<PAGE> 1
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 September 30, 1998
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or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT
For the transition period from ____________ to _____________
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.)
5350 Poplar Avenue, Suite 900, Memphis, Tennessee 38119
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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 PRECEDING 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.
[X] 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 October 31, 1998
- - --------------------------------------------------------------------------------
Common Stock, $0.06 par value 8,936,124
<PAGE> 2
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
PART 1 - FINANCIAL INFORMATION
Index to Financial Information: Page
----
Item 1:
Condensed Consolidated Balance Sheets
as of September 30, 1998 and December 31,
1997 3
Condensed Consolidated Statements of
Operations for the Three Months Ended
September 30, 1998 and 1997 4
Condensed Consolidated Statements of
Operations for the Nine Months Ended
September 30, 1998 and 1997 5
Condensed Consolidated Statements of
Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 6
Notes to Condensed Consolidated
Financial Statements 7
Item 2:
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
2
<PAGE> 3
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Current Assets:
Cash $ 4,163,611 5,608,645
Accounts receivable, net of allowances
for contractual adjustments and
doubtful accounts 16,990,660 12,498,685
Prepaid expenses and other assets 2,907,585 1,327,331
------------ -----------
TOTAL CURRENT ASSETS 24,061,856 19,434,661
Equipment, furniture and fixtures 21,061,378 18,305,614
Less: Accumulated depreciation (8,559,004) (7,116,342)
------------ -----------
NET EQUIPMENT, FURNITURE AND FIXTURES 12,502,374 11,189,272
Management service agreements and other
intangible assets, net of accumulated amortization 35,183,620 29,260,811
Deferred tax asset 522,000 1,356,000
Other assets 1,618,781 1,287,455
------------ -----------
TOTAL ASSETS $ 73,888,631 62,528,199
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 9,146,308 7,645,740
Eye care clams payable 1,264,247 2,471,935
Current installments of obligations under capital
lease and long-term debt 1,275,750 1,428,477
------------ -----------
TOTAL CURRENT LIABILITIES 11,686,305 11,546,152
Obligations under capital lease, excluding
current installments 1,084,451 1,365,448
Long-term debt, excluding current
installments 28,546,638 21,693,712
------------ -----------
TOTAL LIABILITIES 41,317,394 34,605,312
Minority Interest 578,551 523,065
Stockholders' equity:
Common stock 538,266 513,991
Additional paid in capital 33,938,641 31,562,383
Accumulated deficit (2,484,221) (4,676,552)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 31,992,686 27,399,822
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 73,888,631 62,528,199
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Ophthalmic center net revenues $ 13,510,899 9,814,856
Managed eye care revenues 6,342,523 5,005,897
Optometric practice services 10,240,334 9,916,325
Mobile surgical and other 778,257 531,877
------------ ------------
TOTAL REVENUES 30,872,013 25,268,955
Center operating expenses 10,836,154 8,479,133
Eye care claims 4,341,369 3,767,011
Cost of sales 10,523,715 9,653,201
Provision for doubtful accounts 378,842 203,746
Selling, general, administrative and
development expenses 2,795,770 1,900,296
------------ ------------
EARNINGS FROM OPERATIONS 1,996,163 1,265,568
Non-operating revenue (expenses):
Interest and other income 145,258 92,609
Interest expense (735,222) (374,481)
------------ ------------
EARNINGS BEFORE MINORITY INTEREST 1,406,199 983,696
Minority interest in net income of partnerships (165,462) (127,723)
------------ ------------
Earnings before income taxes 1,240,737 855,973
Income tax expense (benefit) 470,000 (1,180,000)
------------ ------------
NET EARNINGS 770,737 2,035,973
Preferred dividends, principally imputed 0 (2,727)
------------ ------------
EARNINGS AVAILABLE TO COMMON
SHAREHOLDERS $ 770,737 $ 2,033,246
============ ============
Earnings per common share:
Basic $ 0.09 $ 0.27
============ ============
Diluted $ 0.09 $ 0.26
============ ============
Weighted average number of common shares
Basic 8,885,529 7,549,315
============ ============
Diluted 8,959,094 7,788,182
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Ophthalmic center net revenues $ 38,419,214 26,557,752
Managed eye care revenues 17,684,243 13,694,044
Optometric practice services 30,734,734 16,305,115
Mobile surgical and other 2,031,154 1,485,309
------------ ------------
TOTAL REVENUES 88,869,345 58,042,220
Center operating expenses 30,811,300 22,268,837
Eye care claims 12,771,632 10,546,856
Cost of sales 30,676,812 16,226,988
Provision for doubtful accounts 823,409 579,760
Selling, general, administrative and
development expenses 8,155,107 5,364,528
------------ ------------
EARNINGS FROM OPERATIONS 5,631,085 3,055,251
Non-operating revenue (expenses):
Interest and other income 343,605 214,577
Interest expense (1,993,309) (816,502)
------------ ------------
EARNINGS BEFORE MINORITY INTEREST 3,981,381 2,453,326
Minority interest in net income of partnerships (464,050) (310,849)
------------ ------------
EARNINGS BEFORE INCOME TAXES 3,517,331 2,142,477
Income tax expense (benefit) 1,325,000 (1,180,000)
------------ ------------
NET EARNINGS 2,192,331 3,322,477
Preferred dividends, principally imputed 0 (19,876)
------------ ------------
EARNINGS AVAILABLE TO COMMON
SHAREHOLDERS $ 2,192,331 $ 3,302,601
============ ============
Earnings per common share:
Basic $ 0.25 $ 0.45
============ ============
Diluted $ 0.25 $ 0.44
============ ============
Weighted average number of common shares
Basic 8,772,738 7,268,550
============ ============
Diluted 8,916,006 7,468,637
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net earnings $ 2,192,331 3,322,477
Adjustments to reconcile net earnings to net cash
Provided by operating activities:
Depreciation and amortization 2,357,457 1,399,455
Deferred tax provision 834,000 (1,180,000)
Provision for doubtful accounts 823,409 579,760
Minority interest in partnerships 464,050 310,849
(Increase) decrease in:
Receivables (5,090,510) (2,666,369)
Prepaids and other assets (1,294,313) (1,082,850)
Increase (decrease) in:
Accounts payable and accrued expenses 1,450,727 1,977,705
Eye care claims payable (1,207,688) 910,761
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 529,463 3,571,788
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (968,879) (700,634)
Acquisitions, net of cash acquired (6,783,875) (6,421,355)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (7,752,754) (7,121,989)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 0 360,994
Net change in long-term debt and capital lease obligations 6,186,821 6,185,195
Distributions to minority interest (408,564) (267,491)
Other 0 (28,128)
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 5,778,257 6,250,570
----------- -----------
NET INCREASE (DECREASE) IN CASH (1,445,034) 2,700,369
CASH AT BEGINNING OF PERIOD 5,608,645 2,943,617
----------- -----------
CASH AT END OF PERIOD $ 4,163,611 $ 5,643,986
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
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,
1997, 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 1998 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 nine month
period ended September 30, 1998 and 1997 are not necessarily indicative of the
results to be expected for the full year.
2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), which
changes the computation and presentation of earnings per share, replacing
primary and fully diluted earnings per share previously required. Earnings per
share for all prior years presented have been presented in accordance with SFAS
128.
Basic earnings per common share for 1998 and 1997 were computed by dividing the
earnings by the weighted average number of common shares outstanding during the
quarter (8,885,529 and 7,549,315, respectively) and the nine month period
(8,772,738 and 7,268,550, respectively). Diluted earnings per common share for
1998 and 1997 were computed by dividing the earnings by the weighted average
number of common shares and common equivalent shares outstanding during the
quarter (8,959,094 and 7,788,182, respectively) and the nine month period
(8,916,006 and 7,468,637, respectively).
3. ACQUISITIONS
On January 2, 1998, the Company completed the acquisition of the assets of
Hunter, Schulz and Horton, O.D., P.A. of New Port Richey, Florida.
Simultaneously with the acquisition, the Company entered into a long-term
management agreement to manage the practice. In connection with the merger, the
Company issued 130,718 shares of the Company's common stock and $1,000,000 in
cash. The cash portion of the transaction was financed under the Company's
revolving credit facility with NationsCredit.
In May 1998, the Company acquired fourteen retail optical locations on military
facilities. The facilities are located principally in existing center markets.
On July 11, 1998, the Company completed the acquisition of the assets of the
ophthalmology practice of Mitchell L. Levin, MD, known as Levin Eye Center, and
a 50% interest in the associated ambulatory surgery center, known as Doctors
Surgery Center. Simultaneously with the acquisition, the Company entered into a
long-term management agreement to manage the practice. In connection with the
merger, the Company issued 151,257 shares of the Company's common stock and
$1,802,500 in cash. The cash portion of the transaction was financed under the
Company's revolving credit facility with NationsCredit.
7
<PAGE> 8
On September 1, 1998, the Company completed the acquisition of the assets of the
ophthalmology practice of Jeffrey G. Straus, MD, known as Louisiana Eye Center
of New Orleans. Simultaneously with the acquisition, the Company entered into a
long-term management agreement to manage the practice. In connection with the
acquisition, the Company issued 106,473 shares of the Company's common stock and
$937,000 in cash. The cash portion of the transaction was financed under the
Company's revolving credit facility with NationsCredit.
4. REVOLVING CREDIT AGREEMENT
In February 1997, the Company entered into a $15,000,000 Credit Facility with
NationsCredit Commercial Corporation, an affiliate of NationsBank, for the
purpose of refinancing certain existing debt, providing working capital and
financing acquisitions. The Credit Facility is a $15 million committed facility,
comprised of a $13 million acquisition facility (the "Acquisition Facility") and
a $2 million working capital facility (the "Working Capital Facility"). The
Credit Facility is fully revolving for the first two years and matures in equal
installments over the next four years. The Credit Facility bears interest at a
variable rate equal to the 30-day commercial paper rate quoted in The Wall
Street Journal plus 4.25%. In December 1997, the Credit Facility was amended
and restated, increasing the availability to $30,000,000.
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.
6. CHANGE IN AMORTIZATION PERIOD FOR MANAGEMENT SERVICE AGREEMENTS
Effective April 1, 1998, in response to recent guidance from the Securities and
Exchange Commission, the Company reduced the maximum amortization period for
intangible assets relating to management service agreements to 25 years.
Previously, management service agreements were amortized over their contractual
term to a maximum of 40 years. This change had the effect of reducing reported
net earnings by approximately $40,000 or $.005 per diluted share per quarter.
7. RECENT ACCOUNTING PRONOUNCEMENT
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components. The adoption of this
Statement had no impact on the Company's net income or shareholder's equity.
8
<PAGE> 9
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires that the Company
report financial and descriptive information about its reportable segments.
Financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. This statement also requires that the Company report
descriptive information about the way the operating segments were determined,
the products and services provided by the operating segments, differences
between the measurements used in reporting segment information and those used in
the Company's financial statements, and changes in the measurement of segment
amounts from period to period. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. The adoption of this
statement will provide additional disclosures in the financial statements for
the year ended December 31, 1998.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Center net revenues 43.8% 38.8% 43.2% 45.8%
Managed Care revenues 20.5 19.8 19.9 23.6
Optometric practice services 33.2 39.2 34.6 28.1
Mobile surgical and other 2.5 2.1 2.3 2.5
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Center operating expenses 35.1 33.6 34.7 38.4
Eye care claims 14.1 14.9 14.4 18.1
Selling, general and administrative expenses 9.1 7.5 9.2 9.3
Cost of sales 34.1 38.2 34.5 28.0
Provision for doubtful accounts 1.2 0.8 0.9 1.0
Earnings from operations 6.5% 6.5% 6.3% 5.2%
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Total Revenues. Total revenues increased from $25,269,000 for the
three months ended September 30, 1997 to $30,872,000 for the three months ended
September 30, 1998, an increase of $5,603,000 or 22.2%.
Center net revenues increased from $9,815,000 for the 1997
period to $13,511,000 for the 1998 period, an increase of $3,696,000,
or 37.7%. The increase resulted primarily from the additions of Centers
in Danville, Illinois; Chicago, Illinois; Newport Richey, Florida; San
Antonio, Texas; Circleville, Ohio; Orlando, Florida and New Orleans,
Louisiana during the 1998 period as well as the addition of an ASC in
the San Antonio, Circleville and Orlando Centers.
Managed care revenues increased from $5,006,000 for the 1997
period to $6,343,000 for the 1998 period, an increase of $1,337,000,
or 26.7%. The increase reflected the continued growth experienced by
the Company's managed care operations, including the addition of an
optical lab in 1997.
Optometric practice service revenues increased from $9,916,000
for the 1997 period to $10,240,000 for the 1998 period, an increase of
$324,000, or 3.3%. Optometric practice services provides products and
services to independent optometrists, including purchasing, education,
training, management, and publications and is related to the
acquisition of Primary Eyecare Network, Inc. (PEN) in May 1997.
Mobile surgical and other revenues increased from $532,000 for
the 1997 period to $778,000 for the 1998 period, an increase of
$246,000 or 46.2%. The increase resulted primarily from higher margin
mobile surgical revenues.
Center Operating Expenses. Center operating expenses increased
from $8,479,000 for the three months ended September 30, 1997 to
$10,836,000 for the three months ended September 30, 1998, an increase
of $2,357,000 or 27.8%. The increase reflected the additions of the
practices in Danville, Chicago, Newport Richey, San Antonio,
Circleville, Orlando and New Orleans during the 1998 period. As a
percentage of center net revenues, center operating expenses decreased
from 86.4% in the 1997 period to 80.2% in the 1998 period, reflecting
improved performance in certain Centers and the impact of the added
Centers.
Eye Care Claims. Eye care claims increased from $3,767,000 for
the three months ended September 30, 1997 to $4,341,000 for the three
months ended September 30, 1998, an increase of $574,000, or 15.2%. The
increase reflected the continued growth experienced by the Company's
managed care operations and is directly correlated with the increase in
managed care revenues. As a percentage of managed care revenues, eye
care claims decreased from 75.2% in the 1997 period to 68.5% in the
1998 period.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses increased from $1,900,000 for the three
months ended September 30, 1997 to $2,796,000 for the three months
ended September 30, 1998, an increase of $896,000, or 47.2%. The
increase primarily reflected (i) the expansion of operation at the EHN,
(ii) development costs associated with expansion of the Company's
practice affiliation program and (iii) the administrative expenses
related to Providers Optical during the 1998 period. As a percentage
of total revenues, selling, general, and administrative expenses
increased from 7.5% in the 1997 to 9.1% in the 1998 period.
Cost of Sales. Cost of sales increased from $9,653,000 for the
three months ended September 30, 1997 to $10,524,000 for the three
months ended September 30, 1998, an increase of $871,000 or 9.0%. This
increase primarily reflected the acquisition of Providers Optical in
December 1997 and the increase in higher margin mobile surgical sales.
As a percentage of total revenues, cost of sales decreased from 38.2%
in the 1997 period to 34.1% in the 1998 period.
Provision for Doubtful Accounts. Provision for doubtful
accounts increased from $204,000 for the three months ended September
30, 1997 to $379,000 for the three months ended September 30, 1998, an
increase of $175,000, or 85.8%. As a percentage of total revenues,
provision for doubtful accounts marginally increased from 0.8% in the
1997 period to 1.2% in the 1998 period.
Interest Income (Expense), Net. Interest expense increased
from $282,000 for the three months ended September 30, 1997 to $590,000
for the three months ended September 30, 1998, an increase of $308,000,
or 109.2%. This increase related to the increase in borrowings in late
1997 and the 1998 period used to finance acquisitions.
Preferred Dividends. Preferred dividends were $3,000 for the
three months ended September 30, 1997. This decrease resulted from the
conversion of Series A Convertible Preferred Stock into Common Stock by
preferred stockholders.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Total Revenues. Total revenues increased from $58,042,000 for the nine
months ended September 30, 1997 to $88,869,000 for the nine months ended
September 30, 1998, an increase of $30,827,000 or 53.1%.
Center net revenues increased from $26,558,000 for the 1997
period to $38,419,000 for the 1998 period, an increase of $11,861,000,
or 44.7%. The increase resulted primarily from the additions of Centers
in Birmingham, Alabama; Marion, Indiana; Danville, Illinois; Chicago,
Illinois; Newport Richey, Florida; San Antonio, Texas; Circleville,
Ohio; Orlando, Florida and New Orleans, Louisiana during the 1998
period as well as the addition of an ASC in the San Antonio,
Circleville and Orlando Centers.
Managed care revenues increased from $13,694,000 for the 1997
period to $17,684,000 for the 1998 period, an increase of $3,990,000,
or 29.1%. The increase reflected the continued growth experienced by
the Company's managed care operations, including the addition of an
optical lab in 1997.
Optometric practice service revenues increased from $16,305,000
for the 1997 period to $30,735,000 for the 1998 period, an increase of
$14,430,000, or 88.5%. Optometric practice services provides products
and services to independent optometrists, including purchasing,
education, training, management, and publications and is related to the
acquisition of Primary Eyecare Network, Inc. (PEN) in May 1997.
10
<PAGE> 11
Mobile surgical and other revenues increased from $1,485,000 for
the 1997 period to $2,031,000 for the 1998 period, an increase of
$546,000 or 36.8%. The increase resulted primarily from higher margin
mobile surgical revenues.
Center Operating Expenses. Center operating expenses increased from
$22,269,000 for the nine months ended September 30, 1997 to $30,811,000 for the
nine months ended September 30, 1998, an increase of $8,542,000 or 38.4%. The
increase reflected the additions of the practices in Birmingham, Marion,
Danville, Chicago, Newport Richey, San Antonio, Circleville, Orlando and New
Orleans during the 1998 period. As a percentage of center net revenues, center
operating expenses decreased from 83.8% in the 1997 period to 80.2% in the 1998
period, reflecting improved performance in certain Centers and the impact of the
added Centers.
Eye Care Claims. Eye care claims increased from $10,547,000 for the
nine months ended September 30, 1997 to $12,772,000 for the nine months ended
September 30, 1998, an increase of $2,225,000, or 21.1%. The increase reflected
the continued growth experienced by the Company's managed care operations and is
directly correlated with the increase in managed care revenues. As a percentage
of managed care revenues, eye care claims decreased from 77.0% in the 1997
period to 72.2% in the 1998 period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $5,365,000 for the nine months ended
September 30, 1997 to $8,155,000 for the nine months ended September 30, 1998,
an increase of $2,790,000, or 52.0%. The increase primarily reflected (i) the
expansion of operation at the EHN, (ii) development costs associated with
expansion of the Company's practice affiliation program and (iii) the
administrative expenses related to PEN and Providers Optical during the 1998
period. As a percentage of total revenues, selling, general, and administrative
expenses remained 9.2% in the 1997 and 1998 period.
Cost of Sales. Cost of sales increased from $16,227,000 for the nine
months ended September 30, 1997 to $30,677,000 for the nine months ended
September 30, 1998, an increase of $14,450,000 or 89.0%. This increase primarily
reflected the acquisition of PEN in May 1997 and Providers Optical in December
1997 and the increase in higher margin mobile surgical sales. As a percentage of
total revenues, cost of sales increased from 28.0% in the 1997 period to 34.5%
in the 1998 period, primarily as a result of the acquisitions.
Provision for Doubtful Accounts. Provision for doubtful accounts
increased from $580,000 for the nine months ended September 30, 1997 to $823,000
for the nine months ended September 30, 1998, an increase of $243,000, or 41.9%.
As a percentage of total revenues, provision for doubtful accounts marginally
decreased from 1.0% in the 1997 period to 0.9% in the 1998 period.
Interest Income (Expense), Net. Interest expense increased from
$602,000 for the nine months ended September 30, 1997 to $1,650,000 for the nine
months ended September 30, 1998, an increase of $1,048,000, or 174.1%. This
increase related to the increase in borrowings in late 1997 and the 1998 period
used to finance acquisitions.
Preferred Dividends. Preferred dividends were $19,000 for the nine
months ended September 30, 1997. This decrease resulted from the conversion of
Series A Convertible Preferred Stock into Common Stock by preferred stockholders
subsequent.
11
<PAGE> 12
ACQUISITIONS
On January 2, 1998, the Company completed the acquisition of the assets of
Hunter, Schulz and Horton, O.D., P.A. of New Port Richey, Florida.
Simultaneously with the acquisition, the Company entered into a long-term
management agreement to manage the practice. In connection with the merger, the
Company issued 130,718 shares of the Company's common stock and $1,000,000 in
cash. The cash portion of the transaction was financed under the Company's
revolving credit facility with NationsCredit.
In May 1998, the Company acquired fourteen retail optical locations on military
facilities. The facilities are located principally in existing center markets.
On July 11, 1998, the Company completed the acquisition of the assets of the
ophthalmology practice of Mitchell L. Levin, MD, known as Levin Eye Center, and
a 50% interest in the associated ambulatory surgery center, known as Doctors
Surgery Center. Simultaneously with the acquisition, the Company entered into a
long-term management agreement to manage the practice. In connection with the
merger, the Company issued 151,257 shares of the Company's common stock and
$1,802,500 in cash. The cash portion of the transaction was financed under the
Company's revolving credit facility with NationsCredit.
On September 1, 1998, the Company completed the acquisition of the assets of the
ophthalmology practice of Jeffrey G. Straus, MD, known as Louisiana Eye Center
of New Orleans. Simultaneously with the acquisition, the Company entered into a
long-term management agreement to manage the practice. In connection with the
acquisition, the Company issued 106,473 shares of the Company's common stock and
$937,000 in cash. The cash portion of the transaction was financed under the
Company's revolving credit facility with NationsCredit.
LIQUIDITY, CASH FLOW, AND CAPITAL RESOURCES
For the nine months ended September 30, 1998, the operating activities of the
Company generated $529,000. The Company used $7,753,000 in investing activities
and generated $5,778,000 in financing activities.
Cash flows from operations included significant adjustments for depreciation and
amortization ($2,357,000) as well as provision for doubtful accounts ($823,000).
Cash flows from operations were significantly affected by working capital
requirements of recent acquisitions and income tax payments. In addition, cash
flows from operations were affected by a decrease in eye care claims payable of
$1,200,000 as the Company significantly decreased the time required to process
and pay eye care claims by its managed care operations. Investing activities
during the period included $1,018,000 in capital expenditures for equipment as
well as acquisitions of the assets of ophthalmic and optometric practices.
Financing activities included an increase in debt and distributions to minority
interest.
As of September 30, 1998 the Company has approximately $2,900,000 available of
its $30,000,000 revolving credit facility.
YEAR 2000
The Company is continuing its efforts to address operational concerns raised by
the so-called year 2000 issue. The principal areas of concern include ensuring
that the systems used in practice management, managed care administration and
accounting are year 2000 compliant, addressing issues related to "imbedded
systems" in equipment, including medical equipment and assessing and addressing
the potential impact of year 2000 problems with other entities with which the
Company has business relationships.
The Company is in the process of upgrading all of its internal systems,
including practice management, managed care administration and accounting. This
is a complex project with many aspects, but addressing the year 2000 issue is a
significant part of the project. The overall cost of this systems project will
be in excess of $1 million, but a relatively small part is exclusively related
to the Year 2000 issue.
12
<PAGE> 13
The Company is in the process of inventorying equipment which have imbedded
systems which may be affected by the year 2000 issue and contacting the
appropriate vendors to ascertain risks and solutions. The cost of this project
is not expected to be material to the Company's financial statements at this
time.
The Company is also corresponding with other entities with which it has business
relationships to assess their progress in addressing the year 2000 issue for the
purpose of assessing the risks to the Company which may result from this
problem.
Although the cost to bring systems and equipment into compliance has not been
and is not expected to be material to the Company's consolidated financial
statements, failure to comply could have a material adverse effect on the
Company's business and financial results.
13
<PAGE> 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not Applicable.
Item 2. Changes in Securities.
Not Applicable.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting on August 12, 1998. At the
meeting, two directors, Ronald L. Edmonds and Thomas P. Lewis were
re-elected to two year terms on the board of directors, by votes of
6,558,732 and 6,559,132 for, 139,283 and 138,883 against, and 60,295
abstaining, respectively. Donald H. Beisner, M.D., was re-elected to a
one year term by votes of 6,548,476 for, 143,283 against and 66,551
abstaining. Other members of the board who continue to serve are David
M. Dillman, M.D., Donald A. Hood, O.D., Andrew W. Miller, and
Herman L. Tacker, O.D.
At the meeting, shareholders also amended the Company's stock option
plan by votes of 6,578,399 for, 78,431 against, and 101,480 abstaining.
The shareholders also amended the Company's stock purchase plan by
votes of 6,587,190 for, 72,281 against, and 98,839 abstaining. Also at
the meeting, shareholders ratified the authorization of the Audit
Committee of the Board of Directors to select the Company's
independent auditors for 1998 by votes of 6,710,482 for, 3,795
against, and 45,533 abstaining.
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits:
(a) (11) Statement re: computation of per share earnings.
(27) Financial Data Schedule (SEC use only)
(b) Reports on Form 8-K:
None.
14
<PAGE> 15
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
November 13, 1998 By \s\ Ronald L. Edmonds
--------------------------------------
Ronald L. Edmonds
Executive Vice President and
Chief Financial Officer
15
<PAGE> 1
EXHIBIT 11
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
Computation of Earnings Per Common Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Basic:
Net earnings $ 770,737 $2,035,973 2,192,331 3,322,477
Preferred stock dividends 0 2,727 0 19,876
---------- ---------- --------- ---------
Net earnings to common shareholders 770,737 2,033,246 2,192,331 3,302,601
Shares:
Weighted average number of shares outstanding 8,885,529 7,549,315 8,772,738 7,268,550
---------- ---------- --------- ---------
Basic earnings per common share and common equivalent share:
Net earnings $ 0.09 $ 0.27 $ 0.25 $ 0.45
========== ========== ========= =========
Diluted:
Net earnings $ 770,737 2,035,973 2,192,331 3,322,477
Preferred stock dividends 0 2,727 0 19,876
---------- ---------- --------- ---------
Net earnings to common shareholders 770,737 2,033,246 2,192,331 3,302,601
Shares:
Weighted average number of shares outstanding 8,885,529 7,549,315 8,772,738 7,268,550
Assuming exercise of warrants and options,
net of number of shares which could have been
purchased with the exercise of such options
(using average market price) 73,565 238,867 143,268 200,087
---------- ---------- --------- ---------
Weighted average number of shares, adjusted 8,959,094 7,788,182 8,916,006 7,468,637
---------- ---------- --------- ---------
Diluted earnings per common share and common equivalent share:
Net earnings $ 0.09 $ 0.26 $ 0.25 $ 0.44
========== ========== ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,785
<SECURITIES> 0
<RECEIVABLES> 16,551
<ALLOWANCES> 3,005
<INVENTORY> 0
<CURRENT-ASSETS> 24,637
<PP&E> 19,115
<DEPRECIATION> 7,896
<TOTAL-ASSETS> 73,889
<CURRENT-LIABILITIES> 11,686
<BONDS> 0
0
0
<COMMON> 538
<OTHER-SE> 31,454
<TOTAL-LIABILITY-AND-EQUITY> 73,889
<SALES> 88,869
<TOTAL-REVENUES> 88,869
<CGS> 30,677
<TOTAL-COSTS> 83,238
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 823
<INTEREST-EXPENSE> 1,993
<INCOME-PRETAX> 3,517
<INCOME-TAX> 1,325
<INCOME-CONTINUING> 2,192
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,192
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
