<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 MARCH 31, 1998
---------------------
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.
- --------------------------------------------------------------------------------
(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
-------------------------------------------------------------------------------
(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.
[ ] 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, 1998
----------------------------- ------------------------------
Common Stock, $0.06 par value 8,715,994
<PAGE> 2
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
PART 1 - FINANCIAL INFORMATION
Index to Financial Information: Page
-------
Item 1:
Condensed Consolidated Balance Sheets
as of March 31, 1998 and December 31,
1997 3
Condensed Consolidated Statements of
Operations for the Three Months Ended
March 31, 1998 and 1997 4
Condensed Consolidated Statements of
Cash Flows for the Three Months Ended
March 31, 1998 and 1997 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> 3
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 5,516,068 5,608,645
Accounts receivable, net of allowances
for contractual adjustments and
doubtful accounts of $2,885,000 and
$3,142,000 in 1998 and 1997, respectively 15,224,115 12,498,685
Prepaid expenses and other assets 1,818,089 1,327,331
------------ -----------
TOTAL CURRENT ASSETS 22,558,272 19,434,661
Equipment, furniture and fixtures 18,744,122 18,179,934
Less: Accumulated depreciation (7,464,198) (6,990,662)
------------ -----------
NET EQUIPMENT, FURNITURE AND FIXTURES 11,279,924 11,189,272
Management service agreements and other
intangible Assets, net of accumulated amortization of
$887,286 and $1,094,390 in 1998 and 1997, Respectively 30,742,358 29,260,811
Deferred tax asset 1,106,000 1,356,000
Other assets 1,407,635 1,287,455
------------ -----------
TOTAL ASSETS $ 67,094,189 62,528,199
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 8,969,950 7,645,740
Eye care claims payable 2,935,329 2,471,935
Current installments of obligations under capital
lease and long-term debt 1,412,456 1,428,477
------------ -----------
TOTAL CURRENT LIABILITIES 13,317,735 11,546,152
Obligations under capital lease, excluding
current installments 1,277,894 1,365,448
Long-term debt, excluding current
installments 23,021,436 21,693,712
------------ -----------
TOTAL LIABILITIES 37,617,065 34,605,312
Minority Interest 521,244 523,065
Stockholders' equity:
Common stock 522,803 513,991
Additional paid in capital 32,431,228 31,562,383
Accumulated deficit (3,998,151) (4,676,552)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 28,955,880 27,399,822
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 67,094,189 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 MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Ophthalmic center net revenues $ 12,215,380 7,561,113
Managed eye care revenues 5,519,758 4,304,888
Optometric practice services 9,924,083 0
Mobile surgical and other 615,425 460,701
------------ -----------
TOTAL REVENUES 28,274,646 12,326,702
Center operating expenses 9,831,807 6,313,253
Eye care claims 4,173,615 3,305,478
Cost of sales 9,708,822 300,569
Provision for doubtful accounts 185,037 124,096
Selling, general, administrative and
development expenses 2,667,237 1,614,968
------------ -----------
EARNINGS FROM OPERATIONS 1,708,128 668,338
Non-operating revenue (expenses):
Interest and other income 79,943 100,382
Interest expense (590,249) (169,812)
------------ -----------
EARNINGS BEFORE MINORITY INTEREST 1,197,822 598,908
Minority interest in net income of partnerships (104,421) (46,612)
------------ -----------
EARNINGS BEFORE INCOME TAXES 1,093,401 552,296
Income tax expense (415,000) 0
------------ -----------
NET EARNINGS 678,401 552,296
Preferred dividends, principally imputed 0 (10,499)
------------ -----------
EARNINGS AVAILABLE TO COMMON
SHAREHOLDERS $ 678,401 $ 541,797
============ ===========
Earnings per common share:
Basic $ 0.08 $ 0.08
============ ===========
Diluted $ 0.08 $ 0.08
============ ===========
Weighted average number of common shares
Basic 8,714,777 6,929,222
============ ===========
Diluted 8,906,424 7,144,724
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net earnings $ 678,401 552,296
Adjustments to reconcile net earnings to net cash
Provided by operating activities:
Depreciation and amortization 745,594 400,236
Deferred tax asset 250,000 0
Provision for doubtful accounts 185,037 124,096
Minority interest in partnerships 104,421 46,612
Increase in:
Receivables (2,727,811) (956,502)
Other receivables (182,656) (33,761)
Prepaids and other assets (627,133) (565,146)
Increase in:
Accounts payable and accrued expenses 1,404,369 922,458
Eye care claims payable 463,394 514,387
------------ -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 293,616 1,004,676
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (212,539) (281,724)
Acquisition of assets of physician practices (1,291,561) (260,525)
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (1,504,100) (542,249)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 0 51,001
Net change in long-term debt and capital lease obligations 1,224,149 (7,832)
Distributions to minority interest (106,242) (62,570)
Other 0 (15,446)
------------ -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 1,117,907 (34,847)
------------ -----------
NET INCREASE (DECREASE) IN CASH (92,577) 427,580
CASH AT BEGINNING OF PERIOD 5,608,645 2,943,617
------------ -----------
CASH AT END OF PERIOD $ 5,516,068 3,371,197
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
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 three month
period ended March 31, 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 and diluted earnings per common share for 1998 and 1997 were computed by
dividing the earnings or losses by the weighted average number of common shares
outstanding during the quarter (8,714,777 and 6,929,222, 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 (8,906,424 and 7,144,724, 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.
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 tow 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 updated to
$30,000,000.
6
<PAGE> 7
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. 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.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 reqires 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.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months
Ended March 31
--------------
1998 1997
---- ----
<S> <C> <C>
Revenues 43.2% 61.4%
Center net revenues 19.5 34.9
Managed Care revenues 35.1 --
Optometric practice services 2.2 3.7
----- -----
Total revenues 100.0 100.0
Center operating expenses 34.8 51.2
Eye care claims 14.8 26.8
Selling, general and administrative expenses 9.4 13.1
Cost of sales 34.3 2.5
Provision for doubtful accounts 0.7 1.0
Earnings from operations 6.0% 5.4%
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Total Revenues. Total revenues increased from $12,327,000 for the three
months ended March 31, 1997 to $28,275,000 for the three months ended March 31,
1998, an increase of $15,948,000 or 129.4%.
Center net revenues increased from $7,561,000 for the 1997
period to $12,215,000 for the 1998 period, an increase of $4,654,000,
or 61.6%. The increase resulted primarily from the additions of Centers
in Birmingham, Alabama; Marion, Indiana; Danville, Illinois; Chicago,
Illinois; San Antonio, Texas; and Circleville, Ohio during the 1998
period as well as the addition of an ASC in the San Antonio and
Circleville Centers. In addition, same-center revenue increased 6% for
the 1998 period.
Managed care revenues increased from $4,305,000 for the 1997
period to $5,520,000 for the 1998 period, an increase of $1,215,000, or
28.2%. The increase reflected the continued growth experienced by the
Company's managed care operations.
Optometric practice service revenues were $9,924,000 for the
three months ended March 31, 1998. 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 $461,000 for
the 1997 period to $615,000 for the 1998 period, an increase of
$154,000 or 33.4%. The increase resulted primarily from higher margin
mobile surgical revenues.
8
<PAGE> 9
Center Operating Expenses. Center operating expenses increased from
$6,313,000 for the three months ended March 31, 1997 to $9,832,000 for the three
months ended March 31, 1998, an increase of $3,519,000 or 55.7%. The increase
reflected the additions of the practices in Birmingham, Marion, Danville,
Chicago, San Antonio and Circleville as well as 3% same-center operating expense
increase during the 1998 period. As a percentage of center net revenues, center
operating expenses decreased from 83.5% in the 1997 period to 80.5% 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 $3,305,000 for the
three months ended March 31, 1997 to $4,174,000 for the three months ended March
31, 1998, an increase of $869,000, or 26.3%. 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 76.8% in the 1997
period to 75.6% in the 1998 period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $1,615,000 for the three months ended
March 31, 1997 to $2,667,000 for the three months ended March 31, 1998, an
increase of $1,052,000, or 65.1%. 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 during the 1998 period. As a percentage
of total revenues, selling, general, and administrative expenses decreased from
13.1% in the 1997 period to 9.4% in the 1998 period.
Cost of Sales. Cost of sales increased from $301,000 for the three
months ended March 31, 1997 to $9,709,000 for the three months ended March 31,
1998, an increase of $9,408,000, or 3125.6%. This increase primarily reflected
the acquisition of PEN in May 1997 and the increase in higher margin mobile
surgical sales. As a percentage of total revenues, cost of sales increased from
2.4% in the 1997 period to 34.3% in the 1998 period, primarily as a result of
the acquisition.
Provision for Doubtful Accounts. Provision for doubtful accounts
increased from $124,000 for the three months ended March 31, 1997 to $185,000
for the three months ended March 31, 1998, an increase of $61,000, or 49.2%. As
a percentage of total revenues, provision for doubtful accounts marginally
decreased from 1.0% in the 1997 period to 0.7% in the 1998 period.
Interest Income (Expense), Net. Interest expense increased from $69,000
for the three months ended March 31, 1997 to $510,000 for the three months ended
March 31, 1998, an increase of $441,000, or 639.1%. This increase related to the
increase in borrowings in late 1997 and the 1998 period used to finance
acquisitions.
Preferred Dividends. Preferred dividends were $10,000 for the three
months ended March 31, 1997. This decrease resulted from the conversion of
Series A Convertible Preferred Stock into Common Stock by preferred stockholders
subsequent to March 31, 1997.
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.
9
<PAGE> 10
LIQUIDITY, CASH FLOW, AND CAPITAL RESOURCES
For the three months ended March 31, 1998, the operating activities of the
Company generated $294,000. The Company used $1,504,000 in investing activities
and generated $1,118,000 in financing activities.
Cash flows from operations included significant adjustments for depreciation and
amortization ($746,000) as well as provision for doubtful accounts ($185,000).
Cash flows from operations were significantly affected by working capital
requirements of acquisitions completed in the fourth quarter of 1997 and first
quarter of 1998 and income tax payments. Investing activities during the period
included $213,000 in capital expenditures for equipment as well as acquisitions
of the assets of optometric practices in Florida. Financing activities included
an increase in debt and distributions to minority interest.
10
<PAGE> 11
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.
None.
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.
(b) Reports on Form 8-K:
The Company filed a current report on Form 8-K on January 2,
1998. The Form 8-K reported Item 1, Acquisition or Disposition
of Assets in connection with the acquisition of substantially
all of the assets of Central Ohio Institute, Inc.
Subsequently, the Company filed Form 8-K/A on March 3, 1998 in
connection with this acquisition.
11
<PAGE> 12
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
April 14, 1998 By /s/ Ronald L. Edmonds
----------------------------------
Ronald L. Edmonds
Executive Vice President and
Chief Financial Officer
12
<PAGE> 1
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>
Basic:
Net earnings $ 678,401 552,296
Preferred stock dividends 0 10,499
---------- ---------
Net earnings to common shareholders 678,401 541,497
Shares:
Weighted average number of shares outstanding 8,714,777 6,929,222
---------- ---------
Basic earnings per common share and common equivalent share:
Net earnings $0. 08 $ 0.08
========== =========
Diluted:
Net earnings $ 678,401 552,296
Preferred stock dividends 0 10,499
---------- ---------
Net earnings to common shareholders 678,401 541,797
Shares:
Weighted average number of shares outstanding 8,714,777 6,929,222
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) 191,647 215,502
---------- ---------
Weighted average number of shares, adjusted 8,906,424 7,144,724
---------- ---------
Diluted earnings per common share and common equivalent share:
Net earnings $ 0.08 $ 0.08
========== =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,516
<SECURITIES> 0
<RECEIVABLES> 15,224
<ALLOWANCES> 2,885
<INVENTORY> 0
<CURRENT-ASSETS> 22,558
<PP&E> 18,744
<DEPRECIATION> 7,464
<TOTAL-ASSETS> 67,094
<CURRENT-LIABILITIES> 13,318
<BONDS> 0
0
0
<COMMON> 523
<OTHER-SE> 28,433
<TOTAL-LIABILITY-AND-EQUITY> 67,094
<SALES> 28,275
<TOTAL-REVENUES> 28,275
<CGS> 9,709
<TOTAL-COSTS> 26,567
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 185
<INTEREST-EXPENSE> 590
<INCOME-PRETAX> 1,093
<INCOME-TAX> 415
<INCOME-CONTINUING> 678
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 678
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
