<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 JUNE 30, 2000
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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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VISIONAMERICA INCORPORATED
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(Exact name of small business issuer as specified in its charter)
Delaware 13-3220466
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(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 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 June 30, 2000
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Common Stock, $0.06 par value 9,933,066
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VISIONAMERICA INCORPORATED AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
PART 1 - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Index to Financial Information: Page
-----
<S> <C>
Item 1:
Condensed Consolidated Balance Sheets
as of June 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of
Operations for the Three Months Ended
June 30, 2000 and 1999 4
Condensed Consolidated Statements of
Operations for the Six Months Ended
June 30, 2000 and 1999 5
Condensed Consolidated Statements of
Cash Flows for the Six Months Ended
June 30, 2000 and 1999 6
Notes to Condensed Consolidated
Financial Statements 7
Item 2:
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
Item 3:
Quantitative and Qualitative Disclosures about 18
Market Risks
</TABLE>
2
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VISIONAMERICA INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 1,723,846 $ 1,866,616
Accounts receivable, net of allowance
for doubtful accounts totaling $3,151,000 at
June 30, 2000 and $3,099,000 at December 31, 1999 8,305,078 8,705,593
Prepaid expenses and other assets 1,875,556 1,575,319
Net assets held for disposal 1,665,000 3,644,615
------------ ------------
TOTAL CURRENT ASSETS 13,569,480 15,792,143
Equipment, furniture and fixtures 31,444,551 28,927,555
Less: Accumulated depreciation (12,582,445) (10,978,361)
------------ ------------
NET EQUIPMENT, FURNITURE AND FIXTURES 18,862,106 17,949,194
Management service agreements and other intangible
assets, net of accumulated amortization of
$2,694,382 and $1,863,000 in 2000 and 1999,
respectively 12,791,670 14,229,901
Other assets 4,274,363 3,734,464
------------ ------------
TOTAL ASSETS $ 49,497,619 $ 51,705,702
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 12,937,115 $ 12,012,862
Current installments of obligations under capital
leases and long-term debt 34,587,354 35,779,628
------------ ------------
TOTAL CURRENT LIABILITIES 47,524,469 47,792,490
Obligations under capital leases, excluding
current installments 7,943,286 6,628,636
Long-term debt, excluding current
installments 406,341 348,145
------------ ------------
TOTAL LIABILITIES 55,874,096 54,769,271
Minority Interest 73,326 77,004
Stockholders' deficit:
Common stock 611,218 551,218
Treasury stock (152,609) (152,609)
Additional paid-in capital 37,184,534 33,028,534
Accumulated deficit (44,092,946) (36,567,716)
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TOTAL STOCKHOLDERS' DEFICIT (6,449,803) (3,140,573)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 49,497,619 $ 51,705,702
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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VISIONAMERICA INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Center net revenues $ 13,550,985 $ 13,985,525
Other revenues 463,049 567,599
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TOTAL REVENUES 14,014,034 14,553,124
Center operating expenses 11,574,768 11,054,200
Selling, general, and administrative expenses 2,170,982 1,495,486
Cost of sales 209,923 271,302
Provision for doubtful accounts 490,150 732,331
Impairment of physician practice management assets 1,562,006 --
------------ ------------
EARNINGS (LOSS) FROM OPERATIONS (1,993,795) 999,805
Gain on sale of investment -- 724,242
Interest expense (1,090,264) (743,837)
Minority interest in net income of partnerships (232,490) (162,842)
Equity in earnings of joint venture 296,651 --
Income tax expense (74,000) (220,353)
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NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS (3,093,898) 597,015
Discontinued operations, net of tax (2,106,355) 95,366
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NET EARNINGS (LOSS) $ (5,200,253) $ 692,381
============ ============
Earnings (loss) from continuing operations per common share:
Basic $ (0.31) $ 0.07
============ ============
Diluted $ (0.31) $ 0.07
============ ============
Earning (loss) from discontinued operations per common share:
Basic $ (0.21) $ 0.01
============ ============
Diluted $ (0.21) $ 0.01
============ ============
Earnings (loss) per common share:
Basic $ (0.52) $ 0.08
============ ============
Diluted $ (0.52) $ 0.08
============ ============
Weighted average number of common shares:
Basic 9,933,066 8,992,347
============ ============
Diluted 9,933,066 9,174,454
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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VISIONAMERICA INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Center net revenues $ 29,323,568 $ 27,883,333
Other revenues 925,138 1,446,271
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TOTAL REVENUES 30,248,706 29,329,604
Center operating expenses 25,481,619 22,021,125
Selling, general, and administrative expenses 4,290,321 2,671,421
Cost of sales 433,149 839,827
Provision for doubtful accounts 1,466,931 1,339,769
Impairment of physician practice management assets 1,562,006 --
------------ ------------
EARNINGS (LOSS) FROM OPERATIONS (2,985,320) 2,457,462
Gain on sale of investment -- 724,242
Interest expense (2,307,509) (1,388,060)
Minority interest in net income of partnerships (340,459) (295,749)
Equity in earnings of joint venture 147,785 --
Income tax expense (115,000) (388,090)
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NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS (5,600,503) 1,109,805
Discontinued operations, net of tax (1,924,727) 176,127
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NET EARNINGS (LOSS) $ (7,525,230) $ 1,285,932
============ ============
Earnings (loss) from continuing operations per common share:
Basic $ (0.58) $ 0.12
============ ============
Diluted $ (0.58) $ 0.12
============ ============
Earnings (loss) from discontinued operations per common share:
Basic $ (0.20) $ 0.02
============ ============
Diluted $ (0.20) $ 0.02
============ ============
Earnings (loss) per common share:
Basic $ (0.78) $ 0.14
============ ============
Diluted $ (0.78) $ 0.14
============ ============
Weighted average number of common shares:
Basic 9,630,516 8,991,474
============ ============
Diluted 9,630,516 9,101,253
============ ============
</TABLE>
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VISIONAMERICA INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $(7,525,230) $ 1,285,932
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) continuing operations:
Depreciation and amortization 2,195,178 1,674,457
Deferred taxes -- 1,000,000
Provision for doubtful accounts 1,466,931 1,339,769
Loss (earnings) from discontinued operations 1,924,727 (176,127)
Equity in earnings of joint venture (147,785) --
Impairment charge 1,562,006 --
Minority interest in partnerships 340,459 295,749
Increase in:
Receivables (1,161,016) (3,899,145)
Prepaids and other assets (630,409) (2,165,731)
Increase in:
Accounts payable and accrued expenses 518,941 2,167,475
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NET CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS (1,456,198) 1,522,379
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS 54,888 (1,632,342)
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,401,310) (109,963)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (664,948) (756,224)
Acquisition of assets of physician practices -- (520,520)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (664,948) (1,276,744)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in long-term debt and capital lease obligations (1,732,375) 2,076,132
Distributions to minority interest (344,137) (324,423)
Proceeds from issuance of common stock 4,000,000 --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,923,488 1,751,709
----------- -----------
NET INCREASE (DECREASE) IN CASH (142,770) 365,002
CASH AT BEGINNING OF PERIOD 1,866,616 3,100,145
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CASH AT END OF PERIOD $ 1,723,846 $ 3,465,147
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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VISIONAMERICA INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The information contained in the interim consolidated financial statements and
footnotes is condensed from that which would appear in the annual consolidated
financial statements. Accordingly, the interim condensed consolidated financial
statements included herein should be read in conjunction with the consolidated
financial statements as of and for the year ended December 31, 1999 filed by
VisionAmerica Incorporated and Subsidiaries (the "Company") with the Securities
and Exchange Commission on Form 10-K. The unaudited interim condensed
consolidated financial statements as of June 30, 2000 and 1999, include all
normal recurring adjustments which management considers necessary for a fair
presentation. Certain 1999 amounts have been reclassified to conform to the 2000
presentation. The results of operations for the interim periods are not
necessarily indicative of the results that may be expected for the entire fiscal
year.
2. EARNINGS PER SHARE
Basic earnings (loss) per share for each period are computed by dividing net
earnings (loss) by the weighted-average number of shares of common stock
outstanding during the period. Diluted earnings (loss) for each period are
computed by dividing net earnings (loss) by the sum of (1) the weighted-average
number of shares outstanding during the period and (2) the dilutive effect of
the assumed exercise of stock options and warrants using the treasury stock
method. The following is a reconciliation of the numerators and denominators of
the per share computations for earnings (loss) from continuing operations per
share(EPS) for the three and six month periods ended June 30, 2000 and 1999,
respectively:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS SIX MONTHS
----------------------- ------------------------
2000 1999 2000 1999
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
NUMERATOR:
Earnings (loss) from continuing operations (numerator
for basic and diluted EPS) (3,093,898) 597,015 (5,600,503) 1,109,805
DENOMINATOR:
Weighted average shares (denominator for basic EPS) 9,933,066 8,992,347 9,630,516 8,991,474
Effect of dilutive securities-stock options -- 182,107 -- 109,779
---------- --------- ---------- ---------
Weighted average shares and assumed conversions
(denominator for diluted EPS) 9,933,066 9,174,454 9,630,516 9,101,253
BASIC EPS $ (0.31) $ 0.07 $ (0.58) $ 0.12
DILUTED EPS $ (0.31) $ 0.07 $ (0.58) $ 0.12
</TABLE>
Options and warrants to purchase 4,247,000 shares of common stock were
outstanding at June 30, 2000, that were not included in the computations of
diluted EPS because they were antidilutive.
3. REVOLVING CREDIT AGREEMENT
The Company has a $50,000,000 bank revolving credit facility. Borrowings under
the agreement bear interest at the 30-day commercial paper rate plus 4.25%,
which was 10.795% at June 30, 2000. Interest only was due monthly until January
2000, at which time the borrowings are due in installments over a four-year
period. Substantially all the Company's assets are pledged under the agreement.
Under the terms of the agreement, the Company is required to maintain compliance
with certain financial covenants. As of December 31, 1999 and June 30, 2000, the
Company is in technical default under the terms of its revolving credit facility
and has not received any waivers of noncompliance with related debt covenants.
Because of these circumstances, all amounts due under the facility can be deemed
immediately due and payable at the lenders' discretion. Therefore, such amounts
totaling $32,667,000 and $33,675,000 have been classified as a current
liability in the accompanying condensed consolidated financial statements at
June 30, 2000 and
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December 31, 1999, respectively. The Company's senior lenders agreed on May 1,
2000, subject to various terms and conditions, to provide a new $2.5 million
discretionary over-line as an amendment to the credit facility to fund certain
Company expenditures. As a part of this amendment, the senior lenders received
warrants, exercisable at $0.06 per share, to purchase 20% of the Company's
common stock on a fully diluted basis (2,836,760 shares). The warrants were
valued at approximately $216,000 and were recorded as deferred financing costs.
If the Company repays both the $2.5 million facility and the $3.0 million letter
of credit described in note 6 within six months of their respective effective
dates, 50% of the warrants will be canceled at no cost to the Company. The
discretionary over-line expired on August 1, 2000 with the $2.5 million borrowed
thereunder as of that date becoming due and payable. The lenders have indicated
their willingness to extend the payment date for the over-line an additional 90
days while they pursue the restructuring of the credit facility with the
Company. This additional amendment to the credit facility would include an
agreement by the lenders for the Company to use a certain portion of the
proceeds of any asset dispositions during the 90 days for working capital
purposes. The Company's lenders have not to-date, however, extended any formal
commitment to waive noncompliance or otherwise renegotiate the terms of the
credit facility. The Company does not currently have alternative financing
arrangements should the lenders demand repayment. Management is pursuing the
renegotiation of the credit facility as noted above. However, if the Company
cannot resolve the issues with its current lenders, management expects to pursue
alternative financing arrangements. The Company's objective is to achieve a new
financing arrangement which will not adversely affect its financial condition.
Nevertheless, no new financing arrangements are in place and there can be no
assurances that any such arrangements will in fact be consummated. Unamortized
deferred financing costs totaling $211,000 at June 30, 2000, which are included
in other assets, would be written off in the event that the Company reaches an
agreement with lenders other than those currently in place.
4. RESTRICTED STOCK SALE AND JOINT VENTURE
On February 24, 2000, ICON Laser Eye Centers, Inc. (ICON) purchased 1,000,000
restricted shares of the Company's common stock for aggregate proceeds totaling
$4,000,000. The related agreement also grants ICON, contingent upon certain
events, registration rights with respect to the restricted shares. These rights
include the Company's issuance of a warrant for an additional 1,000,000 shares
of the Company's common stock if, among other things, a registration statement
is not filed for the 1,000,000 shares by July 31, 2000.
ICON has subsequently requested that the Company renegotiate the agreement
described above. As a result of negotiations to-date, the Company and ICON
entered into a Letter of Intent ("LOI") on May 12, 2000 that outlines the terms
of both a settlement regarding the stock purchase agreement and a joint
operating arrangement.
The settlement portion of the LOI contemplates the termination of the stock
purchase agreement and the issuance by the Company of a $4,000,000 subordinated
convertible note to ICON. The note would bear interest at 5% annually, and all
principal and interest would be due at the note's suggested maturity date of May
31, 2005. The note would be convertible at any time into Company common stock at
a conversion rate of $1.00 per share. Additionally, ICON would receive
detachable warrants to purchase 1,000,000 shares of the Company's common stock
at $0.06 per share. The LOI also outlines the structure of a joint operating
arrangement which would formalize the current unincorporated joint venture
between the Company and ICON (see below), whereby the Company and ICON would
each have a 50% ownership interest in a new entity that would market and provide
laser vision correction services in select markets.
The LOI was subject to negotiation and execution of definitive agreements by May
27, 2000. The Company and ICON have been negotiating definitive agreements with
respect to the terms of the LOI, but currently there remain significant
unresolved issues. Therefore no such agreements are currently in place, nor can
achievement of such agreements be assured. Additionally, the agreements would
require the approval of the Company's senior lenders and the settlement with
respect to the stock purchase agreement might require the approval of the
Company's shareholders.
As of June 30, 2000, the Company and ICON have joint laser vision correction
activities in 7 of the Company's markets as an unincorporated joint venture with
terms substantially in accord with the LOI. The Company and ICON have pursued
joint laser vision correction centers in 13 of the Company's markets. Subsequent
to initiation, however, joint activities have been discontinued in 6 of the
markets. ICON continues to operate 4 of these centers independently, and the
Company continues to operate 2
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independently. The Company's investment in the joint venture activity is
accounted for using the equity method and the Company's 50% interest in the
activities is included in the accompanying condensed consolidated statements of
operations as equity in earnings of joint venture.
5. IMPAIRMENT OF PHYSICIAN PRACTICE MANAGEMENT ASSETS
In discussions beginning in late fiscal 1999 and continuing into fiscal 2000,
the Company determined that dramatic shifts in strategic and operational focuses
were required to enhance the sustainability of the Company's business model. An
important component of these shifts in focus was a global evaluation of existing
physician practice management relationships and the related assets underneath
those contractual arrangements, referred to here as the "impairment analysis."
The impairment analysis was characterized by an identification (generally based
on poor historical cash flows and/or active disposal consideration) of
under-performing physician practice management relationships and an evaluation
of the business case for continuation of those relationships. The impairment
analysis specifically identified 10 contractual relationships that are
economically burdensome to the Company and that also meet the accounting
criteria for impairment as of December 31, 1999, based on a comparison of the
asset carrying values to the undiscounted net cash flows expected from the
physician practice management relationships. Given such results, the Company
evaluated the value of related contract assets, principally consisting of net
working capital and intangible assets associated with the related practice
affiliation transactions, to determine the amount of any impairment loss.
Impairment was measured by comparing the existing book value of the net practice
assets to the Company's estimates of fair value for the respective practices.
Fair value generally was determined based on estimated selling price criteria
obtained from industry consultants experienced with physician practice disposals
in similar circumstances. As a result of the analysis above, the Company
recorded an impairment charge to earnings in the fourth quarter of fiscal 1999
totaling $19.2 million, comprised primarily of write-downs of related practice
intangible assets.
During the second quarter of 2000, Company management continued to pursue
possibilities for the disposition of the practice assets noted above. During
this process, certain of the related physician relationships deteriorated as
noted under Physician Disputes in Note 6. As a result, it became apparent that
in lieu of the sale of certain of the practices, termination and abandonment of
the practices might be the Company's only recourse. In other cases, based on
preliminary discussions with potential buyers, the Company's previous
expectations as to estimated selling prices appeared aggressive given the lack
of performance of the related practices. Consequently, it was determined that
recoverability of asset values for the impaired practices in excess of tangible
book value was unlikely, and the Company recorded an additional impairment
charge of $1,562,000 in the second quarter of 2000 principally to write-off any
remaining intangible assets of these practices.
The 10 practices identified as impaired represented approximately 26% of the
Company's 1999 net revenues from physician practice management operations (the
center operations segment) and 20% of such net revenues during the six months
ended June 30, 2000.
6. CONTINGENCIES
DELINQUENT PAYROLL TAXES AND WITHHOLDINGS
At June 30, 2000 and December 31, 1999, the Company had accrued approximately
$6.4 million and $5.3 million, respectively, for unremitted payroll taxes and
withholdings that are included in accrued expenses in the accompanying condensed
consolidated balance sheets.
The Company and its advisors continue to negotiate with the Internal Revenue
Service (IRS) regarding a settlement of outstanding amounts (including
accumulated penalties and interest) due to the IRS. Based on negotiations to
date, it is considered probable that the IRS will ultimately agree to a
settlement wherein the Company will be released from its obligation for all
delinquent payroll taxes, withholdings, penalties and interest for a lump sum
payment no greater than the accrual at December 31, 1999. Nevertheless, there
can be no assurance that the Company will be able to negotiate a settlement with
the IRS for an amount less than is owed, including penalties and interest, and
further that, in the event of a settlement, it will have the
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funds to effect the settlement. If applicable, the $6.4 million accrual in the
accompanying condensed consolidated financial statements will be adjusted
downward when the Company has entered into a formal settlement with the IRS and
has been legally released from liability with respect to this matter.
In an agreement dated May 3, 2000, between the Company, its senior lenders and
the IRS, the IRS has withdrawn existing liens against Company assets for the
unpaid taxes and withholdings and has agreed to refrain from taking any further
collection actions against the Company. In exchange, the senior lenders have
provided a $3,000,000 letter of credit on which the IRS may draw upon under
certain conditions, and in any event by May 1, 2001 if the Company has not
settled with the IRS.
CLASS ACTION SECURITIES CLAIMS
The Company and certain of its officers are the subjects of various class-action
claims, filed at various dates since March 2000, alleging violations of federal
securities laws. These complaints, which were consolidated as of June 26, 2000,
generally allege that certain shareholders suffered financial losses as a result
of false and misleading information the Company provided about its financial
condition.
The Company is not yet able to determine what impact, if any, the litigation
described above will have on the Company's financial position or results of
operations. The Company has directors' and officers' liability insurance
coverage that would apply to losses that might be suffered as a result of these
claims; however, there is a possibility that related alleged damages may be in
excess of such available coverage. An unfavorable outcome to these matters could
have a material adverse effect on the Company's financial position or results of
operations.
PHYSICIAN DISPUTES
Contract disputes have arisen between the Company and the doctors in seven of
the Company's practice management relationships, six of which relate to the
impaired relationships described in Note 5 above. These matters are in various
stages of dispute resolution, with one case having escalated to a demand for
mediation by the doctor and in two cases to the doctors having filed suit
against the Company. Both lawsuits were filed in June 2000, claim breach of the
related management contracts amongst other things, and seek unspecified damages.
If settlement discussions regarding the other disputes are not successful, each
of these matters could progress to arbitration or litigation. The net assets of
the seven related physician practices as of June 30, 2000, were approximately
$13,221,000.
The Company is currently unable to predict the outcome of these litigations and
disputes or determine, in the event of unfavorable outcome, the potential losses
to the Company with regard to damages sought, the recoverability of related
physician practice assets, potential practice termination costs (lease
terminations and other such exit costs), and legal costs. However, an
unfavorable outcome to these litigations and disputes, in the aggregate if not
individually, could have a material adverse effect on the Company's financial
position or results of operations.
PROVIDERS NOTES
Effective December 14, 1999, the Company sold all of the stock of Providers
Optical, Inc. ("Providers"). Consideration for the stock sale, totaling
approximately $2.8 million, consisted of the following: $100,000 due within 90
days of closing, $400,000 due within 180 days of closing, a $1.5 million 9% term
note payable over 60 months, and a $1.3 million non-interest bearing balloon
note due December 3, 2004 (interest imputed at a 9% stated interest rate for
financial reporting purposes). The aggregate loss from Providers for financial
reporting purposes from both operations and its disposal totaled approximately
$1.3 million for the year ended December 31, 1999. The first $100,000 payment
due on the sale was received on March 22, 2000, but failed to clear the
Company's bank upon receipt. Subsequent recovery of the $100,000 payment has yet
to be resolved and all subsequent payments due the Company have been defaulted
on. On the basis of the cross default provisions in the notes, the Company has
sued for acceleration and collection of all amounts due from the sale. Because
of these events and the lack of sufficient information concerning the buyer's
financial condition, the recoverability of the amounts due from the sale are
uncertain and
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potential write-downs thereof could have a material adverse effect on the
Company's financial condition or results of operations.
LIABILITY INSURANCE COVERAGES
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's management agreements require its affiliated ophthalmologists to
maintain professional liability coverage, generally with minimum requirements of
$1,000,000 per occurrence and $3,000,000 annually. The Company also maintains
general liability coverage. Providing support associated with health care
services may give rise to claims from patients or others for damages, and the
Company has in fact been named in certain professional liability claims. The
Company believes that the ultimate resolution of these matters will not have a
material 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. GOING CONCERN MATTERS
The Company faces significant operational and financial challenges in the
near-term, including but not limited to:
- Renegotiation of its senior credit facility, as described in
note 3;
- Negotiation of definitive agreements with ICON with respect to
the LOI discussed in note 4:
- Reaching a final settlement of the IRS matter discussed in
note 6; and
- Management of the class action claims and physician disputes
described in note 6.
The Company, with the assistance of its lenders and certain advisors, has been
actively and globally evaluating its business strategy and operating model. This
evaluation is especially important in light of significant economic weaknesses
evidenced by its physician practice management segment in 1999 and continuing
into fiscal 2000 (leading to the impairment charges described in Note 5) and
what the Company believes are dramatic opportunities to grow and enhance its
laser vision correction revenue streams through a joint venture arrangement with
ICON or independently in the absence of a satisfactory resolution of the issues
with ICON. The complexity of the Company's business evaluation is further
aggravated by significant immediate liquidity issues that must be addressed in
parallel with any contemplated strategic and operational changes.
In order to emerge from its current liquidity and operational difficulties with
a profitable business model, the Company must achieve success on a number of
critical fronts, including those described above. While the Company's management
is focused on these objectives, there can be no assurance that the Company will
in fact achieve such success. These circumstances raise substantial doubt about
the Company's ability to continue as a going concern. The condensed consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
8. SEGMENT INFORMATION
The Company classifies its operations into two business segments: center
operations and other. The center operations segment includes all activity
related to managing ophthalmology practices and ambulatory surgical centers. The
other segment primarily includes the operations of VisionAmerica Surgical
Services, Inc., formerly Omega Medical Services, Inc., which provides mobile
surgical and other supplies and services to eye care providers. The corporate
category includes general and administrative expenses associated with the
operation of the Company's corporate office. There are no material intersegment
sales,
11
<PAGE> 12
and operating income by business segment excludes interest income, interest
expense, and corporate expenses.
Summarized financial information by business segment for the three and six month
periods ended June 30, 2000 and 1999 is as follows (unaudited):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Center operations $ 13,550,985 $ 13,985,525 $ 29,323,568 $ 27,883,333
Other 463,049 567,599 925,138 1,446,271
------------ ------------ ------------ ------------
Total revenues $ 14,014,034 $ 14,553,124 $ 30,248,706 $ 29,329,604
============ ============ ============ ============
Earnings (losses):
Center operations $ 230,697 $ 2,205,467 $ 975,814 $ 4,531,147
Other 11,594 96,959 7,790 192,436
------------ ------------ ------------ ------------
Total segments 242,291 2,302,426 983,604 4,723,583
Corporate expense (1,935,761) (574,860) (3,814,706) (1,534,581)
Net interest expense (1,093,938) (747,356) (2,313,942) (1,395,358)
Minority interest expense (232,490) (162,842) (340,459) (295,749)
Income tax expense (74,000) (220,353) (115,000) (388,090)
------------ ------------ ------------ ------------
Total earnings (losses) from
continuing operations $ (3,093,898) $ 597,015 $ (5,600,503) $ 1,109,805
============ ============ ============ ============
</TABLE>
9. DISCONTINUED OPERATIONS
The Company adopted a plan in the fourth quarter of 1998 to transition the
ownership and operation of its managed care subsidiary ("EHN") to a strategic
partner. The Company completed the sale of certain assets of EHN in the third
quarter of 1999, but the anticipated strategic relationship did not materialize
and the Company discontinued the remaining operations of EHN. The remaining
contracts of EHN have terminated as of December 31, 1999, and the operation was
completely discontinued by the end of May 2000. During the fourth quarter of
1999 the Company's board of directors also adopted plans of disposal related to
Primary Eyecare Network ("PEN"), its ophthalmic buying group, and Providers
Optical Inc. ("Providers"), its wholesale optical laboratory. Providers was sold
in 1999 and PEN was disposed of in the third quarter of 2000 as discussed below.
As a result of the above, the operations of EHN, PEN, and Providers have been
classified as discontinued operations for each period presented in the
accompanying condensed consolidated financial statements.
Initially, no loss was expected on the disposal of PEN. Bids for the purchase of
PEN received during the second quarter of 2000, however, indicated that a loss
might be incurred, and effective August 31, 2000 substantially all of the assets
of PEN were sold at an estimated loss of $2,286,000. This estimated loss on the
disposal is recorded as of June 30, 2000, and although the actual loss is
subject to finalization of the balance sheet of PEN at closing, it is not
expected to differ significantly from the estimate.
10. DELISTING
The Company's common stock was delisted from the NASDAQ Stock Market effective
June 29, 2000, and now trades on the OTC Bulletin Board.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Except for historical information, statements relating to the Company's
plans, objectives and future performance are forward looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are based on management's current expectations. Because of various
risks and uncertainties, actual strategies and results in future periods may
differ materially from those currently expected.
The discussion set forth below analyzes certain factors and trends
related to the financial results for the three and six month periods ended June
30, 2000 and 1999. This discussion should be read in conjunction with the
condensed consolidated financial statements and notes to the condensed
consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
In early 1999 the Company announced plans to focus its resources on its
core business of operating eye care and surgery centers including a major new
initiative to expand its laser vision correction capabilities. Despite some
success in its refractive surgery campaign in certain of its markets, in
planning discussions beginning in late 1999 and continuing into 2000, the
Company determined that dramatic shifts in strategic and operational focuses
were required to enhance the sustainability of the Company's business model. An
important component of these shifts in focus was a global evaluation of existing
physician practice management relationships and the related assets underneath
those contractual arrangements, referred to here as the "impairment analysis."
The impairment analysis was characterized by an identification (generally based
on poor historical cash flows and/or active disposal consideration) of
under-performing physician practice management relationships and an evaluation
of the business case for continuation of those relationships. The impairment
analysis specifically identified 10 contractual relationships that are
economically burdensome to the Company and that also meet the accounting
criteria for impairment as of December 31, 1999. As a result of the analysis,
the Company recorded an impairment charge to earnings in the fourth quarter of
fiscal 1999 totaling $19.2 million, comprised primarily of write-downs of
related practice intangible assets, and an additional charge of $1,562,000 in
the second quarter of 2000 to record further impairment as discussed in note 5
to the Consolidated Condensed Financial Statements. The 10 centers identified as
impaired represent approximately 26% of the Company's 1999 net revenues from
physician practice management operations (the center operations segment) and 20%
of such net revenues during the six months ended June 30, 2000.
The Company incurred a net loss from continuing operations of
$28,827,000 for the year ended December 31, 1999, including the impairment
charge discussed above, and incurred a further loss from continuing operations
in the six months ended June 30, 2000 of $5,601,000, including an impairment
charge of $1,562,000 as noted above. At June 30, 2000, current liabilities
(which includes all amounts due to the Company's senior lenders as discussed
below) exceeded current assets by $33,800,000. Reflective of these amounts, the
Company faces significant operational and financial challenges in the near-term,
including but not limited to those described below.
Contract disputes have arisen between the Company and the doctors in
seven of the Company's practice management relationships, six of which relate to
the impaired relationships described above. These matters are in various stages
of dispute resolution, with one case having escalated to a demand for mediation
by the doctor and in two cases to the doctors having filed suit against the
Company. Both lawsuits were filed in June 2000, claim breach of the related
management contracts amongst other things, and seek unspecified damages. If
settlement discussions regarding the other disputes are not successful, each of
these matters could progress to arbitration or litigation. The net assets of the
seven related physician practices as of June 30, 2000, were approximately
$13,221,000. The Company is currently unable to predict the outcome of these
litigations and disputes or determine, in the event of unfavorable outcome, the
potential losses to the Company with regard to damages sought, the
recoverability of related physician practice assets, potential practice
termination costs (lease terminations and other such exit costs), and legal
costs. However, an unfavorable outcome to these litigations and disputes, in the
aggregate if not individually, could have a material adverse effect on the
Company's financial position or results of operations.
13
<PAGE> 14
The Company is in technical default under the terms of its revolving
credit facility and has not received any waivers of noncompliance with related
debt covenants. Because of these circumstances, all amounts due under the
facility can be deemed immediately due and payable at the lenders' discretion.
Therefore, such amounts totaling $ 32,667,000 and $33,675,000 have been
classified as a current liability in the accompanying condensed consolidated
financial statements at June 30, 2000 and December 31, 1999, respectively. The
Company's senior lenders agreed on May 1, 2000, subject to various terms and
conditions, to provide a new $2.5 million discretionary over-line as an
amendment to the credit facility to fund certain Company expenditures. As a part
of this amendment, the senior lenders received warrants, exercisable at $0.06
per share, to purchase 20% of the Company's common stock on a fully diluted
basis. If the Company repays both the $2.5 million facility and the $3.0 million
letter of credit described in note 6 within six months of their respective
effective dates, 50% of the warrants will be canceled at no cost to the Company.
The discretionary over-line expired on August 1, 2000 with the $2.5 million
borrowed thereunder as of that date becoming due and payable. The lenders have
indicated their willingness to extend the payment date for the over-line an
additional 90 days while they pursue the restructuring of the credit facility
with the Company. This additional amendment to the credit facility would include
an agreement by the lenders for the company to use a certain portion of the
proceeds of any asset dispositions during the 90 days for working capital
purposes. The Company's lenders have not to-date, however, extended any formal
commitment to waive noncompliance or otherwise renegotiate the terms of the
credit facility. The Company does not currently have alternative financing
arrangements should the lenders demand repayment. Management is pursuing the
renegotiation of the credit facility as noted above. However, if the Company
cannot resolve the issues with its current lenders, management expects to pursue
alternative financing arrangements. The Company's objective is to achieve a new
financing arrangement which will not adversely affect its financial condition.
Nevertheless, no new financing arrangements are in place and there can be no
assurances that any such arrangements will in fact be consummated.
At June 30, 2000 and December 31, 1999, the Company had accrued
approximately $6.4 million and $5.3 million, respectively, for delinquent
unremitted payroll taxes and withholdings. The Company and its advisors are
currently negotiating with the Internal Revenue Service (IRS) regarding a
settlement of outstanding amounts (including accumulated penalties and interest)
due to the IRS. In an agreement dated May 3, 2000, between the Company, its
senior lenders and the IRS, the IRS has withdrawn existing liens against Company
assets for the unpaid taxes and withholdings and has agreed to refrain from
taking any further collection actions against the Company. In exchange, the
senior lenders have provided a $3,000,000 letter of credit on which the IRS may
draw upon under certain conditions, and in any event by May 1, 2000 if the
Company has not settled with the IRS. The Company believes its negotiations with
the IRS will result in a settlement within a range, the high end of which is no
greater than the recorded liability for these taxes and withholdings at December
31, 1999. Nevertheless, there can be no assurance that the Company will be able
to negotiate a settlement with the IRS for an amount less than is owed,
including penalties and interest, and further that, in the event of a
settlement, it will have the funds to effect the settlement.
The Company and certain of its officers are the subjects of various
class-action claims, filed at various dates since March 2000, alleging
violations of federal securities laws. These complaints, which were consolidated
on June 26, 2000, generally allege that certain shareholders suffered financial
losses as a result of false and misleading information the Company provided
about its financial condition. The Company is not yet able to determine what
impact, if any, the litigation described above will have on the Company's
financial position or results of operations. The Company has directors' and
officers' liability insurance coverage that would apply to losses that might be
suffered as a result of these claims; however, there is a possibility that
related alleged damages may be in excess of such available coverage. An
unfavorable outcome to these matters could have a material adverse effect on the
Company's financial position or results of operations.
In February 2000, the Company announced plans to jointly offer laser
vision correction programs in certain of its markets with ICON Laser Eye
Centers, Inc. (ICON), a market leader in lower-priced excimer laser services. In
connection with these joint efforts, ICON provides marketing services and access
to its telephone response call center for patient follow-up and scheduling and
the Company provides the facilities and personnel. Additionally, on February 24,
2000, ICON purchased 1,000,000 restricted shares of the Company's common stock
for aggregate proceeds totaling $4,000,000.
14
<PAGE> 15
ICON has subsequently requested that the Company renegotiate the stock
purchase described above. As a result, the Company and ICON entered into a
Letter of Intent ("LOI") on May 12, 2000 that outlines the terms of both a
settlement regarding the stock purchase agreement and a joint operating
arrangement. The settlement portion of the LOI contemplates the termination of
the stock purchase agreement and the issuance by the Company of a $4,000,000
subordinated convertible note to ICON. The note would bear interest at 5%
annually, and all principal and interest would be due at the note's suggested
maturity date of May 31, 2005. The note would be convertible at any time into
Company common stock at a conversion rate of $1.00 per share. Additionally, ICON
would receive detachable warrants to purchase 1,000,000 shares of the Company's
common stock at $0.06 per share. The LOI also outlines the structure of a joint
operating arrangement which would formalize the current joint activities between
the Company and ICON, whereby the Company and ICON would each have a 50%
ownership interest in a new entity that would market and provide laser vision
correction services in select markets. As of June 30, 2000, the Company and ICON
have joint laser vision correction activities in 7 of the Company's markets as
an unincorporated joint venture with terms substantially in accord with the LOI.
The Company and ICON have pursued joint laser vision correction centers in 13 of
the Company's markets. Subsequent to initiation, however, joint activities have
been discontinued in 6 of the markets. ICON continues to operate 4 of these
centers independently, and the Company continues to operate 2 independently.
The LOI was subject to negotiation and execution of definitive
agreements by May 27, 2000. The Company and ICON have been negotiating
definitive agreements with respect to the terms of the LOI, but currently there
remain significant unresolved issues. Therefore no such agreements are currently
in place, nor can achievement of such agreements be assured. Additionally, the
agreements would require the approval of the Company's senior lenders and the
settlement with respect to the stock purchase agreement might require the
approval of the Company's shareholders.
The Company, with the assistance of its lenders and certain advisors,
has been actively and globally evaluating its business strategy and operating
model. This evaluation is especially important in light of significant economic
weaknesses evidenced by its physician practice management segment in 1999 and
continuing into fiscal 2000 and what the Company believes are dramatic
opportunities to grow and enhance its laser vision correction revenue streams
through a joint venture arrangement with ICON or independently in the absence of
a satisfactory resolution of the issues with ICON. The complexity of the
Company's business evaluation is further aggravated by significant immediate
liquidity issues that must be addressed in parallel with any contemplated
strategic and operational changes.
In order to emerge from its current liquidity and operational
difficulties with a profitable business model, the Company must achieve success
on a number of critical fronts, including those described above. While the
Company's management is focused on these objectives, there can be no assurance
that the Company will in fact achieve such success. These circumstances raise
substantial doubt about the Company's ability to continue as a going concern.
The condensed consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Net cash used in continuing operations for the six months ended June
30, 2000 was $1,456,000, as a result of the continuing losses incurred by these
operations. Actual cash used is significantly less than the actual loss from
continuing operations due to significant non-cash items including depreciation
and amortization, the provision for doubtful accounts, and the impairment charge
taken in the second quarter. The only investing activities for the first half of
the year were capital expenditures of $665,000. The cash used in operations and
investing activities was funded by net cash provided by financing activities of
$1,923,000, which consisted principally of the $4 million private equity
investment by ICON in February 2000, less net repayments of bank borrowings and
capitalized lease obligations.
Net cash used in operating activities totaled $110,000 for the six
months ended June 30, 1999, with net cash provided by continuing operations of
$1,522,000 being more than offset by the cash used by the Company's discontinued
operations of $1,632,000. Contributing to the cash provided by continuing
operations, however, was an increase in accounts payable and accrued expenses,
which was due to the delinquent payroll taxes and withholdings noted above as
well as an elongation of the Company's payables
15
<PAGE> 16
cycle. Cash used in investing activities for the six month period in 1999
consisted of capital expenditures and practice acquisitions totaling $1,277,000
and were financed by additional bank borrowings.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
-------------------- -------------------
(IN THOUSANDS) (IN THOUSANDS)
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Center net revenues $ 13,551 $ 13,985 $ 29,324 27,883
Other revenues 463 568 925 1,446
-------- -------- -------- --------
TOTAL REVENUES 14,014 14,553 30,249 29,329
Center operating expenses 11,575 11,054 25,482 22,021
Selling, general, and administrative expenses 2,171 1,495 4,290 2,671
Cost of sales 210 271 433 840
Provision for doubtful accounts 490 732 1,467 1,340
Impairment of physician practice management assets 1,562 -- 1,562 --
-------- -------- -------- --------
EARNINGS (LOSS) FROM OPERATIONS (1,994) 1,000 (2,985) 2,457
Gain on sale of investment -- 724 -- 724
Interest expense (1,090) (744) (2,308) (1,388)
Minority interest in net income of partnerships (232) (163) (340) (296)
Equity in earnings of joint venture 297 -- 148 --
Income tax expense (74) (220) (115) (388)
-------- -------- -------- --------
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS $ (3,094) $ 597 $ (5,600) $ 1,109
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Total Revenues. Total revenues decreased from $14,553,000 for the three
months ended June 30, 1999 to $14,014,000 for the three months ended June 30,
2000, a decrease of $539,000 or 3.7%.
Center net revenues decreased from $13,985,000 for the 1999 period to
$13,551,000 for the 2000 period, a decrease of $434,000, or 3.1%. The decrease
is the combined effect of an increase in revenues at the non-impaired centers of
approximately $600,000, or 6% from the 1999 period and a decrease in revenues
from the impaired centers of approximately $1,000,000, or 31%. The increase at
the non-impaired centers is principally attributable to a significant increase
in refractive revenue at these centers as many of these centers were just
beginning to focus on refractive surgery in the 1999 period. Additionally, the
centers which did have significant refractive surgery in the 1999 period were
using a third party laser at that time and therefore only recognized the
professional fee component of the total procedure fee as revenue. The Company
began installing its own excimer lasers in April 1999, allowing the center to
also collect the facilities fee portion of the total procedure fee, however the
majority of procedures performed in the 1999 period were performed at third
party facilities. In the 2000 period, approximately 95% of refractive procedures
were performed on in-house lasers. The decrease in revenues at the impaired
centers was due to the continued poor performance of these centers caused
principally by continuing physician relationship issues.
Other revenues decreased from $568,000 for the 1999 period to $463,000
for the 2000 period, a decrease of $105,000 or 18.4% due to the loss of a
significant mobile surgical services contract.
Center Operating Expenses. Center operating expenses increased from
$11,054,000 for the three months ended June 30, 1999 to $11,575,000 for the
three months ended June 30, 2000, an increase of $521,000 or 4.7%, and as a
percentage of center net revenue, center operating expenses increased from 79.0%
to 85.4%. A portion of the increase is due to incremental expenses associated
with the increase in refractive surgery noted above. Also contributing to the
increase is the discontinuance in 2000 of the
16
<PAGE> 17
accrual of management fees from the impaired centers from which, due to
continuing losses, the fees appear uncollectible. Management fees are recorded
as a reduction of center operating expenses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $1,495,000 for the three months ended
June 30, 1999 to $2,171,000 for the three months ended June 30, 2000, an
increase of $676,000, or 45.2%. The increase is comprised of an increase in
professional fees related to the Company's operational and administrative
difficulties, mitigated by a reduction in corporate staffing and marketing costs
resulting from cost containment measures implemented in 2000. As a percentage of
total revenues, selling, general, and administrative expenses increased from
10.3% in the 1999 period to 15.5% in the 2000 period.
Cost of Sales. Cost of sales decreased from $271,000 for the three
months ended June 30, 1999 to $210,000 for the three months ended June 30, 2000,
a decrease of $61,000. This decrease is insignificant. Cost of sales as a
percentage of other revenues, however, remained comparable at 47.8% in the 1999
period versus 45.4% in the 2000 period.
Provision for Doubtful Accounts. Provision for doubtful accounts
decreased from $732,000 for the three months ended June 30, 1999 to $490,000 for
the three months ended June 30, 2000, a decrease of $242,000, or 33.1%. As a
percentage of total revenues, provision for doubtful accounts decreased from
5.0% in the 1999 period to 3.5% in the 2000 period. This decrease was
principally due to a shift in the payor mix caused by the increase in refractive
surgery. The majority of all refractive procedures are paid prior to the
procedure, significantly decreasing the possibility of uncollectible accounts.
Interest Expense. Interest expense increased from $744,000 for the
three months ended June 30, 1999 to $1,090,000 for the three months ended June
30, 2000, an increase of $346,000, or 46.6%. This increase relates principally
to capital lease obligations incurred during the second half of 1999 for lasers
and other equipment related to the Company's refractive surgery marketing
initiative, and to a lesser extent, an increase in bank borrowings and rising
interest rates on the floating rate bank debt.
Equity in earnings of joint venture. Equity in earnings of joint
venture represents the Company's 50% interest in the activities of its joint
laser vision correction arrangement with ICON Laser Eye Centers, Inc. as more
fully described in note 4 to the condensed consolidated financial statements.
These operations were not in existence in the 1999 period.
Income Tax Expense. Income tax expense in the three months ended June
30, 2000, represents state income taxes related to profitable centers, as the
Company is in a loss carryforward position for Federal income tax purposes.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Total Revenues. Total revenues increased from $29,329,000 for the six
months ended June 30, 1999 to $30,249,000 for the six months ended June 30,
2000, an increase of $920,000 or 3.1%.
Center net revenues increased from $27,883,000 for the 1999 period to
$29,324,000 for the 2000 period, an increase of $1,441,000, or 5.2%. The
increase is the result of an increase in revenues at the non-impaired centers of
approximately $3,200,000, or 16.0% and a decrease at the impaired centers of
approximately $1,800,000, or 22.6%. The increase at the non-impaired centers is
attributable to an increase in refractive surgery volume, as well as to facility
fee charges as discussed above for the three months ended June 30, 2000. The
impact of the increases from refractive surgery at the non-impaired centers was
mitigated, however, by a decrease in revenues at two of these centers due to
physician transitions. The decrease in revenues at the impaired centers was due
to the continued poor performance of these centers caused principally by
physician relationship issues.
Other revenues decreased from $1,446,000 for the 1999 period to
$925,000 for the 2000 period, a decrease of $521,000 or 36.0% due to a
nonrecurring equipment sale in 1999 and the loss of a significant mobile
surgical services contract in 2000.
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<PAGE> 18
Center Operating Expenses. Center operating expenses increased from
$22,021,000 for the six months ended June 30, 1999 to $25,482,000 for the six
months ended June 30, 2000, an increase of $3,461,000 or 15.7%, and as a
percentage of center net revenue, center operating expenses increased from 79.0%
to 86.9%. These fluctuations were due to the same causes discussed above for the
three months ended June 30, 2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $2,671,000 for the six months ended June
30, 1999 to $4,290,000 for the six months ended June 30, 2000, an increase of
$1,619,000, or 60.6%. The increase results principally from spending on the
continuing development of new information systems and an increase in
professional fees related to the Company's operational and administrative
difficulties. As a percentage of total revenues, selling, general, and
administrative expenses increased from 9.1% in the 1999 period to 14.2% in the
2000 period.
Cost of Sales. Cost of sales decreased from $840,000 for the six months
ended June 30, 1999 to $433,000 for the six months ended June 30, 2000, a
decrease of $407,000. As a percentage of other revenues, cost of sales decreased
from 58.1% in the 1999 period to 46.8% in the 2000 period as a result of the
equipment sale noted above causing a higher mix of relatively lower margin
equipment and supply sales to higher margin mobile surgical sales in 1999.
Provision for Doubtful Accounts. Provision for doubtful accounts
increased from $1,340,000 for the six months ended June 30, 1999 to $1,467,000
for the six months ended June 30, 2000, an increase of $127,000, or 9.5%. As a
percentage of total revenues, provision for doubtful accounts increased from
4.6% for the 1999 period to 4.9% for the 2000 period. The increase for the six
month period is the net result of a significantly larger increase in the first
quarter of 2000, which was offset by a decrease in the second quarter. The
increase in the first quarter was due to ongoing accounts receivable collection
problems related to computer system conversions at the centers in the latter
half of 1999. The decrease in the second quarter was the due to improvement of
accounts receivable collections and a favorable change in the payor mix due to
the increase in refractive surgery.
Interest Expense. Interest expense increased from $1,388,000 for the
six months ended June 30, 1999 to $2,308,000 for the six months ended June 30,
2000, an increase of $920,000, or 66.3%. The increase is due to the same causes
discussed above for the three months ended June 30, 2000.
Equity in earnings of joint venture. Equity in earnings of joint
venture represents the Company's 50% interest in the activities of its joint
laser vision correction arrangement with ICON Laser Eye Centers, Inc. as more
fully described in note 4 to the condensed consolidated financial statements.
The six month earnings of $148,000 are less than the earnings for the three
months ended June 30, 2000 due to start up losses in the first three months of
2000.
Income Tax Expense. Income tax expense in the three months ended June
30, 2000, represents state income taxes related to profitable centers, as the
Company is in a loss carryforward position for Federal income tax purposes.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
There were no material changes during the quarter in the information
about market risks included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
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<PAGE> 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 6 to the accompanying Condensed Consolidated Financial
Statements and Item 3. Legal Proceedings in the Company's Form 10-K
filed on May 17, 2000.
Item 2. Changes in Securities.
See Note 3 of the accompanying Condensed Consolidated Financial
Statements regarding recent issuances of unregistered securities to the
Company's senior lenders.
Item 3. Defaults Upon Senior Securities.
See Note 3 to the accompanying Condensed Consolidated Financial
Statements regarding defaults by the Company under its senior credit
facility.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
On July 11, 2000 the Company announced that Mr. Thomas P. Lewis,
President and a member of the board of directors, has given notice to
the Company that he is resigning as an officer to pursue other
activities, and that he intends to depart by December 31, 2000. The
Company also announced the appointment of Mr. Joshua Angel as a member
of the board of directors, replacing Donald H. Beisner, MD, who
resigned in April 2000.
On August 23, 2000, Mr. Ghassan Barazi, the Company's chief operating
officer and a member of the board of directors, resigned as chief
operating officer. Mr. Barazi remains on the board of directors.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K: None.
19
<PAGE> 20
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.
VISIONAMERICA INCORPORATED
--------------------------------------------
Registrant
September 8, 2000 By \s\ Andrew W. Miller
--------------------------------------------
Andrew W. Miller
Acting Chief Executive Officer
By \s\ Barry E. Reifler
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Barry E. Reifler
Senior Vice President and Chief Financial
Officer
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