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FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 0-19283
OMEGA HEALTH SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3220466
- ------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5100 Poplar Avenue, Suite 2100
Memphis, Tennessee 38137
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(Address of principal executive offices and Zip Code)
Issuer's telephone number, including area code: (901) 683-7868
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Title of each class
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Common Stock, $.06 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
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<PAGE>
The registrant's revenues for the twelve months ended December 31, 1996
were $42,737,193.
The aggregate market value of the shares of Common Stock held by
nonaffiliates of the registrant as of March 1, 1997 is approximately
$41,181,000. (For purposes of this calculation only, all executive officers and
directors are classified as affiliates.)
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MARCH 1, 1997
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Common Stock, $.06 par value 6,877,312
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference and the part of Form 10-K into which
the document is incorporated:
Portions of the Proxy Statement relating to the 1997 Annual Meeting of
Registrant's Shareholders........................................... Part III.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Omega Health Systems, Inc. ("Omega" or the "Company") was incorporated
in the State of Delaware in 1984 as OcuSystems, Inc. In 1988 the Company
merged with Omega Health Services, Inc. and changed its name to Omega Health
Systems, Inc. Effective March 31, 1994 the Company acquired all of the stock
of Eye Health Network, Inc. ("EHN"), in exchange for 787,500 shares of
Company common stock, in a transaction accounted for as a pooling of
interests. Prior period financial information has been restated to reflect
this consolidation.
The Company is an integrated eye care services company providing a full
range of services to optometry and ophthalmology practices, including management
services, managed care programs, purchasing and marketing services and practice
acquisition opportunities.
The Company or a wholly-owned subsidiary currently owns 14 eye care
centers and provides management services to one independent ophthalmic practice
pursuant to management agreement (collectively, the "Centers"), from which
ophthalmologists provide medical and surgical care to patients having disorders
of the eye, including four ambulatory surgical centers adjacent to Centers owned
by the Company. The Centers have 25 full-time locations and provides services in
44 satellite locations for a total of 69 locations in 10 states. The Company's
Centers emphasize professional interrelationships between ophthalmologists and
optometrists for the co-management of patient care. Each of the Centers provides
medical and surgical support services for one or more ophthalmic practices
pursuant to management agreements. A total of 33 ophthalmologists and 26
optometrists are associated with the Centers. The Company's activities are
restricted to providing support to medical professionals. The Company does not
provide medical care to patients.
EHN, with principal offices in Denver, Colorado, develops and administers
managed care networks of optometrists, ophthalmologists and surgical facilities
for health maintenance organizations and other third-party payors. At March 1,
1997, EHN had managed care contracts covering approximately 2.0 million lives,
with provider networks or other arrangements in all fifty states.
MERGERS, ACQUISITIONS AND DIVESTITURES
See "The Company" above for information about the Company's acquisition of
EHN in March 1994. In December 1994 thirteen ophthalmology practices that are
members of Windsor National Associates, Inc. ("Windsor") paid approximately
$725,000 for Company common stock and warrants. The proceeds were used to
support the expansion of EHN's managed care activities. In addition, eleven of
these practices entered into management services agreements with EHN and
underwrote $550,000 of initial fees to EHN under these service agreements.
On January 2, 1996, the Company completed the acquisition of the assets of
an ophthalmology practice located in Nashville, Tennessee. The consideration for
the acquisition consisted of $50,000 in cash and a $600,000 7% convertible
subordinated note due in 60 monthly installments.
On March 13, 1996, the Company acquired the assets of an ophthalmology
practice known as Capital Eye Center located in Tallahassee, Florida and entered
into a long-term management agreement with the selling physician's professional
corporation. In addition, the Company acquired all of the stock of an ambulatory
surgery center associated with the practice known as Capital Eye Surgery Center.
The total consideration for these transactions included cash of $2 million and a
$1.4 million 7% convertible subordinated note due in 60 monthly installments.
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On September 10, 1996, the Company completed the acquisition of
substantially all of the net assets of EyeCare and SurgeryCenter of North Texas,
P.A. and ECSC Retina, P.A., two Dallas, Texas professional associations which
practice ophthalmology, in exchange for 771,429 shares of Company common stock.
Omega Health Systems of North Texas, Inc. manages the practices pursuant to
long-term management agreements. Also on September 10, 1996, a subsidiary of the
Company and SurgEyeCare, Inc. entered into a partnership agreement to form
SurgEyeCare General Partnership (the "Partnership"). Under the terms of the
partnership agreement, the Company contributed $4,550,000 cash to the
Partnership and SurgEyeCare, Inc. contributed assets with an agreed value of
$6,100,000. After the initial capital contributions, the Partnership distributed
$4,476,438 in cash to SurgEyeCare, Inc. After these transactions, the Company
owns a 75% interest in the Partnership and SurgEyeCare, Inc. owns a 25%
interest. Under the terms of the partnership agreement, the subsidiary of the
Company is designated as managing partner. The Company financed the contribution
to the Partnership, in part, with the proceeds of a $3,280,000 acquisition term
loan from a commercial bank, which was refinanced in February 1997.
RECENT DEVELOPMENTS
On March 5, 1997 the Company completed the acquisition of the assets of
the ophthalmology practice of Sarah J. Hays, M.D. of Birmingham, Alabama.
Simultaneously with the acquisition, the Company entered into a long-term
management agreement with Dr. Hays' professional corporation. The assets were
acquired in exchange for 108,081 shares of the Company's common stock and
$859,500 in cash.
EYE CARE CENTERS
The Company owns Centers in which ophthalmologists conduct their practice.
In the case of one managed practices, the ophthalmologist owns both the practice
and the Center. Each Center is operated through the joint efforts of an
ophthalmologist ("Medical Director") and an optometrist ("Center Director") who
coordinates the respective skills of the two professions. The Medical Director
is responsible for all medical decisions affecting patient care. Additionally,
the Medical Director, in coordination with the Center Director, establishes
ongoing continuing education programs, patient support and other programs for
the benefit of the participating optometrists and other health care
professionals. The Center Director manages the Center's day-to-day operations
and coordinates patient care provided by the Center with input provided by, and
in a fashion consistent with, the continuing patient relationship held by
primary health care providers. The Center Director generally does not provide
optometry services such as primary care, a category that includes eye exams and
the sale of spectacles and contact lenses. Because each Center provides only
secondary and tertiary patient eye care, any needed primary care including eye
exams, prescriptions, and the preparation of corrective lenses and contacts are
provided by primary eye care providers.
Typically, the Company's Centers are in 3,000 to 4,000 square feet of
leased space, containing approximately four examination rooms, specialty areas
for lasers, fundus photography and administrative offices. In addition to the
Medical Director and Center Director, the Center's staff typically includes a
business office manager and both administrative and medical support personnel.
Depending upon the medical procedure required, many surgeries are conducted at
nearby hospitals and ambulatory surgical centers. Among the more common surgical
procedures are: cataract surgery, glaucoma surgery, laser procedures for retinal
and glaucomatous conditions, eye lid surgery, cosmetic surgery, corneal surgery,
strabismus surgery, retina surgery and refractive surgery.
Each of the Company's Centers has entered into an agreement with its
Medical Director. The agreement includes a term of three to ten years initial
duration with extensions thereafter. Pursuant to the agreement, the Company
provides support to the Medical Director, which typically includes the physical
facility, ophthalmic equipment, administrative and medical personnel, center
working capital, insurance, continuing education, billing and collection
systems, accounting, administration, and marketing support. The Medical Director
pays the Company a fee from his/her medical practice, out of which the Company
pays all expenses of the Center's operations. The Company is responsible for
billing and collection on behalf of the Medical Director, including the
administration of third party reimbursement claims. The Company's revenues and
the receipt of revenues from the Medical Director are subject to numerous
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factors beyond the Company's control, including the timing of Medicare
reimbursements, the number and type of procedures performed by the Medical
Director, and the amount of reimbursement permitted by Medicare for procedures
performed. Conversely, while the receipt of revenues cannot be controlled by the
Company, the expenses of operating the Center and providing support to the
Medical Director remain relatively constant.
The table below lists the name and location of each Center and the date
the Center was opened or acquired.
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NAME AND LOCATION OF EYE CARE CENTER DATE OPENED
OR ACQUIRED
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Omega Eye Care Center; Albuquerque, NM 11/87
Capital Eye Consultants; Fairfax, VA 4/88
Omaha Eye Institute[1];Omaha, NE 4/88
Omega Eye Center; Jackson, TN 5/88
Omega Eye Care Center; Birmingham, AL 6/89
Omega Eye Center [2] ; El Paso, Texas 8/89
Southern Eye Associates; Memphis, TN 1/90
VisionAmerica; Nashville, TN 9/90
Eye Associates of Houston; Houston, TX 5/91
Omega Eye Associates [1]; Clearwater, FL 01/92
Missouri Eye Institute; Springfield, MO 01/92
Missouri Eye Institute; St. Louis, MO 01/92
Capital Eye Center [1]; Tallahassee, FL 03/96
EyeCare and SurgeryCenter of North Texas[1]; Dallas, TX 9/96
Omega Eye Associates of Birmingham; Birmingham, AL 3/97
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[1] The Center maintains an ambulatory surgical unit at this location.
[2] This Center is a managed practice.
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MANAGED CARE
The Company's wholly-owned subsidiary, EHN, is involved in various phases
of eye care managed care programs. EHN develops and administers managed care
networks of eye care providers, including optometrists and ophthalmologists, and
surgical facilities. EHN provides medical and surgical vision care plans to
self-insured groups (corporations, trust funds and association groups), insured
groups (insurance companies and HMO's) and third-party entities (preferred
provider organizations, exclusive provider organizations, physician hospital
organizations, benefit consultants, and brokers). Currently covering 2.0 million
lives, EHN is now providing eye care through its networks or other arrangements
in all 50 states.
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OPHTHALMIC SUPPLIES AND EQUIPMENT SALES
Omega Medical Services, Inc. ("OMS"), incorporated in the State of
Tennessee in 1991 and a wholly-owned subsidiary of the Company, is the
purchasing and supply arm of the Company. OMS offers high quality ophthalmic
supplies and equipment at a reasonable cost to participating physicians,
patients and facility partners. This service leverages the collective purchasing
strengths of all Omega participants with a national panel of over 150 vendors to
secure products and services. OMS also operates a mobile surgical service which
provides ophthalmic surgical equipment and supplies to surgical facilities,
including hospitals and ambulatory surgery centers on a per-case basis.
Optometrists and ophthalmologists affiliated with Omega's other divisions, as
well as 22 hospitals and 23 ambulatory surgery centers in 20 states currently
have access to the benefits provided by OMS. OMS allows the Company to maintain
quality control over the equipment and products used in patient care, while
controlling costs for providers and payors. Revenues of OMS for the years ended
December 31, 1996 and 1995 were $2,607,000 and $1,845,000, respectively.
DEVELOPMENT PLANS
The Company proposes to expand through the purchase of the assets of
ophthalmology practices, primarily in locations that complement existing Company
operations. The Company currently has seven letters of intent covering proposed
practice asset acquisition transactions, which are expected to be completed in
the first half of 1997. The Company plans to develop surgical suites to support
existing or new Centers where permitted by state law, and where, in its
judgment, the characteristics of the surgical component of the practice would
provide the potential for increased return on investment. These surgical centers
would generally be located within the confines of the Center's physical
facilities. The Company anticipates that it may open satellite surgical centers
and clinics in the general vicinity of one or more Centers based upon the
geographical and market conditions surrounding the Centers as well as other
factors.
The Company also intends to expand through additional managed eye care
contracts and networks developed by EHN (See discussion of EHN on page 5) and
through the continued expansion of OMS's mobile surgical service in markets
served by Centers. In addition, the Company plans to expand the management
services offered to independent optometry practices.
EXCIMER LASER SUPPORT
The Company has organized a subsidiary, VisionAmerica Laser Centers, Inc.
("VisionAmerica") for the purpose of developing and supporting excimer laser
programs for doctors affiliated with the Company. The excimer laser is used to
perform a surgical procedure known as photorefractive keratectomy (PRK). Laser
technology is an important element in a total eye health care delivery system,
as over 100 million Americans are suffering from some form of refractive error
(nearsightedness, farsightedness, astigmatism). About 70% of these people are
currently under the care of an optometrist. Refractive surgery can provide
sufficiently improved vision for most people, reducing or even eliminating their
need for glasses or contact lenses. However, the cost of this technology makes
it prohibitive for doctors and their patients without the cooperation of
doctors, facilities and managers. VisionAmerica has as its goal ensuring that
doctors affiliated with the Company have cost effective access to excimer laser
equipment. In this role, VisionAmerica assists in negotiating access to excimer
laser technology from facility partners, including hospitals, surgery centers
and laser center companies. In addition, VisionAmerica provides comanagement
education programs for PRK emphasizing the Company's corporate philosophy of
cooperation between optometry and ophthalmology. VisionAmerica has a management
agreement with Birmingham Refractive Associates, L.L.C.
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COMPETITION
There are other enterprises, both public and private, including well-known
for-profit and not-for-profit companies and other organizations engaged in the
management of medical and surgical services for diagnostic and therapeutic eye
care treatment and the development and marketing of managed eye care programs,
and acquisition programs related to physician practice management. Many of these
enterprises have substantially greater capital, research and development,
marketing, and human resources than the Company.
Additionally, the Company, in its efforts to establish or acquire and
operate Centers and Managed Practices, as well as expand its managed care
operations, will be competing with existing practices and groups of practices of
both ophthalmologists and optometrists as well as with formal and informal
organizations of eye care professionals. The development of new treatments or
procedures available to eye care professionals may constitute an additional form
of competition, including the association of various eye care professionals
through licensing or other forms of relationships.
GOVERNMENTAL REGULATION
The Company is involved in the medical services industry, which is the
subject of intense governmental regulation by both federal and state agencies.
Complying with governmental regulations increases the expense and directly
affects the way the Company is permitted to conduct its business. With regard to
federal regulation, the Company is subject to the laws, rules and regulations
which create and regulate federal Medicare and Medicaid programs (the "Medicare
Laws"). The Medicare Laws regulate the medical services industry as it relates
to federal government reimbursements for patient services, including ophthalmic
services. The Medicare laws prohibit the offering, payment, solicitation or
receipt of remuneration, directly or indirectly, for the referral of patients to
receive services for which payment may be made under Medicare, Medicaid, and
other federal programs. It is unlawful for health care providers to offer, pay,
or accept any "remuneration" in return for the referral of a person for medical
services covered under the Medicare or Medicaid programs, if the payment was
intended to induce the referral.
The Company monitors its business activity to assure compliance with
applicable Medicare Laws. Medicare Laws and regulations thereunder are the
subject of ongoing revisions, both through new laws, new regulations, and new
interpretations of existing laws or regulations. The Department of Health and
Human Services of the United States has enacted regulations pertaining to
Medicare and Medicaid fraud and abuse, which regulations promulgate a "safe
harbor" for certain activities and relationships of persons and entities
providing health care services. The safe harbor provisions pertain to investment
interests in large, publicly-traded companies, investment interests in smaller,
privately-held entities, space rental, equipment rental, personal services and
management contracts, sale of professional practice from one practitioner to
another, referral services, warranties, discounts, bona fide employment
arrangements, group purchasing organizations, and waiver of certain beneficiary
co-insurance and deductible amounts. The Company does not believe that it is in
violation of the Medicare Laws relating to fraud and abuse or otherwise. In the
event that the Company or any of its subsidiaries were found to be in violation
of such regulations, it could have a material adverse effect on the Company's
business operations, income, and financial condition, which could involve
criminal penalties and fines, exclusion from the Medicare system, and civil
claims of third parties.
A substantial portion of the revenues received by the Company's Centers
and is dependent upon reimbursement from Medicare, Medicaid, or private
insurance companies. The estimated percentages of revenues received from
Medicare, Medicaid and private insurance reimbursements are 63%, 5%, and 26%,
respectively. Medicare and Medicaid reimbursement is subject to guidelines
established by the Health Care Financing Administration and, accordingly, may be
subject to reduction or other changes not related to the actual costs of eye
care procedures performed. Management believes that the current trend of
reductions in allowance for various procedures performed in the Company's
Centers may continue. Additionally, administrative expenses and reimbursement
delays may, from time to time, be associated with third-party reimbursements.
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Medicare reimbursement rates for certain procedures performed by doctors
associated with the Company were decreased in various amounts in January 1996
and again in January 1997. The reductions in 1997 are expected to be more modest
than in 1996, however, additional reductions are expected in Medicare
reimbursement in the future. If the Company is not able to offset these
reductions by a combination of increases in volume and decreases in operating
costs, these reductions will have a negative impact on the results of Center
operations.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the Company's executive officers, their ages,
positions with the Company and year each became an officer of the Company.
Served as
Name Age Capacities in which Served Officer Since
- ---- --- -------------------------- -------------
Andrew W. Miller 53 Chairman 1990
Thomas P. Lewis 42 President and Chief Executive 1985
Officer
Ronald L. Edmonds 41 Executive Vice President and Chief 1992
Financial Officer
Donald A. Hood, 52 President and Chief Executive 1994
O.D. Officer of EHN; Senior Vice
President - Managed Care of Omega
Randall N. 44 National Optometric Director and 1986
Reichle, O.D. Vice President
Cassandra T. Speier 38 Senior Vice President - Center 1994
Operations
Set forth below is biographical information concerning the executive officers of
the Company:
ANDREW W. MILLER has served as the Company's Chairman since September 30,
1990 and has been a principal stockholder of the Company since 1986. Mr. Miller
served as the Company's Chief Executive Officer from September 30, 1990 until
March 1, 1991. Since 1989, Mr. Miller has served as Chairman of American
Healthmark, Inc., a hospital ownership and management corporation. Mr. Miller
has also served as a director of Surgical Care Affiliates, Inc. ("SCA"), an
owner and operator of outpatient health care facilities, from 1987 until its
recent acquisition by HealthSouth. Mr. Miller served as President and Chief
Executive Officer of SCA from its founding in 1982 until May 1987 and from May
1987 until 1990 served as its Vice Chairman and Chairman of the Executive
Committee. Mr. Miller was a Senior Vice President of Hospital Corporation of
America ("HCA") and President of HCA Management Company ("HMC"), a division of
HCA, prior to leaving HCA and founding SCA in 1982. Mr. Miller was with HCA for
12 years starting in 1970. Mr. Miller is a certified public accountant and prior
to his association with HCA was employed by a national accounting firm.
THOMAS P. LEWIS has served as the Company's President since January 1990
and its Chief Executive Officer since March 1, 1991. From June 1988 to December
1989, he served as Executive Vice President and Chief Operating Officer. From
June 1986 until the merger with Omega Health Services, Inc. in June 1988, he
served as the Company's President and Chief Executive Officer. He has been a
Director since June 1986. From June 1985 to June 1986, Mr. Lewis served as the
Company's Vice President. A graduate of Rice University, Mr. Lewis holds a
Masters degree in Health Care Administration from Trinity University.
RONALD L. EDMONDS has served as the Company's Executive Vice President
since January 1997 and its Chief Financial Officer since September 1992. From
September 1992 until December 1996, he served as Senior Vice President. He was
elected a director in February 1993 and Secretary in October 1994. From 1978
until 1992, he served in various positions with KPMG Peat Marwick in Memphis,
Tennessee, Oklahoma City, Oklahoma and New York City, New York. Mr. Edmonds is a
certified public accountant and holds B.S. and M.S. degrees in accounting from
Oklahoma State University.
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DONALD A. HOOD, O.D. was one of the founders of The Eye Health Network,
Inc. in 1988 and presently serves as its President and Chief Executive
Officer and as Senior Vice President - Managed Care of the Company. He was
elected to the Company's board of directors in April 1994. Dr. Hood has
maintained a private optometry practice in the Denver, Colorado area since
1972. Dr. Hood graduated from the Pacific University College of Optometry in
1968.
RANDALL N. REICHLE, O.D., F.A.A.O., has served as a Company Vice
President, since July 1986 and is currently National Optometric Director of the
Company. Dr. Reichle has maintained a private optometric practice in Houston,
Texas since July 1976. He has also served as Center Director for the Company's
Eye Center in Houston, Texas since July 1986. Dr. Reichle is a 1976 graduate of
the University of Houston College of Optometry.
CASSANDRA T. SPEIER has served as Senior Vice President -- Center
Operations for the Company since July 1994. From 1990 to 1994, Ms. Speier
served in various management positions with MedCath, Inc. of Charlotte, North
Carolina. She was previously employed as regional director of Medivision,
Inc. Ms. Speier has a Masters Degree from Loma Linda University and a
Bachelor's Degree from the University of Colorado.
There are no family relationships between any of the officers and
directors of the Company.
EMPLOYEES
At December 31, 1996, the Company had a total of 329 employees with 275 of
those employed on a full-time basis.
ITEM 2. PROPERTIES
The Company's principal offices situated at 5100 Poplar Avenue, Suite
2100, Memphis, Tennessee 38137, consisting of approximately 5,600 square feet,
are leased from an independent third party, pursuant to a lease which expires in
May 1998. Additionally, the Company, through wholly-owned subsidiaries, leases
an aggregate of approximately 82,563 square feet, used for the headquarters of
The Eye Health Network in Denver, Colorado, and Centers owned by the Company.
Monthly lease payments for these facilities aggregate approximately $108,158.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation incidental to its
business. The Company is not involved in any material litigation at this time,
and management is not aware of any legal claim or matter that may have a
material adverse effect upon the results of operations or financial condition of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on The Nasdaq Small-Cap Market under
the symbol OHSI. The following table sets forth the quarterly high and low sales
price information for the Company's common stock during the period from January
1, 1995 through December 31, 1996. Such prices represent prices between dealers
and do not include retail mark-ups, mark-downs or commissions.
1996 1995
--------------------------- ------------------------------
High Low High Low
---- --- ---- ---
First Quarter $6.00 $5.00 $5.50 $4.50
Second Quarter 6.63 5.25 5.50 4.75
Third Quarter 6.83 5.75 6.00 4.63
Fourth Quarter 7.00 6.00 6.00 5.25
There were 406 holders of record of the Common Stock as of March 1, 1997.
The Company believes it had in excess of 1,000 beneficial owners of Common Stock
as of March 1, 1997. The Company has not paid any cash dividends and does not
anticipate paying cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On May 17, 1996, the Registrant completed the sale of 729 shares of its Series A
convertible preferred stock. The placement agent for the issue was Swartz
Investments, LLC. The preferred stock was issued to qualified foreign investors
pursuant to Regulation S under the Securities Act . The aggregate offering price
was $7,290,000. The placement agent fee was $729,000. Each share of preferred
stock was issued at a purchase price of $10,000 and is convertible into common
stock at an exercise price equal to the lesser of $5.75 or 85% of the average
bid price of the common stock at the time of conversion. The preferred stock
automatically converts at the end of three years if not already converted. Until
conversion, the preferred stock has a 8% dividend, payable in kind. In
connection with the placement, the purchasers of the preferred stock were
granted options to acquire 633,913 additional shares of the Registrant's common
stock at an exercise price of $5.75, which options are exercisable until May 17,
2001. The placement agent was issued warrants to purchase an additional 126,782
shares of common stock with the same exercise price and term. As of December 31,
1996, 670 of the 729 shares of convertible preferred stock have been converted.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues $19,109,687 21,761,449 27,636,067 32,395,471 42,737,193
Net earnings (loss) (5,397,871) 359,357 112,407 480,874 1,303,126
Earnings (loss) available to common
shareholders (1) (5,397,871) (359,357) 112,407 480,874 (170,597)
Net earnings (loss) per common
share (1) (1.38) 0.09 0.02 0.10 (.03)
December 31,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Total assets 8,096,701 7,935,321 9,352,369 11,740,395 27,439,557
Long-term obligations, net 1,875,853 1,262,929 1,122,994 1,597,904 7,205,174
Stockholders' equity 1,159,337 2,534,484 3,400,724 3,961,247 15,043,163
(1) after adjustment in 1996 for imputed dividends on convertible preferred stock as required by a
Securities and Exchnage Commission announcement on March 28, 1997. Absent the impact of this
announcement, the Company would have reported earnings per share of $.20 for the year ended December 31,
1996. See note 1 to the consolidated financial statements included elsewhere herein.
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto included elsewhere
herein.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
Total revenues for the year ended December 31, 1996 increased $9,677,000
or 30% over total revenues for the year ended December 31, 1995. Each of the
Company's three major divisions experienced significant growth.
Center net revenues increased $5,824,000 or 29%. Approximately 6% of this
increase resulted from significant volume growth in existing centers. This
increase in revenue from existing Centers was achieved despite a reduction in
Medicare reimbursement effective January 1, 1996 estimated to be approximately
8% of Center net revenues. The remainder of the increase (approximately 23%)
resulted from the acquisition of the assets of three practices and two
ambulatory surgery centers. The practices and ambulatory surgery centers
acquired included an additional practice in Nashville, a practice and associated
ambulatory surgery center in Tallahassee, Florida, and a practice and a 75%
interest in an ambulatory surgery center in Dallas, Texas.
Managed care revenues increased approximately $4,097,000 or 39%. EHN
continued to experience significant increase in covered members, reaching
approximately 2,000,000 at December 31, 1996.
Supply and equipment sales increased $239,000, or 13%, over 1995 supply
and equipment sales in the prior year, reflecting the continued expansion of the
mobile surgical service and a decrease in lower margin capital equipment sales.
Management and other revenues decreased $358,000, reflecting a reduction
in fees earned by VisionAmerica Laser Centers and a reduction in management fees
from managed centers in which the Company does not have an ownership interest as
the Company focuses on centers in which it has an equity interest.
Center operating expenses increased at a lower rate than Center net
revenues, reflecting the overall growth and development of existing Centers. The
margin improvement was significant in Clearwater and St. Louis, which have been
problem locations. Eye care claims increased at a greater rate than managed care
revenues, reaching 81% of managed care revenues in 1996, compared to 72% in
1995. This reduced margin is the result of higher than expected utilization,
especially late in the year and a decreased level of fees from participating
providers and networks. Selling, general and administrative expenses increased
16% due to costs associated with the growth in managed care operations,
equipment and supply operations and corporate support services.
The Company had earnings from operations of $1,753,000 in 1996, compared
to $763,000 in 1995.
Interest expense increased by $338,000 or 116% due to higher debt levels,
primarily incurred in connection with the Tallahassee and Dallas acquisitions.
The Company reported no Federal income tax expense for 1996 as it is in a
net operating loss carryforward position. As of December 31, 1996, the Company
had available net operating loss carryforwards, subject to Internal Revenue Code
Section 382 limitations, of $8,000,000 expiring from the year 2000 to 2007.
Net earnings increased from $481,000 in 1995 to $1,303,000 in 1996,
reflecting the Company's growth and improved margins in its Center operations.
11
<PAGE>
YEARS ENDED DECEMBER 31, 1995 AND 1994
Total revenues for the year ended December 31, 1995 increased $5,299,000
or 19% over total revenues for the year ended December 31, 1994. All of the
Company's operations experienced significant growth during 1995, with the
exception of management and other revenues.
Managed care revenues increased approximately $2,486,000, or 31%. EHN
continued to experience significant growth in covered members, reaching
approximately 1,500,000 at December 31, 1995.
Center net revenues increased $2,154,000 or 12%. This increase resulted
from significant growth in two Center locations and modest revenue growth in
most other Centers, partially offset by problems experienced in two Center
locations. The 1995 results continued to be significantly affected by operating
problems experienced in two Center locations, Clearwater and St. Louis. These
two centers had losses aggregating $840,000 in 1995, compared to $637,000 in
1994. In August 1995, a new principal surgeon began practice in St. Louis.
Supply and equipment sales increased $751,000, or 69%, over supply and
equipment sales for the prior year. This growth resulted from the development of
a mobile surgical program and the expansion of marketing to optometrists
affiliated with various Omega networks.
Management and other revenues decreased $92,000, reflecting a reduction in
management fees earned from managed practices in which the Company does not have
an ownership position, partially offset by development fees generated by
VisionAmerica Laser Centers, the Company's excimer laser development subsidiary.
Center operating expenses increased at a rate slightly lower than the
increase in center net revenues. Eye care claims increased at a rate slightly
lower than the increase managed care revenues. Selling, general and
administrative expenses increased approximately 21% primarily as a result of
increased costs associated with the Company's managed eye care operations.
The Company had earnings from operations of $763,000 in 1995 compared
to $270,000 in 1994.
Interest expense increased $57,000 reflecting higher debt levels. Total
debt and capital lease obligations increased approximately 43%, as a result
primarily of capital expenditures and capital lease obligations incurred in 1995
related largely to relocating and enlarging the Nashville center and relocating
and adding an ambulatory surgery center to the Omaha center.
Net earnings increased from $112,000 in 1994 to $481,000 in 1995.
YEARS ENDED DECEMBER 31, 1994 AND 1993
Total revenues for the year ended December 31, 1994 increased $5,875,000,
or 27%, over total revenues for the year ended December 31, 1993. This growth
was led by a 156% increase in managed care revenues as EHN continued to
experience significant growth in covered members. Center net revenues increased
$411,000, or 2.4%, resulting from revenue growth in a number of Centers,
partially offset by problems experienced in three Center locations. Management
and other revenues increased $140,000, or 19%, primarily due to growth in
management fees from independent ophthalmic practices. Supply and equipment
sales increased $416,000, or 58% due to expansion of marketing to surgery
facilities associated with various Omega networks. The Company had earnings from
operations of $270,000 in 1994 compared to a loss from operations of $29,000 in
1993.
12
<PAGE>
The 1994 results were also significantly affected by operating problems
experienced in three locations, Clearwater, Portland and St. Louis. These three
centers had losses aggregating $907,000 in 1994, compared to $367,000 in 1993.
Earnings were also negatively impacted by legal costs and other expenses related
to the pooling-of-interests with EHN.
Interest expense decreased $84,000 or 26% reflecting lower debt levels and
interest rates. Total debt and capital lease obligations decreased approximately
14%.
Net earnings decreased from $359,000 in 1993 to $112,000 in 1994. The 1993
earnings included non-recurring gains of $642,000 from the sale of unprofitable
eye care centers in Jackson, Mississippi and Knoxville, Tennessee, as well as
the sale of certain surgical assets of the ambulatory surgical center in
Nashville, Tennessee. In 1994, a loss of $51,000 was recorded for the planned
closure of the Portland center.
LIQUIDITY, CASH FLOWS AND CAPITAL RESOURCES
At December 31, 1996, the Company had working capital of $4,773,000,
compared to $1,226,000 in 1995. Cash totaled $2.9 million at December 31, 1996,
compared to $2.7 million in 1995. Long-term debt and capital lease obligations
increased from $3,153,000 in 1995 to $8,411,000 in 1996, reflecting primarily
borrowings associated with acquisitions.
For the year ended December 31, 1996, the Company used $50,000 in cash in
operating activities and used $8,430,000 in investing activities. Financing
activities generated cash of $8,688,000. The decrease in cash flow generated by
operations is the result of the working capital requirements associated with the
Company's acquisitions. Cash flows from operations included significant
adjustments for depreciation and amortization ($1,232,000) and the provision for
doubtful accounts ($367,000). The investing cash flows are directly attributed
to the acquisition program and capital expenditures of $721,000. Financing
activities included the sale of $7.29 million in Series A Convertible Preferred
Stock and borrowings associated with the acquisition program.
For the year ended December 31, 1995, the Company generated cash of
$1,871,000 in operating activities and used $1,000,000 in investing activities.
Financing activities used $374,000. Cash flows from operations included
significant adjustments for depreciation and amortization ($1,130,000) and the
provision for doubtful accounts ($445,000). Cash flows from investing activities
consisted principally of capital expenditures. Significant financing activities
included $946,000 in principal payments on debt and leases, and $572,000 in
proceeds of new debt.
For the year ended December 31, 1994, the Company generated cash of
$1,425,000 in operating activities and used $794,000 in investing activities.
Financing activities generated $427,000. Cash flows from operations included
significant adjustments for depreciation and amortization ($1,213,000) and the
provision for doubtful accounts ($505,000). Cash flows from investing activities
consisted principally of capital expenditures. Significant financing activities
included $941,000 in principal payments on debt and leases, $628,000 in proceeds
of new debt and $740,000 in net proceeds from sale of stock.
On May 17, 1996, the Company completed the sale of $7,290,000 in
convertible preferred stock. Subject to certain limitations, the preferred stock
is convertible into common stock at an exercise price equal to the lesser of
$5.75 or 85% of the average bid price of the common stock at the time of
conversion. The preferred stock automatically converts at the end of three years
if not already converted. The preferred stock has a 8% dividend, payable in
kind, until conversion. In addition, the investors received warrants to purchase
approximately 634,000 additional shares at an exercise price of $5.75. The net
proceeds were approximately $6.49 million and were used to repay the bridge
financing incurred in the Tallahassee practice acquisition, to finance a portion
of the cost of the Dallas transaction and for working capital. Of the 729 shares
of preferred stock issued, 670 shares had been converted into 1,370,097 shares
of common stock at December 31, 1996.
13
<PAGE>
In February, 1997, the Company entered into a $15,000,000 revolving credit
agreement with Nations Credit Commercial Corporation for the purpose of
refinancing certain existing debt, providing working capital and financing
acquisitions. This facility and the proceeds of the 1996 preferred stock are
expected to meet the Company's financing needs to support the Company's normal
operations for the next twelve months and to support the Company's proposed
acquisition program through the third quarter of 1997. The Company may seek
additional debt or equity financing to allow it to sustain its acquisition
program.
CAPITAL EXPENDITURES
The Company used $720,000 for capital expenditures in 1996 compared to
$914,000 in 1995 and $779,000 in 1994. In addition, the Company incurred capital
lease obligations of $981,000 in 1996, $1,275,000 in 1995 and $76,000 in 1994.
These capital expenditures consisted primarily of ophthalmic equipment for use
in the Company's centers and satellite locations. The higher levels in 1995
reflect the relocation and expansion of the Nashville and Omaha centers. Capital
expenditures in 1997 are estimated at approximately $1.2 million, exclusive of
the assets of additional practice locations.
RECENT DEVELOPMENTS
On March 5, 1997 the Company completed the acquisition of the assets of
the ophthalmology practice of Sarah J. Hays, M.D. of Birmingham, Alabama.
Simultaneously with the acquisition, the Company entered into a long-term
management agreement with Dr. Hays' professional corporation. The assets were
acquired in exchange for 108,081 shares of the Company's common stock and
$859,500 in cash. The cash portion of the transaction was financed under the
Company's revolving credit facility .
IMPACT OF INFLATION AND CHANGING PRICES
To date, the Company's business has not been significantly affected by
inflation. A substantial portion of the Company's revenues are dependent on
reimbursement from Medicare, Medicaid or private insurance companies (estimated
to be 63%, 5% and 26% of Center net revenues, respectively) and may be subject
to reduction or other changes not related to the actual costs of eye care
procedures performed. Effective January 1, 1996 and again in January, 1997, the
Medicare reimbursement rates for certain procedures performed by physicians
associated with the Company were decreased in various amounts. If the Company is
not able to offset these reductions by a combination of increases in volume and
decreases in operating costs, these reductions will have a negative impact on
the results of Center operations.
The Company's managed care operations are also subject to price
competition. Many of these contracts may be based on Medicare reimbursement
rates or similar payment methodologies and, as such, may be subject to payment
reduction. Based on the structure of the Company's managed care contracts, most
of any such reductions are born by participating providers.
NEW ACCOUNTING STANDARDS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by the Company be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. This statement requires that the majority of long-lived assets and
certain identifiable intangibles to be disposed of be reported at the lower of
carrying amount or fair value less cost to sell. Implementation of this
statement did not have a material impact on the Company's financial statements.
14
<PAGE>
In October 1995 the Board adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), which
provides that companies adopt a method of accounting for stock compensation
awards based on estimated fair value at the date the awards are granted using an
accepted pricing model. The resulting charge to income is recognized over the
period during which the options or awards vest. The Board encourages recognition
of such expense in the statement of income but does not require it. If expense
is not recorded in the financial statements, FAS 123 requires pro forma
disclosures regarding the effects on net income per share had expense been
recognized.
The Financial Accounting Standards Board has issued SFAS 128, "Earnings
per Share," and SFAS 129, "Disclosure of Information about Capital Structure."
SFAS 128 establishes standards for computing and presenting earnings per share
and applies to entities with publicly held common stock. SFAS 129 establishes
standards for disclosing information about an entity's capital structure and
applies to all entities. Management believes that the Company's adoption of
these standards, when effective, will not have a significant impact on the
Company's consolidated financial statements.
The Financial Accounting Standards Board has issued SFAS 128, "Earnings
per Share," and SFAS 129, "Disclosure of Information about Capital Structure."
SFAS 128 establishes standards for computing and presenting earnings per share
and applies to entities with publicly held common stock. SFAS 129 establishes
standards for disclosing information about an entity's capital structure and
applies to all entities. Management believes that the Company's adoption of
these standards, when effective, will not have a significant impact on the
Company's consolidated financial statements.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(A) FINANCIAL STATEMENTS
Index to Consolidated Financial Statements: Page
----
Independent Auditors' Report 19
Consolidated Balance Sheets as of
December 31, 1996 and 1995 20
Consolidated Statements of Operations
for the Years Ended December 31, 1996, 1995 and 1994 22
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994 23
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1996, 1995 and 1994 24
Notes to Consolidated Financial Statements 25
15
<PAGE>
(b) Supplementary Data - Selected quarterly financial data (unaudited):
1996
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------------------
Total revenues $ 8,897,727 10,462,495 11,105,924 12,271,047
Earnings from operations 180,956 420,577 478,334 673,090
Net earnings 122,129 297,330 410,369 473,298
Earnings (loss) available to
common shareholders (1) 122,129 (1,062,041) 303,484 460,831
Earnings (loss) per common
share (1) $ 0.03 (0.22) 0.06 0.07
1995
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------------------
Total revenues $ 7,873,728 8,410,478 8,381,017 8,270,248
Earnings from operations 153,727 220,224 107,243 281,347
Net earnings 108,833 200,256 164,278 7,507
Earnings per common share $ 0.02 0.04 0.06 -
(1) after adjustment in the second quarter of 1996 for imputed dividends on
convertible preferred stock as required by a Securities and Exchnage Commission
announcement on March 28, 1997. Absent the impact of this announcement, the
Company would have reported earnings per share of $.05 for the second quarter
ended June 30, 1996. See note 1 to the consolidated financial statements
included elsewhere herein.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
16
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, COMPLIANCE WITH
SECTION 16(A) OF THE ACT
Set forth below is biographical information concerning the directors of the
Company:
RONALD L. EDMONDS (41) has served as the Company's Executive Vice
President since January 1997 and Chief Financial Officer since September 1992.
From September 1992 until December 1996, he served as Senior Vice President. He
was elected a director in February 1993 and Secretary in October 1994. From 1978
until 1992, he served in various positions with KPMG Peat Marwick in Memphis,
Tennessee, Oklahoma City, Oklahoma and New York City, New York. Mr. Edmonds is a
certified public accountant and holds B.S. and M.S. degrees in accounting from
Oklahoma State University.
DONALD A. HOOD, O.D. (52) was one of the founders of The Eye Health
Network, Inc. in 1988 and presently serves as its President and Chief Executive
Officer. He was elected to the Company's board of directors in April 1994. Dr.
Hood has maintained a private optometry practice in the Denver, Colorado area
since 1972. Dr. Hood graduated from the Pacific University College of Optometry
in 1968.
THOMAS P. LEWIS (42) has served as the Company's President since January
1990 and as its Chief Executive Officer since March 1, 1991. From June 1988 to
December 1989, he served as Executive Vice President, and Chief Operating
Officer. Mr. Lewis has been the Company's Secretary since June 1986. From June
1986, until the merger with Omega Health Services, Inc., in June 1988, he served
as the Company's President and Chief Executive Officer. He has been a director
since June 1986. From June 1985 to June 1986, Mr. Lewis served as the Company's
Vice President.
ANDREW W. MILLER (53) has served as the Company's Chairman since September
1990 and has been a principal shareholder of the Company since 1986. Mr. Miller
served as the Company's Chief Executive Officer from September 30, 1990 until
March 1, 1991. Since 1989, Mr. Miller has served as Chairman of American
HealthMark, Inc., a hospital ownership and management corporation and since 1996
has served as chairman and chief executive officer of Women's Health Partners, a
physician practice management company focused on obstetrics and gynecology. Mr.
Miller also served as a director of Surgical Care Affiliates, Inc. ("SCA"), an
owner and operator of outpatient health care facilities, from 1987 until its
merger with HealthSouth, Inc. in 1996. Mr. Miller served as President and Chief
Executive Officer of SCA from its founding in 1982 until May 1987 and from May
1987 until 1990 served as its Vice Chairman and Chairman of the Executive
Committee. Mr. Miller is also a director of Healthwise of America, Inc., a
former affiliate of SCA until its acquisition by United Healthcare in 1996. Mr.
Miller was a Senior Vice President of Hospital Corporation of America ("HCA")
and President of HCA Management Company ("HMC"), a division of HCA, prior to
leaving HCA and founding SCA in 1982. Mr. Miller was with HCA for 12 years
starting in 1970. Mr. Miller is a certified public accountant and prior to his
association with HCA, he was employed by a national accounting firm.
HERMAN L. TACKER, O.D. (58) has served as a director of the Company since
May 1989. Previously, he was a director of Omega Health Services, Inc. from
October 1985, until it merged with the Company in June 1988. From 1972 to the
present, Dr. Tacker has conducted a private optometric practice in Memphis,
Tennessee, and has served as a Professor at the Southern College of Optometry.
He graduated from Southern College of Optometry in 1965 and in 1969 earned a
M.S. Degree in Education from Indiana University.
17
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The federal securities laws require the Company's directors and officers,
and persons who own more than ten percent of a registered class of the Company's
equity securities, to file with the Securities and Exchange Commission initial
reports of ownership and reports of changes in ownership of any securities of
the Company. To the Company's knowledge, based solely on review of the copies of
such reports furnished to the Company and representations that no other reports
were required, during the fiscal year ended December 31, 1996, all of the
Company's officers and directors made all required filings, except that each
director and officer filed one late annual report on Form 5.
ITEM 10. EXECUTIVE COMPENSATION
The following table shows the aggregate cash compensation paid by the
Company to (i) the chief executive officer, and (ii) the executive officers of
the Company for the years ended December 31, 1996, 1995, and 1994.
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Long Term
Other Annual Compensation
Name and Position Year Salary ($) Bonus ($) Compensation ($) Options (#)
- ----------------- ---- ---------- --------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
Thomas P. Lewis 1996 104,000 14,426 -0- -0-
President and Chief Executive 1995 104,000 6,000 8,335(1) -0-
Officer 1994 96,000 8,500 8,335(1) -0-
Ronald L. Edmonds 1996 92,000 9,617 -0- 25,000
Executive Vice President and 1995 92,000 4,000 -0- -0-
Chief Financial Officer 1994 85,000 7,000 -0- -0-
Cassandra T. Speier 1996 89,000 -0- -0- 25,000
Senior Vice President - 1995 86,833 1,250 -0- -0-
Center Operations 1994 38,958 -0- -0- 15,000
Randall N. Reichle, O.D. 1996 84,000 52,115 -0- 5,000
Vice President and 1995 84,000 46,333 -0- -0-
National Optometric Director 1994 82,500 37,765 -0- -0-
Donald A. Hood, O.D. 1996 85,000 54,959 -0- -0-
The Eye Health Network 1995 85,000 25,000 -0- -0-
President and Chief Executive 1994 85,000 39,654 -0- 50,000
Officer
(1) In January 1990, the Company entered into a stock bonus arrangement with Mr. Lewis, pursuant
to which Mr. Lewis was issued 1,667 shares on each January 1, for five years, commencing January
1, 1991, provided Mr. Lewis was an employee of the Company on such dates. The stock bonus
arrangement was partial compensation for Mr. Lewis' relocation to Memphis, Tennessee.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Option Grants in 1996(1)
------------------------
Potential Realizable
Value at Assumed Rates of
% of Total Options Exercise Stock Appreciation for
Options Granted to Price Option Term
Name Granted Employees in 1996 ($/Sh) Expiration Date 5%($) 10%($)
- ---- ------- ----------------- ------ --------------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Ronald L. Edmonds 25,000 20% $5.75 August, 2002 48,889 110,912
Cassandra T. Speier 25,000 20% $5.75 August, 2002 48,889 110,912
Randall N. Reichle 5,000 4% $5.75 August, 2002 9,778 22,182
Aggregated Option Exercises in 1996(1) and Year end Option Values(2)
--------------------------------------------------------------------
Number of Unexercised Options Value of Unexercised In-The-Money Options
at Year End at Year End ($)
Name Exercisable/Unexercisable Exercisable/Unexercisable (2)
- ---- ------------------------- -----------------------------
<S> <C> <C>
Thomas P. Lewis 21,667/18,333 $78,650/$66,550
Ronald L. Edmonds 12,667/35,333 $45,980/$59,510
Randall N. Reichle, O.D. 3,667/12,333 $13,310/$31,020
Donald A. Hood, O.D. 0/50,000 $0/$140,000
Cassandra T. Speier 0/40,000 $0/$53,950
(1) During 1996, no options were exercised by any executive officer.
(2) Option values are based on a December 31, 1996 market price per share of $6.63.
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 1, 1997, the Company's records indicated that the following
number of shares were beneficially owned by (i) each person known by the Company
to beneficially own more than 5% of the Company's shares; (ii) directors and
persons nominated to become directors of the Company and executive officers; and
(iii) directors and officers of the Company as a group.
<TABLE>
<CAPTION>
Name of Beneficial Owner Amount and Nature of Percent of Class(1)
------------------------ Beneficial Ownership (1) -------------------
------------------------
<S> <C> <C>
(i) The Dreyfus Corporation
c/o Mellon Bank Corporation
One
Mellon Bank Center
Pittsburgh, PA 15258 650,000 8.20%
(ii) Andrew W. Miller(2) 324,992 4.10%
Herman L. Tacker, O.D.(3) 133,553 1.68%
Thomas P. Lewis(4) 152,689 1.93%
Ronald L. Edmonds(5) 15,516 0.20%
Donald A. Hood, O.D. 80,038 1.01%
Randall N. Reichle, O.D.(6) 10,393 0.18%
Cassandra T. Speier -0- -0-
(iii) Directors and Executive Officers as a group 720,949 9.09%
(7 persons)(7)
</TABLE>
19
<PAGE>
(1) Unless otherwise indicated, beneficial ownership consists of sole voting
and investing power based on 7,926,935 shares issued and outstanding, including
options and warrants to purchase 1,049,623 shares which are exercisable or
become exercisable within 60 days.
(2) Included in Mr. Miller's shares are options to purchase 10,000 shares.
(3) Of the total of 133,553 shares shown, 16,875 are held jointly by Dr.
Tacker and his wife, Wilma R. Tacker. Included in Dr. Tacker's shares are
options to purchase 11,667 shares.
(4) Included in Mr. Lewis' shares are options to purchase 21,667 shares.
(5) Included in Mr. Edmond's shares are options to purchase 12,667 shares.
(6) Included in Mr. Reichle's shares are options to purchase 3,667 shares.
(7) Included in the ownership of directors and executive officers as a group
are options to purchase 59,667 shares, which are exercisable or become
exercisable within 60 days.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has, and expects to have, transactions in the ordinary course
of its business with directors and officers of the Company and their affiliates,
including members of their families or corporations, partnerships or other
organizations in which such officers or directors have a controlling interest,
on substantially the same terms (including price, or interest rates and
collateral) as those prevailing at the time for comparable transactions with
unrelated parties. The Company has an agreement to perform management services
for Cathleen M. Schanzer, M.D., the Medical Director for the Company's Memphis
Center. Dr. Schanzer is the wife of the Company's president, Thomas P. Lewis.
The management agreement includes payments to Dr. Schanzer equal to 35% of the
cash receipts of the practice, but with minimum payments to her totaling
$200,400 per year. Dr. Schanzer received approximately $389,000 in 1996 pursuant
to the management agreement.
On March 13, 1996, the Company acquired the assets of an ophthalmology
practice known as Capital Eye Center located in Tallahassee, Florida and entered
into a long-term management agreement with the selling physician's professional
corporation. In addition, the Company acquired all of the stock of an ambulatory
surgery center associated with the practice known as Capital Eye Surgery Center.
The total consideration for these transactions included cash of $2 million and a
$1.4 million 7% convertible subordinated note due in 60 monthly installments. In
connection with this transaction, the Company obtained bridge financing in the
form of a 12% $2.5 million subordinated note. The financing was obtained from an
affiliate of the Company's chairman of the board, Andrew W. Miller. The note was
repaid June 12, 1996 with the proceeds of the sale of preferred stock.
20
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(1) Exhibits
--------
Exhibit
Number Description
- ------ -----------
3.1 Articles of Incorporation*
3.2 Amendment to Articles of Incorporation**
3.3 Bylaws*
4.1 Form of Common Stock Certificate*
4.2 Certificate of Designation of Series A Preferred Stock **
11 Statement Re: Computation of Per Share Earnings
22 Subsidiaries of the Registrant
23 Consent of Independent Public Accountants
27 Financial Data Schedule (Electronic filing only)
* Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-18, Registration No. 33-35262-A.
** To be filed by amendment.
(2) Reports on Form 8-K
--------------------
The Company filed a current report on Form 8-KA on November 25, 1996. The Form
8-KA included the financial statements required in connection with the
acquisition of substantially all of the assets of EyeCare and SurgeryCenter of
North Texas, P.A. and the formation of SurgEyeCare General Partnership.
21
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange Act,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OMEGA HEALTH SYSTEMS, INC.
By s/s Thomas P. Lewis
-----------------------------
Ronald L. Edmonds
Executive Vice President
and Chief Financial Officer
Date April 29, 1997
----------------------------
22
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
Omega Health Systems, Inc.
We have audited the accompanying consolidated balance sheets of Omega Health
Systems, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 financial position of Omega Health
Systems, Inc. and subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Memphis, Tennessee
March 13, 1997
23
<PAGE>
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
Assets 1996 1995
------ ---- ----
Current assets:
Cash $2,943,617 2,735,556
Patient accounts receivable, net of
allowances for contractualadjustments
and doubtful accounts of $1,760,000 and
$1,674,000 in 1996 and 1995, respectively 5,990,723 3,785,063
Other receivables 484,460 617,585
Prepaid expenses and other assets 534,661 268,964
---------- ----------
Total current assets 9,953,461 7,407,168
Equipment, furniture and fixtures (notes 3 and 4):
Owned 9,254,482 7,211,780
Held under capital lease 2,542,029 1,542,439
---------- ----------
11,796,511 8,754,219
Less accumulated depreciation (5,965,932) (5,145,756)
---------- ----------
Net equipment, furniture and fixtures 5,830,579 3,608,463
Intangible assets, net of amortization of $411,536
and $114,709 in 1996 and 1995, respectively
(note 2) 10,513,937 452,532
Other assets (note 5) 1,141,580 272,232
---------- ----------
$27,439,557 11,740,395
=========== ==========
See accompanying notes to consolidated financial statements.
24
<PAGE>
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
Liabilities and Stockholders' Equity 1996 1995
------------------------------------ ---- ----
Current liabilities:
Accounts payable $ 1,407,647 1,884,968
Accrued expenses 1,391,549 1,421,235
Eye care claims payable 1,176,068 1,319,635
Current installments of obligations under
capital leases and long-term debt (notes
3 and 4) 1,205,060 1,555,406
------------ -----------
Total current liabilities 5,180,324 6,181,244
Obligations under capital leases, excluding
current installments (note 3) 1,367,718 1,136,413
Long-term debt, excluding current installments
(note 4) 5,837,456 461,491
------------ -----------
Total liabilities 12,385,498 7,779,148
Minority interest in partnership 10,896 -
Stockholders' equity (note 7):
Preferred stock; no par value, 1,000,000
shares authorized; issued 59 shares
in 1996 485,049 -
Common stock, par value of $0.06;
authorized 25,000,000 shares; issued
6,865,787 shares in 1996 and 4,706,175 411,946 282,369
shares in 1995
Additional paid-in capital 22,685,778 12,047,891
Accumulated deficit (8,539,610) (8,369,013)
------------- ------------
Total stockholders' equity 15,043,163 3,961,247
Commitments and contingencies (notes 3 and 9)
------------- ------------
$27,439,557 11,740,395
============= ============
See accompanying notes to consolidated financial statements.
25
<PAGE>
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Center net revenues $ 25,576,743 19,752,926 17,598,777
Managed care revenues 14,642,992 10,546,467 8,060,841
Supply and equipment sales 2,084,878 1,845,744 1,094,250
Management and other revenues 432,580 790,334 882,199
------------ ------------ ------------
Total revenues 42,737,193 32,935,471 27,636,067
Center operating expenses 21,675,900 17,814,960 15,992,923
Eye care claims 11,932,085 7,589,390 5,977,117
Selling, general, and administrative expenses 5,593,414 4,835,891 3,986,001
Cost of sales 1,415,800 1,487,879 904,795
Provision for doubtful accounts 367,037 444,810 505,421
------------ ------------ ------------
Earnings from operations 1,752,957 762,541 269,810
Non-operating revenue (expense):
Interest income 60,010 59,045 29,402
Interest expense (628,730) (290,978) (234,365)
Loss on disposal of eye centers -- (209,290) (50,840)
Other 168,197 159,556 98,400
------------ ------------ ------------
Earnings before minority interest 1,352,434 480,874 112,407
Minority interest in income of partnerships (49,308) -- --
------------ ------------ ------------
Net earnings 1,303,126 480,874 112,407
Preferred dividends, principally those
imputed as described in note 1 (l) (1,473,723) -- --
------------ ------------ ------------
Earnings (loss) available to common
shareholders $ (170,597) 480,874 112,407
============ ============ ============
Earnings (loss) per common share $ (0.03) 0.10 0.02
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
<TABLE>
<CAPTION>
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
Additional Unamortized Total
Preferred Common paid-in Accumulated financing stockholders'
Stock stock capital deficit cost equity
----- ----- ------- ------- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1993 $ - 268,811 11,305,830 (8,962,294) (77,863) 2,534,484
Issuance of 197,461 shares
of common stock - 11,848 664,122 - - 675,970
Net earnings - - - 112,407 - 112,407
Amortization of financing
costs - - - - 77,863 77,863
---------- -------- ---------- ---------- -------- ----------
Balances at December 31,
1994 - 280,659 11,969,952 (8,849,887) - 3,400,724
Issuance of 28,496 shares
of common stock - 1,710 77,939 - - 79,649
Net earnings - - - 480,874 - 480,874
---------- -------- ---------- ---------- -------- ----------
Balances at December 31,
1995 - 282,369 12,047,891 (8,369,013) - 3,961,247
Issuance of 729 shares
of preferred stock 6,494,292 - - - - 6,494,292
Issuance of 1,370,097
shares of common stock
with conversion of 670
shares of preferred stock (6,009,243) 82,206 5,927,037 - - -
Issuance of 789,515 shares
in common stock - 47,371 3,237,127 - - 3,248,498
In-kind dividends on
preferred stock - - 187,252 (187,252) - -
Imputed dividends on
preferred stock - - 1,286,471 (1,286,471) - -
Net earnings - - - 1,303,126 - 1,303,126
---------- -------- ---------- ---------- -------- ----------
Balances at December 31,
1996 $ 485,049 411,946 22,685,778 (8,539,610) - 15,043,163
========== ======== ========== ========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,303,126 480,874 112,407
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,232,204 1,129,606 1,212,674
Provision for doubtful accounts 367,037 444,810 505,421
Minority interest in partnership 49,308 -- --
Loss on disposal of eye care centers -- -- 50,840
Decrease (increase), net of acquisition effects, in:
Accounts receivable (1,724,405) (900,173) (1,183,448)
Other receivables 133,125 (197,356) (38,259)
Prepaid expenses and other current assets (683,631) 8,199 145,789
Increase (decrease), net of acquisition effects, in:
Accounts payable and accrued expenses (572,920) 582,308 157,014
Eye care claims payable (143,567) 322,236 462,534
----------- ----------- -----------
Net cash provided by (used in) operating activities (49,723) 1,870,504 1,424,972
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (720,790) (914,287) (779,345)
Acquisition of assets of physician practices (note 2) (7,128,466) -- --
Investment in Clearvision, Inc. (500,000) -- --
Other (81,180) (85,525) (14,445)
----------- ----------- -----------
Net cash used in investing activities (8,430,436) (999,812) (793,790)
----------- ----------- -----------
Cash flows from financing activities:
Financing costs incurred (50,400) -- --
Principal payments on long-term debt (5,405,542) (718,200) (708,342)
Principal payments on obligations under capital leases (497,889) (228,158) (232,504)
Principal payments on subordinated debt (307,043) -- --
Principal payments on bridge financing (2,500,000) -- --
Proceeds from issuance of bridge financing 2,500,000 -- --
Proceeds from issuance of debt 8,486,715 572,440 627,619
Proceeds from issuance of common stock 6,499 -- 740,136
Proceeds from issuance of preferred stock 6,494,292 -- --
Distributions to minority interest (38,412) -- --
----------- ----------- -----------
Net cash provided by (used in) financing activities 8,688,220 (373,918) 426,909
----------- ----------- -----------
Net increase in cash 208,061 496,774 1,058,091
Cash at beginning of year 2,735,556 2,238,782 1,180,691
----------- ----------- -----------
Cash at end of year $ 2,943,617 2,735,556 2,238,782
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
- --------------------------------------------------------------------------------
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Nature of Operations
--------------------
The Company's significant operations involve the development of
regional eye care delivery systems, which may include (1) developing
and managing ophthalmological centers owned by the Company, (2)
developing networks of ophthalmologists and optometrists, (3)
enhancing and managing pre-existing practices of ophthalmologists,
and (4) negotiating and administering managed care contracts.
(b) Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
(c) Restricted Cash Balances
------------------------
Under certain managed care agreements, the Company is required to
maintain cash reserves of approximately $1.3 million. However, such
reserves are not limited as to use by the related agreements.
(d) Equipment, Furniture and Fixtures
---------------------------------
Equipment, furniture, and fixtures are stated at cost. Equipment,
furniture and fixtures under capital leases are stated at the lower
of the present value of minimum lease payments at the beginning of
the lease term or fair value at the inception of the lease.
Depreciation on equipment, furniture and fixtures is calculated on
the straight-line method over the estimated useful lives of the
assets ranging from five to ten years. Leasehold improvements are
amortized on the straight-line method over the respective lease
term.
(e) Business and Credit Concentrations
----------------------------------
The Company provides health care services through its eye care
centers. The Company grants credit to patients, substantially all of
whom are local residents to each center. The Company generally does
not require collateral or other security in extending credit to
patients; however, it routinely obtains assignment of (or is
otherwise entitled to receive) patients' benefits payable under
their health insurance programs, plans or policies (e.g. Medicare,
Medicaid, Blue Cross and commercial insurance policies).
29
<PAGE>
- --------------------------------------------------------------------------------
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
The mix of receivables from patients and third-party payors as of
December 31, 1996 and 1995 follows:
1996 1995
---- ----
Medicare 46% 50%
Medicaid 8% 9%
Other third-party payors 38% 32%
Patients 8% 9%
---- ----
100% 100%
==== ====
Contracts with two managed care organizations comprised 61%, 69% and
72% of managed care revenues in the years ended December 31, 1996,
1995 and 1994, respectively. No other single managed care contract
comprised more than 9% of such revenues during any of the respective
years.
(f) Center Net Revenues
-------------------
Center net revenues are gross charges for patient services rendered
recorded net of estimated third-party payor contractual adjustments.
The physicians associated with the Company have agreements with
governmental and other third-party payors that provide for payments
at amounts different from their established rates. Contractual
adjustments under third-party reimbursement programs represent the
difference between the billings at established rates for services
and amounts reimbursed by third-party payors. Services rendered
under the Medicare program, the largest third-party payor, are
reimbursed based upon a predetermined fee schedule for the
procedures performed.
(g) Managed Care Revenues
---------------------
Managed care revenues consist of capitated and fee-for-service
amounts received from health maintenance organizations and other
third-party payors for eye care managed care programs. Under its
agreements with participating eye care providers, the Company
retains a percentage of such payments as an administrative fee and
distributes the balance to the providers for eye care claims under
the programs. Managed care revenues also include fees for developing
and administering managed care networks.
(h) Supply and Equipment Sales
--------------------------
Supply and equipment sales are comprised primarily of sales of
ophthalmic supplies and equipment to hospitals, ambulatory surgical
centers and eye care providers. OMS also operates a mobile surgical
service which provides ophthalmic surgical equipment and supplies to
surgical facilities, including hospitals and ambulatory surgery
centers on a per-case basis. The costs related to these sales are
included in cost of sales.
30
<PAGE>
- --------------------------------------------------------------------------------
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
(i) Management and Other Revenues
. -----------------------------
Management and other revenues are comprised primarily of fees earned
for management of ophthalmologists' practices. The management fees
are monthly charges fixed by contractual arrangements with the
respective ophthalmologists. Receivables related to management fees
are included in other receivables.
(j) Intangible Assets
-----------------
Intangible assets arise from business acquisitions made by the
Company. The excess of cost of purchased assets over the fair value
of net assets acquired is amortized straight-line over terms ranging
from ten to forty years, generally the term of the related
management agreement. The recoverability of intangible assets is
reevaluated when warranted by business events and circumstances. The
Company believes that no impairment of such assets has occurred and
that no revisions of estimated useful lives are currently necessary.
(k) Income Taxes
------------
The asset and liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the differences are
expected to reverse.
(l) Earnings (Loss) Per Share
--------------------------
The earnings (loss) per common share for 1996, 1995 and 1994 were
computed by dividing earnings, after giving effect to in-kind and
imputed preferred dividends, by the weighted average number of
shares of common stock and common stock equivalents outstanding
during the year (5,598,926, 4,804,858 and 4,590,991 shares,
respectively).
On March 28, 1997, a formal announcement from the staff of the
United States Securities and Exchange Commission was made available
which impacted the Company's calculation of earnings per share with
respect to the May 1996 issuance of convertible preferred stock
described in note 7. This Announcement generally required that the
Company impute and reognize a preferred dividend for the difference
between the conversion price to preferred shareholders at issuance
and the value of the related common stock solely as measured in the
public market at that date.
The Company has followed the guidance in the announcement in the
calculation of earnings (loss) per share in the accompanying
consoldiated financial statements. Absent the impact of this
Announcement, the Company would have reported earnings per share for
1996 of $0.20.
(m) Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
31
<PAGE>
- --------------------------------------------------------------------------------
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results
could differ from these estimates. In particular, the liability for
eye care claims payable is necessarily based on such estimates and,
accordingly, amounts ultimately paid will be more or less than such
estimates.
(n) Financial Instruments
---------------------
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments," requires that the
Company disclose estimated fair values for its financial instruments
(as defined). The Company's financial instruments principally
consist of cash, net receivables, accounts payable and various
debt instruments. Due to their short-term nature, the fair
values of net receivables and accounts payable approximate their
carrying values. The fair value of the various debt instruments
has been estimated using interest rates currently offered to the
Company for borrowings having similar character, collateral and
duration. The fair value of such instruments approximates the
Company's carrying amounts.
(o) Accounting Changes
------------------
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." SFAS 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by the Company
be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. This statement requires that the majority of
long-lived assets and certain identifiable intangibles to be
disposed of be reported at the lower of carrying amount or fair
value less cost to sell. Implementation of this statement did not
have a material impact on the Company's consolidated financial
statements.
Also effective January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock Based Compensation", which permits entities
to recognize as expense over the vesting period the fair value of
all stock-based awards on the date of grant. Alternately, SFAS 123
allows entities to continue to apply the provisions of APB 25 and
provide pro forma net earnings and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS 123
has been applied. The Company has elected to continue to apply the
provisions of APB 25 and provide the pro forma disclosure provisions
of SFAS 123.
The Financial Accounting Standards Board has issued SFAS No. 128,
"Earnings per Share," and SFAS No.129, "Disclosure of Information
about Capital Structure." SFAS 128 establishes standards for
computing and presenting earnings per share and applies to entities
with publicly held common stock. SFAS 129 establishes standards for
disclosing information about an entity's capital structure and
applies to all entities. Management believes that the Company's
adoption of these standards, when effective, will not have a
significant impact on the Company's consolidated financial
statements.
32
<PAGE>
- --------------------------------------------------------------------------------
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
(p) Reclassifications
-----------------
Certain prior year balances have been reclassified to conform to the
1996 presentation.
(2) Mergers, Acquisitions and Divestitures
--------------------------------------
In March 1994, the Company acquired all of the outstanding stock of The
Eye Health Network, Inc., a Denver based eye health and vision care
provider organization. The Company issued 787,500 shares of its common
stock to the former shareholders of The Eye Health Network to effect the
acquisition, which has been accounted for as a pooling-of-interests. All
previously reported financial information has been restated to give effect
to the pooling.
Details of revenue and earnings of the Company and The Eye Health Network
for the three months prior to consummation of the combination included in
the 1994 combined net earnings are presented below.
Total Net
Revenues Earnings (Loss)
-------- ---------------
Omega Health Systems, Inc. $4,486,357 (107,082)
The Eye Health Network, Inc. 1,675,200 129,759
---------- --------
Combined $6,161,557 22,677
========== ========
On January 2, 1996, the Company completed the acquisition of the stock of
Warren R. Berrie, MD, PC, of Nashville, Tennessee. This acquisition
included substantially all of the assets of the medical practice of Warren
R. Berrie, MD. Simultaneously with the acquisition, the Company entered
into a five year management agreement with Dr. Berrie. The total
consideration for the acquisition of the assets of the Berrie practice was
$650,000, of which $50,000 was paid in cash, with the balance in the form
of a five year subordinated note. The note is due in monthly installments,
bears interest at 7% and is convertible into common stock at a conversion
price of $5.89 per share.
On March 12, 1996, the Company completed the acquisition of the assets of
the ophthalmology practice of Paul R. Garland, MD, of Tallahassee,
Florida. In addition, the Company acquired all of the capital stock of the
surgery center associated with Dr. Garland's practice, Capital Eye Surgery
Center, Inc. Simultaneously with the acquisition, the Company entered into
a twenty-five year management agreement with Dr. Garland's professional
corporation. The total consideration for the Garland transactions was $3.4
million, of which $2 million was paid in cash, with the balance in the
form of a five year subordinated note. The note is due in monthly
installments, bears interest at 7% and is convertible into Omega common
stock at a conversion price of $6.50 per share. In connection with the
Garland acquisition, the Company obtained bridge financing in the form of
a 12% $2.5 million subordinated note. The financing was obtained from an
affiliate of the Company's chairman of the board. The note was repaid June
12, 1996 with the proceeds of the sale of preferred stock.
33
<PAGE>
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OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
On September 10, 1996, the Company completed the acquisition of
substantially all of the net assets of EyeCare and SurgeryCenter of North
Texas, P.A. and ECSC Retina, P.A., two Dallas, Texas professional
associations which practice ophthalmology, in exchange for 771,429 shares
of the common stock. Omega Health Systems of North Texas, Inc. manages the
practices pursuant to long-term management agreements.
Also on September 10, 1996, a subsidiary of the Company and SurgEyeCare,
Inc. entered into a partnership agreement to form SurgEyeCare General
Partnership (the "Partnership"). Under the terms of the partnership
agreement, the Company contributed $4,550,000 cash to the Partnership and
SurgEyeCare, Inc. contributed assets with an agreed value of $6,100,000.
After the initial capital contributions, the Partnership distributed
$4,476,438 in cash to SurgEyeCare, Inc. After these transactions, the
Company owns a 75% interest in the Partnership and SurgEyeCare, Inc. owns
a 25% interest. Under the terms of the partnership agreement, the
subsidiary of the Company is designated as managing partner. The Company
financed the contribution to the Partnership, in part, with the proceeds
of a $3,280,000 acquisition term loan from a commercial bank. The loan
bears interest at the bank's prime rate plus 50 basis points and is due in
48 monthly installments of principal and interest. This loan was
refinanced in February 1997.
The following sets forth certain pro forma financial information for the
twelve months ended December 31, 1996 and 1995 as if the Tallahassee and
Dallas transactions, which were accounted for as purchases, had been
completed as of January 1, 1995:
1996 1995
---- ----
Revenues $46,653,440 30,651,000
Net earnings 1,776,670 1,094,000
Net earnings per common share .03 .20
Weighted average shares 6,114,621 5,465,781
34
<PAGE>
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OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
(3) Leases
The Company and its wholly owned subsidiaries are obligated under capital
leases for equipment and furniture and fixtures that expire within the
next five years. The Company and its wholly owned subsidiaries also have
several noncancellable operating leases for equipment and office space
that expire within the next ten years.
Future minimum lease payments under noncancellable operating leases and
the present value of future minimum capital lease payments as of December
31, 1996 are:
Capital Operating
Leases Leases
------ ------
Years ending December 31:
1997 $847,699 1,446,523
1998 643,981 1,099,197
1999 443,422 933,032
2000 454,127 675,852
2001 77,512 338,691
2002 and thereafter - 569,526
---------- ----------
$2,466,741 $5,062,791
==========
Less amount representing
interest (at an average rate of 11%) 456,559
----------
2,010,182
Less current installments of
obligations under capital leases 642,464
----------
Obligations under capital leases,
excluding current installments $1,367,718
===========
Total rental expense under operating leases for the years ended December 31,
1996, 1995 and 1994 was approximately $1,811,000, $1,418,000 and $1,226,000,
respectively.
35
<PAGE>
- --------------------------------------------------------------------------------
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
(4) Long-term debt
Long-term debt at December 31, 1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Note payable for physician practice payable in monthly
installments of $81,417 including interest at prime plus 1%
through September 2000, secured by assets
of several centers, repaid in February 1997 $3,099,902 -
Subordinated note payable for physician practice payable
in monthly installments of $27,504 including
interest at 7% through February 2001, and
convertible into common stock at $6.50 per share 1,187,881 -
Note payable under revolving credit agreement, bearing
interest at prime plus 1%, interest due monthly, principal
due August 1997, secured by accounts receivable at several
centers. No unused amount is available under the agreement
at December 31, 1996, repaid in February 1997 750,000 650,000
Subordinated note payable for physician practice, payable
in monthly installments of $11,881 including interest
at 7% through January 2001, convertible into common
common stock at $5.89 per share 505,076 -
Borrowings under revolving line of credit, with interest at
prime plus 3%, secured by receivables at two centers,
repaid in February 1997 218,345 -
Non-interest bearing note payable for physician practice,
payable in monthly installments of $16,500 through
December 1997, secured by assets of the St. Louis
center, repaid in February 1997 205,500 306,704
Unsecured note payable for physician practice, due in
monthly installments of $8,670 including interest at
15%, payable through May 1997 41,775 132,099
Unsecured note payable, interest at 10% payable
annually and principal due January 1996 - 10,000
Various notes payable, with interest rates varying from
6% to 9.95%, due in monthly installments including
interest, through June 2004, secured by equipment
with a total depreciated cost of $385,699 332,221 437,329
Other 59,352 89,790
----------- ----------
Total long-term debt 6,400,052 1,625,922
Less current installments 562,596 1,164,431
----------- ----------
Long-term debt, excluding current
installments $ 5,837,456 461,491
=========== ==========
</TABLE>
36
<PAGE>
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OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
At December 31, 1996, the Company classified $1,965,531 of borrowing due
within one year as long-term debt. The Company refinanced these amounts on
a long-term basis through its revolving credit agreement on February 25,
1997 as described in note 10.
Maturities of long-term debt subsequent to December 31, 1996 are as
follows: 1997, $562,596; 1998, $483,867; 1999, $1,272,260; 2000,
$1,342,277; and 2001, $2,739,052.
(5) Other Assets
------------
In December 1996, the Company acquired $500,000 face amount of convertible
preferred stock of Clearvision Laser Centers, Inc. (Clearvision). The
preferred stock is convertible into common stock of Clearvision using a
formula based on actual sales of Clearvision common stock during the six
month period ending June 30, 1997. In exchange for the preferred stock,
the Company paid $250,000 in cash and contributed certain marketing and
educational materials with an agreed value of $250,000. In addition, Omega
received warrants to purchase an additional $250,000 in Clearvision common
stock at a price based on the same formula. The preferred stock is
convertible at any time after June 30, 1997. The warrant is exercisable
for a one year period ending June 30, 1998. Upon conversion of the
preferred stock, the Company's investment is expected to represent less
than 5% of Clearvision's outstanding common stock and would therefore be
accounted for using the cost method.
(6) Income Taxes
------------
No provision for current and deferred Federal and State income taxes was
required for the years ended December 31, 1996, 1995 and 1994. Income
tax expense differs from the amount computed by applying a Federal income
tax rate of 34% to net earnings due to the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax expense at statutory rate $ 443,000 164,000 38,000
Increase (reduction) in taxes resulting from:
Non-deductible expenses 33,000 44,00 65,000
Change in the valuation allowance for deferred
tax assets (476,000) (208,000) (103,000)
--------- --------- ---------
Total $ -- -- --
========= ========= =========
</TABLE>
37
<PAGE>
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OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Equipment, furniture and fixtures, principally
due to differences in depreciation $ 215,000 172,000 309,000
Intangible assets, principally recognition
of amortization 100,000 153,000 238,000
Receivables, principally due to
allowance for doubtful accounts 256,000 141,000 254,000
Accrued expense 112,000 69,000 73,000
Net operating loss carryforwards 2,917,000 3,541,000 3,409,000
----------- ----------- -----------
Total gross deferred tax assets 3,600,000 4,076,000 4,283,000
Valuation allowance (3,600,000) (4,076,000) (4,283,000)
----------- ----------- -----------
Net deferred tax assets $ -- -- --
=========== =========== ============
</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. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment. Based on expectations for future taxable income
over the periods which the deferred tax assets are deductible, management
believes the Company has established a reasonable valuation allowance. As
of December 31, 1996, the Company had available net operating loss
carryforwards, subject to Internal Revenue Code Section 382 limitations,
of approximately $8,000,000 expiring from the year 2000 to 2007.
(7) Stockholders' Equity
--------------------
The Company accounts for stock options in accordance with the provisions
of Accounting Principles Board Opinion No 25, "Accounting for Stock Issued
to Employees," and related interpretations (APB 25). As such, compensation
expense is recorded on the date of grant only if the current market price
of the underlying stock exceeds the exercise price.
The Company has a "1985 Stock Option Plan" which was made available to
selected employees, including officers of the Company, directors, key
advisors and selected physicians practicing at Company facilities and
which expired in 1994. The plan allowed options to be granted for up to
450,000 shares. The following table summarizes the information about these
stock options:
38
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OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
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Notes to Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
Weighted Average
Number of Shares Exercise Price
----------------- ----------------
Balance at December 31, 1993 314,335 $3.27
Granted 145,500 4.02
Exercised 4,167 3.00
Forfeited 3,332 3.00
Expired 22,500 3.11
------- -----
Balance at December 31, 1994 429,836 $3.54
Granted - -
Exercised 20,460 2.78
Forfeited 20,000 3.00
Expired - -
------- -----
Balance at December 31, 1995 389,376 $3.60
Granted - -
Exercised 4,999 3.00
Forfeited 26,000 3.67
Expired 2,376 4.80
------- -----
Balance at December 31, 1996 356,001 $3.60
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $3.00-$6.50 and 2.67
years, respectively. At December 31, 1996 and 1995, the number of options
exercisable was 111,167 and 26,710, respectively, and the weighted average
exercise price of those options was $3.56 and $5.14, respectively.
The Company adopted the "1995 Stock Option Plan" which was made available
to selected employees, including officers of the Company, directors, key
advisors and selected physicians practicing at Company facilities. The
plan allows options to be granted for up to 300,000 shares. The following
table summarizes the information about these stock options outstanding at
December 31, 1996 and 1995:
Weighted Average
Number of Shares Exercise Price
----------------- ----------------
Balance at December 31, 1994 - -
Granted 2,500 $5.00
Exercised - -
Forfeited - -
Expired - -
------- -----
Balance at December 31, 1995 2,500 $5.00
Granted 125,000 5.73
Exercised - -
Forfeited - -
Expired - -
------- -----
Balance at December 31, 1996 127,500 $5.72
39
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OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
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Notes to Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $5.00-$5.75 and 5.47
years, respectively. At December 31, 1996 and 1995 no options were
exercisable.
The per share weighted-average fair value of stock options granted during
1996 and 1995 was $4.46 and $3.83 on the date of grant using the Black
Sholes option-pricing model with the following weighted-average
assumptions: 1996 and 1995 -expected dividend yield of 0%, risk-free
interest rate of 6%, and an expected life of 6 years.
Since the Company applies APB 25 in accounting for its plans, no
compensation cost has been recognized for its stock options in the
consolidated financial statements. Had the Company recorded compensation
cost based on the fair value at the grant date for its stock options under
SFAS 123, the Company's net earnings and earnings per share would have
been reduced by approximately $53,000 or $0.01 per share in 1996 and
approximately $1,000 or $0.00 per share in 1995.
Pro forma net earnings reflect only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS 123 is not reflected in the pro forma net earnings
amounts presented above because compensation costs are reflected over the
option's vesting period of three years and compensation cost for options
granted prior to January 1, 1995 is not considered.
In November and December 1989, in connection with refinancing debt
obligations of the Company, the Company agreed to issue shares of common
stock to shareholders in return for loans and loan guarantees made by
these shareholders to the Company. The primary debt obligation resulting
from this refinancing was a $450,000 loan from a bank, with five
shareholders as direct obligors thereunder. Those shareholders received
approximately 120,000 shares of common stock for their participation in
the refinancing. The shares of common stock were recorded at their
estimated fair market value of approximately $3.00 per share with the
offsetting amount, considered to be unamortized financing costs, as a
deduction from stockholders' equity. The unamortized financing cost was
amortized using a method that approximated the interest method over the
contractual term of the above loan, which matured in December 1994.
In January 1990, the Company entered into a stock bonus arrangement with
one of its officers, whereby that officer was issued 1,667 shares of
common stock on each January 1 from 1991 through 1995, provided that he
was an employee of the Company each of those dates.
The 1991 Employee Stock Purchase Plan provides for the implementation of
stock purchases by employees of shares of the Company stock either on the
open market or from such available authorized but unissued shares. The
Company has reserved 50,000 shares for issuance under the Purchase Plan.
Each eligible employee is granted on the grant date of each Purchase Plan
year options to purchase 1,250 shares of the Company's stock during the
Purchase Plan year. The issue price of the stock is equal to the lesser of
(1) 85% of the market price on the exercise date of each Purchase Plan
year or (2) 85% of the market price on each grant date of each Purchase
Plan year. As of December 31, 1996, 27,119 shares have been purchased by
the Plan; and 12,494 shares were issued in 1997 for contributions made
through December 31, 1996.
40
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OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
In December 1994, the Company issued 172,643 shares of its common stock to
a group of ophthalmologists for $725,100. In addition, the Company also
issued warrants to purchase 145,020 shares of the Company's common stock
at $7 per share and warrants to purchase an additional 159,523 shares of
the Company's common stock at $5 per share. The warrants expire December
29, 1997.
On May 17, 1996, the Company completed the sale of $7,290,000 in
convertible preferred stock. Subject to certain limitations, the preferred
stock is convertible into common stock at an exercise price equal to the
lesser of $5.75 or 85% of the average bid price of the common stock at the
time of conversion. The preferred stock automatically converts at the end
of three years if not already converted. Until converted, the preferred
stock has an 8% dividend, payable in kind. In addition, the investors
received warrants to purchase approximately 634,000 additional shares at
an exercise price of $5.75. The net proceeds were approximately $6.49
million and were used to repay the bridge financing incurred in the
Tallahassee practice acquisition, to finance a portion of the cost of the
Dallas transaction and for working capital. Of the 729 shares of preferred
stock issued, 670 shares had been converted into 1,370,097 shares of
common stock at December 31, 1996.
On September 10, 1996, the Company completed the acquisition of
substantially all of the net assets of EyeCare and SurgeryCenter of North
Texas, P.A. and ECSC Retina, P.A., two Dallas, Texas, professional
associations which practice ophthalmology in exchange for 771,429 shares
of common stock.
(8) Benefit Plan
------------
In 1996, the Company established a 401(k) Profit Sharing Plan (the "Plan")
which allows qualifying employees electing participation to defer a
portion of their income on a pretax basis through contributions to the
Plan. The Plan permits discretionary contributions to be made by the
Company, as determined by the Company's Board of Directors. No
contributions were made by the Company during 1996.
(9) Contingencies
-------------
The Company maintains professional liability coverage on a claims made
basis for its centers, employees, and independent contractors, including
center directors, with minimum requirements of $3,000,000 per occurrence
and $3,000,000 annually. The Company also maintains general liability
coverage. Additionally, the physicians associated with the Company
maintain professional liability coverage. Providing support associated
with health care services may give rise to claims from patients or others
for damages. The Company has been named in certain professional liability
claims. The Company believes that the ultimate resolution of these matters
will not have a significant effect on the Company's financial position or
results of operations. To the extent that any claims-made coverage is not
renewed or replaced with equivalent insurance, claims based on occurrences
during the term of such coverage, but reported subsequently, would be
uninsured. 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.
(10) Supplemental Cash Flow Information
-----------------------------------
Capital lease obligations of approximately $981,000, $1,275,000 and
$76,000 were incurred in 1996, 1995, and 1994, respectively. See note 3.
41
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OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
Common stock was issued for other than cash consideration during 1996,
1995 and 1994. See notes 2 and 6.
Interest paid totaled $673,727, $301,573 and $238,141 in 1996, 1995 and
1994, respectively.
(11) Subsequent Events
-----------------
On February 25, 1997, the Company entered into a $15,000,000 revolving
credit agreement with NationsCredit Commercial Corporation, an affiliate
of NationsBank. Borrowings under the credit agreement will be used to
finance acquisitions, repay existing indebtedness and provide working
capital. The credit agreement has a six-year term and is fully revolving
for the first two years.
On March 5, 1997 the Company completed the acquisition of the assets of
the ophthalmology practice of Sarah J. Hays, M.D. of Birmingham, Alabama.
Simultaneously with the acquisition, the Company entered into a long-term
management agreement with Dr. Hays' professional corporation. The assets
were acquired in exchange for 108,081 shares of the Company's common stock
and $859,500 in cash. The cash portion of the transaction was financed
under the Company's revolving credit facility with NationsCredit
Commercial Corporation.
(12) Supplementary Information
-------------------------
The following sets forth supplementary information regarding the allowances
for contractual adjustments and doubtful accounts:
Balance at Additions Change in Balance at
Year ended Beginning of Charged to Contractual End of
December 31, Year Expense Charge-offs Adjustments Year
- ------------ ---- ------- ----------- ----------- ----
1996 1,674,000 367,037 135,302 (145,735) 1,760,000
1995 1,596,423 444,810 498,296 131,063 1,674,000
1994 1,615,182 505,421 573,672 49,493 1,596,423
42
