereunder shall be paid before any penalty or
interest shall be charged thereon.
7. UTILITIES AND SERVICES - Tenant shall be responsible for and shall pay
all costs and charges for utilities and services in connection with Tenant's
occupancy of the Premises, including but not
<PAGE>
limited to water, sewer, energy, telephone, garbage and other services. All of
the foregoing utilities and services shall be instituted and obligated for in
the name of Tenant, and Landlord shall have no responsibility whatsoever for
furnishing or cost of same.
8. MAINTENANCE, REPAIR AND RENOVATION - Tenant, at the sole cost and
expense of Tenant, at all times during the term hereof shall operate, keep and
maintain the Premises, including but not limited to the grounds, roof, interior
walls, interior and exterior doors, windows, plate glass, plumbing, electrical,
heating, air conditioning and other interior and exterior elements of the
Premises, in good order, condition and repair.
All repairs and replacements shall be of a quality and class at least equal
to the quality and class of the Premises at the time of entry by Tenant.
Further, Tenant, at the sole cost and expense of Tenant, shall have the
right to make renovations, additions and improvements of or to the Premises at
any time and from time to time in accordance with plans and specifications
submitted to and approved in writing by Landlord, which approval Landlord agrees
not to withhold unreasonably. Any and all repairs, replacements, renovations,
additions or improvements of or to the Premises which shall be affixed to or
become a part of the Premises shall remain to be surrendered as part of the
Premises, without cost to Landlord, at the expiration or sooner termination of
this Lease; provided, however, that at any time prior to the expiration or
sooner termination of this Lease, Tenant may remove such trade fixtures
installed by Tenant as may be affixed to the Premises provided that such removal
can be effected without materially damaging the Premises.
Upon the expiration or sooner termination of this Lease and surrender of
the Premises by Tenant to Landlord, the Premises shall be in as good a condition
as same are in as of the time of entry by Tenant, excepting only deterioration
caused by ordinary wear and tear.
9. CASUALTY INSURANCE - Tenant, at the sole cost and expense of Tenant,
shall keep the Premises insured to the extent of not less than 100% of the
replacement cost of all improvements upon the Premises against loss or damage by
fire, with extended coverage. Each insurance policy effecting such coverage
shall designate the Landlord, Landlord's mortgage, if any, and Tenant as
insureds as their respective interests may appear, and shall contain a clause
that the insurer will not cancel or modify the insurance coverage without first
giving Landlord a minimum of thirty (30) days' advance written notice by
certified mail. Further, each such policy shall be carried with a reputable
insurance company authorized to do business in North Carolina and approved by
Landlord, and a copy of each such policy or certificate of insurance shall be
provided to Landlord together with evidence of the timely payment of all
premiums. In the event Tenant at any time shall fail to maintain such insurance
or shall fail to pay any and all premiums therefor, Landlord shall have the
right and option to effect such insurance and pay any and all premiums
therefor, and, in the event of any such payment, Tenant, on the rental date
next succeeding the date on which such payment shall have been made, shall
pay to
<PAGE>
Landlord a sum equal to the amount which was so paid for such insurance
premiums, it being expressly understood that Landlord shall have no obligation
whatsoever hereunder to effect such insurance or to make such premium payments
to cure the default of Tenant.
If Landlord's lender requires Landlord to impound insurance premiums on a
periodic basis during the term, Tenant, on notice from Landlord indicating such
requirement, shall pay to Landlord such sum toward its liability under this
paragraph and on such periodic basis as may be required by Landlord's lender.
10. CROSS-WAIVER OF SUBROGATION - Landlord hereby releases Tenant and
Tenant hereby releases Landlord to the extent of their respective casualty
insurance coverage, from any liability for loss or damage to the Premises caused
by fire or any of the extended coverage casualties included in their respective
insurance policies, even if such fire or other casualty should be brought about
by the fault or negligence of the other party, of such party's agents or
employees. Landlord and Tenant shall each cause an endorsement (commonly known
as a "waiver of subrogation" endorsement) to be attached to their casualty
insurance policies which endorsement shall contain the following wording:
This insurance shall not be invalidated should the insured waive in writing
prior to a loss or any or all right of recovery against any party for loss
occurring to the property described herein.
11. LIABILITY INSURANCE - Tenant, at the sole cost and expense of Tenant,
shall maintain for the benefit of Landlord and Tenant, general liability
insurance protecting Landlord and Tenant against any claim or claims for damage
arising by reason of injury, death or damage occasioned in, upon or adjacent to
the Premises, such insurance to protect Landlord and Tenant jointly and
severally to the limit of $1,000,000.00 for injury to or death of any one (1) or
more persons by the same accident and to the limit of $2,000,000.00 for damage
to property of other persons. Each policy effecting such coverage shall
designate Landlord, Landlord's mortgagee, if any, and Tenant as insureds as
their respective interests may appear, and shall contain a clause that the
insurer will not cancel or modify the insurance coverage without first giving
Landlord a minimum of thirty (30) days' advance written notice by certified
mail. Further, each such policy shall be carried with a reputable insurance
company authorized to do business in North Carolina and approved by Landlord,
and a copy of each such policy or a certificate of insurance shall be provided
to Landlord together with evidence of the timely payment of all premiums. In the
event Tenant at any time shall fail to maintain such insurance or shall fail to
pay any and all premiums therefor, Landlord shall have the right and option to
effect such insurance and pay any and all premiums therefor; and, in the event
of any such payment, Tenant, on the rental date next succeeding the date on
which such payment shall have been made, shall pay to Landlord a sum equal to
the amount which was so paid for such insurance premiums, it being expressly
understood that Landlord shall have no obligation whatsoever hereunder to effect
such insurance or to make such premium payments to cure the default of Tenant.
<PAGE>
If Landlord's lender requires Landlord to impound insurance premiums on a
periodic basis during the term, Tenant, on notice from Landlord indicating such
requirement, shall pay to Landlord such sum toward its liability under this
paragraph and on such periodic basis as may be required by Landlord's lender.
12. OTHER INSURANCE - Tenant, at the sole cost and expense of Tenant, shall
maintain such other insurance as may be required by law or as Tenant may deem
necessary for the use and purposes of Tenant, including, if applicable, workers'
compensation insurance.
13. RESTRICTIVE COVENANTS - The Premises being leased are conveyed subject
to the restrictive covenants of record, if any, and Landlord and Tenant hereby
agree to abide by any and all restrictions, conditions, easements and covenants
contained in the aforesaid restrictive covenants.
14. USE - Tenant may use the Premises only for an optometric center and for
such other lawful purpose or purposes as Landlord from time to time may approve
in writing, such approval not to be withheld unreasonably.
Tenant at all times shall comply fully with all federal, state and local
laws, rules, regulations, orders and requirements relating to health, safety or
the environment, including without limitation those relating to ambient air,
surface and ground water, surface and subsurface soils and other natural
resources and those relating to the manufacture, processing, distribution, use,
treatment, storage, handling, transportation, release, disposal or importing and
exporting of hazardous substances, hazardous wastes, pollutants, contaminants,
toxic substances, asbestos, oil, other petroleum or chemical, biological or
radioactive substances, and shall not permit to exist on the Premises any
hazardous substance, hazardous waste, pollutant, contaminant, toxic substance,
asbestos, oil, other petroleum or chemical, biological or radioactive substance
which is subject to regulation under any such law, rule, regulation, order or
requirement or storage tank used for the storage thereof, whether above-ground
or underground, except such as may be consented to in writing by Landlord prior
thereto.
Tenant shall maintain the Premises in a clean, orderly and neat condition
at all times, and shall not permit, allow or cause the adoption or use of any
devices or practices on or about the Premises that would tend to detract from or
impair the dignity of the Premises or otherwise create a nuisance. Landlord
acknowledges and agrees that the Tenant's intended use of the Premises as
provided in this section does not in and of itself detract from or impair the
dignity of the Premises or otherwise create a nuisance. Further, Tenant shall
not permit, allow or cause any act or deed to be performed or any practice to be
adopted or followed on or about the Premises that shall cause or be likely to
cause injury or damage to any person or to the Premises.
Tenant shall hold harmless Landlord from and against any and all loss,
cost, claim, damage, liability, or expense, including reasonable attorney fees,
incurred by Landlord arising from any use of the Premises in violation of the
terms hereof or failure to maintain the Premises as herein provided, and the
obligations of Tenant hereunder shall survive the expiration or sooner
termination of this Lease.
15. PERMITS AND LICENSES - Tenant shall be responsible for obtaining and
maintaining
<PAGE>
all licenses, permits and governmental authorizations necessary or desirable for
Tenant's use of the Premises.
16. ASSIGNMENT AND SUBLETTING - Tenant shall not assign or sublet the
Premises or any portion thereof without Landlord's prior written approval, which
approval Landlord agrees not to withhold unreasonably, due consideration to be
given to the identify, character and financial stability of the proposed
assignee or sublessee and to the proposed use of Premises by such proposed
assignee or sublessee. In the event Tenant assigns or sublets the Premises or
any portion thereof, Tenant shall remain bound, obligated and liable to Landlord
for all payments due hereunder and for the performance of all covenants and
conditions of this Lease.
17. INVOLUNTARY ASSIGNMENT - No interest of Tenant in this Lease shall be
assignable by operation of law. Each of the following acts shall be considered
an involuntary assignment:
(a) If Tenant is or becomes bankrupt or insolvent, makes an assignment
for the benefit of creditors, or institutes a proceeding under the Bankruptcy
Act in which Tenant is the bankrupt; or, if Tenant is a partnership or consists
of more than one person or entity, if any partner of the partnership or other
person or entity is or becomes bankrupt or insolvent, or makes an assignment for
the benefit of creditors;
(b) If a writ of attachment or execution is levied on this Lease; and;
(c) If, in any proceeding or action to which Tenant is a party, a
receiver is appointed with authority to take possession of the Premises.
An involuntary assignment shall constitute a default by Tenant and Landlord
shall have the right to elect to terminate this Lease, in which case this Lease
shall not be treated as an asset of Tenant.
18. DAMAGE OR DESTRUCTION - If the Premises shall be so damaged or
destroyed by fire, the elements, or other casualty so as to render the Premises
unfit for tenancy for the use and purposes of Tenant as determined by Landlord,
Landlord shall have the option of terminating this Lease or abating the rent for
a reasonable period of time and restoring the Premises as nearly as possible to
the condition the same were in immediately prior to such damage or destruction.
In the event of any lesser damage or destruction, Landlord shall have the
obligation to repair, replace or restore the Premises or any portion thereof
following any such damage or destruction only to the extent of insurance
proceeds actually received. In no event shall the rent payable under the terms
of this Lease abate in whole or in part as a result of any such damage or
destruction.
19. CONDEMNATION - If the whole or such part of the Premises shall be
appropriated and taken by virtue of any condemnation proceeding for any public
or quasi-public use or purpose so as to render the remaining portion unfit for
tenancy for the uses and purposes of Tenant, then this Lease immediately shall
terminate on the date possession thereof shall be obtained by the condemning
authority and Landlord shall refund to Tenant any rent prepaid by Tenant
hereunder.
In the event of any lesser appropriation by any condemning authority,
effective the date possession of the Premises shall be acquired by the
condemning authority the rent payable hereunder shall be
<PAGE>
adjusted equitably on the basis of the effect that such taking shall have on
Tenant's reasonable use of the Premises. If the adjustment of rent cannot be
agreed upon by Landlord and Tenant, the matter shall be submitted and determined
by arbitration pursuant to the arbitration provisions of the North Carolina
General Statutes.
All damages awarded for the acquisition or condemnation of the Premises, or
any part thereof, shall become the sole and absolute property of Landlord,
regardless of whether such damages are awarded as compensation for the
diminution in value of the leasehold or for the loss of the fee. Tenant,
however, shall be entitled to that portion of the award, if any, that expressly
is stated to have been given to Tenant for the loss of business and the loss of
value to and the cost of removal of any stock, furniture, fixtures and equipment
owned by Tenant.
20. DEFAULT - In the event of failure by Tenant to pay any rent hereunder
within ten (10) days from when due or upon failure of Tenant to commence to cure
any other default of Tenant in any of the other terms or conditions of this
Lease to be observed or performed by Tenant within 30 days after notice thereof
and thereafter to proceed diligently to cure such default, Landlord, without
excluding any other rights and remedies that Landlord may have, shall have the
immediate right of re-entry and may remove all persons and property from the
Premises and such property may be removed and stored in a public warehouse or
elsewhere at the cost of and for the account of Tenant, all without resort to
legal process and without Landlord's being deemed guilty of trespass or becoming
liable for any loss or damage that may be occasioned thereby. If Landlord shall
elect to re-enter the Premises as herein provided or if Landlord shall take
possession of the Premises pursuant to legal proceedings, Landlord either may
terminate this Lease or from time to time without terminating this Lease may
make such alterations to and repairs of the Premises as Landlord may deem
necessary in order to relet the Premises, and may relet the Premises for such
term or terms and at such rent or rents and upon such other conditions and
provisions as Landlord may deem advisable. In the event of any such reletting or
relettings, all rents received by Landlord shall be applied: first, to the
payment of any indebtedness other than rent due hereunder from Tenant to
Landlord; second, to the payment of any cost or expense of such reletting,
including the expense of alterations and repairs; third, to the payment of rent
due and unpaid hereunder, and the residue, if any, to payment of future rent due
and unpaid hereunder. If any such reletting shall yield rent insufficient to pay
the rent due by Tenant hereunder for any period, Tenant shall be liable to
Landlord for the deficiency and shall pay same as it becomes due. No such
re-entry or taking of possession of the Premises by Landlord shall be construed
as an election to terminate this Lease unless a written notice of such intention
shall be given by Landlord to Tenant at the time of such re-entry.
Notwithstanding any such re-entry and reletting without termination, Landlord at
any time thereafter may elect to terminate this Lease for such previous breach.
In the event of any such termination, Landlord may recover from Tenant damages
incurred by reason of such breach, including attorney fees and other costs
involved in obtaining possession of the Premises and in enforcing the rights and
remedies of Landlord hereunder, together with the difference in value between
the
<PAGE>
rent provided hereunder for the remainder of the term and the reasonable rental
value of the Premises for the remainder of the term. The failure of Landlord to
seek redress for violation of, or to insist upon the strict performance of, any
covenant or condition of this Lease shall not prevent a subsequent act which
originally would have constituted a breach or violation of the terms hereof from
having all of the force and effect of an original violation. The receipt of rent
by Landlord with knowledge of the breach of any covenant or condition of this
Lease by Tenant shall not be deemed a waiver of such breach. Landlord and Tenant
agree that the written notice limitation as provided in this paragraph shall not
be applicable to any default that results in an emergency requiring prompt
action by Landlord.
21. ADDITIONAL REMEDIES - Landlord shall be entitled to enjoin any breach
by Tenant of any covenant or condition hereunder and may invoke any right or
remedy allowed by law or in equity or by statute or otherwise without being
restricted to those remedies provided for in this lease; and each right and
remedy provided for in this Lease shall be cumulative, and not alternative, and
may be exercised in addition to every other right or remedy provided for in this
Lease or now hereafter existing at law or in equity by any statute or otherwise,
and the exercise of any right or the pursuit of any remedy by Landlord shall not
preclude the simultaneous or later exercise or pursuit by Landlord of any other
right or remedy.
22. QUIET ENJOYMENT - Landlord warrants and represents to Tenant that
Landlord has full right and power to execute this Lease and that Tenant, upon
payment of the rent and performance of the terms and conditions contained in
this Lease, shall peaceably and quietly have, hold and enjoy the Premises during
the term of this Lease.
23. EXAMINATION - Tenant shall examine the Premises before taking
possession, and except as reflected in the Tenant's "Punch List" as described in
Section 2(C) above, the entry by Tenant into possession shall constitute
conclusive evidence that as of the date thereof the Premises were in good order
and satisfactory condition.
24. EXCULPATION AND INDEMNIFICATION - Landlord shall not be liable for and
Tenant shall indemnify and hold harmless Landlord from and against any and all
loss, cost, claim, damage or expense of any kind, including attorney's fees,
threatened against or incurred by Landlord and arising from any personal injury,
property damage or other matter of any kind arising out of Tenant's use or
occupancy of the Premises, including damage to Tenant or Tenant's property.
25. SECURITY DEPOSIT - None.
26. RIGHT OF ENTRY - Upon advance notice which is reasonable under the
circumstances, Landlord shall have the right to enter the Premises during all
reasonable hours in order to examine same and to insure that all maintenance,
repair or replacement required of Tenant hereunder is effected properly. Entry
hereunder by Landlord, Landlord's agents, servants, employees and invitees shall
not constitute an eviction or deprivation of any right conferred upon Tenant
hereunder.
<PAGE>
27. NOTICE - Any notice between Landlord and Tenant hereunder shall be in
writing and shall not be effective, any law or statute to the contrary
notwithstanding, unless the same shall be hand-delivered or forwarded by the
United States Postal Service, registered or certified, with return receipt
requested, to the party being notified at the address hereinafter specified.
Any such notice given by United States Postal Service shall be deemed given
and sufficient upon receipt, refusal or nondelivery after five days if addressed
to:
Landlord: CS Investments, Inc.
104 Headlands Lane
Cary, NC 27511
Tenant: Optometric Eye Care Center, PA
720 S.E. Maynard Road
Cary, NC 27511
Consolidated Eye Care, Inc.
112 Zebulon Court
Rocky Mount, NC 27804
The addresses hereinabove set forth may be changed from time to time by notice
as provided herein. Notice by Landlord to one Tenant shall be deemed to be
notice to be both Tenants, and each Tenant hereby irrevocably appoints the other
Tenant as an agent for the Tenant for the purpose of accepting notice under this
Lease.
28 SUBORDINATION - This Lease is subject to and subordinate to all security
interests, liens, mortgages and deeds of trust which now or hereafter may affect
the Premises and to all renewals, modifications, consolidations, replacements
and extensions thereof. Tenant shall execute promptly any certificate or other
form of instrument in confirmation of such subordination that Landlord from time
to time may request. Landlord shall obtain a subordination and attornment
agreement from each such holder of a security interest, mortgage or deed of
trust acknowledging the Tenant's rights under this Lease.
29. LIABILITY OF TENANTS - Each Tenant under this Lease shall be jointly
and severally liable for all obligations of the Tenant under this Lease.
Landlord shall have the option to pursue any remedy and compromise any liability
of Tenant as against either or both Tenants without prejudice of its rights to
pursue any remedy and compromise any liability against the other Tenant. This
Lease does not address any matter regarding the rights and obligations between
the Tenants.
30. IDENTITY OF INTERESTS - The execution of this Lease or the performance
of any act
<PAGE>
or acts pursuant to the provisions hereof shall not be deemed to have the effect
of creating between Landlord and Tenant any relationship of principal and agent,
partnership, or relationship other than that of Landlord and Tenant.
31. SEVERABILITY - In the event that any term or condition of this Lease or
the application thereof to any circumstance or situation shall be invalid or
unenforceable in whole or in part, the remainder thereof and the application of
said term or condition to any other circumstance or situation shall not be
affected thereby, and each term and condition of this Lease shall be valid and
enforceable to the full extent permitted by law.
32. PARAGRAPH HEADINGS - The paragraph headings used in this Lease are for
convenience of reference only and shall not be considered terms of this Lease.
33. GRAMMATICAL USAGE - Throughout this Lease, references to the neuter
gender shall be deemed to include the masculine and feminine, the singular the
plural, and the plural the singular as indicated by the context in which used.
34. GOVERNING LAW - This Lease shall be performed in the State of North
Carolina and Landlord and Tenant agree, notwithstanding the principles of
conflicts of law, that the internal laws of the State of North Carolina shall
govern and control the validity, interpretation, performance and enforcement of
this Lease.
35. MANDATORY ARBITRATION - Any controversy or claim between or among the
Landlord, Tenant and Guarantor, in whatever capacity, including, but not limited
to, those arising out of or relating to this Lease or any related agreements or
instruments and any claim based on or arising from an alleged tort, shall be
determined by binding arbitration in accordance with the Federal Arbitration Act
(or if not applicable, the applicable state law), the Rules of Practice and
Procedure for Arbitration of Commercial Disputes of Judicial Arbitration and
Mediation Services, Inc. (J.A.M.S.), and as provided herein. In the event of any
inconsistency, the provisions contained herein shall control. Judgment upon any
arbitration award may be entered in any court having jurisdiction. Any party to
this Agreement may bring an action, including a summary or expedited proceeding,
to compel arbitration of any controversy or claim to which this Agreement
applies in any court having jurisdiction over such action.
The arbitration shall be conducted in Wake County, North Carolina and
administered by J.A.M.S. who will appoint an arbitrator; if J.A.M.S. is unable
or legally precluded from administering the arbitration, then the American
Arbitration Association will serve. All arbitration hearings will be commenced
within (90) days of the demand for arbitration. The arbitrator shall only, upon
a showing of cause, be permitted to extend the commencement of such hearing for
up to an additional sixty (60) days.
Nothing in this Lease shall be deemed to (i) limit the applicability of any
otherwise applicable statutes of limitation or repose and any waivers contained
in this Lease; or (ii) limit the right of any party (A) to exercise self help
remedies (B) to obtain from a court provisional or ancillary
<PAGE>
remedies such as (but not limited to) injunctive relief. Any party hereto may
exercise such self help rights or obtain such provisional or ancillary remedies
before, during or after the pendency of any arbitration proceeding brought
pursuant to this Lease. Neither the exercise of self help remedies nor the
institution or maintenance of an action for provisional or ancillary remedies
shall constitute a waiver of the right of any party, including the claimant in
any such action, to arbitrate the merits of the controversy or claim occasioning
resort to such remedies.
36. ENTIRE AGREEMENT - This Lease contains the entire agreement and
understanding between Landlord and Tenant, and there are no oral understandings,
terms or conditions, and neither Landlord nor Tenant has relied upon any
representation, express or implied, not contained herein. All prior
negotiations, understandings, terms and conditions are merged in this Lease.
37. MODIFICATION - This Lease may not be changed or modified orally, but
only by an agreement in writing signed by the party against whom enforcement or
waiver, change, modification or discharge is sought.
38. DUPLICATE ORIGINALS - This Lease is executed in duplicate originals;
and both Landlord and Tenant acknowledge receipt of one such original, agree
that the duplicate originals hereof are identical, and further agree that either
original shall be admissible in any proceeding, legal or otherwise, without the
production of the other such original.
39. MEMORANDUM OF LEASE - Either Landlord or Tenant may cause this Lease to
be recorded, and a memorandum of lease in the usual short form shall be utilized
for recording.
In the event of termination of this Lease prior to the date of termination
indicated in the memorandum of lease, Tenant shall make, execute and deliver to
Landlord immediately upon request therefor an instrument in proper form for
recordation in the office where the aforesaid memorandum of lease is recorded
evidencing such termination. In the even that Tenant shall not make, execute and
deliver such instrument to Landlord, Tenant shall be responsible for and hereby
agrees to pay to Landlord the reasonable costs and attorney fees incurred by
Landlord in taking such legal action as Landlord may determine necessary to
obtain confirmation of record by judicial action or otherwise of the termination
of such lease as well as in enforcing collection of such costs and fees.
40. ADDITIONAL INSTRUMENTS - Landlord and Tenant shall execute and deliver
any instruments necessary to carry out any agreement, term, condition or
assurance in this Lease whenever the occasion shall arise and the request for
such instrument shall be made.
IN TESTIMONY WHEREOF, Landlord and Tenant have executed this instrument
under seal, all effective the day and year first above written.
<PAGE>
LANDLORD: CS INVESTMENTS, INC.
By: /s/ Don R. Cloninger
--------------------------------
Name: Don R. Cloninger
------------------------------
Title: President
Attest:
/s/ Stuart L. Samuels
- -------------------------------------
Name: Stuart L. Samuels
--------------------------------
Title: Secretary
-------------------------------
[CORPORATE SEAL]
STATE OF NORTH CAROLINA
COUNTY OF WAKE
I, Judy M. Crumpler, a Notary Public in and for said County and State, do
hereby certify that Stuart L. Samuels personally came before me this day and
acknowledged that he is _________________ Secretary of CS Investments, Inc., a
corporation, and that by authority duly given and as the act of the corporation,
the foregoing instrument was signed in its name by its _________________
President, sealed with its corporate seal, and attested by herself/himself as
its ___________ Secretary.
WITNESS my hand and notarial seal, this the 12th day of June, 1996.
/s/ Judy M. Crumpler
-------------------------------
Notary Public
My Commission Expires
March 22, 1997
- --------------------------
<PAGE>
TENANT: OPTOMETRIC EYE CARE CENTER, P.A.
By: /s/ D. Blair Harrold
--------------------------------------
Name: D. Blair Harrold
------------------------------------
Title: President
-----------------------------------
Attest:
/s/ Allan Barker
- --------------------------------
Name: Allan Barker
---------------------------
Title: Secretary, Officer
--------------------------
[CORPORATE SEAL]
STATE OF NORTH CAROLINA
COUNTY OF WAKE
I, Judy M. Crumpler, a Notary Public in and for said County and State, do
hereby certify that Allan Barker personally came before me this day and
acknowledged that he is _________________ Secretary of Optometric Eye Care
Center, P.A. a corporation, and that by authority duly given and as the act of
the corporation, the foregoing instrument was signed in its name by its
_________________ President, sealed with its corporate seal, and attested by
herself/himself as its ___________ Secretary.
WITNESS my hand and notarial seal, this the 12th day of June, 1996.
/s/ Judy M. Crumpler
------------------------------
Notary Public
My Commission Expires
March 22, 1997
- --------------------------
[OFFICIAL SEAL]
<PAGE>
TENANT: CONSOLIDATED EYE CARE, INC.
By: /s/ Allan L. Barker
-----------------------------------
Name: Allan L. Barker
---------------------------------
Title: President, CEO
--------------------------------
Attest:
/s/ D. Blair Harrold
- --------------------------------
Name: D. Blair Harrold
---------------------------
Title: Secretary
--------------------------
[CORPORATE SEAL]
STATE OF NORTH CAROLINA
COUNTY OF WAKE
I, Judy M. Crumpler, a Notary Public in and for said County and State, do
hereby certify that D. Blair Harrold personally came before me this day and
acknowledged that he is _________________ Secretary of Consolidated Eye Care,
Inc. a corporation, and that by authority duly given and as the act of the
corporation, the foregoing instrument was signed in its name by its
_________________ President, sealed with its corporate seal, and attested by
herself/himself as its ___________ Secretary.
WITNESS my hand and notarial seal, this the 12th day of June, 1996.
/s/ Judy M. Crumpler
-----------------------------
Notary Public
My Commission Expires
March 22, 1997
- --------------------------
[OFFICIAL SEAL]
<PAGE>
EXHIBIT 10.44
STATE OF NORTH CAROLINA
COUNTY OF JOHNSTON
THIS LEASE, made and entered into as of the 31st day of August, 1994, by
and between CHARLES S ZWERLING and wife, JEAN S. ZWERLING ("Landlord") and
OPTOMETRIC EYE CARE, P.A. ("Tenant").
SECTION ONE
DEMISE, DECRIPTION, AND USE OF PREMISES
In consideration of the agreements and covenants hereinafter set forth,
Landlord does hereby demise and lease unto the Tenant, a certain parcel of land,
together with the buildings and other improvements situated thereon (hereinafter
referred to as "Premises") located at 1201 Brightleaf (Selma) Road in the City
of Smithfield, Johnston County, North Carolina, and presently occupied by Dr.
Charles S. Zwerling and being the office building previously owned by Dr.
William C. Philbrick, said property being more particularly described on Exhibit
A attached hereto.
SECTION TWO
INITIAL TERM AND RENEWAL TERMS
The term of this lease shall be for five years, commencing on September 1,
1994 and ending on August 31, 1999.
Landlord grants to Tenant the right and option to renew this lease for an
additional period of five years beginning September 1, 1999 and ending August
21, 2004, subject to all the same terms and conditions of this lease except an
adjustment of rent. If the first option is exercised, Tenant shall have a
further right and option to new for a second renewal term of five years
beginning September 1, 2004 and ending August 21, 2009, subject to all the same
terms and conditions except the adjustment of rent. Each option must be
exercised by the Tenant giving the Landlord a notice, written or verbal, at
least 90 days prior to the end of the preceding term. Tenant shall in no event
have the right to renew unless Tenant shall have performed all of its
obligations and shall not be in default of any of the terms of this lease.
SECTION THREE
RENT
As rental for the Premises, the Tenant shall pay to the Landlord, without
notice or demand, the sum of $4,400 per month, paid on or before the 5th day of
each calendar month, in advance.
In the event the first option to renew is exercised, the rental rate shall
adjust to $4,800. In the event the second option to renew is exercised, the
rental rate shall adjust to $5,200 per month.
1
<PAGE>
SECTION FOUR
TAXES AND ASSESSMENTS
Landlord shall pay, as such shall become due and payable, all taxes and
assessments and other general, special, ordinary, and extraordinary governmental
charges which are assessed, levied, or charged against or imposed upon the
Premises. Tenant shall pay all taxes assessed on any equipment or contents
contained on the Premises.
SECTION FIVE
REPAIRS AND DESTRUCTION OF IMPROVEMENTS
(a) Tenant shall, throughout the term of this lease, at its own cost, and
without any expense to Landlord, keep and maintain the interior of the
Premises, in good, sanitary, and neat order, condition and repair,
ordinary wear and tear excepted. Landlord shall keep and maintain the
exterior of the Premises, including roof, windows, doors, sidewalks,
awnings, and heating and air conditioning systems ("HVAC") in neat
order, condition and repair. Tenant shall pay the premiums on
maintenance contract for the alarm system and HVAC similar to that
currently carried. Landlord will pay for all repairs, including parts,
not paid for by the maintenance contracts.
(b) In the event of the total destruction of the Premises, either party
shall have the option to terminate this Lease. In the event of the
partial destruction of the Premises, the Landlord shall at its own
expense promptly repair or restore same to the condition as good or
better than that which existed prior to such damage or destruction.
(c) In the event of the partial destruction of the Premises rendering the
Premises solely or partially untenantable, the rent shall abate
proportionately until the repair or restoration of such damage. In the
event the Landlord is unable to furnish (within ten (10) days of the
damage) to the Tenant a commitment that the Landlord or his contractor
will be able to restore or repair the premises to the prior condition
within ninety (90) days after the casualty, the Tenant may by written
notice within five (5) days immediately following such ten (10) day
period, terminate this Lease.
(d) The Tenant shall be entitled to place, at Tenant's expense, signage
about the Premises; provided, said signage shall be in accordance with
appropriate local sign ordinances. All signage placed upon the Premises
by the Tenant shall be removed by the Tenant upon expiration of the
Lease.
2
<PAGE>
SECTION SIX
UTILITIES
Tenant shall fully and promptly pay for all water, gas, heat, light, power,
telephone service, and other public utilities of every kind furnished to the
Premises.
SECTION SEVEN
INSURANCE
(a) Landlord shall, at all times during the term of this Lease and any
renewal term and at the Landlord's sole expense, keep all improvements
which are now or hereafter a part of the Premises insured for the
benefit of the Landlord against loss or damage by fire and extended
coverage hazards.
(b) Tenant shall maintain in effect at its sole expense throughout the terms
of this Lease and any renewal general public liability insurance
covering the Premises and its appurtenances in an amount not less than
$500,000 per occurrence, without any right of subrogation against
Landlord.
(c) All insurance policies shall be issued by insurers of recognized
responsibility authorized to do business in North Carolina. All policies
which shall contain provisions requiring ten days' written notice to
Landlord and Tenant of cancellation. All policies insuring Landlord
shall provide that the Tenant is an additional party insured, and all
policies insuring Tenant shall provide that the Landlord is an
additional party insured.
SECTION EIGHT
WARRANTIES OF TITLE AND QUIET POSSESSION
Landlord covenants that it is seized of the Premises in fee simple and has
full right to make this Lease and that Tenant shall have quiet and peaceable
possession of the Premises.
SECTION NINE
LANDLORD'S RIGHT TO ENTRY
Tenant shall permit Landlord and its agents to enter into and upon the
Premises at all reasonable times for the purpose of inspecting the same, or for
the purpose of posting notices of non-responsibility for alterations, additions,
or repairs, without any rebate of rent and without any liability to Tenant for
any loss of occupation or quiet enjoyment of the Premises and shall permit
Landlord and its agents at any time within ninety (90) days prior to the
expiration of this Lease, to place on the Premises any usual or ordinary "To
Lease" signs and exhibits the Premises to prospective tenants at reasonable
hours.
3
<PAGE>
SECTION TEN
USES PROHIBITED
Tenant shall not use or permit the Premises to be used for any purpose
other than the practice of optometry and primary eye care as normally rendered
in the practice of optometry, so long as the Landlord is maintaining an office
on the Premises for the active practice of ophthalmology as provided in Section
Nineteen.
Tenant shall comply with all applicable laws affecting the Premises, the
breach of which might result in any penalty on Landlord or forfeiture of
Landlord's title to the Premises. Tenant shall not commit, or suffer to be
committed, any waste or nuisance on the Premises.
SECTION ELEVEN
SUBLETTING AND ASSIGNMENT
Tenant may not sublet the Premises in whole or in part without the
Landlord's prior written consent, which consent may not be unreasonable withheld
except that Landlord may unreasonably prohibit the subleasing for the purposes
of practicing ophthalmology so long as the Landlord is maintaining an office on
the Premises for the active practice of ophthalmology as provided in Section
Nineteen. The making of any such sublease shall not release Tenant from or
otherwise affect in any manner any of Tenant's obligations hereunder. Any such
subleasing or assignment without such consent shall be void and shall, at the
option of the Landlord, terminate this Lease. Neither this Lease not the
leasehold estate of Tenant nor any interest of Tenant hereunder in the Premises
shall be subject to involuntary assignment, transfer, or sale, or to assignment,
transfer, or sale by operation of law in any manner whatsoever, and any such
attempted involuntary assignment, transfer, or sale shall be void and of no
effect and shall, at the option of Landlord, terminate this Lease.
SECTION TWELVE
ABANDONMENT OF PREMISES
Tenant shall not vacate or abandon the Premises at any time during the term
or renewal hereof; but if Tenant shall abandon, vacate or surrender the Premises
or be dispossessed by process of the law, or otherwise, any personal property
belonging to Tenant and left on the Premises shall be deemed to be abandoned, at
the option of Landlord.
SECTION THIRTEEN
LIENS
Tenant shall keep all of the Premises free and clear of any and all
mechanics', materialmen's, and other liens arising out of or in connection with
work or labor done, services performed, or materials or
4
<PAGE>
appliances used or furnished for or in connection with any operations of Tenant,
any alterations, improvement, or repairs or additions which Tenant may make or
permit or cause to be made, or any work or construction, by, for, or permitted
by Tenant on or about the Premises, or any obligation of any kind incurred by
Tenant, and at all times promptly and fully to pay and discharge any and all
claims on which any such lien may or could be based, and to indemnify Landlord
against all such liens and claims of liens and suits or other proceedings
pertaining thereto.
SECTION FOURTEEN
CONDEMATION
In the event that all or such a substantial portion of the Premises as
would impair the ability of Tenant to transact its business are taken in a
condemnation proceeding or by exercise of any right of eminent domain or are
voluntarily conveyed in lieu of such taking, the Tenant may, at its option,
terminate this lease on the date of such taking. If the taking does not
substantially affect the Premises so as to impair the ability of the Tenant to
continue its business, this lease shall continue in full force and effect.
SECTION FIFTEEN
INDEMNIFICATION OF LESSOR
Landlord shall not be liable for any loss, injury, death, or damage to
persons or property which at any time may be suffered or sustained by Tenant or
by any person whosoever may at any time be using or occupying or visiting the
Premises or be in, on, or about the same, whether such loss, injury, death, or
damage shall be caused by or in any way result from or arise out of any act,
omission, or negligence of Tenant or any occupant, subtenant, visitor, or user
of any portion of the Premises, and Tenant shall indemnify and hold harmless
Landlord against all claims, liability, loss, or damage whatsoever on account of
any such loss, injury, death or damage excepting loss, injury, death, or damage
caused by the act or omissions or negligence of the Landlord, his agents or
invitees.
SECTION SIXTEEN
ATTORNEY'S FEES
If any action at law or in equity shall be brought to recover any rent
under this lease, or for or on account of any breach of, or to enforce or
interpret any of the covenants, terms, or conditions of this lease, or for the
recovery of the possession of the Premises, the prevailing party shall be
entitled to recover from the other party as part of the prevailing party's costs
reasonable attorney's fees, the amount of which shall be fixed by the court and
shall be made a part of any judgement or decree rendered.
5
<PAGE>
SECTION SEVENTEEN
REDELIVERY OF PREMISES
Tenant shall pay the rent and all other sums required to be paid by Tenant
hereunder in the amounts, at the times, and in the manner herein provided, and
shall keep and perform all the terms and conditions hereof on its part to be
kept and performed, and, at the expiration or sooner termination of this lease,
peaceably and quietly quit and surrender to Landlord the Premises in good order
and condition subject to the other provisions of this lease. In the event of the
non-performance by Tenant of any of the covenants of Tenant undertaken herein,
this lease may be terminated as herein provided.
SECTION EIGHTEEN
PROHIBITED OF INVOLUNTARY ASSIGNMENT: EFFECT OF BANKRUPTCY OR INSOLVENCY
(a) Neither this lease nor the leasehold estate of Tenant nor any interest
of Tenant hereunder in the Premises or in the building shall be subject
to involuntary assignment, transfer, or sale, or to assignment,
transfer, or sale by operation of law in any manner whatsoever and any
such attempt at involuntary assignment, transfer or sale shall be void
and of no effect.
(b) Tenant agrees that in the event any proceedings under the Bankruptcy Act
are commenced by or against Tenant, and, if against Tenant, such
proceedings shall not be dismissed before either an adjudication in
bankruptcy or the confirmation of a plan of reorganization and or in the
event Tenant is adjudged insolvent or makes an assignment for the
benefit of its creditors, or if a receiver is appointed for Tenant and
such receiver is not discharged within a period of thirty days after his
appointment, any such event or any involuntary assignment shall be
deemed to constitute a breach of this lease by Tenant and shall, at the
election of Landlord, but not otherwise, without notice or entry or
other action of Landlord terminate this Lease and also all rights of
Tenant under this lease and in and to the Premises and also all rights
of any and all persons claiming under the Tenant.
SECTION NINETEEN
USE BY LANDLORD
Landlord shall have the right to use a designated office on the Premises
for use as a medical office to see ophthalmology patients for one-half day each
week during regular business hours. The day of the week shall be by mutual
agreement of Landlord and Tenant with reasonable consideration and coordination
of the business needs and schedules of Landlord and Tenant. For such use,
Landlord shall pay to Tenant the sum of $180 for each one-half day actually used
each week for the initial term and first renewal term. During the second renewal
tern, the rental shall be $200 per one-half day. Tenant shall provide all
6
<PAGE>
janitorial services, utilities, receptionist, use of all equipment on the
Premises necessary to provide optical eye care, and local telephone service for
the benefit of Landlord during such times. Tenant shall have no duty to buy any
new ophthalmology equipment.
SECTION TWENTY
NOTICES
All notices, demands, or other writings in this lease provided to be given or
made or sent, or which may be given or made or sent, by either party hereto to
the other, shall be deemed to have been fully given or made or sent when made in
writing and deposited in the United States mail, registered and postage prepaid,
and addressed as follows:
TO LANDLORD: Charles S. Zwerling and Jean S. Zwerling
2709 Medical Office Place
Goldsboro, N.C. 27534
TO TENANT: Optometric Eye Care, P.A.
P.O. Box 7189
Rocky Mount, N.C. 27802
Attn: Samuel Petteway
The address to which any notice, demand, or other writing may be given or
made or sent to any party as above provided may be changed by written notice
given by such party as above provided.
SECTION TWENTY-ONE
DEFAULT
If Tenant shall fail to pay the rent or fail to cure any breach of any
other covenant for ten days after having been notified by Landlord, or
should Tenant be adjudged a bankrupt or make assignment for benefit of
creditors, Tenant shall be deemed in default of this Lease, and Landlord shall
be entitled to terminate this Lease.
SECTION TWENTY-TWO
COVENANT NOT-TO-COMPETE
The parties hereto acknowledge that prior to the execution of this Lease,
the parties entered into a certain Optometry Practice Purchase Agreement
("Purchase Agrement") wherein the Landlord agreed for a term of five years not
to compete with the optometry practice purchased by Tenant under said Purchase
Agreement, which is hereby incorporated by reference. It is expressly agreed by
the Tenant that in the event the Tenant shall abandon the Premises during the
initial term of this Lease, or the Tenant shall during the initial term be held
in default resulting in a termination of the Lease, then in such event, the
aforesaid covenant not-to-compete in the Purchase Agreement shall no longer be
of any force or effect.
7
<PAGE>
It is further agreed that after the initial term, and in the event the
Tenant shall renew the Lease and as an inducement to said renewal, the Landlord
shall not during such renewal term on his own account, or directly or
indirectly, on the account of any other entity, engage in or have a financial
interest in "primary eye care" business (as defined in the Purchase Agreement)
in competition with Tenant from a located situation within a ten mile radius of
the municipal city limits of the Town of Smithfield, North Carolina.
SECTION TWENTY-THREE
RIGHT OF PURCHASE
In the event that during the initial or renewal term of this Lease,
Landlord desires to sell the Premises to any person other than the Tenant,
Landlord shall give Tenant notice, written or verbal, of such intent. Tenant
shall have the option for a period of ten days thereafter to elect to
purchase the Premises for its fair market value, cash at closing. Upon the
receipt of such election, the parties will have the Premises appraised by an MAI
appraiser mutually agreeable to both Landlord and Tenant. The appraised price
determined by such appraiser shall be binding upon both parties, and both
parties agree to buy or sell, as the case may be, in accordance with such
appraised price. Closing shall occur with ten days of the delivery of such
appraisal.
SECTION TWENTY-FOUR
MEMORANDUM OF LEASE
The parties will at any time at the request of the other promptly execute
duplicate originals of any instrument constituting a memorandum of lease for
recording purposes.
SECTION TWENTY-FIVE
APPLICABLE LAW
This Lease is being executed and intended to be performed in the State of
North Carolina and shall be construed and enforced in accordance with the law of
the State of North Carolina despite that any party, successor or assign shall
now or in the future be a resident of any other state.
SECTION TWENTY-SIX
ENTIRE AGREEMENT
This Lease expresses the entire understanding and agreement between
Landlord and Tenant. This Lease cannot be modified, changed, discharged or
terminated expect by a writing signed by the Landlord and Tenant. Time is of the
essence of this Lease, and of each and every covenant, term, condition and
provision hereof. This Lease and all the covenants, conditions and provisions
herein shall be binding upon and inure to the benefit of the parties hereto and
their respective heirs, personal representatives, executors, administrators,
successors and assigns.
8
<PAGE>
IN WITNESS WHEROF, the parties have executed this Lease on the day and year
first written.
LANDLORD:
By: /s/ Charles S. Zwerling (SEAL)
-----------------------
Charles S. Zwerling
By: /s/ Jean S. Zwerling (SEAL)
-----------------------
Jean S. Zwerling
TENANT:
OPTOMETRIC EYE CARE CENTER, P.A.
By: /s/ D. Blair Harrold
------------------------------
D. Blair Harrold
(Corporate Seal)
ATTEST:
/s/ Allan Barker
- ---------------------------
Secretary
9
<PAGE>
STATE OF NORTH CAROLINA
COUNTY OF ________________
This is to certify that CHARLES S. ZWERLING and wife, JEAN S. ZWERLING
personally appeared before me this 31st day of August, 1994, and acknowledged
the due execution of the foregoing Lease.
WITNESS my hand and Notarial Seal.
/s/
------------------------------------
Notary Public
My commission expires:
July 7, 1998
- --------------------------------
STATE OF NORTH CAROLINA
COUNTY OF ________________________
I, ___________________________________, a Notary Public of
___________________ County, North Carolina, certify that
____________________________ personally came before me this day and acknowledged
that he is Secretary of OPTOMETRIC EYE CARE, P.A., a professional corporation,
and that by authority duly given and as act of the corporation, the foregoing
instrument was signed in its name by its President, sealed with its corporate
seal, and attested by himself as its Secretary.
WITNESS my hand and Notarial Seal.
------------------------------------
Notary Public
My commission expires:
- -------------------------------
10
<PAGE>
Prepared by and return to: T. Stewart Gibson, Esquire
Battle, Winslow, Scott & Wiley, P.A.
Post Office Box 7100
Rocky Mount, NC 27804-0100
STATE OF NORTH CAROLINA
MEMORANDUM OF LEASE
COUNTY OF UNION
THIS MEMORANDUM OF LEASE effective as of this 2nd day of January, 1995,
by and between JOHN W. HEARN, BETTY HEARN, AND LILIAN HEARN (hereinafter
collectively referred to as "LANDLORD") and OPTOMETRIC EYE CARE CENTER, P.A., a
North Carolina professional corporation with its principal offices in Rocky
Mount, North Carolina (herein "TENANT").
W I T N E S S E T H:
1. PROPERTY. Landlord Leased to Tenant that certain real property
located at Suite A, 1007 Skyway Drive in the town of Monroe, Union County, North
Carolina, being a part of that property more particularly described on Exhibit A
attached hereto and hereby incorporated by reference.
2. TERM. The term of this Lease is seven (7) years commencing on
January 2, 1995 and ending ion December 31, 2001, with two (2) successive
renewal terms of five (5) years each, the second renewal term ending December
31, 2011.
3. LEASE. This Lease is subject to the more specific Lease Agreement
regarding the above described property executed by Landlord and Tenant on
January 2, 1995, the provisions of which are hereby incorporated in this
memorandum by reference.
4. OPTION. There exists a right of first refusal option to purchase the
property upon which is situate the leased premises, said option in favor of the
Tenant expires upon the termination of the Lease.
This memorandum does not completely summarize the said Lease Agreement
and the provisions of the latter shall control both interpretations and conflict
between the two writings.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have cause this instrument to be
executed in the manner provided by law.
/s/ John W. Hearn (SEAL)
------------------------------
John W. Hearn
/s/ Betty Hearn (SEAL)
------------------------------
Betty Hearn
/s/ Lillie Hearn (SEAL)
------------------------------
Lillie Hearn
OPTOMETRIC EYE CARE CENTER, P.A.
By: for D. Blair Harrold /s/ Sam Petteway
-------------------------------------
President
ATTEST:
/s/ Allan Barker
------------------------
Secretary
(CORPORATE SEAL)
NORTH CAROLINA
Union COUNTY
I, Emma H. Surratt, a Notary Public for said County and State, do hereby
certify that JOHN W. HEARN personally appeared before me this day and
acknowledged the due execution of the foregoing instrument.
Witness my hand and official stamp / seal, this the 2nd day of January,
1995.
(OFFICIAL STAMP / SEAL) /s/ Emma H. Surratt
------------------------------------
Notary Public
My Commission Expires: 8-9-97
<PAGE>
NORTH CAROLINA
Union COUNTY
I, Emma H. Surratt, a Notary Public for said County and State, do hereby
certify that BETTY HEARN personally appeared before me this day and acknowledged
the due execution of the foregoing instrument.
Witness my hand and official stamp / seal, this the 2nd day of
January, 1995.
(OFFICIAL STAMP / SEAL) /s/ Emma H. Surratt
------------------------------------
Notary Public
My Commission Expires:8-9-97
NORTH CAROLINA
Union COUNTY
I, Emma H. Surratt, a Notary Public for said County and State, do hereby
certify that LILLIE HEARN personally appeared before me this day and
acknowledged the due execution of the foregoing instrument.
Witness my hand and official stamp / seal, this the 2nd day of January,
1995.
(OFFICIAL STAMP / SEAL) /s/ Emma H. Surratt
------------------------------------
Notary Public
My Commission Expires:8-9-97
NORTH CAROLINA
Union COUNTY
I, Emma H. Surratt, a Notary Public for said County and state, certify that
Allan Barker personally came before me this day and acknowledged that he is
Secretary of OPTOMETRIC EYE CARE CENTER, P.A., a corporation, and that by
authority duly given and as the act of the corporation, the foregoing instrument
was signed in its name by its President, sealed with its corporate seal, and
attested by self as its Secretary.
Witness my hand and official stamp / seal, this the 2nd day of January,
1995.
(OFFICIAL STAMP/ SEAL) /s/ Emma H. Surratt
------------------------------------
Notary Public
My Commission Expires:8-9-97
<PAGE>
NORTH CAROLINA - Union County
The foregoing certificate(s) of Emma H. Surratt, Notary Public of Union
County, North Carolina is (are) certified to be correct. This instrument was
presented for registration and recorded in this office at Book 759 Page 286 this
16th day of January, 1995 at 12:25 o'clock P.M.
JUDY G. PRICE, REGISTER OF DEEDS By: /s/Bonnie G. Stewart Asst/Deputy
<PAGE>
EXHIBIT A
NORTH CAROLINA
LEASE AGREEMENT
(Triple Net)
COUNTY OF UNION
THIS LEASE AGREEMENT made and entered in this 2nd day of January, 1995 by
and between JOHN W. HEARN, BETTY HEARN AND LILIAN HEARN, North Carolina
residents hereinafter collectively referred to as "LANDLORD" and OPTOMETRIC EYE
CARE CENTER, P.A., a professional corporation with its principal office in Rocky
Mount, North Carolina, hereinafter called "TENANT".
W I T N E S S E T H :
IN CONSIDERATION of the rentals hereinafter reserved and the covenants and
conditions herein contained, LANDLORD has granted, demised, leased and let, and
by these presents does grant, demise, lease, and let unto TENANT, and TENANT
takes and hires from LANDLORD, the Premises, more particularly described on the
Lease Schedule initialed by the parties and attached hereto as Exhibit A and
incorporated herein,
TO HAVE AND HOLD, the Premises unto TENANT, upon the following terms and
conditions:
TERM OF LEASE
1.1 Initial Term. The initial term of this lease shall be as set forth on
the Lease Schedule attached as Exhibit A hereto unless sooner terminated as
herein provided.
1.2 Renewal.
(a) First Renewal Term. Provided, the TENANT is not in default under
any of the terms, covenants and conditions of this lease at the end of the
initial term and provided further that TENANT shall give LANDLORD at least
sixty (60) days written notice prior to the expiration of the initial term
of intent to extend, TENANT shall have the right (if designated on the
Lease Schedule attached as Exhibit A) to extend the term of this lease,
provided that the rent for such renewal term, if any, shall be in
accordance with the provisions of paragraph 2.2 of this lease. Said renewal
term shall be referred to herein as the "First Renewal Term".
(b) Second renewal Term. Provided, the TENANT is not in default under
any of the terms, covenants and conditions of this lease at the end of the
First Renewal Term and provided further that TENANT shall give LANDLORD at
least sixty (60) days written notice prior to the expiration of the First
Renewal Term of intent to extend, TENANT shall have the right (if
designated on the Lease Schedule attached as Exhibit A) to extend the term
of this lease, provided that the rent for such additional renewal term, if
any, shall be in accordance with the provisions of paragraph 2.2 of this
lease. Said additional renewal term shall be referred to herein as the
"Second Renewal Term".
<PAGE>
1.3 Expiration / Termination. The TENANT will deliver and surrender to the
LANDLORD possession of the Premises upon expiration or termination of this
lease, in as good condition and repair as the same shall be at the commencement
of the lease.
RENTAL
2.1 Initial Term. TENANT shall pay LANDLORD as rent (herein "Base Rent")
during the initial term the sum set forth in the Lease Schedule attached as
Exhibit A. Except as provided herein, such rent shall be payable at LANDLORD's
address for notice as provided hereinbelow, in advance, without demand, in equal
monthly installments on the first day of each and every month during the initial
term of this lease.
2.2 Renewal Rent. During the renewal term(s), if any, the TENANT shall pay
as rent (herein "Renewal Rent") the sum set forth in the Lease Schedule attached
as Exhibit A, said Renewal Rent payable in monthly installments.
All payments of rent during any renewal term shall be due as of the first day of
each month.
2.3 Past Due Rent. In the event the TENANT's rent due hereunder is not paid
to the LANDLORD by the TENANT within ten (10) days of the due date, TENANT
agrees to pay LANDLORD a late charge of four percent (4%) of the amount due. The
TENANT further agrees to pay LANDLORD any cost incurred by LANDLORD in effecting
the collection of any past due amounts, including but not limited to attorney's
fees.
2.4 Upfitting by Tenant. Upon delivery of possession of the Premises to the
TENANT, TENANT at its cost shall promptly proceed to install such trade
fixtures, signage and surfacing lab equipment as specified in Schedule 2.4
attached hereto, and to perform such other work as is necessary or appropriate
to prepare the Premises for the opening of the TENANT's business. The TENANT
will cause all such work to be with materials of good quality and in a good and
workmanlike manner, and in strict conformity with the plans and specifications
set forth in Schedule 2.4 which have been approved and initialed by the LANDLORD
and TENANT. TENANT's contractors and subcontractors shall provide lien waivers
to LANDLORD at LANDLORD's request.
USE OF PREMISES
3.1 Use. TENANT will not permit the Premises to be used for any immoral or
illegal purpose or in a manner which constitutes a nuisance. TENANT will comply
with all applicable laws, ordinances, rules, and regulations of any duly
constituted public authority relating to its business.
TENANT will not cause or permit any hazardous or toxic substance to be
brought upon, kept or used in or about the Premises by the TENANT, any
sublessee, its agents, employees, contractors or invitees, unless same will be
used, kept and stored in a manner that complies with federal and state laws
regulating any such hazardous or toxic substance.
<PAGE>
MAINTENANCE / ALTERATIONS
4.1 Maintenance. TENANT shall at all times keep the interior of the
Premises in good order, condition and repair. TENANT shall perform all necessary
and normal maintenance and repair to doors, fixtures, equipment, and
appurtenances thereof (including lighting, heating and plumbing fixtures, and
any air conditioning system serving the Premises). TENANT shall be responsible
for all interior painting, replacement of broken damaged glass (unless caused by
negligence or willful act of the LANDLORD or its agents) and replacement and
maintenance of carpet, tile, floor and wall coverings. TENANT shall be
responsible for implementing and maintaining a pest control contract with regard
to the Premises. TENANT agrees to sweep and clean, and remove snow and ice from
entrances of Premises.
LANDLORD shall be responsible for maintenance, upkeep and repair of the
roof and structural portions of the Premises (i.e. floor slabs, exterior walls),
all paved areas (including without limitation driveways, curbs and parking areas
including the striping of the same), all downspouts and water collection systems
and utility lines, landscaping, loading areas, sidewalks and for the replacement
of any complete mechanical system, provided its various component parts cannot
be repaired at a reasonable cost (relative to replacement cost) by TENANT.
Notwithstanding the foregoing, LANDLORD shall further replace or make any and
all repairs to any mechanical system, or major component thereof, (including,
without limitation, heating, air conditioning, electrical or plumbing) which
repair would cost in excess of thirty percent (30%) of replacement costs.
4.2 Fixtures. Subject to right of approval in Section 4.3, TENANT may, at
its sole expense, install equipment, fixtures or partitions on or in the
Premises.
Upon the termination of this Lease, TENANT shall have the right to remove
from the Premises the improvements made by TENANT, including removable
partitions, shelving, removable trade fixtures, equipment, furniture, and
personal property; provided, TENANT shall reimburse LANDLORD for the cost of
repairing any and all damage resulting to the Premises as a result of such
removal.
4.3 Alterations. TENANT, at its expense, may, in good workmanlike manner,
make structural or interior alterations to the Premises as it deems necessary in
the conduct of its business provided said alterations do not reduce the value of
such Premises.
4.4 Sign. The TENANT shall be responsible for any such required sign
permits for facia signage and the cost of said facia signage. All signage shall
be in accordance with the appropriate local sign ordinances. All signs placed
about the facia of the Premises by the TENANT shall be removed from the Premises
by the TENANT upon the expiration of the Lease, and such damages caused by the
removal shall be repaired by the TENANT. All signs used in or about the Premises
shall be in good taste.
4.5 Trash. TENANT shall not permit the unsightly accumulation of trash,
garbage or debris in the Premises or in the area immediately outside the
Premises.
4.6 Glass. TENANT shall replace, at the expense of TENANT, any and all
glass damaged or broken from any cause whatsoever in or about the Premises.
<PAGE>
UTILITIES AND SERVICES
5.1 Utilities. TENANT shall procure for its own account and shall pay the
cost of all water, gas, electric power and fuel consumed or used in or at the
said Premises, including the appropriate deposits as required. LANDLORD shall
not be liable to TENANT in damages or otherwise for any interruptions,
curtailment, or suspension of utility service.
TAXES
6.1 Taxes. TENANT shall list and be responsible for payment when due for
all taxes and assessments which may be imposed by any governmental body on the
TENANT's own equipment, fixtures, inventory or other contents in or upon the
Premises.
TENANT agrees to pay, as additional rent, its proportionate share of all
real property taxes and assessments which may be levied or assessed by any
lawful authority against the land and improvements on the Property. TENANT shall
pay that portion of such taxes equal to the product obtained by multiplying the
total taxes by a fraction, the numerator being the square footage area of the
leased premises, and the denominator of which shall be the total square footage
of all leasable space of the buildings located on the property. LANDLORD will
bill the TENANT annually for such real estate taxes accompanied by copies of the
appropriate tax bills, computations of the appropriate share thereof of the
TENANT, and the LANDLORD's proof of payment of said taxes. The TENANT will remit
to the LANDLORD within (30) days TENANT's share of the taxes. For any portion of
the aggregate lease term computed from the date hereof covered herein which is
less than a full calendar year, the allocation of taxes shall be reduced to
limit such charge to a corresponding pro rata portion of such year. This
provision shall apply both at the beginning and the end of the lease term.
"Real Estate Taxes" shall mean any property taxes and assessments imposed
by county and/or municipal taxing authorities upon the ownership of the land and
improvements upon said land provided the same are due and payable attributable
to a period or periods during the term of this lease. Provided, however, "real
estate taxes" shall not include any capital levy or special assessment upon the
Premises for purposes of permanent public improvements.
INSURANCE
7.1 Liability Insurance. TENANT shall, during the entire term hereof, keep
in full force and effect policies of:
(a) comprehensive public liability insurance with a contractual
liability endorsement covering property damage, death and personal injury
with respect to the Premises, the entrance and walk area in front of the
Premises, and the business operated by TENANT and any subtenants of TENANT
in the Premises in which the limits of public liability shall not be less
than $500,000 per occurrence and $1,000,000 aggregate and in which the
property damage liability shall not be less than $500,000.
(b) all risks, property insurance (in an adequate amount) to cover the
full replacement value of all personal property, inventory, trade fixtures,
furnishings, equipment,
<PAGE>
alterations, leasehold improvements and betterments and all other items
located or placed in the Premises by the TENANT.
(c) workman's compensation insurance covering all persons employed,
directly or indirectly, by the TENANT as required by the laws of the State
of North Carolina.
The aforesaid policies, excepting the workman's compensation, shall name
LANDLORD, any person, firms or corporations designated by LANDLORD, and TENANT
as insured, and shall contain a clause that the insurer will not cancel or
change the insurance without first giving the LANDLORD thirty (30) days prior
written notice. At the LANDLORD's request, a copy of the policy or a certificate
of insurance shall be delivered to LANDLORD.
7.2 Fire and Extended Coverage Insurance. In addition to the insurance in
which TENANT is required to maintain pursuant to this Lease, TENANT agrees to
pay to LANDLORD promptly upon receipt of invoices from LANDLORD that portion of
the total premium paid by LANDLORD for fire, extended coverage and rental
insurance (including so-called "extended coverage and/or all risk endorsement")
upon LANDLORD's buildings and improvements which bears the same ratio to the
total premium as the number of squares feet in TENANT's Premises bears to the
number of leasable square feet in the buildings upon the Property which are
covered by insurance. The amount of fire insurance to be maintained by LANDLORD
shall not be less than ninety (90%) and not more than one hundred percent (100%)
of the replacement value of LANDLORD's buildings and improvements on the
Premises as such value may exist from time to time. LANDLORD will bill the
TENANT periodically accompanied by copies of the appropriate bills and
computations of the TENANT's proportionate share. TENANT will remit within (20)
days any premiums due to LANDLORD for such insurance. A copy of the casualty
insurance policy and any renewals or modifications thereof shall be delivered to
TENANT.
TENANT agrees that it will not keep, use, sell or offer for sale in or upon
the Premises any article which may be prohibited by the standard form of fire
insurance policy.
DAMAGE OR DESTRUCTION OF PREMISES
8.1 Total or Partial Destruction. In the event the Premises are partially
damaged by fire or other perils covered by extended coverage insurance, LANDLORD
agrees to forthwith repair same, and this Lease shall remain in full force and
effect, except that TENANT shall be entitled to a proportionate reduction of the
rent from the date of damage and while such repairs are being made, such
proportionate reduction to be based upon the portion of the Premises rendered
untenantable during repairs.
In the event the Premises are damaged as a result of fire or other cause
thereby rendering the Premises wholly untenantable, then LANDLORD shall have the
option: (a) to repair or restore such damage, this lease continuing in full
force and effect, but the Base Rent to be proportionately reduced as hereinabove
provided or (b) to give notice to TENANT at any time within thirty (30) days
after such damage, terminating this Lease as of the date of the damage.
Provided, however, the LANDLORD may not elect to terminate this Lease unless the
necessary repairs cannot reasonably be made within a period of ninety (90) days
or less, or unless the cost of repairing such damage shall equal or exceed sixty
percent (60%) of fair replacement value of
<PAGE>
the Premises immediately prior to such damage (provided this sentence shall not
apply if one year or less remain in the Lease term, or of then in a renewal
term, the renewal term). In the event of giving such notice, this lease shall
expire and all interest of the TENANT in the Premises shall terminate on the
date which the Premises were rendered untenantable.
Notwithstanding anything herein to the contrary, in the event the Premises are
damaged as result of fire or other cause thereby rendering the Premises wholly
untenantable, and upon request of the TENANT to the LANDLORD, the LANDLORD
within ten (10) days after such request can not give the TENANT a binding
contract from a contractor that the Premises can be repaired within sixty (60)
days, barring any contingencies beyond the control of the contractor, then the
TENANT shall have the option upon five (5) days notice to the LANDLORD to
terminate this Lease.
EMINENT DOMAIN
9.1 Condemnation. If the whole or any part of the Premises, parking area,
or all means of access thereto shall be condemned or sold under threat of
condemnation, and such condemnation shall render the Premises unsuitable for the
business of the TENANT, TENANT may upon ten (10) days notice to LANDLORD
terminate this lease. TENANT shall have no claim against LANDLORD or to any
portion of the award in condemnation for the value of any unexpired term of this
Lease, but this shall not limit TENANT's right to compensation from the
condemning authority for the value of any of TENANT's property taken (other than
TENANT's leasehold interest in the Premises).
ASSIGNMENT / SUBLEASE
10.1 Assignment or Subletting. Without the prior written consent of the
LANDORD, said consent not to be unreasonably withheld, TENANT will not by
operation of law or otherwise, assign, transfer, mortgage, or encumber this
lease, or sublet or permit the Premises or any part thereof to be used by
others. Notwithstanding any assignment or subLease, TENANT shall remain fully
liable on this Lease and shall not be released from performing any terms,
covenants and conditions of this Lease.
RIGHT OF ENTRY
11.1 Right of Entry. LANDLORD, its agents and representatives, shall have
the right to enter the Premises upon twenty-four (24) hours notice, except in
case of emergencies, for the purpose of inspection of Premises, making repairs,
replacements, alterations or additions to Premises, or exhibiting Premises to
prospective tenants during the last sixty (60) days of the initial term or any
renewal term; and any such entry herein authorized shall not be or constitute an
eviction or deprivation of any right conferred hereunder upon TENANT.
DEFAULT
12.1 Event of Default. If one or more of the following events shall occur,
the TENANT shall be in default under the lease:
(a) any failure of TENANT to pay any rent due, additional rent or
other sums hereunder within ten (10) days after written notice by LANDLORD;
or
<PAGE>
(b) if TENANT fails to perform any other of the terms, conditions or
covenants contained in this lease to be observed or performed by TENANT and
such default shall continue for more than thirty (30) days after written
notice thereof specifically referring to this Section 12.1(b) shall have
been mailed to TENANT, or
(c) if TENANT shall become bankrupt or insolvent, or file any debtor
proceedings, or take or have taken against TENANT in any court pursuant to
any statute either of the United States or of any State a petition in
bankruptcy or insolvency or for reorganization or for the appointment of a
receiver or trustee of all or a portion of TENANT's property, or
(d) if TENANT makes or enters into an assignment or arrangement for
the benefit of creditors, or
(e) if TENANT shall abandon the Premises or suffer the lease to be
taken under any writ of execution.
12.2 Remedies. In the event of default, LANDLORD, without excluding any
other right or remedies that it may have, shall have the immediate right of
re-entry and may remove all persons and property from the Premises and such
property may be removed and stored in a public warehouse or elsewhere at the
cost of and for the account of TENANT, all without resort to legal process and
without being deemed guilty of trespass, or becoming liable for any loss or
damage which may be occasioned thereby, excepting claims as may arise due to
negligence of LANDLORD. If LANDLORD should elect to re-enter as herein provided
or should it take possession pursuant to legal proceedings, it may either
terminate this lease, make such alterations and repairs as may be necessary in
order to relet the Premises, and relet said Premises for such term and at such
rentals and upon such reasonable rents, terms, and conditions under the doctrine
of mitigation of damages. In the event of such reletting, all rentals received
by LANDLORD shall be applied first, to the payment of any costs and expenses of
such reletting, including the expense of alterations and repairs; second, to the
payment of rent due and unpaid hereunder, and the residue, if any, shall be held
by LANDLORD and applied in payment of future rent due and unpaid hereunder. If
such reletting shall yield rentals insufficient for any month to pay the rent
due by TENANT hereunder for that month, TENANT shall be liable to LANDLORD for
the deficiency and same shall be paid monthly. LANDLORD shall be entitled to any
excess rents collected or reletting over rents reserved herein. No such re-entry
or taking possession of Premises by LANDLORD shall be construed as an election
to terminate this lease unless a written notice of such intention be given by
LANDLORD to TENANT at the time of such re-entry.
12.3 Subsequent Termination. Notwithstanding any such re-entry and
reletting without termination, LANDLORD may at any time thereafter elect to
terminate this Lease for such previous breach. Should LANDLORD at any time
terminate this Lease for any breach, in addition to any other remedies, it may
have, it may recover from TENANT all damages it may incur by reason of such
breach, including the cost recovering the Premises, and the present worth
(discounted at the legal rate plus 3%) at the time of such termination of the
excess, if any, of the amount of rent reserved in this lease for the remainder
of the stated term over the then reasonable rental value of the Premises for the
remainder of the stated term, all of which amounts shall be immediately due and
payable from TENANT to LANDLORD.
<PAGE>
12.4 Waiver. No course of dealing between LANDLORD and TENANT, or any delay
on the part of LANDLORD in exercising any rights it may have under this lease,
shall operate as a waiver of a prior default or operate as a waiver of any
subsequent default or defaults; and no express waiver shall affect any
condition, covenant, or term other than the one specified in such waiver and
that one only for the time and in the manner specifically stated.
QUIET ENJOYMENT
13.1 Quiet Enjoyment. LANDLORD covenants that TENANT, upon paying the rent
and performing all of its obligations under this lease, shall peacefully and
quietly have, hold and enjoy the Premises throughout the initial term and any
renewal term, or until this lease is terminated as herein provided.
INDEMNIFICATION
14.1 Indemnification. Except as may result from LANDLORD's (or its agents)
negligent or willful act, TENANT covenants to indemnify and save harmless
LANDLORD against any and all claims, losses and expenses arising from the
conduct or management of its business upon the Premises or from any work or
thing whatsoever done in or about the Premises or the equipment thereof in the
course of its business or arising from any act of TENANT or any of its
customers, agents, contractors, or employees, or arising from any accident,
injury, or damage whatsoever, however caused, to any person or persons, or to
the property of any person, persons, corporation or corporations, occurring
during the lease on, in, or about the Premises or on or about the designated
area and from and against all costs, attorneys' fees, expenses and liabilities
incurred in or about any such claim or any action or proceeding brought thereon;
and in case any such action or proceeding be brought against LANDLORD by reason
of any claim. TENANT, on notice from LANDLORD, shall resist or defend such
action or proceeding.
HOLDING OVER
15.1 Holding Over. Any holding over after the expiration of this lease, for
whatever reason, shall be construed to created a tenancy from month to month at
the rent herein reserved, prorated on a monthly basis, and such tenancy shall
otherwise be subject to the terms and conditions set forth in this lease.
NOTICE
16.1 Notice. All notices required or agreed to be given hereunder by either
party shall be in writing and sent postage prepaid, certified or registered
mail, return receipt requested to the addresses set forth in the Lease Schedule
attached as Exhibit A, as may be changed by written notice in accordance
herewith.
ESTOPPEL, ATTORNMENT, SUBORDINATION
17.1 Estoppel Certificate. Within twenty (20) days after request therefor
by LANDLORD, or in the event that upon any sale, assignment or hypothecation of
the Premises and/or the land thereunder by LANDLORD, an estoppel certificate
shall be required from TENANT, TENANT agrees to deliver in recordable form a
certificate to any proposed mortgagee or purchaser, or to LANDLORD, certifying
that TENANT is in possession of the Premises, has unconditionally accepted the
same
<PAGE>
and is currently paying the rents reserved herein; that this lease is unmodified
and in full force and effect (or if there have been modifications, that the
lease is in full force and effect as modified and state the modifications) and
that there are no defaults by LANDLORD therein and no defenses or offsets
thereto, or stating those claimed by TENANT.
17.2 Attornment/Non-Disturbance/Surbordination. In the event any
proceedings are brought for the foreclosure of, or in the event of exercise of
the power of sale under any mortgage made or other sale by the Landlord covering
the Premises, or in the event of transfer by deed in lieu of foreclosure, or by
any other manner, the TENANT shall attorn to the purchaser or transferee upon
any such foreclosure or sale or transfer and recognize such purchaser or
transferee shall not disturb Tenant's possession so long as TENANT is not in
default under the terms of this lease. Subject to the foregoing condition of
non-disturbance, the lease will be subordinate to the lien resulting from any
other method of financing or refinancing, now or hereafter in force against the
land the buildings of which the Premises are a part or upon any buildings
hereafter placed upon the land of which the Premises are a part, and to all
advances made or hereafter to be made upon the security thereof. This section
shall be self-operative and no further instrument of subordination shall be
required by any mortgage.
The TENANT, upon request of any party in interest, shall execute promptly
such instruments or certificates to carry out the intent of attornment and
subordination and non-disturbance above as shall be reasonably requested by
LANDLORD.
RIGHT OF FIRST REFUSAL
18.1 Right of First Refusal. In the event that LANDLORD or any successor in
interest to the LANDLORD elects to sell the property on which the Premises is
located to any person other than the TENANT, the LANDLORD shall give TENANT
written notice of any bona fide offer (and a written copy thereof executed by
the offeror it deems acceptable) and TENANT shall have thirty (30) business days
from receipt of such notice to notify LANDLORD, or its successor in interest,
that TENANT will purchase the Premises on the same terms and conditions set
forth in the offer. This right shall continue to exist during the term of this
Lease, and any renewal thereof.
MISCELLANEOUS
19.1 Law/Construction. The laws of the State of North Carolina shall govern
the validity, performance and enforcement of this lease. The headings of the
several sections and paragraphs contained herein are for convenience only and do
not define, limit or construe the contents of such sections and paragraphs.
19.2 Benefit. The covenants, agreements and obligations herein contained,
except as herein otherwise specifically provided, shall extend to, bind and
inure to the benefit of the parties hereto and their respective personal
representative, heirs, successors and assigns.
19.3 Exclusive. So long as the TENANT shall not be in default under the
terms of this lease, LANDLORD covenants and agrees that the TENANT shall have
the sole and exclusive right to conduct an Eye Care Practice upon the property
and LANDLORD shall not allow or permit any other TENANT upon the property to
conduct an Eye Care Practice in competition with the TENANT. For purposes
herein, the term "Eye Care Practice" includes the practice of optometry,
ophthalmology, and the provision of optician services, including but not limited
to prescribing
<PAGE>
and interpreting prescriptions, fitting glasses, servicing glasses, prescribing
and performing medical treatment for diseases and illnesses of the eyes, fitting
frames, compounding and fabricating lens and frames, and any devices used for
the correction of vision, and the fitting and retail sale of contact lens,
frames, eye wear, solutions and incidentals thereto.
19.4 Nonwaiver. A waiver of any covenant, term or condition of this lease
by either party shall not be construed as a waiver of a subsequent breach of the
same covenant, term or condition. The consent or approval by either party to or
of any act by the other party requiring such consent or approval shall not be
deemed to waive or render unnecessary consent to or approval of any subsequent
similar act.
19.5 Recording. Neither party shall record this lease without the written
consent of other; provided, however, upon the request of and expense of either
party hereto, the other party shall join in the execution of a statutory
memorandum of this lease for purposes of recordation.
19.6 Entire Agreement. This lease contains all of the agreements and
conditions made between the parties hereto and be modified or amended only by an
agreement in writing signed by all the parties hereto or their respective
successors in interest.
IN WITNESS WHEREOF, the parties hereto have executed this Lease in
accordance with law, this the day and year first above written.
TENANT:
OPTOMETRIC EYE CARE CENTER , P.A.
BY: for D. Blair Harrold /s/ Sam Petteway
-------------------------------------------
ATTEST
/s/ Allan Barker
- ------------------------
Secretary
(CORPORATE SEAL)
LANDLORD:
/s/ John W. Hearn (SEAL)
-----------------------------------------
John W. Hearn
/s/ Betty Hearn (SEAL)
-----------------------------------------
Betty Hearn
/s/ Lillie Hearn (SEAL)
-----------------------------------------
Lillie Hearn
<PAGE>
NORTH CAROLINA
COUNTY OF UNION
I, Emmett Surratt, a Notary Public for said county and state hereby certify
that Allan Barker personally came before me this day and acknowledged that he is
___________ Secretary of OPTOMETRIC EYE CARE CENTER, P.A., and that by authority
duly given and as the act of the corporation, the foregoing instrument was
signed in its name by its ________________ President, sealed with its corporate
seal and attested by ______________ self as its _________________ Secretary.
Witness my hand and official stamp/seal, this 2nd day of January, 1995.
(OFFICIAL STAMP/SEAL) /s/ Emma H. Surratt
------------------------------------------
Notary Public
My Commission Expires:
8-9-97
NORTH CAROLINA
Union COUNTY
I, Emma H. Surratt, a Notary Public for said County and State, do hereby
certify that JOHN W. HEARN personally appeared before me this day and
acknowledged the due execution of the foregoing instrument.
Witness my hand and official stamp / seal, this the 2nd day of January,
1995.
(OFFICIAL STAMP / SEAL) /s/ Emma H. Surratt
------------------------------------
Notary Public
My Commission Expires:
8-9-97
<PAGE>
NORTH CAROLINA
Union COUNTY
I, Emma H. Surratt, a Notary Public for said County and State, do hereby
certify that BETTY HEARN personally appeared before me this day and acknowledged
the due execution of the foregoing instrument.
Witness my hand and official stamp / seal, this the 2nd day of January,
1995.
(OFFICIAL STAMP / SEAL) /s/ Emma H. Surratt
------------------------------------
Notary Public
My Commission Expires:
8-9-97
NORTH CAROLINA
Union COUNTY
I, Emma H. Surratt, a Notary Public for said County and State, do hereby
certify that LILLIE HEARN personally appeared before me this day and
acknowledged the due execution of the foregoing instrument.
Witness my hand and official stamp / seal, this the 2nd day of January,
1995.
(OFFICIAL STAMP / SEAL) /s/ Emma H. Surratt
------------------------------------
Notary Public
My Commission Expires:
8-9-97
<PAGE>
Exhibit A
Lease Schedule to Lease Agreement
Dated January 2, 1995
<TABLE>
<CAPTION>
<S> <C>
1. Premises: Approximately _square feet of space located at 1007 Skyway
Drive, Suite A, Monroe, North Carolina, with non-exclusive
right of parking and ingress and egress to the Lease
premises.
2. Initial Term: The term of the Lease shall begin on January 2, 1995 and
shall end at midnight on the 31st day of December, 2001.
3. First Renewal Term: The Tenant shall have the right to have the option to renew
this lease for a term commencing January 1, 2002 and ending
on December 31, 2006.
4. Second Renewal Term: The Tenant shall have the right to have the option to renew
this lease at the expiration of the First Renewal Term for
an additional term commencing January 1, 2007 and ending on
December 21, 2011.
5. Base Rent: The sum of $45,600.00 per year payable in 12 monthly
installments of $3,800.00 per month.
6. Renewal Rent: The sum of $48,450.00 per year payable in 12 monthly
(First Renewal Term) installments of $4,037.50 per month.
7. Renewal Rent: The sum of $51,480.00 per year payable in 12 monthly
(Second Renewal Term) installments of $4,290.00 per month.
8. Other Term: __________________________________________________________
__________________________________________________________
__________________________________________________________
</TABLE>
IN WITNESS WHEREOF, the parties have executed this Lease Schedule, this the
2nd day of January, 1995.
<PAGE>
ADDRESS: LANDLORD:
- ---------------------- /s/ John W. Hearn (SEAL)
- ---------------------- --------------------------------
John W. Hearn
- ---------------------- /s/ Betty Hearn (SEAL)
- ---------------------- -------------------------------
Betty Hearn
- ---------------------- /s/ Lillie Hearn (SEAL)
- ---------------------- -------------------------------
Lillie Hearn
TENANT:
OPTOMETRIC EYE CARE CENTER, P.A.
Post Office Box 7189
Rocky Mount, NC 27802 By: for D. Blair Harrold /s/ Sam Petteway
----------------------------------------
Title: President Vice President
---------------------------------------
<PAGE>
EXHIBIT 21 -- SUBSIDIARIES
1. The Registrant has three direct subsidiaries and owns 100% of the
outstanding capital stock of each:
a. PrimeVision Health, Inc., a Delaware corporation; and
b. OptiCare Eye Health Centers, Inc., a Connecticut corporation.
c. OC Acquisition Corp., a Florida corporation.
2. PrimeVision Health, Inc., owns 100% of the outstanding capital stock of
the following corporations:
a. Accountable Eye Care Associates, Inc., a California corporation;
b. OptiCare Eye Health Network, Inc., a North Carolina corporation
(formerly known as Consolidated Eye Care, Inc.);
c. PrimeVision Central, Inc., a Delaware corporation;
d. PrimeVision East, Inc., a Delaware corporation;
e. PrimeVision North Carolina, Inc., a North Carolina corporation;
f. PrimeVision West, Inc., a Delaware corporation; and
g. Cohen Systems, Inc., a Florida corporation.
3. OptiCare Eye Health Network, Inc., owns 100% of the outstanding capital
stock or equity interests (except as noted) of the following entities:
a. AECC Total Vision Health Plan of Texas, Inc., a Texas corporation;
b. Association of Eye Care Centers Total vision Health Plan, Inc., a
North Carolina corporation; and
c. Eye Care Eyes, a North Carolina general partnership; OptiCare Eye
Health Network, Inc., owns a 50% equity interest in the partnership,
and 2 other persons own the balance of equity interests.
4. Accountable Eye Care Associates, Inc., owns 51% of the capital stock of
Georgia Eye Care, Inc., a Georgia corporation.
1
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of OptiCare Health Systems,
Inc. on Form S-4 of our report related to the consolidated financial statements
of OptiCare Health Systems, Inc. and subsidiaries as of December 31, 1999 and
for the year then ended, dated March 24, 2000, appearing in the Joint Proxy
Statement/Prospectus, which is part of this Registration Statement, and to the
reference to us under the headings "Experts" in such Joint Proxy
Statement/Prospectus.
/s/ DELOITTE & TOUCHE LLP
Hartford, Connecticut
May 10, 2000
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of OptiCare Health Systems,
Inc. on Form S-4 of our report related to the combined financial statements of
OptiCare Eye Health Centers, Inc. and Affiliate dated March 26, 1999, appearing
in the Joint Proxy Statement/Prospectus, which is part of this Registration
Statement, and to the reference to us under the headings "Experts" in such Joint
Proxy Statement/Prospectus.
/s/ DELOITTE & TOUCHE LLP
Hartford, Connecticut
May 10, 2000
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated May 7, 1999, with respect to the financial statements of
Prime Vision Health, Inc. and Subsidiaries included in the Proxy Statement of
Opticare Health Systems, Inc. that is made a part of the Registration Statement
(Form S-4) and Prospectus of Opticare Health Systems, Inc. for the registration
of 6,250,000 shares of its common stock.
/s/ Ernst & Young LLP
Raleigh, North Carolina
May 10, 2000
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated April 7, 2000 (except for paragraph 2 of Note 16, as to
which the date is April 21, 2000 and except for paragraph 3 of Note 16, as to
which the date is May 5, 2000), with respect to the consolidated financial
statements and schedule of Vision Twenty-One, Inc. and Subsidiaries included in
the Proxy Statement of OptiCare Health Systems, Inc. that is made a part of the
Registration Statement (Form S-4) and Prospectus of OptiCare Health Systems,
Inc. for the registration of 6,250,000 shares of its common stock.
/s/ Ernst & Young LLP
------------------------
Ernst & Young LLP
Tampa, Florida
May 10, 2000
<PAGE>
EXHIBIT 23.5
CONSENT OF LEGG MASON WOOD WALKER, INCORPORATED
We hereby consent to, (i) the inclusion of our opinion letter, dated February 9,
2000 to the Board of Directors of OptiCare Health Systems, Inc. ("OptiCare") as
Appendix D to the Joint Proxy Statement/Prospectus of OptiCare relating to the
merger of OptiCare with Vision Twenty-One, Inc. and (ii) all references to Legg
Mason Wood Walker, Incorporated ("Legg Mason") in the sections captioned
"Summary of the Joint Proxy Statement/Prospectus - Opinions of Financial
Advisors," "The Merger - Background of the Merger," "The Merger - Reasons for
the Merger; Recommendations of Boards of Directors," "The Merger - Opinion of
OptiCare Advisor" and "The Merger Agreement - Additional Agreements" of the
Joint Proxy Statement/Prospectus of OptiCare which forms a part of this
Registration Statement on Form S-4. In giving such consent, we do not admit that
we come within the category of persons whose consent is required under, and we
do not admit that we are "experts" for purposes of, the Securities Act of 1933,
as amended, and the rules and regulations promulgated thereunder.
LEGG MASON WOOD WALKER, INCORPORATED
By: /s/ Scott R. Cousino
-----------------------------------
Name: Scott R. Cousino
Title: Managing Director
May 9, 2000
<PAGE>
EXHIBIT 23.6
CONSENT OF PAINEWEBBER INCORPORATED
We hereby consent to, (i) the inclusion of our opinion letter, dated February 9,
2000 to the Board of Directors of Vision Twenty-One, Inc. ("Vision Twenty-One")
as Appendix E to the Joint Proxy Statement/Prospectus of OptiCare relating to
the merger of OptiCare with Vision Twenty-One, Inc. and (ii) all references to
Painewebber, Incorporated ("Painewebber") in the sections captioned "Summary of
the Joint Proxy Statement/Prospectus - Opinions of Financial Advisors," "The
Merger - Background of the Merger," "The Merger - Reasons for the Merger;
Recommendations of Boards of Directors," "The Merger - Opinion of Vision
Twenty-One Advisor" and "The Merger Agreement - Additional Agreements" of the
Joint Proxy Statement/Prospectus of OptiCare which forms a part of this
Registration Statement on Form S-4. In giving such consent, we do not admit that
we come within the category of persons whose consent is required under, and we
do not admit that we are "experts" for purposes of, the Securities Act of 1933,
as amended, and the rules and regulations promulgated thereunder.
PAINEWEBBER INCORPORATED
By: /s/ George J. Kostas
-----------------------------------
Name: George J. Kostas
Title: Director
May 9, 2000
<PAGE>
EXHIBIT 99.1
FORM OF
OPTICARE HEALTH SYSTEMS, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
, 2000
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY
The undersigned stockholder of OptiCare Health Systems, Inc. hereby
appoints Dean J. Yimoyines and Steven L. Ditman, and each of them, with full
power of substitution, proxies to vote the shares of stock which the
undersigned could vote if personally present at the Annual Meeting of
Stockholders of OptiCare Health Systems, Inc. to be held at a.m., local time,
on , 2000 at , or any adjournment or postponement thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE PROPOSALS.
1. Approval of the issuance of shares of Common Stock pursuant to the
Merger Agreement among Opticare Health Systems, Inc., Vision Twenty-One,
Inc. and OC Acquisition Corp.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. To elect eight (8) members to serve on the Opticare Health Systems,
Inc. Board of Directors.
FOR ALL NOMINEES LISTED BELOW [ ] WITHHOLD AUTHORITY TO VOTE FOR ALL
(EXCEPT AS MARKED TO THE NOMINEES LISTED BELOW
CONTRARY BELOW) Dean J. Yimoyines, Steven L.
Ditman, Martin E. Franklin,
Ian G.H. Ashken, Allan L.M. Barker,
John F. Croweak, Carl J. Schramm
and [ ]
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE
A LINE THROUGH OR OTHERWISE STRIKE THE NOMINEE'S NAME IN THE LIST ABOVE.)
- --------------------------------------------------------------------------------
(Continued, and to be voted, signed and dated on the reverse side.)
<PAGE>
3. Approval of an amendment to the Opticare Health Systems, Inc.
performance stock program.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. Ratification of the appointment of Deloitte & Touche LLP as the
independent auditors for Opticare Health Systems, Inc.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. In their discretion upon such other matters as may properly come
before the meeting
UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR PROPOSAL 1,
PROPOSAL 3, PROPOSAL 4 AND FOR EACH OF THE NOMINEES LISTED IN PROPOSAL 2
ABOVE.
DATED: , 2000
----------------------------------------------------------
SIGNATURE(S) OF STOCKHOLDERS(S)
Please date and sign exactly as your name appears on the
envelope in which this material as mailed. If shares are
held jointly, each stockholder should sign. Executors,
administrators, trustees, etc. should use full title and, if
more than one, all should sign. If the stockholder is a
corporation, please sign full corporate name by an
authorized officer. If the stockholder is a partnership,
please sign full partnership name by an authorized person.
<PAGE>
EXHIBIT 99.2
FORM OF
VISION TWENTY-ONE, INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
, 2000
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY
The undersigned stockholder of Vision Twenty-One, Inc. hereby appoints ,
and each of them, with full power of substitution, proxies to vote the shares
of stock which the undersigned could vote if personally present at the Special
Meeting of Stockholders of Vision Twenty-One, Inc. to be held at a.m.,
local time, on , 2000 at , or any adjournment or postponement
thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE PROPOSALS.
1. APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND PLAN OF
REORGANIZATION AMONG OPTICARE HEALTH SYSTEMS, INC., VISION TWENTY-ONE, INC. AND
OC ACQUISITION CORP.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. IN THEIR DISCRETION UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE
THE MEETING
<PAGE>
UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
DATED: , 2000
---------------------------------------
SIGNATURE(S) OF STOCKHOLDERS(S)
Please date and sign exactly as your
name appears on the envelope in which
this material as mailed. If shares are
held jointly, each stockholder should
sign. Executors, administrators,
trustees, etc. should use full title
and, if more than one, all should sign.
If the stockholder is a corporation,
please sign full corporate name by an
authorized officer. If the stockholder
is a partnership, please sign full
partnership name by an authorized
person.
