FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 1997
------------------------------------------
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
ACT
For the transition period from to
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Commission File Number: 0-19283
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Omega Health Systems, Inc.
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(Exact name of small business issuer 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)
901-683-7868
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(Issuer's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. [X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
DURING THE PRECEEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at April 30, 1997 Class
- ---------------------------------------------------------------------------
Common Stock, $0.06 par value 7,412,520
<PAGE>
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended March 31, 1997
PART 1 - FINANCIAL INFORMATION
Index to Financial Information: Page
-------
Item 1:
Condensed Consolidated Balance Sheets
as of March 31, 1997 and December 31,
1996 3
Condensed Consolidated Statements of
Operations for the Three Months Ended
March 31, 1997 and 1996 4
Condensed Consolidated Statements of
Cash Flows for the Three Months Ended
March 31, 1997 and 1996 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2:
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
2
<PAGE>
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1997 and December 31, 1996
(unaudited)
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Current Assets:
Cash $ 3,371,197 2,943,617
Accounts receivable, net of allowances
for contractual adjustments and
doubtful accounts of $1,972,683 and
$1,760,091 in 1997 and 1996, respectively 6,673,557 5,990,723
Other receivables 518,221 484,460
Prepaid expenses 800,645 534,661
------------ ------------
Total current assets 11,363,620 9,953,461
Equipment, furniture and fixtures 12,762,424 11,796,511
------------ ------------
Accumulated depreciation (6,467,543) (5,965,932)
------------ ------------
Net equipment, furniture and fixtures 6,294,881 5,830,579
Intangible assets from acquisition, net of
amortization of $545,790and $411,536 in
1997 and 1996, respectively 11,528,596 10,513,937
Other assets 1,674,760 1,141,580
------------ ------------
Total assets $ 30,861,857 27,439,557
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 3,660,868 2,799,196
Claims liability 1,690,455 1,176,068
Current installments of long-term debt 695,155 836,894
Current installments of subordinated debt 393,280 368,166
------------ ------------
Total current liabilities 6,439,758 5,180,324
Long-term debt, excluding current
installments 6,998,453 5,837,456
Subordinated debt, excluding current
installments 1,210,014 1,367,718
------------ ------------
Total liabilities 14,648,225 12,385,498
Minority Interest -- 10,896
Stockholders' equity:
Common stock 422,060 411,946
Preferred stock 307,441 485,049
Additional paid in capital 22,195,473 21,399,307
Accumulated deficit (6,711,342) (7,253,139)
------------ ------------
Total stockholders' equity 16,213,632 15,043,163
------------ ------------
Total liabilities and stockholders' equity $ 30,861,857 27,439,557
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months Ended March 31, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Center net revenues $ 7,561,113 4,915,330
Managed care revenues 4,304,888 3,333,863
Supply and equipment sales 434,109 491,778
Management and other revenues 26,592 156,756
------------ ------------
Total revenues 12,326,702 8,897,727
Center operating expenses 6,313,253 4,501,338
Eye care claims 3,305,478 2,500,967
Cost of sales 300,569 353,818
Provision for doubtful accounts 124,096 43,906
Selling, general, administrative and
development expenses 1,614,968 1,316,742
------------ ------------
Earnings from operations 668,338 180,956
Non-operating revenue (expenses):
Interest expense (169,812) (115,671)
Interest and other revenue 100,382 56,844
------------ ------------
Earnings before minority interest 598,908 122,129
Minority interest in net income of majority-owned
partnership (46,612) 0
Earnings before income taxes 552,296 122,129
Income tax expense 0 0
------------ ------------
Net earnings $ 552,296 122,129
============ ============
Earnings per common share $ 0.08 $ 0.03
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1997 and 1996
(unaudited)
1997 1996
Cash flows from operations:
Net earnings 552,296 122,129
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 400,236 256,548
Provision for doubtful accounts 124,096 43,906
Minority Interest in partnerships 46,612 0
Increase in:
Receivables (956,502) (228,561)
Prepaids and other assets (598,907) (206,761)
Increase (decrease) in:
Accounts payable and accrued expenses 922,458 (108,117)
Eye care claims payable 514,387 (43,626)
----------- -----------
Net cash provided by (used in)
operating activities 1,004,676 (164,482)
Cash flows from investing activities:
Capital expenditures (281,724) (213,684)
Acquisition of Tallahasse, FL practice 0 (2,014,701)
Acquisition of Birmingham, AL practice (46,574) 0
Acquisition of Tennessee optometric practice (205,860) 0
Other (8,091) (64,145)
----------- -----------
Net cash used in investing activities (542,249) (2,292,530)
Cash flows from financing activities:
Proceeds from issuance of common stock 51,001 0
Net change in long-term debt (7,832) 2,483,190
Distributions to minority interest (62,570) 0
Other (15,446) 0
----------- -----------
Net cash provided by (used in) financing
activities (34,847) 2,483,190
----------- -----------
Net increase in cash 427,580 26,178
Cash at beginning of period 2,943,617 2,735,556
----------- -----------
Cash at end of period $ 3,371,197 2,761,734
=========== ===========
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the accounting policies in effect as of December 31,
1996, as set forth in the annual consolidated financial statements of Omega
Health Systems, Inc. Certain prior year interim balances have been reclassified
to conform to the 1997 presentation. In the opinion of management, all
adjustments necessary for a fair presentation of the consolidated financial
statements have been included. The results of operations for the three month
period ended March 31, 1997 and 1996 are not necessarily indicative of the
results to be expected for the full year.
2. Earnings Per Share
Earnings per common share for 1997 and 1996 were computed by dividing the
earnings or losses by the weighted average number of common and common
equivalent shares outstanding during the quarter (7,144,724 and 4,849,396,
respectively).
3. Acquisitions
On March 5, 1997, the Company completed the acquisition of the assets of the
ophthalmology practice of Sarah J. Hays, M.D., of Birmingham, AL. 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.
On May 1, 1997, the Company completed the acquistion of the assets of the
ophthalmology practice of Joseph F. Faust, M.D., of Marion, IN and a 50%
interest in the associated ambulatory surgery center. Simultaneously with the
acquisitions, the Company entered into long-term management agreements to manage
both the practice and the surgery center.
The assets were acquired in exchange for 169,000 shares of the Company's common
stock and $1.7 million in cash. The cash portion of the transaction was financed
under the Company's revolving credit facility with NationsCredit Commercial
Corporation.
On May 1, 1997, the Company completed a merger with Primary Eyecare Network,
based in San Ramon, CA. Primary Eyecare Network provides products and services
to independent optometrists, including management, purchasing, education,
training, and publications.
In connection with the merger, the Company issued 195,000 shares of its common
stock to the shareholders of Primary Eyecare Network and paid $1.9 million in
cash The cash portion of the transaction was financed under the Company's
revolving credit facility with NationsCredit Commercial Corporation.
6
<PAGE>
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4. Revolving Credit Agreement
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.
5. Contingencies
The Company is engaged in the business of providing support and management
services to the eye care profession, which subjects it to intense federal and
state regulation. Both state and federal laws prohibit fee splitting and other
forms of compensation based on patient referral. These regulations may, in the
future, be amended or interpreted in such a fashion as to adversely affect the
business of Omega.
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.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenues for the quarter ended March 31, 1997 increased $3,429,000 or 39%
over revenues for the corresponding period of the prior year.
Center net revenues increased $2,646,000 or 54% for the quarter compared to the
same period in 1996. The increase resulted from the addition of the practice in
Tallahassee, Florida purchased late in the first quarter of 1996, the addition
of the practice and surgery center in Dallas, Texas purchased late in the third
quarter of 1996, and the addition of the Birmingham, Alabama practice purchased
in March 1997, as well as increases in revenues of practices managed in both
1996 and 1997 ("same clinic") of 9% for the quarter. Center operating expenses
rose 40% or $1,812,000 compared to the same period in 1997. The increase in
center operating expenses reflected the additions of the practices in
Tallahassee, Dallas, and Birmingham.
The Company's managed care operations continued to experience growth with
revenue increase of 29% or $971,000 for the quarter over the corresponding
period of 1996. Claims expense also increased 32% for the quarter in correlation
with the increase in managed care revenue.
Supply and equipment sales decreased $58,000 or 12% for the quarter ended March
31, 1997 over the same period of 1996. The decrease reflects the reduction in
equipment sales, which have lower margins, and is partially offset by an
increase in mobile surgical revenues, resulting in higher margins realized in
1997.
Selling, general, and administrative expenses increased approximately 23% for
the quarter compared to the same period in 1996. This increase primarily
reflects the expansion of operations at the Eye Health Network as well as
increased development costs as the Company began to expand its acquisition
program.
Interest expense increased $54,000 for the three months ended March 31, 1997
compared to the same period of 1996. This increase relates to the increase in
bank financing incurred in late 1996 and in 1997 in connection with
acquisitions.
ACQUISITIONS
On March 5, 1997, the Company completed the acquisition of the assets of the
ophthalmology practice of Sarah J. Hays, M.D., of Birmingham, AL. 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.
On May 1, 1997, the Company completed the acquisition of the assets of the
ophthalmology practice of Joseph F. Faust, M.D., of Marion, IN and a 50%
interest in the associated ambulatory surgery center. Simultaneously with the
acquisitions, the Company entered into long-term management agreements to manage
both the practice and the surgery center.
8
<PAGE>
The assets were acquired in exchange for 169,000 shares of the Company's common
stock and $1.7 million in cash. The cash portion of the transaction was financed
under the Company's revolving credit facility with NationsCredit Commercial
Corporation.
On May 1, 1997, the Company completed a merger with Primary Eyecare Network,
based in San Ramon, CA. Primary Eyecare Network provides products and services
to independent optometrists, including management, purchasing, education,
training, and publications.
In connection with the merger, the Company issued 195,000 shares of its common
stock to the shareholders of Primary Eyecare Network and paid $1.9 million in
cash. The cash portion of the transaction was financed under the Company's
revolving credit facility with NationsCredit Commercial Corporation.
LIQUIDITY, CASH FLOW, AND CAPITAL RESOURCES
For the three months ended March 31, 1997, the operating activities of the
Company generated $1,005,000. The Company used $542,000 in investing activities
and $35,000 in financing activities.
Cash flows from operations included significant adjustments for depreciation and
amortization ($400,000) as well as provision for doubtful accounts ($124,000).
Investing activities during the period included $282,000 in capital expenditures
for equipment as well as acquisitions of the assets of ophthalmic and optometric
practices in Alabama and Tennessee. Financing activities included debt
reduction, distributions to minority interest and proceeds from the issuance of
common stock.
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.
9
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not Applicable.
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
(11) Statement re: computation of per share earnings.
(27) Financial Data Schedule (Electronic filing only).
(b) Reports on Form 8-K:
None.
10
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act,
the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
OMEGA HEALTH SYSTEMS, INC.
----------------------------------
Registrant
May 15, 1997 /s/ Ronald L. Edmonds
------------------------------------
Ronald L. Edmonds
Senior Vice President and
Chief Financial
Officer
11
EXHIBIT 11
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
Computation of Earnings Per Common Share
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Primary (for Statement of Operations):
Net earnings $ 552,296 122,129
Preferred stock dividends 10,499 0
---------- ----------
Net earnings to common shareholders 541,797 122,129
Shares:
Weighted average number of shares outstanding 6,929,222 4,716,096
Assuming exercise of warrants and options, net
of number of shares which could have been
purchased with the exercise of such options
(using average price for the period) 215,502 133,300
---------- ----------
Weighted average number of shares, adjusted 7,144,724 4,849,396
---------- ----------
Primary earnings per common share
and common equivalent share:
Net earnings (loss) $ 0.08 0.03
========== ==========
Assuming full dilution (for Statement of Operations):
Net earnings $ 552,296 122,129
Preferred stock dividends 10,499 0
---------- ----------
Net earnings to common shareholders 541,797 122,129
Shares:
Weighted average number of shares outstanding 6,929,222 4,716,096
Assuming exercise of warrants and options, net
of number of shares which could have been
purchased with the exercise of such options
(using closing market price) 211,006 133,300
---------- ----------
Weighted average number of shares, adjusted 7,140,228 4,849,396
---------- ----------
Primary earnings per common share
and common equivalent share:
Net earnings (loss) $0.08(a) 0.03(a)
========== ==========
</TABLE>
(a) This calculation is submitted in accordance with Regulation S-B item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF OMEGA HEALTH SYSTEMS, INC., FOR THE THREE MONTH PERIOD
ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,371
<SECURITIES> 0
<RECEIVABLES> 8,647
<ALLOWANCES> 1,973
<INVENTORY> 0
<CURRENT-ASSETS> 11,364
<PP&E> 12,762
<DEPRECIATION> 6,468
<TOTAL-ASSETS> 30,862
<CURRENT-LIABILITIES> 5,351
<BONDS> 0
0
307
<COMMON> 422
<OTHER-SE> 15,484
<TOTAL-LIABILITY-AND-EQUITY> 30,862
<SALES> 12,327
<TOTAL-REVENUES> 12,327
<CGS> 301
<TOTAL-COSTS> 11,658
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 124
<INTEREST-EXPENSE> 170
<INCOME-PRETAX> 552
<INCOME-TAX> 0
<INCOME-CONTINUING> 552
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 552
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
