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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
Commission file number 0-19283
VISIONAMERICA INCORPORATED
(Exact name of registrant as specified in its charter)
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DELAWARE 13-3220466
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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5350 POPLAR AVENUE, SUITE 900
MEMPHIS, TENNESSEE 38119
(Address of principal executive offices and Zip Code)
Issuer's telephone number, including area code: (901) 683-7868
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Title of each class
COMMON STOCK, $.06 PAR VALUE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
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The registrant's revenues for the twelve months ended December 31,
1999 were $57,101,108.
The aggregate market value of the shares of Common Stock held by
nonaffiliates of the registrant as of March 31, 2000 is approximately
$11,827,454. (For purposes of this calculation only, all executive officers and
directors are classified as affiliates.)
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
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CLASS OUTSTANDING AT MARCH 31, 2000
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Common Stock, $.06 par value 10,170,789
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DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference and the part of Form 10-K into
which the document is incorporated:
None.
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PART I
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS
Forward-looking statements contained in this Form 10-K are subject to
the safe harbor created by the Private Securities Litigation Reform Act of 1995
and are highly dependent upon a variety of important factors that could cause
actual results to differ materially from those reflected in such
forward-looking statements. When used in this document and documents referenced
herein, the words "intend," "anticipate," "believe," "estimate," and "expect"
and similar expressions as they relate to the Company are included to identify
such forward-looking statements. These forward-looking statements are based
largely on the Company's current expectations and are subject to a number of
risks and uncertainties, including without limitation, those identified in this
Form 10-K and from time to time in the Company's filings with the Securities
and Exchange Commission. Actual results could differ materially from these
forward-looking statements. In addition, important factors to consider in
evaluating such forward-looking statements include changes in external market
factors, changes in the Company's business or growth strategy or an inability
to execute its strategy due to changes in its industry or the economy
generally, the emergence of new or growing competitors and various other
competitive factors. In light of the numerous risks and uncertainties that
exist, there can be no assurance that the forward-looking statements contained
in this Form 10-K will in fact occur.
ITEM 1. BUSINESS
THE COMPANY
VisionAmerica is an eye care company that provides facilities and
services to ophthalmologists and optometrists integrating primary, medical and
surgical eye care. VisionAmerica manages 22 affiliated practices at which 45
affiliated ophthalmologists provide medical and surgical eye care at the
Company's Centers, which include 118 service locations and 8 ambulatory surgery
centers (ASCs). The Company generates revenues from professional fees from
affiliated practices and facility fees for services provided at the Company's
ASCs and laser facilities and the provision of mobile surgical and other
supplies and services to eye care providers.
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. At December
31, 1999, the Company had excimer laser technology available on-site in all of
its 22 markets.
As a part of the above strategic focus, 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 therefore the Company
incurred substantial additional losses in the discontinuance of the remaining
operations of EHN. The remaining contracts of EHN have terminated as of December
31, 1999, and the operation should be completely discontinued by the end of May
2000. As a result of these actions, the operations of EHN have been classified
as discontinued operations for each period presented in the accompanying
financial statements, and an estimated loss on disposal of $768,000 after tax
was recognized in the fourth quarter of 1998. Subsequent revisions to the
estimated loss resulted in the recognition of approximately $2.8 million in
additional pre-tax losses in 1999. No significant financial impact of this
operation is expected in 2000.
Further emphasizing its focus on its core business, during the fourth
quarter of 1999 the Company's board of directors adopted plans of disposal
related to Primary Eyecare Network ("PEN"), a discount purchasing program for
products used in the day-to-day practices of optometrists, and Providers
Optical Inc. ("Providers"), which owned a wholesale optical laboratory and
operated optical dispensaries at 33 Army & Air Force Exchange Service
locations. Providers was sold in 1999 as described below. The Company expects
to finalize a sale of PEN during 2000 and no loss on disposal is expected. As a
result of these plans, the operations of PEN and Providers have also been
classified as discontinued operations for each period presented in the
accompanying consolidated financial statements.
Effective December 14, 1999, the Company sold all of the stock of
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
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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,
however, the funds have been placed in escrow pending resolution of certain
matters. Because of these events and the lack of sufficient information
concerning the buyer's current financial condition, the recoverability of the
amounts due from the sale are uncertain and potential write-downs thereof could
have a material adverse effect on future results of the Company.
EYE CARE INDUSTRY
According to industry sources, total United States expenditures on eye
care were $55 billion in 1998. Expenditures for medical and surgical
ophthalmology care in 1998 were approximately $33.2 billion. Approximately $5.2
billion was spent on primary eye care such as eye exams, treatment of vision
disorders and prescriptions for eye glasses and contact lenses. Eye care
expenditures are expected to increase as the population continues to age and as
technological advances make complex ophthalmic procedures more accessible and
affordable.
Ophthalmologists generally specialize in medical and surgical eye care
procedures, including cataract surgery, glaucoma surgery, laser procedures for
retinal conditions, eyelid surgery, corneal surgery and strabismus surgery.
Ophthalmologists are medical doctors who have completed four years of medical
school training, a one year internship and at least three additional years of
ophthalmic training. In 1998, there were approximately 15,300 ophthalmologists
in the United States who performed approximately 2.4 million major surgical
procedures. Optometrists specialize in primary eye care and have completed a
four-year training program following college to earn a doctor of optometry
degree. In 1998, approximately 33,000 optometrists were actively involved in
patient care in the United States.
Unlike the majority of medical specialties, eye care professionals do
not depend on traditional primary care physicians for patient referrals.
Patients develop primary eye care relationships directly with either an
ophthalmologist or, more typically, an optometrist. Professional tension
between ophthalmologists and optometrists, due to this overlap in the provision
of primary eye care, is a significant factor that the Company believes leads to
inefficient patient management in the eye care industry. For example,
optometrists have attempted to expand their practice revenue by securing
regulatory approval to perform more complex medical procedures that
traditionally have been performed by ophthalmologists, and ophthalmologists
have attempted to retain exclusive authority to perform existing specialty
services while expanding their primary care patient relationship base.
Traditional ophthalmologists who maintain primary care practices tend to
perform fewer medical and surgical procedures.
Large retail optical centers have emerged as a significant point of
initial patient contact for eye care. Patients increasingly are seeking
convenient and accessible primary eye care through discount optical centers
that typically feature convenient locations, walk-in service, extended hours of
operation, name brand eyeglass frames and contact lenses at low prices and an
optometrist on the premises. Such retailers generate the patient volume to
support purchases of expensive clinical equipment, allowing affiliated
optometrists to further expand their practices. Because of lower patient
volumes, independent office-based optometrists typically must expend a greater
portion of practice revenue to support the practice's administrative, billing
and collections, capital and other overhead costs. The Company believes that
the emerging prominence of volume retailers and their affiliated optometric
practices has created significant competitive pressure on independent
office-based optometrists to reduce their prices and increase their marketing
efforts in order to maintain adequate patient volume.
Competitive pressures within the eye care industry and between
ophthalmologists and optometrists, the increasing influence of managed care,
the capital costs associated with provision of innovative laser-based surgical
procedures and the administrative demands of operating a profitable practice
are influencing individual ophthalmologists and optometrists to affiliate with
larger eye care organizations. These organizations provide services and
resources to ophthalmologists and optometrists based on their practice-specific
needs. Much of the consolidation is occurring through affiliations with
physician practice management companies which offer eye care professionals
access to administrative, accounting, and information services, managed care
contracting, volume purchasing, equipment and capital resources. Certain other
programs provide only the service or services that meet the specific needs of
an ophthalmic or optometric practice. The Company believes that consolidation
remains in the early stages, with less than 2.0% of ophthalmologists and
optometrists affiliated with a practice management company.
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STRATEGY
VisionAmerica's objective is to emphasize and focus on its core
business. The Company plans to continue to develop and provide management and
other services to comprehensive eye care networks that deliver quality,
cost-effective eye care in convenient locations through the cooperative efforts
of optometrists and ophthalmologists. The Company seeks to achieve this
objective by implementing the following strategy: (i) expanding its laser
vision correction services; (ii) expanding its base of affiliated
ophthalmologists in VisionAmerica markets; (iii) developing and managing
primary care optometric networks; (iv) disposing of certain affiliated practice
assets and (v) disposing of PEN and Providers. The Company believes its strategy
of organizing ophthalmologists, optometrists, and related ancillary services
into cooperative, integrated eye care networks enhances its ability to manage
the delivery of quality eye care services cost-effectively. The following is a
discussion of the primary components of the Company's strategy.
Expand Laser Vision Correction Services
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 services. At December 31,
1999, the Company had excimer laser technology available on-site in all of its
22 markets. In connection with this new initiative, VisionAmerica acquired 15
VISX STAR S2(TM) Excimer Laser Systems from VISX(TM), Inc. VISX(TM), Inc. is
a U.S. market leader among manufacturers of excimer lasers for ophthalmic use.
As a result of this initiative, 10,483 vision correction procedures were
performed at VisionAmerica centers in 1999, compared with the 4,588 procedures
performed in 1998. It should be noted, however that a substantial number of the
1999 procedures were performed on a complementary or reduced fee basis as a part
of the initiative promotion. In addition, 19,589 cataract procedures were
performed at VisionAmerica centers in 1999, compared with the 17,587 procedures
performed in 1998.
According to industry sources, approximately 980,000 excimer laser
procedures were performed in the United States in 1999. These sources estimate
that approximately 1,500,000 excimer laser procedures will be performed in the
United States during 2000. This is a significant growth opportunity, and the
Company is continuing to take steps to position its Affiliated Practices for
success in the refractive surgery marketplace. The Company seeks to provide a
comprehensive refractive surgery program for its Affiliated Practices. In
addition to providing access to state-of-the-art laser technology, the Company
provides technical and patient information support programs. As the refractive
surgery market continues to develop, the Company believes that competition will
focus on quality, convenience and price. The Company has taken steps to assist
its Affiliated Practices in competing in each of these areas.
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., a Canadian publicly-traded company ("ICON"). ICON is a market
leader in value-priced excimer laser services. In connection with these joint
efforts, ICON provides marketing services to certain Affiliated Practices that
desire to participate in this program and access to its telephone response call
center for patient follow-up and scheduling. Through April 2000 the two
companies have launched 13 VSNA/ICON Laser Eye Centers in various VisionAmerica
markets. Optometry affiliates and consumer response has been favorable in each
campaign. For example, in all of 1999, VisionAmerica Centers performed a total
of 10,483 refractive laser procedures. While in most cases the VSNA/ICON Centers
have only been operating for a few weeks, VisionAmerica Centers have already
performed 5,614 laser surgeries of which 2,349 were performed in VSNA/ICON
Centers. The Company intends to pursue this initiative, as requested by
Affiliated Practices, in other VisionAmerica markets that are deemed appropriate
for this program.
Expand Base of Affiliated Ophthalmologists
VisionAmerica intends to expand its network of affiliated
ophthalmologists in targeted markets throughout the United States. The Company
evaluates potential affiliation candidates based on a variety of factors,
including (i) commitment to cooperate with optometrists in the effective
co-management of patient care; (ii) medical credentials and reputation; (iii)
competitive market position; and (iv) recognition of the need for outside
managerial, financial and systems expertise to maximize practice opportunities
in a managed care environment. VisionAmerica believes that its experience in
the eye care industry, its reputation in the optometric community, the depth of
its management team and its affiliation and cooperative operating model make it
an attractive partner for ophthalmologists.
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Develop and Manage Optometric Networks
VisionAmerica believes that optometrists are best positioned to
provide the primary care component of an integrated eye care delivery system,
freeing ophthalmologists to focus on complex medical and surgical procedures.
To facilitate the optometrist's role as a primary care provider, VisionAmerica
develops and manages optometric networks that position member eye care
providers to work cooperatively with affiliated ophthalmologists in delivering
a full range of services through VisionAmerica's eye care Centers. These
primary care oriented networks result in medically appropriate referrals from
network optometrists to affiliated ophthalmologists for medical and surgical
procedures. This cooperative approach to patient management enhances the
optometrist-to-ophthalmologist referral pattern and increases ophthalmologist
productivity. The Company believes that coordination of patient care between
optometrists and ophthalmologists is essential to the delivery of quality eye
care services on a cost-effective basis, particularly considering recent trends
in managed care and cost containment in the health care industry.
Dispose of Practice Assets
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 4th
quarter of fiscal 1999 totaling $19.2 million, comprised primarily of
write-downs of related practice intangible assets.
The 10 practices identified as impaired represent approximately 26% of
the Company's 1999 net revenues from physician practice management operations
(the center operations segment). While the Company's Board of Directors has not
yet formally adopted plans for disposal of the practice assets discussed above,
the Company expects such plans to be adopted in the 2nd quarter of fiscal 2000
and such assets to be reported as held for disposal beginning in that quarter.
Dispose of PEN and Providers
The Company adopted plans of disposal related to PEN and Providers in
the fourth quarter of 1999. As a result of these plans, the operations of PEN
and Providers have been classified as discontinued operations for each period
presented in the accompanying consolidated financial statements.
Effective December 14, 1999, the Company sold all of the stock of
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. However, the funds have been placed in escrow pending resolution of
certain issues. Because of these events and the lack of sufficient information
concerning the buyer's current financial condition, the recoverability of the
amounts due from the sale are uncertain and potential write-downs thereof could
have a material adverse effect on future results of the Company.
VISIONAMERICA SERVICES
In order to meet the strategic needs of ophthalmologists and
optometrists associated with its eye care networks and other health care
providers, VisionAmerica provides a wide range of practice management and other
services. The Company's services not only allow eye care professionals to
devote more of their time to delivery of quality primary, medical and surgical
eye care, they are also intended to enable the providers to expand and position
their practices effectively in an increasingly competitive health care services
environment.
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Ophthalmologist Practice Management Services
VisionAmerica provides a wide range of practice management services in
an effort to increase the revenues and manage the expenses of its Affiliated
Practices. Affiliated Practices are practices with which VisionAmerica has
entered into a management agreement. The Affiliated Practices, together with
their physical facilities, are sometimes referred to as Centers. VisionAmerica
seeks to increase Affiliated Practices' revenues primarily by expanding laser
vision correction services, by building optometric networks to increase patient
referrals, by adding medical and surgical eye care services and by expanding a
practice's geographic coverage through satellite offices.
In addition to efforts to increase the revenues of Affiliated
Practices, the Company assists in managing their practices more effectively.
VisionAmerica recruits a local optometrist to serve as Center Director at each
Affiliated Practice and employs all non-physician personnel. The Company is
responsible for billing and collections, accounting and financial management,
assisting in credentialing affiliated ophthalmologists, negotiating managed
care contracts, marketing, supply and equipment purchasing, outcomes
assessment, human resources and other administrative services. These services
are coordinated through its corporate offices in Memphis, Tennessee and on-site
at each Center.
VisionAmerica implements appropriate financial management procedures
and resources at its Centers. The Company's employees provide billing and
collections, cash management, financial reporting and capital budgeting
services and typically arrange for the provision of equipment financing,
auditing, legal and tax services, as well as appropriate insurance coverage.
The Company identifies the information requirements of each Affiliated Practice
and implements the appropriate systems resources. The Centers are linked by a
virtual private network utilizing the internet. The Company plans to link its
eye care practice management systems with a corporate data repository. The
Company's information technology strategic plan includes enhancing technology
resources throughout the system.
VisionAmerica coordinates purchasing of ophthalmic supplies and
equipment at all Centers. In an effort to minimize such costs, the Company
leverages its vendor relationships, evaluates and plans equipment requirements,
and compares bids on specific items. The Company provides facilities planning
assistance including market surveys, lease negotiation and construction
oversight for leasehold improvements at Centers, satellites and ASCs.
To facilitate communications with patients and referring optometrists,
the Company supplies Affiliated Practices with standardized clinical and
promotional brochures, newsletters and other materials. The Company retains
public relations and advertising agencies to develop such materials and to
coordinate broader campaigns. The Company maintains a site on the world wide
web at www.visionamerica.com which provides information to patients, doctors
and the public about the Company's services. The Company also provides human
resource services for its Centers, including payroll, employee benefits and
related administrative services.
Based on local market conditions, requests from optometrists, and
other factors, from time-to-time VisionAmerica affiliates with optometric
practices on a selective basis.
Laser Vision Correction Services
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. At December
31, 1999, the Company had excimer laser technology available on-site in all of
its 22 markets. In connection with this new initiative, VisionAmerica acquired
15 VISX STAR S2(TM) Excimer Laser Systems from VISX(TM), Inc. VISX, Inc. is a
U.S. market leader among manufacturers of excimer lasers for ophthalmic use.
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., 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. As of May 15,
2000, this joint program has been initiated in 13 of the company's markets and
early results of the joint programs indicate strong market acceptance. The
definitive terms of the joint venture relationship have not been finalized,
however a letter of intent outlining the arrangement was signed on May 12,
2000, subject to the preparation and execution of definitive documents by May
27, 2000. The letter of intent provides for equal ownership in a newly formed
joint venture entity.
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According to industry sources, 980,000 excimer laser procedures were
performed in the United States during 1999. These sources estimate that
1,500,000 excimer laser procedures will be performed in the United States
during 2000. This is a significant growth opportunity and the Company is
continuing to take steps to position its Affiliated Practices for success in
the refractive surgery marketplace. The Company seeks to provide a
comprehensive refractive surgery program for its Affiliated Practices. The
Company is providing support in all aspects of the program, including access to
technology, marketing programs, educational programs for doctors, patient
information programs, and patient finance programs. The Company maintains a
refractive surgery information and referral program on its world wide web site,
www.visionamerica.com. In addition, Company representatives monitor all aspects
of the refractive surgery marketplace, including emerging technologies, arrange
case schedules for affiliated ophthalmologists and their patients, provide the
required technical personnel and supplies and sponsor co-management education
programs for laser eye centers.
Mobile Surgical and Other Services
Through the Omega Medical Services division, the Company operates a
mobile surgical program that provides ophthalmic surgical equipment, related
supplies and technical support personnel to surgical facilities, including
hospitals and ASCs, on a per-case basis. This service provides ophthalmologists
in suburban or rural areas access to equipment to meet the local demand for
complex eye care procedures, and allows the associated facilities to avoid the
otherwise substantial capital costs associated with such equipment.
VisionAmerica's mobile surgical equipment was used in approximately 2,600
medical and surgical eye care procedures in the year ended December 31, 1999.
The Company also provides certain equipment and supply purchasing services to
ophthalmologists, hospitals and ASCs.
EYE CARE CENTER OPERATIONS
The Company operates Centers in which affiliated ophthalmologists
conduct their practice under management agreements with the Company. Each
Center is typically operated through the joint efforts of one or more
affiliated ophthalmologists and an optometrist employed by the Company who
serves as a Center Director. The affiliated ophthalmologists examine patients
and perform medical and surgical eye care in the Center and are responsible for
all medical decisions affecting patient care. The affiliated ophthalmologists,
in coordination with the Center Director, establish ongoing continuing
education programs, patient support and other programs for the benefit of the
network optometrists and other health care professionals. Although the Centers
do not focus on primary eye care and typically do not dispense eyeglasses and
contact lenses, Center Directors provide eye care in connection with
ophthalmologists as necessary. In general, patients receive primary care,
including eye exams, prescriptions, and the preparation of corrective lenses
and contact lenses, from network optometrists.
Typically, the Company's Centers are in 3,000 to 10,000 square feet of
leased space, generally containing four or more examination rooms, specialty
areas for lasers and fundus photography and administrative offices. In addition
to the affiliated ophthalmologists and Center Director, the Center's staff
typically includes a business office manager and both administrative and
medical support personnel. Depending upon the medical procedure required, most
surgeries are conducted at nearby hospitals and ASCs. Common surgical
procedures include cataract surgery, glaucoma surgery, laser procedures for
retinal conditions, eye lid surgery, cosmetic surgery, corneal surgery,
strabismus surgery, retina surgery and refractive surgery.
Eight Centers maintain ASCs. These surgical facilities generally are
located within or adjacent to the Centers' physical facilities. The Company
plans to develop additional ASCs to support Centers where permitted by state
law and where, in management's judgment, the characteristics of the surgical
component of the practice provide potential for increased return on investment.
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The table below lists the name and primary location of each Center,
the date the Center was opened or acquired, the number of affiliated
ophthalmologists and the number of locations.
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DATE
OPENED NUMBER OF
PRIMARY OR AFFILIATED SERVICE
NAME OF CENTER LOCATION ACQUIRED OPHTHALMOLOGISTS LOCATIONS
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Omega Eye Care Center........................... Birmingham, AL 6/89 4 22
VisionAmerica of North Florida(1)............... Tallahassee, FL 3/96 1 1
Omega Eye Associates(1)......................... Clearwater, FL 1/92 1 2
Eye Institute(2)................................ Newport Richey, FL 1/98 0 1
Dillman Eye Care................................ Danville, IL 8/97 1 1
Eye Surgeons & Consultants...................... Chicago, IL 9/97 4 6
VisionAmerica, of Indiana(1).................... Marion, IN 5/97 1 3
Missouri Eye Institute.......................... Springfield, MO 1/92 2 8
VisionAmerica of St. Louis...................... St. Louis, MO 1/92 2 5
Omaha Eye Institute(1).......................... Omaha, NE 4/88 2 10
VisionAmerica of New Mexico..................... Albuquerque, NM 11/87 2 5
VisionAmerica of Ohio(1)........................ Circleville, OH 12/97 3 4
VisionAmerica of Jackson........................ Jackson, TN 5/88 3 8
VisionAmerica of Memphis........................ Memphis, TN 1/90 2 3
VisionAmerica(3)................................ Nashville, TN 9/90 2 15
VisionAmerica of Houston........................ Houston, TX 7/86 4 3
EyeCare and Surgery Center of North Texas(1).... Dallas, TX 9/96 4 5
Omega Eye Center................................ El Paso, TX 8/89 1 3
Cataract and Laser Institute(1)................. San Antonio, TX 11/97 1 5
Capital Eye Consultants......................... Fairfax, VA 4/88 2 1
Levin Eye Center(1)............................. Kissimmee, FL 7/98 1 2
VisionAmerica of Louisiana...................... Metairie, LA 9/98 2 5
-- ---
Total.................................. 45 118
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(1) This Center maintains an ambulatory surgical unit.
(2) This Center includes an optometry practice and is served by the
ophthalmologist associated with the Clearwater center.
(3) This Center opened an ASC in March 2000.
CORPORATE COMPLIANCE PROGRAM
The Company implemented a Corporate Compliance Program in 1998. The
program includes a Corporate Integrity Statement and Code of Conduct, Fraud and
Abuse Policy and other policies and procedures intended to support the
Company's commitment to conducting its business in compliance with law. The
program is reviewed annually and modified if appropriate. The program is
implemented under the direction of the Audit and Compliance Committee of the
Board of Directors and includes the designation of a senior officer as chief
compliance officer.
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MANAGEMENT AGREEMENTS
The Company has entered into Management Agreements with each of the
Affiliated Practices, and intends to enter into long-term service agreements
with each additional practice with which it affiliates in the future, to
provide management, administrative and development services. Under the
Management Agreements, the Affiliated Practices are solely responsible for all
aspects of the practice of medicine, and the Company has the primary
responsibility for the business and administrative aspects of the Affiliated
Practices. The Company employs optometrist Center Directors and all other
non-physician personnel at each Center. Pursuant to the Management Agreements,
the Company provides or arranges for various management, administrative and
development services for the Affiliated Practices relating to the day-to-day
non-medical operations of the Affiliated Practices.
The following discussion of the Management Agreements is a general
summary of the form of a "typical" Management Agreement. The Company expects to
enter into similar agreements with other Affiliated Practices in the future.
The actual terms of the individual Management Agreements, and other service
agreements into which the Company may enter in the future, may vary in certain
respects from the description below as a result of negotiations with the
individual practices and the requirements of local regulations. The Centers
established prior to 1991 were formed by establishing a network of optometrists
to support co-management centers at which ophthalmologists' practices provided
medical and surgical eye care pursuant to an independent management contract
(the "Independent Contracts"). These Centers generally did not involve the
purchase of equipment or other assets from the ophthalmologists or other
initial payments from the Company to the ophthalmologists. The term "Management
Agreements" includes the Independent Contracts, unless specifically noted. The
term "Affiliated Practice" includes ophthalmologists practicing at the Centers,
unless specifically noted. The Independent Contracts have certain differing
provisions from the current form of Management Agreement, as noted below.
Pursuant to the Management Agreement, the Company, among other things,
(i) acts as the exclusive manager and administrator of non-medical services
relating to the operation of the Affiliated Practices, (ii) bills patients,
insurance companies and other third party payors and collects, on behalf of the
Affiliated Practices, the fees for professional medical and other services
rendered, including goods and supplies sold by the Affiliated Practices, (iii)
provides or arranges for, as necessary, clerical, accounting, purchasing,
payroll, legal, bookkeeping and computer services and personnel, information
management, preparation of certain tax returns, printing, postage and
duplication services and medical transcribing services, (iv) supervises and
maintains custody of substantially all files and records (medical records of
the Affiliated Practices remain the property of the Affiliated Practices), (v)
provides facilities for the Affiliated Practices, (vi) prepares annual and
capital operating budgets, (vii) orders and purchases equipment, inventory and
supplies as reasonably requested by the Affiliated Practices, (viii)
implements, in consultation with the Affiliated Practices, local informational
programs, (ix) provides financial and business assistance in the negotiation,
establishment, supervision and maintenance of contracts and relationships with
managed care and other similar providers and payors, and (x) coordinates with
the optometric network to arrange for continuing education programs and to
provide other information and services requested by the optometric network.
Under the Management Agreements, the Affiliated Practices retain the
responsibility for, among other things, (i) employing ophthalmologists, subject
to the terms of the Management Agreement, (ii) ensuring that ophthalmologists
have the required licenses, credentials, approvals and other certifications
needed to perform their duties and (iii) complying with certain federal and
state laws and regulations applicable to the practice of medicine. The
Affiliated Practices maintain exclusive control of the practice of medicine and
the delivery of medical services. The Company assists the Affiliated Practices
in obtaining professional liability and worker's compensation insurance for the
physicians and other medical employees of the Affiliated Practices, as well as
general liability umbrella coverage. The Company is responsible for obtaining
professional liability and worker's compensation insurance for employees of the
Company and general liability and property insurance for the Affiliated
Practices.
Under the Management Agreements (excluding the Independent Contracts)
the Company receives a set monthly fee for managing the Affiliated Practices,
plus an additional fee in the event the revenues or earnings of the Affiliated
Practice exceed certain levels, and such management fees may be reduced in the
event of significant reductions in the revenues of the Affiliated Practices.
The management fees paid to the Company typically range from 25% to 50% of the
funds available after payment of all operating expenses of the Affiliated
Practice. Under the Independent Contracts the Company typically is paid 60% to
70% of the revenues of the Affiliated Practice, and from this amount the
Company pays all of the operating expenses of the Center and retains a
management fee.
The Management Agreements (excluding the Independent Contracts) have
initial terms of 40 years, with automatic extensions (unless specified notice
is given) of additional five-year terms. The Independent Contracts have
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<PAGE> 11
terms ranging from one to five years, automatically renewing for successive one
year periods, unless a four month notice is given. The Management Agreement may
be terminated by either party if the other party (i) files a petition in
bankruptcy or other similar events occur or (ii) defaults on the performance of
a material duty or obligation, which default continues for a specified term
after notice. In addition, the Company may terminate the agreement if the
Affiliated Practice's participation in the Medicare or Medicaid program is
terminated or suspended, or an ophthalmologist's license is terminated or
suspended, or the Affiliated Practice is unable to obtain professional
liability insurance, as a result of some act or omission of the Affiliated
Practice or the ophthalmologists. The Affiliated Practice may terminate the
agreement if the Company, after notice, fails to remit funds due to the
Affiliated Practice. Under the Independent Contracts the parties may more
easily terminate the agreements, generally with notice of 180 days or less.
Generally upon termination of a Management Agreement (excluding the Independent
Contracts) by the Company during the first five years of the term, the Company
is required to sell and the Affiliated Practice is required to purchase and
assume the assets and liabilities related to the Affiliated Practice at the
purchase price paid by the Company for such assets, less certain annual
reductions.
Generally under the Management Agreements (excluding the Independent
Contracts), each physician owner must give the Company 24 months notice of an
intent to retire from the Affiliated Practice, which notice may not be given
during the first three years of the term.
The Affiliated Practices and the physician owners of the Affiliated
Practices generally agree not to compete with the Company in providing services
similar to those provided by the Company under the Management Agreements, and
the physician owners also generally agree with the Company not to compete with
an Affiliated Practice, within a specified geographic area. Non-competition
restrictions generally apply to physician owners during their affiliation with
the Affiliated Practices and for two to five years thereafter. In addition, the
Management Agreement requires the Affiliated Practice to enter into a
non-competition agreement with each ophthalmologist in the Affiliated Practice,
and the Company is a third-party beneficiary of such agreements. The Management
Agreements generally require the Affiliated Practices to pursue enforcement of
the non-competition agreement with ophthalmologists or assign to the Company
the right to pursue enforcement.
The Management Agreements contain indemnification provisions, pursuant
to which the Company indemnifies the Affiliated Practices for damages resulting
from negligent acts or omissions by the Company or its agents, employees or
shareholders. In addition, the Affiliated Practices indemnify the Company for
any damages resulting from any negligent act or omissions by any affiliated
ophthalmologists, agents or employees of the Affiliated Practice. The
Management Agreements provide that in the event disputes arise between the
parties, or new issues arise, and such issues are not resolved, then such
issues will be submitted to binding arbitration.
COMPETITION
The Company competes with other private and publicly-traded physician
practice management companies which seek to affiliate with eye care
professionals. Additionally, certain hospitals, clinics, health care companies,
HMOs and retail eye centers engage in similar activities and are, or may
become, competitors in providing management to providers of eye care services.
Some of these competitors have substantially greater financial resources than
the Company. The Company believes that it competes for affiliation candidates
primarily on the basis of its management experience in the eye care industry,
its reputation in the optometric community, the depth of its management team
and its affiliation and cooperative operating model. The Company's Centers
compete with the practices of local ophthalmologists as well as with formal and
informal organizations of eye care professionals for eye care patients desiring
laser vision correction services or other general eye care. The Company
believes that it competes for eye care patients primarily on the basis of the
quality of its medical and surgical eye care services, cost to patients for its
laser vision correction services, patient satisfaction with the staff and
service at the Centers, and the strength of its networks of referring
optometrists.
GOVERNMENT REGULATION AND SUPERVISION
The delivery of health care services has become one of the most highly
regulated of professional and business endeavors in the United States. Both the
federal government and the individual state governments are responsible for
overseeing the activities of individuals and businesses engaged in the delivery
of health care services. Federal law and regulations are based primarily upon
the Medicare program and the Medicaid program, each of which is financed, at
least in part, with federal funds. State jurisdiction is based upon the state's
interest in regulating the quality of health care in the state, regardless of
the source of payment.
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<PAGE> 12
Although the Company believes its operations are in material
compliance with applicable health care laws, it has not received or applied for
a legal opinion from counsel or from any federal or state judicial or
regulatory authority to that effect. Many of such laws are broad and subject to
varying interpretations, and many aspects of the Company's business operations
have not been the subject of state or federal regulatory interpretation. The
laws applicable to the Company are subject to evolving interpretations, and
therefore, there can be no assurance that a review of the Company or the
Affiliated Practices by a court or law enforcement or regulatory authority will
not result in a determination that could have a material adverse effect on the
Company or the Affiliated Practices. Furthermore, there can be no assurance
that the laws applicable to the Company will not be amended in a manner that
could have a material adverse effect on the Company.
The Affiliated Practices are intensely regulated at the federal,
state, and local levels. Although these laws often do not directly apply to the
Company, to the extent an Affiliated Practice is found to have violated any of
these laws, and as a result, suffers a decrease in its revenues or an increase
in costs, the Company's results of operations may experience a material adverse
effect.
FEDERAL LAW
The federal health care laws apply in any case in which an Affiliated
Practice is providing an item or service that is reimbursable under Medicare or
Medicaid or in which the Company is claiming reimbursement from Medicare or
Medicaid on behalf of physicians with whom the Company has a Management
Agreement. The principal federal laws include those that prohibit the filing of
false or improper claims with the Medicare or Medicaid programs, those that
prohibit unlawful inducements for the referral of business reimbursable under
Medicare or Medicaid and those that prohibit the provision of certain services
by a provider to a patient if the patient was referred by a physician with
which the provider has certain types of financial relationships.
False and Other Improper Claims. The federal government is authorized
to impose criminal, civil and administrative penalties on any health care
provider that files a false claim for reimbursement from Medicare or Medicaid.
Criminal penalties are also available in the case of claims filed with private
insurers if the government can show that the claims constitute mail fraud or
wire fraud. While the criminal statutes are generally reserved for instances
evidencing an obviously fraudulent intent, the criminal and administrative
penalty statutes are being applied by the government in an increasingly broad
range of circumstances. The government has taken the position, for example,
that a pattern of claiming reimbursement for unnecessary services violates
these statutes if the claimant should have known that the services were
unnecessary. The government has also taken the position that claiming
reimbursement for services that are substandard is a violation of these
statutes if the claimant should have known that the care was substandard.
The Company believes that its billing activities on behalf of the
Affiliated Practices are in material compliance with such laws, but there can
be no assurance that the Company's activities will not be challenged or
scrutinized by governmental authorities. A determination that the Company had
violated such laws could have a material adverse impact on the Company.
Anti-Kickback Law. A federal law commonly known as the 'Anti-kickback
Amendments' prohibits the offer, solicitation, payment or receipt of anything
of value (direct or indirect, overt or covert, in cash or in kind) which is
intended to induce the referral of Medicare or Medicaid patients, or the
ordering of items or services reimbursable under those programs. The law also
prohibits remuneration that is intended to induce the recommendation of, or the
arranging for, the provision of items or services reimbursable under Medicare
and Medicaid. The law has been broadly interpreted by a number of courts to
prohibit remuneration that is offered or paid for otherwise legitimate purposes
if the circumstances show that one purpose of the arrangement is to induce
referrals. Even bona fide investment interests in a health care provider may be
questioned under the Anti-kickback Amendments if the government concludes that
the opportunity to invest was offered as an inducement for referrals. The
penalties for violations of this law include criminal sanctions and exclusion
from the Medicare and Medicaid programs.
In part to address concerns regarding the implementation of the
Anti-kickback Amendments, the federal government in 1991 published regulations
that provide exceptions, or 'safe harbors,' for certain transactions that will
not be deemed to violate the Anti-kickback Amendments. Among the safe harbors
included in the regulations were provisions relating to the sale of physician
practices, management and personal services agreements and employee
relationships. Subsequently, regulations were published offering safe harbor
protection to additional activities, including referrals within group practices
consisting of active investors. Proposed amendments clarifying the existing
safe harbor regulations were published in 1994. If any of the proposed
regulations are ultimately adopted, they would result in
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<PAGE> 13
substantive changes to existing regulations. The failure of an activity to
qualify under a safe harbor provision, while potentially leading to greater
regulatory scrutiny, does not render the activity illegal per se.
There are several aspects of the Company's relationships with
physicians to which the anti-kickback law may be relevant. Although neither the
investments in the Company by physicians nor the Management Agreements between
the Company and the Affiliated Practices qualify for protection under the safe
harbor regulations, the Company does not believe that these activities fall
within the type of activities the Anti-kickback Amendments were intended to
prohibit. A determination that the Company had violated the Anti-kickback
Amendments would have a material adverse effect on the Company.
The Stark Self-Referral Laws. The Omnibus Budget Reconciliation Act of
1993 (OBRA '93) includes a provision that significantly expands the scope of
the Ethics in Patient Referrals Act, also known as the "Stark Law." The Stark
Law originally prohibited a physician from referring a Medicare or Medicaid
patient to any "entity" for the provision of clinical laboratory services if
the physician or a family member of the physician had an ownership interest or
compensation relationship with the entity. The Stark Law, as a result of OBRA
'93, currently applies to eleven (11) "designated health services" (including
clinical laboratory services), and continues to prohibit a physician from
referring Medicare or Medicaid beneficiaries to entities he or she owns or with
which he or she has a compensation relationship. In January, 1998, the Health
Care Financing Administration issued proposed regulations to the Stark Law. It
is not yet possible to predict whether these proposed regulations will be
adopted or, if adopted, what their final form, effective dates and impact on
the Company will be.
Reimbursement Requirements. In order to participate in the Medicare
and Medicaid programs, the Affiliated Practices must comply with reimbursement
regulations, including those that require many health care services to be
conducted "incident to" a physician's supervision. Satisfaction of all
reimbursement requirements is required under the Company's corporate compliance
program. The Company believes that the Affiliated Practices are in compliance
with the reimbursement requirements; however, no assurance of such compliance
can be given. The Affiliated Practices failure to comply with these
reimbursement requirements could negatively affect the Company's results of
operations.
ANTITRUST RISKS
The federal and state antitrust laws prohibit activities which
constitute unfair competition, price-fixing, restraints on trade or the
creation of a monopoly. Potential violations of the federal antitrust laws may
be challenged by the United States Department of Justice, the Federal Trade
Commission or private plaintiffs. If a violation of the federal or state
antitrust laws is found by the courts to have occurred, courts may impose
treble damages, injunctions, civil penalties, criminal sanctions, substantial
fines and other assessments of court costs and attorney's fees. If a violation
of the federal or state antitrust laws is found by the courts to have occurred,
then the Company could be subjected to criminal and/or civil liability. The
Department of Justice and the Federal Trade Commission have stated that managed
care networks will be closely scrutinized for potential violations of the
federal antitrust laws. The Company has adopted certain antitrust compliance
guidelines which must be strictly followed by the Company.
STATE LAW
State Anti-Kickback Laws. Many states have laws that prohibit payment
of kickbacks in return for the referral of patients. Some of these laws apply
only to services reimbursable under state Medicaid programs. However, a number
of these laws apply to all health care services in the state, regardless of the
source of payment for the service. Based on court and administrative
interpretation of federal anti-kickback laws, the Company believes that these
laws prohibit payments to referral sources where a purpose for payment is for
the referral. However, the laws in most states regarding kickbacks have been
subjected to limited judicial and regulatory interpretation and therefore, no
assurances can be given that the Company's activities will be found to be in
compliance. Noncompliance with such laws could have an adverse effect upon the
Company and subject it and physicians affiliated with the Affiliated Practices
to penalties and sanctions.
State Self-Referral Laws. A number of states have enacted
self-referral laws that are similar in purpose to the Stark Law but which
impose different restrictions. Some states, for example, only prohibit
referrals when the physician's financial relationship with a health care
provider is based upon an investment interest. Other state laws apply only to a
limited number of designated health services. Some states do not prohibit
referrals, but require only that a patient be informed of the financial
relationship before the referral is made. The Company believes that its
operations are in material compliance with the self-referral law of the states
in which the Centers are located.
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Fee-Splitting Laws. Many states prohibit a physician from splitting
with a referral source the fees generated from physician services. Other states
have a broader prohibition against any splitting of a physician's fees,
regardless of whether the other party is a referral source. In most states, it
is not considered to be fee-splitting when the payment made by the physician is
reasonable reimbursement for services rendered on the physician's behalf.
The Company is reimbursed by physicians on whose behalf the Company
provides management services. The compensation provisions of the Management
Agreements have been designed to comply with applicable state laws relating to
fee-splitting. There can be no certainty, however, that, if challenged, the
Company and its Affiliated Practices will be found to be in compliance with
each state's fee-splitting laws. A determination in any state that the Company
is engaged in any unlawful fee-splitting arrangement could render any
Management Agreement between the Company and an Affiliated Practice located in
such state unenforceable or subject to modification in a manner adverse to the
Company.
Corporate Practice of Medicine. Most states prohibit corporations from
engaging in the practice of medicine. Many of these state doctrines prohibit a
business corporation from employing a physician. States differ, however, with
respect to the extent to which a licensed physician can affiliate with
corporate entities for the delivery of medical services. Some states interpret
the 'practice of medicine' broadly to include activities of corporations such
as the Company that have an indirect impact on the practice of medicine, even
where the physician rendering the medical services is not an employee of the
corporation and the corporation exercises no discretion with respect to the
diagnosis or treatment of a particular patient.
The Company intends that, pursuant to its Management Agreements, it
will not exercise any responsibility on behalf of affiliated physicians that
could be construed as affecting the practice of medicine. Accordingly, the
Company believes that its operations do not violate applicable state laws
relating to the corporate practice of medicine. Such laws and legal doctrines
have been subjected to only limited judicial and regulatory interpretation and
there can be no assurance that, if challenged, the Company would be considered
to be in compliance with all such laws and doctrines. A determination in any
state that the Company is engaged in the corporate practice of medicine could
render any Management Agreement between the Company and an Affiliated Practice
located in such state unenforceable or subject to modification in a manner
adverse to the Company.
Licensure and Certification of Need Requirements. Every state imposes
licensing requirements on individual physicians and on facilities and services
operated or provided by physicians. Many states also require regulatory
approval, including certificates of need, before (a) establishing certain types
of health care facilities, (b) offering certain services, or (c) expending
monies in excess of statutory thresholds for health care equipment, facilities
and programs. The execution of a management agreement with an Affiliated
Practice currently does not require any regulatory approval on the part of the
Company or any Affiliated Practice. However, in connection with the expansion
of existing operations and the entry into new markets, the Company and the
Affiliated Practices may become subject to additional regulation.
REGULATORY COMPLIANCE
The Company recognizes that health care regulations will continue to
change, and, as a result, regularly monitors developments in health care law.
The Company expects to modify its agreements and operations from time to time
as the business and regulatory environment changes. While the Company believes
it will be able to structure all of its agreements and operations in accordance
with applicable law, there can be no assurance that its arrangements will not
be successfully challenged.
EMPLOYEES
As of December 31, 1999, the Company employed 554 persons, 443 of whom
were full-time employees. Under the terms of the Management Agreements with the
Affiliated Practices, the Company employs the non-physician personnel of the
Centers, primarily clerical, administrative, and technical, that support such
Affiliated Practices. No employee of the Company or of any affiliated
ophthalmologist is a member of a labor union or subject to a collective
bargaining agreement. The Company believes that its employee relations are
good.
ITEM 2. PROPERTIES
The Company does not own any real estate. The Company leases 11,000
square feet of space at 5350 Poplar Avenue in Memphis, Tennessee, where the
Company's headquarters are located. The lease expires in 2005. Additionally,
the Company leases approximately 10,647 square feet in Denver, Colorado,
approximately 2,270 square feet used for PEN in San Ramon, California and an
aggregate of approximately 237,056 square feet used for Centers and
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<PAGE> 15
ASCs managed by the Company. The Company's lease of the Denver space will
terminate effective May 31, 2000 in connection with the discontinuance of the
operations of EHN. The Company hopes to have a sublessee in place by May of
2000. Total monthly lease payments for all of the above facilities aggregate
approximately $319,284.
ITEM 3. LEGAL PROCEEDINGS
Except for the matters described below, the Company is not aware of
any litigation which is currently pending or threatened against the Company or
any outstanding claims against any affiliated ophthalmologist that would have a
material adverse effect on the Company's financial condition or results of
operations. The Company's affiliated ophthalmologists are from time-to-time
involved in legal proceedings incident to their business, most of which involve
claims related to the alleged medical malpractice of the affiliated
ophthalmologists.
On December 3, 1999, West Tennessee Eye Associates filed suit against
Omega Health Systems of Jackson, Tennessee, Inc. (hereinafter "Omega"),
alleging that Omega had tortiously interfered with an employment contract
between West Tennessee Eye Associates and Dr. Rolando Toyos. The complaint
sought damages in the amount of $1,811,343.00. Omega responded by denying these
allegations and by filing a counter-complaint against West Tennessee Eye
Associates and two of its principals, Dr. David Irvine and Dr. Antonio Aguirre,
alleging that Dr. Aguirre, Dr. Irvine, and West Tennessee Eye Associates had
financially damaged Omega. This counter-complaint is based upon theories of
liability including breach of contract, bad faith, and misrepresentation. In
the counter-complaint, Omega seeks actual damages of $426,532.93 and punitive
damages of $4,265,329.30. At the outset of this litigation, West Tennessee Eye
Associates sought a temporary restraining order and permanent injunction
ordering Dr. Toyos to cease performing ophthalmology services in the Jackson,
Tennessee area. When the complaint was presented ex parte to Chancellor Morris
in late November of 1999, Chancellor Morris issued such a restraining order.
Approximately one week later, at the request of Omega and Dr. Toyos, Chancellor
Morris dissolved the restraining order but required the defendants to post a
$50,000.00 bond. Extensive discovery took place during December of 1999 and
January of 2000. On January 31, 2000, the court held an injunction hearing with
respect to West Tennessee Eye Associates' request for an injunction. On April
13, 2000, counsel received a letter from Chancellor Morris indicating that the
court was denying the injunction and requesting that the parties file proposed
findings and conclusions. The parties' money damage claims are still pending;
however no trial date has been set. In the event of an unfavorable ruling, this
matter could have a material adverse effect on the Company's financial
condition or results of operations.
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<PAGE> 16
On March 30, 2000, an action was filed by Robert Kelly, Jr. in the
Federal District Court for the Middle District of Tennessee allegedly on behalf
of all individuals and institutional investors that purchased or otherwise
acquired publicly-traded securities of the Company between November 5, 1998 and
March 24, 2000. The Company, Ronald L. Edmonds, former Chief Financial Officer,
and Thomas P. Lewis, Chief Executive Officer are named as defendants. The
complaint alleges violations of federal securities laws based upon the
provision of false and misleading information about the Company's financial
condition during the above period. The complaint alleges that certain
shareholders suffered financial losses as a result of the alleged false and
misleading information, and the complaint requests class action status for the
plaintiffs. The Company has not filed an answer or other responsive pleading
and is analyzing the complaint. The Company has Directors and Officers
coverage; however, the claim which is alleged would likely be well in excess of
the coverage. Until the allegations are fully analyzed the Company is unable to
determine the potential impact of this action on the Company. The Company has
retained Alston & Bird LLP as lead counsel and Baker, Donelson, Bearman &
Caldwell, P.C., as local counsel. Other substantially similar suits have been
filed. Specifically, the Company is aware of two substantially similar suits
filed in the United States District Court for the Middle District of Tennessee
on behalf of plaintiffs identified as H & K Realty and William Washington, III.
While these suits are in the very early stages, the Company intends to
vigorously defend the suits and to assert defenses on its behalf. In the event
of unfavorable rulings, these matters could have a material adverse effect on
the Company's financial condition or results of operations.
ICON Laser Eye Centers, Inc. ("ICON") has requested that the Company
re-negotiate certain provisions of the Agreement dated February 24, 2000,
wherein ICON purchased 1,000,000 shares of Company common stock for a total
purchase price of $4,000,000.00. The Agreement further provides that a warrant
for an additional 1,000,000 shares of Company common stock will be issued to
ICON if, among other things, a registration statement is not filed for the
original 1,000,000 shares by July 31, 2000. The parties entered into a letter of
intent regarding the re-negotiation on May 12, 2000. Pursuant to this letter the
parties intend to terminate the original Agreement and execute full mutual
releases and the Company intends to issue to ICON a subordinated convertible
debenture maturing May 31, 2005 with interest at 5% and convertible into Company
common stock at $1.00 per share, and a warrant to purchase 1,000,000 shares of
Company common stock at $.06 per share. These proposed transactions are subject
to a definitive agreement being approved by the board of directors of both
companies, the approval of VisionAmerica's shareholders and the approval of the
Companies' senior lenders.
Presently, separate disputes exist between the Company and Dr. Harmeet
Chawla, Dr. Joseph Faust and Dr. Mitch Levin. The Company and each of these
doctors have been in separate negotiations in an attempt to resolve these
disputes. Dr. Chawla and Dr. Faust have filed separate requests for mediation
with the American Arbitration Association. Although neither doctor has filed a
demand for arbitration or instituted litigation, if these disputes are not
resolved by discussions, claims may be made by all or some of the doctors in
connection with their respective contractual relationships with the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
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<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was traded on The Nasdaq Small-Cap Market
under the symbol OHSI until January 1998 when it became traded on the Nasdaq
National Market. The Company's common stock began trading under the symbol VSNA
in August 1999. The symbol change occurred in connection with the change of the
Company's name from Omega Health Systems, Inc. to VisionAmerica Incorporated
effective August 16, 1999. The common stock currently trades under the symbol
VSNAE. An "E" was appended to the Company's symbol because the Company failed to
timely file its Form 10-K for the 1999 fiscal year. Furthermore, as a result of
the failure to file the Form 10-K there is a delisting proceeding regarding the
Company's common stock pending before a panel of the Nasdaq Stock Market. The
following table sets forth the quarterly high and low sales price information
for the Company's common stock during the period from January 1, 1998 through
March 31, 2000. Such prices represent prices between dealers and do not include
retail mark-ups, mark-downs or commissions.
<TABLE>
<CAPTION>
2000 1999 1998
----------------- ---------------- ---------------
High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
First Quarter $5.25 $1.38 $4.69 $3.28 $8.00 $6.75
Second Quarter -- -- 8.63 3.50 7.44 5.88
Third Quarter -- -- 9.00 5.00 7.13 3.75
Fourth Quarter -- -- 5.69 2.41 5.00 3.03
</TABLE>
There were 403 holders of record of the Common Stock as of March 31,
2000. The Company believes it had in excess of 1,000 beneficial owners of
Common Stock as of March 31, 2000. The Company has not paid any cash dividends
and does not anticipate paying cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
The common stock issued in connection with each of the following
transactions was issued in connection with a private placement made to
accredited investors.
In connection with the acquisition by merger as of March 1, 1997, of
Refractive Surgery Center of Birmingham, a professional corporation, the
Company issued to Sarah J. Hayes, M.D., 108,081 shares of Company Common Stock,
valued at $714,414.
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In connection with the purchase as of March 31, 1997, by the Company
from Nathan L. Lipton, M.D., P.A. of substantially all of its assets, the
Company issued to Dr. Lipton 15,267 shares of Company Common Stock, valued at
$100,000.
In connection with the acquisition as of April 30, 1997, by merger of
Primary Eyecare Network and P.E.N. Resources, Inc., the Company issued to
Leonard Osias, O.D. and his wife, Irene Osias, 195,365 shares of Company Common
Stock, valued at $1,275,928.
In connection with the acquisition by merger as of May 1, 1997, of
Faust Eye Center, P.C., the Company issued to Joseph Faust, M.D. 169,186 shares
of Company Common Stock, valued at $1,112,400.
In connection with the acquisition by merger as of August 29, 1997, of
Dillman Eye Care Optical Department, Inc., the Company issued to David M.
Dillman, M.D., 76,925 shares of Company Common Stock, valued at $500,000.
In connection with the acquisition by merger as of September 30, 1997,
of Golden Eye Surgeons and Consultants, Ltd., the Company issued to Bruce
Golden, M.D. 89,694 shares of Company Common Stock, valued at $672,700. In
addition, the Company granted to Dr. Golden the option to purchase 10,000
shares of Company Common Stock at $8.25 per share, exercisable at various dates
on or before September 26, 2003.
In connection with the acquisition by merger as of November 24, 1997
of Alan D. Baribeau, M.D., P.A., the Company issued to Alan D. Baribeau, M.D.,
131,250 shares of Company Common Stock valued at $1,050,000.
In connection with the purchase as of December 16, 1997 of 100% of the
outstanding stock of Central Ohio Eye Institute, Inc., the Company issued
440,625 shares of Company Common Stock valued at $3,525,000.
In connection with the acquisition of certain assets of Physicians
Eyecare Network, Inc. as of December 31, 1997, the Company issued to Physicians
Eyecare Network, Inc. 175,000 shares of Company Common Stock, valued at
$1,500,000.
In connection with the acquisition by merger as of January 1, 1998, of
Hunter, Schulz and Horton, O.D., P.A., the Company issued to Drs. Hunter,
Schulz and Horton 130,718 shares of Company Common Stock, valued at $1,000,000.
In connection with the purchase as of July 11, 1998, of Levin Eye
Center, P.A., the Company issued to Mitchell L. Levin, M.D., 151,257 shares of
Company Common Stock, valued at $1,022,500.
In connection with the purchase as of September 1, 1998, of Louisiana
Eye Center of New Orleans, P.C., the Company issued to Jeffrey G. Straus, M.D.,
106,473 shares of Company Common Stock, valued at $625,000.
In connection with the acquisition by merger as of October 1, 1999, of
Talladega Ophthalmology Associates, P.C., the Company issued to Khalid L. Khan,
M.D., 61,050 shares of Company Common Stock valued at $384,000.
In connection with an agreement as of February 24, 2000, the Company
issued to ICON Laser Eye Centers, Inc. ("ICON") 1,000,000 shares of Company
Common Stock for a cash payment of $4,000,000. The agreement further provided
that a warrant for an additional 1,000,000 shares of Company Common Stock will
be issued to ICON if, among other things, a registration statement was not filed
for the original 1,000,000 shares by July 31, 2000. The exercise price for the
shares under the warrant would be determined by reference to the average trading
price of Company Common Stock. ICON requested re-negotiation of this agreement
and the parties entered into a letter of intent regarding the re-negotiation on
May 12, 2000. Pursuant to this letter of intent the parties intend to terminate
the original Agreement and execute full mutual releases and the Company intends
to issue to ICON a subordinated convertible debenture maturing May 31, 2005 with
interest at 5% and convertible into Company common stock at $1.00 per share, and
a warrant to purchase 1,000,000 shares of Company common stock at $.06 per
share. These proposed transactions are subject to a definitive agreement being
approved by the board of directors of both companies, the approval of
VisionAmerica's shareholders and the approval of the Company's senior lenders.
In connection with an agreement as of May 1, 2000, the Company issued
to its senior lenders warrants to purchase 20% percent of the Company's common
stock, on a fully diluted basis (2,836,760 shares), exercisable at $0.06 per
share. Specifically, Banc of America Commercial Finance Corporation was issued
warrants for 1,418,380 shares, U.S. Bank National Association was issued
warrants for 851,028 shares, and AMSouth Bank was issued warrants for 567,352
shares. In exchange for these warrants the lenders have agreed to make
available a $2.5 million discretionary revolving credit facility to the
Company, to provide a $3.0 million letter of credit to the Internal Revenue
Service and to make certain other accommodations and provisions. If the Company
repays and terminates the $2.5 million credit facility and terminates without
drawing the $3.0 Internal Revenue Service letter of credit within six months of
their respective effective dates, 50% percent of the warrants will be cancelled
at no cost to the Company.
18
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the consolidated financial statements included elsewhere herein. See note
16 to the consolidated financial statements for a discussion of going concern
matters affecting the Company.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues $21,840,434 $28,044,201 $39,755,933 $53,986,833 $ 57,101,108
Net earnings (loss) from continuing
operations 12,829 1,545,296 3,268,833 1,661,323 (28,826,774)
Net earnings (loss) from continuing
operations per common share:
Basic 0.00 0.01 0.44 0.19 (3.20)
Diluted 0.00 0.01 0.42 0.19 (3.20)
Net earnings (loss) 480,874 1,303,126 3,882,932 1,213,981 (33,105,145)
Earnings (loss) available to
common shareholders(1) 480,874 (170,597) 3,863,058 1,213,981 (33,105,145)
Net earnings (loss) per common
share:(1)
Basic $ 0.10 $ (0.03) $ 0.52 $ 0.14 (3.67)
Diluted 0.10 (0.03) 0.50 0.14 (3.67)
<CAPTION>
December 31,
------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets $10,292,509 $26,121,860 $59,767,045 $72,972,374 $ 51,705,702
Long-term obligations, net 1,596,209 1,318,055 23,059,160 31,470,599 6,976,781
Stockholders' equity (deficit) 3,961,247 15,043,163 27,399,822 30,824,614 (3,140,573)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and notes thereto included elsewhere
herein.
DEVELOPMENT OF THE BUSINESS
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. At December
31, 1999, the Company had excimer laser technology available on-site in all of
its 22 markets.
As a part of the above strategic focus, 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 therefore the Company
incurred substantial additional losses in the discontinuance of the remaining
operations of EHN. The remaining contracts of EHN have terminated as of December
31, 1999, and the operation should be completely discontinued by the end of May
2000. As a result of these actions, the operations of EHN have been classified
as discontinued operations for each period presented in the accompanying
financial statements, and an estimated loss on disposal of $768,000 after tax
was recognized in the fourth quarter of 1998.
19
<PAGE> 20
Subsequent revisions to the estimated loss resulted in the recognition of
approximately $2.8 million in additional pre-tax losses in 1999. No significant
financial impact of this operation is expected in 2000.
Further emphasizing its focus on its core business, the Company's
board of directors adopted plans of disposal related to its ophthalmic buying
group ("PEN") and its wholesale optical laboratory ("Providers") in the fourth
quarter of 1999. Providers was sold in 1999 as described below. The Company
expects to finalize a sale of PEN during 2000 and no loss on disposal is
expected. As a result of these plans, the operations of PEN and Providers have
also been classified as discontinued operations for each period presented in
the accompanying consolidated financial statements.
Effective December 14, 1999, the Company sold all of the stock of
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
however, the funds have been placed in escrow pending resolution of certain
matters. Because of these events and the lack of sufficient information
concerning the buyer's current financial condition, the recoverability of the
amounts due from the sale are uncertain and potential write-downs thereof could
have a material adverse effect on future results of the Company.
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 ten contractual relationships
that are economically burdensome to the Company and that also met 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
1999 totaling $19.2 million, comprised primarily of write-downs of related
practice intangible assets.
The ten practices identified as impaired represent approximately 26% of
the Company's 1999 net revenues from physician practice management operations
(the center operations segment). While the Company's Board of Directors has not
yet formally adopted plans for disposal of the practice assets discussed above,
the Company expects such plans to be adopted in the second quarter of fiscal
2000 and such assets to be reported as held for disposal beginning in that
quarter.
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., 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. As of May 15,
2000, this joint program has been initiated in 13 of the company's markets and
early results of the joint programs indicate strong market acceptance. The
definitive terms of the joint venture relationship have not been finalized,
however a letter of intent outlining the arrangement was signed on May 12,
2000, subject to the preparation and execution of definitive documents by May
27, 2000. The letter of intent provides for equal ownership in a newly formed
joint venture entity.
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred a net loss from continuing operations of
$28,827,000 for the year ending December 31, 1999, including the impairment
charge discussed above. At December 31, 1999, current liabilities ( which
includes all amounts due to the Company's senior lenders as discussed below)
exceeded current assets by $32,000,000. Comparatively, the Company's net
earnings from continuing operations in 1998 were $1,661,000 and it had working
capital of $11,441,000 at December 31, 1998. Reflective of these trends, the
Company faces significant operational and financial challenges in the
near-term, including but not limited to those described below.
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
20
<PAGE> 21
$33,675,000 have been classified as a current liability in the accompanying
consolidated financial statements at December 31, 1999. 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 new
lending agreement, the senior lenders will receive 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 a $3.0
million letter of credit described below within six months of their respective
effective dates, 50% of the warrants will be canceled at no cost to the
Company. The Company's lenders have not to-date, however, extended any
commitment to waive noncompliance with the covenants under the credit facility.
The Company does not currently have alternative financing arrangements should
the lenders demand repayment. Management intends to pursue the renegotiation of
its credit facility with its current lenders. 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 in such a fashion that the Company's financial position
will not be adversely affected. Nevertheless, no new financing arrangements are
in place and there can be no assurances that any such arrangements will in fact
be consummated.
At December 31, 1999, the Company had accrued approximately $5.3
million 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 agreed to
withdraw existing liens against Company assets for the unpaid taxes and
withholdings and to refrain from taking any further collection actions against
the Company. In exchange, the senior lenders will provide a $3,000,000 letter
of credit on which the IRS may draw upon under certain conditions, and in any
event after one year 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. 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 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.
The Company, with the assistance of its lenders, certain advisors and
ICON, is 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 throughout
1999 (leading to the impairment analysis and related material charge to 1999
earnings) 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. 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.
The Company is in the process of negotiating the definitive terms of a
joint laser vision correction initiative with ICON as discussed above.
Additionally, on February 24, 2000, ICON purchased 1,000,000 shares of
restricted common stock of the Company for $4,000,000. ICON subsequently
requested that the Company renegotiate the transaction and in the letter of
intent dated May 12, 2000 noted above, the Company has agreed to rescind the
prior stock purchase and issue ICON a $4,000,000 subordinated convertible
debenture with interest at 5%, convertible into the Company's common stock at
$1.00 per share and maturing on May 31, 2005. ICON would also be issued
warrants to purchase 1,000,000 shares of the Company's common stock at $.06 per
share. This agreement is also subject to the negotiation and execution of
definitive documents by May 27, 2000, and further, would require approval of
the Company's shareholders and its senior lenders. The Company views its
relationship with ICON as critical to its future business objectives, and
therefore the importance of current negotiations with ICON should be viewed in
that light.
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
21
<PAGE> 22
success. These circumstances raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements
do not include any adjustments that might result if the Company is unable to
continue to operate its business.
Net cash used in operations in 1999 was $2,445,000, however, an
increase in accounts payable and accrued expenses of $5,927,000 reduced the
cash use to this level. The increase in accounts payable and accrued expenses
was due to the delinquent payroll taxes and withholdings noted above as well as
to an elongation of the Company's payables cycle. Net cash used in investing
activities declined to $1,293,000 in 1999 as the Company spent only $1,299,000
on acquisitions of physician practice assets and $1,256,000 on capital
expenditures, with the sales of an equity investment and an interest in an ASC
providing offsetting cash flows of $1,262,000. The net cash used in operations
and investing activities was financed by a net increase in borrowings and the
use of approximately $1,234,000 of the Company's cash balance at December 31,
1998.
As noted above, the Company received $4,000,000 from ICON in February
2000 in a stock purchase transaction. The proceeds were used to make the first
principal payment due under the Company's senior credit facility of $1,680,000
and to pay current operating expenses and past due payables. Although
alleviating the severity of the Company's immediate cash flow problems, this
infusion of capital was not sufficient to satisfy any future working capital
needs.
For the year ended December 31, 1998, the operating activities of the
Company generated $1,435,000. The Company used $7,840,000 in investing
activities and generated $6,762,000 in financing activities. Cash flows from
operations included significant adjustments for depreciation and amortization
($3,140,000) as well as provision for doubtful accounts ($1,575,000). Investing
activities during the period included $1,235,000 in capital expenditures for
equipment as well as acquisitions of the assets of ophthalmic practices in
Florida, Louisiana and New Mexico. Financing activities included an increase in
borrowings and distributions to minority interests.
For the year ended December 31, 1997, the Company generated $2,563,000
in cash from operating activities and used $15,284,000 in investing activities.
Financing activities generated cash of $14,043,000. Cash flows from operations
included significant adjustments for depreciation and amortization ($1,795,000)
and the provision for doubtful accounts ($728,000). The investing cash flows
represented the acquisition program and capital expenditures of $1,129,000.
Financing activities included borrowings used to finance the acquisition
program.
As noted above, the Company used $1,256,000 in cash for capital
expenditures in 1999, compared to $1,235,000 in 1998 and $1,129,000 in 1997. In
addition, the Company incurred capital lease obligations of $7,065,000 in 1999,
$1,105,000 in 1998, and $642,000 in 1997. These capital acquisitions consisted
primarily of purchases of ophthalmic equipment for use in the Company's Centers
and satellite locations. The higher level of capital acquisitions in 1999
reflects the Company's initiative to expand laser vision correction services.
Expected capital expenditures for 2000 are currently not known, pending the
finalization of the Company's strategic plan and the availability of financing.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
22
<PAGE> 23
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Years Ended December 31,
------------------------
- ---------------------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Center net revenues ..................................... 95.8% 97.1% 96.3%
Other ................................................... 4.2 2.9 3.7
------ ------ ------
Total revenues .......................................... 100.0 100.0 100.0
Center operating expenses .................................. 86.2 75.9 76.7
Selling, general and administrative expenses ............... 13.3 9.0 9.8
Cost of sales .............................................. 2.3 1.4 2.1
Provision for doubtful accounts ............................ 7.3 2.9 1.8
Impairment of physician practice management assets ......... 33.6 -- --
- ---------------------------------------------------------------------------------------------
Earnings (loss) from operations ............................ (42.7)% 10.8% 9.6%
- ---------------------------------------------------------------------------------------------
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
TOTAL REVENUES. Total revenues increased from $53,987,000 for the year
ended December 31, 1998 to $57,101,000 for the year ended December 31, 1999, an
increase of $3,114,000, or 5.8%.
Center net revenues increased from $52,399,000 for the 1998 period to
$54,724,000 for the 1999 period, an increase of $2,325,000, or 4.4%.
The increase resulted primarily from the additions of Centers in
Kissimmee, Florida; Metairie, Louisiana;and Zanesville, Ohio during
1998 and 1999 as well as the addition of an ASC in Kissimmee. Center
net revenues for 1999 were negatively impacted by a fourth quarter
adjustment of approximately $3,500,000 to the allowance for
contractual adjustments which was based on newly available statistical
data from the Company's new practice management software and included
the impact of increased levels of accounts receivable due from managed
care payors. Same-center revenues in the aggregate remained
approximately the same between the periods; however, a decline in
same-center revenues for the "impaired" centers included in both years
of approximately $4,000,000 or 25% was offset by an increase for the
other centers of approximately 12%.
Other revenues increased from $1,587,000 for the 1998 period to
$2,377,000 for the 1999 period, an increase of $790,000 or 49.8%. The
increase was comprised principally of increases in mobile surgical
sales due to additional sites serviced and incremental equipment sales
of approximately $406,000.
CENTER OPERATING EXPENSES. Center operating expenses increased from
$40,977,000 for the year ended December 31, 1998 to $49,238,000 for the year
ended December 31, 1999, an increase of $8,261,000 or 20.1%. The absolute
increase principally reflects the 1998 and 1999 practice additions noted above
and increased costs associated with the 1999 refractive surgery initiative. As
a percentage of center net revenues, center operating expenses increased from
78.2% in the 1998 period to 90.0% in the 1999 period, due principally to i) the
deterioration in the "impaired" centers' revenues, ii) the start-up and
incremental costs of the refractive surgery initiative being disproportionate
to the related increase in revenues in the other centers, and iii) the effects
of the adjustment to the allowance for contractual adjustments noted above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $4,835,000 for the year ended December
31, 1998 to $7,618,000 for the year ended December 31, 1999, an increase of
$2,783,000, or 57.6%. The increase primarily reflects increased spending on the
development and implementation of new information systems and increased
professional fees incurred in connection with the Company's operational and
administrative difficulties. As a percentage of total revenues, selling,
general and administrative expenses increased from 9.0% in the 1998 period to
13.3% in the 1999 period.
23
<PAGE> 24
COST OF SALES. Cost of sales increased from $744,000 for the year
ended December 31, 1998 to $1,306,000 for the year ended December 31, 1999, an
increase of $562,000. As a percentage of other revenues, cost of sales
increased from 46.8% in the 1998 period to 54.9% in the 1999 period, primarily
as a result of the higher mix in 1999 of equipment and supplies sales, which
have a relatively lower margin, to mobile surgical sales.
PROVISION FOR DOUBTFUL ACCOUNTS. Provision for doubtful accounts
increased from $1,575,000 for the year ended December 31, 1998 to $4,154,000
for the year ended December 31, 1999, an increase of $2,579,000, or 163.7%.
Only $158,000 of the increase reflects the additions of the practices in
Kissimmee, Metairie and Zanesville, with the remaining increase of $2,421,000
provided principally for a deterioration in the aging of the accounts
receivable caused by disruptions in collections activity associated with the
computer systems conversions during the year. As a percentage of total
revenues, provision for doubtful accounts increased from 2.9% in the 1998
period to 7.3% in the 1999 period.
IMPAIRMENT OF PHYSICIAN PRACTICE MANAGEMENT ASSETS. As noted above,
the Company recorded an impairment charge to earnings in the 4th quarter of
fiscal 1999 totaling $19.2 million, comprised primarily of write-downs of
related practice intangible assets.
NON-OPERATING REVENUE (EXPENSE). In June 1999, the Company recognized
a $724,000 gain on the sale of an equity investment. Interest expense increased
from $2,626,000 for the year ended 1998 to $3,215,000 for the year ended
December 31, 1999, an increase of $589,000, or 22.4%. This increase reflects
higher levels of bank borrowings used to finance the 1998 and 1999 acquisitions
and working capital needs, as well as the effects of higher interest rates on
these floating rate borrowings over the periods.
INCOME TAX EXPENSE. Despite the large loss from continuing operations
before income taxes, the Company provided income tax expense of $1,298,000.
This is due principally to state income taxes, a large part of the impairment
charge being non-deductible, and an increase in the valuation allowance for
deferred tax assets to fully reserve such assets at December 31, 1999. The
latter action was a result of management's assessment of the likelihood of
realization based principally on the going concern matters discussed above and
at note 16 to the consolidated financial statements.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
TOTAL REVENUES. Total revenues increased from $39,756,000 for the year
ended December 31, 1997 to $53,987,000 for the year ended December 31, 1998, an
increase of $14,231,000, or 35.8%.
Center net revenues increased from $38,290,000 for the 1997 period to
$52,399,000 for the 1998 period, an increase of $14,109,000, or 36.8%.
The increase resulted primarily from the additions of Centers in
Birmingham, Alabama; Marion, Indiana; Danville, Illinois; Chicago,
Illinois; San Antonio, Texas; Circleville, Ohio; Kissimmee, Florida;
and Metairie, Louisiana during 1997 and 1998 as well as the additions
of ASC's in Dallas, San Antonio, Circleville and Kissimmee. In
addition, same-center revenues increased 6% for the 1998 period.
Other revenues increased from $1,466,000 for the 1997 period to
$1,587,000 for the 1998 period, an increase of $121,000 or 8.3%. The
increase reflected an increase in mobile surgical revenues principally
due to site additions.
CENTER OPERATING EXPENSES. Center operating expenses increased from
$30,499,000 for the year ended December 31, 1997 to $40,977,000 for the year
ended December 31, 1998, an increase of $10,478,000 or 34.4%. The increase
reflected the additions of the practices in Birmingham, Marion, Danville, San
Antonio, Circleville, Kissimmee and Metairie, as well as a 6% increase in
same-center operating expenses during the 1998 period. As a percentage of
center net revenues, center operating expenses decreased from 79.6% in the 1997
period to 78.2% in the 1998 period, reflecting the impact of the added centers
and improved performance in certain Centers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $3,907,000 for the year ended December
31, 1997 to $4,835,000 for the year ended December 31, 1998, an increase of
$928,000, or 23.8%. The increase primarily reflected development costs
associated with expansion of the Company's practice affiliation program. As a
percentage of total revenues, selling, general and administrative expenses
decreased from 9.8% in the 1997 period to 9.0% in the 1998 period.
COST OF SALES. Cost of sales decreased from $826,000 for the year
ended December 31, 1997 to $744,000 for the year ended December 31, 1998, a
decrease of $82,000, or 9.9%. As a percentage of other revenues (to which
these
24
<PAGE> 25
costs relate), cost of sales decreased from 56.3% in the 1997 period to
46.8% in the 1998 period, primarily as a result of the higher mix in 1998 of
mobile surgical sales, which have a relatively higher margin, to equipment and
supplies sales.
PROVISION FOR DOUBTFUL ACCOUNTS. Provision for doubtful accounts
increased from $728,000 for the year ended December 31, 1997 to $1,575,000 for
the year ended December 31, 1998, an increase of $847,000, or 116.4%. This
increase reflected the additions of the practices in Birmingham, Marion,
Danville, San Antonio, Circleville, Kissimmee and Metairie. As a percentage of
total revenues, provision for doubtful accounts increased from 1.8% in the 1997
period to 2.9% in the 1998 period.
INTEREST EXPENSE Interest expense increased from $1,033,000 for the
year ended 1997 to $2,626,000 for the year ended December 31, 1998, an increase
of $1,593,000, or 154.2%. This increase related to the increase in bank
borrowings in 1997 and 1998 used to finance acquisitions and working capital.
IMPACT OF INFLATION AND CHANGING PRICES
Approximately 37.8%, 3.7% and 29.9% of the Company's total revenues
for the year ended December 31, 1999 were reimbursed directly by Medicare,
Medicaid and private insurers, respectively. Revenues from these sources may be
subject to reduction or other changes not related to the actual costs of eye
care procedures performed.
Effective January 1, 1997 and 1998, Medicare reimbursement rates for
certain procedures performed by affiliated ophthalmologists (the "relevant"
procedures) were decreased in various amounts. No significant rate schedule
changes were effected in January 1999, and changes in rates for relevant
procedures in January 2000 were mixed and offsetting. Future reductions in
reimbursement rates for relevant procedures could have a negative impact on the
results of Center operations if not countered by increases in volume and/or
decreases in operating costs.
YEAR 2000
The year 2000 issue exists because many computer systems and
applications currently use two-digit date fields to designate a year. The
Company developed a Year 2000 Plan to address all of its Year 2000 issues. The
Company's primary focus was on its own internal information technology systems,
including all types of systems in use by the Company in its operations, finance
and human resources departments, and to deal with the most critical systems
first.
The Company has not experienced any significant disruptions to its
financial or operating systems caused by failure of computerized systems
resulting from Year 2000 issues. Furthermore, the company does not expect Year
2000 issues to have a material adverse effect on the Company's operations or
financial results in 2000. Although the company has no information that
indicates any significant Year 2000 issues, management recognizes and is
attentive to future financial and operational risk associated with Year 2000
computer system failures.
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996. The
federal Health Insurance Portability and Accountability Act of 1996 ("HIPAA"),
required that standards be developed for the privacy and protection of
individually identifiable health information. As directed by HIPAA, the federal
government recently proposed detailed regulations to protect individual health
information that is maintained or transmitted electronically from proper
access, alteration or less. Final regulations are expected some time this year.
The Company expects that health care organizations will be required to comply
with the new standards 24 months after the date of adoption. The Company
expects to begin to address HIPAA issues during fiscal year 2000. Because the
HIPAA regulations have not been finalized, the Company has not been able to
determine the impact of the new standards on it financial position or results.
The Company does expect to incur costs to evaluate and implement the rules, and
will be actively evaluating such costs and their impact on financial position
and operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
In the normal course of business, the financial position of the
Company is routinely subjected to a variety of risks. Among these risks is the
market risk associated with interest rate movements on outstanding debt. The
Company regularly assesses these risks and has established policies and
business practices to protect against the adverse effects of these and other
potential exposures. The Company's borrowings under the Credit Facility contain
an element of market risk from changes in interest rates. The Company may
manage this risk, in part, through the use of interest rate swaps. To date, the
Company has not done so. The Company does not enter into interest rate swaps or
hold other derivative financial instruments for speculative purposes. For
purposes of specific risk analysis, the Company uses sensitivity analysis to
determine the impact that market risk exposures may have on the Company. The
financial instruments included in the sensitivity analysis consist of all of
the Company's cash and equivalents, long-term and short-term debt and all
derivative financial instruments. To perform sensitivity analysis, the Company
assesses the risk of loss in fair values from the impact of hypothetical
changes in interest rates on market sensitive instruments. The market values
for interest rate risk is computed based on the present value of future cash
flows as impacted by the changes in the rates attributable to the market risk
being measured. The discount rates used for the present value computations were
selected based on market interest rates in effect at December 31, 1999. The
market values that result from these computations are compared with the market
values of these financial instruments at December 31, 1999. The differences in
this
25
<PAGE> 26
comparison are the hypothetical gains or losses associated with each type of
risk. A one percent increase or decrease in the levels of interest rates on
variable rate debt with all other variables held constant would result in a
reduction in pre-tax earnings of approximately $313,000 but would not have a
material effect on the fair value of the Company's financial instruments or its
financial position.
26
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<S> <C> <C>
(a) FINANCIAL STATEMENTS
Index to Consolidated Financial Statements: Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets as of
December 31, 1999 and 1998 F-3
Consolidated Statements of Operations
for the Years Ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
27
<PAGE> 28
(b) SUPPLEMENTARY DATA - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
1999
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $14,886,342 $15,053,378 $16,440,989 $ 10,720,299
Earnings (loss) from operations 1,301,461 1,065,712 (1,378,715) (25,402,497)
Net earnings (loss) from continuing operations 512,790 597,015 (1,671,332) (28,265,247)
Net earnings (loss) 593,551 692,381 (2,888,415) (31,502,662)
Earnings (loss) from continuing operations per
common share
Basic 0.06 0.07 (0.19) (3.09)
Diluted 0.06 0.07 (0.19) (3.09)
Earnings (loss) per common share
Basic 0.07 0.08 (0.32) (3.44)
Diluted 0.07 0.08 (0.32) (3.44)
</TABLE>
<TABLE>
<CAPTION>
1998
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $12,669,401 $13,172,729 $14,152,046 $13,992,657
Earnings from operations 1,235,880 1,382,254 1,643,304 1,594,896
Net earnings from continuing operations 425,707 414,017 512,227 309,372
Net earnings (loss) 523,076 544,079 565,333 (418,507)
Earnings from continuing operations
per common share
Basic 0.05 0.05 0.06 0.03
Diluted 0.05 0.05 0.06 0.03
Earnings (loss) per common share
Basic 0.06 0.06 0.06 (0.05)
Diluted 0.06 0.06 0.06 (0.05)
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
28
<PAGE> 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
Company's executive officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ---- --- ---------------------
<S> <C> <C>
Andrew W. Miller 55 Director, Chairman and Acting Chief Executive Officer
Thomas P. Lewis 45 President and Director
Ghassan Barazi 36 Chief Operating Officer and Director
Allen D. Leck 52 Senior Vice President - Value Added Services
Cassandra T. Speier 41 Senior Vice President
Randall N. Reichle, O.D. 47 National Optometric Director, Vice President and Director
David M. Dillman, M.D. 49 National Medical Director and Director
Herman L. Tacker, O.D. 61 Director
Ernest B. Remo 60 Director
</TABLE>
Set forth below is biographical information concerning the executive officers of
the Company:
ANDREW W. MILLER has served as the Company's Acting Chief Executive
Officer since May 2, 2000, Chairman of the Board of Directors since September
30, 1990 and has been a principal stockholder of the Company since 1986. Mr.
Miller served as the Company's Chief Executive Officer from September 30, 1990
until March 1, 1991. Since June 1996, Mr. Miller has served as chairman and
chief executive officer of Women's Health Partners, Inc., a physician practice
management company specializing in obstetrics and gynecology. Since 1989 Mr.
Miller has served as Chairman of American Healthmark, Inc., a hospital ownership
and management corporation. Formerly Mr. Miller was affiliated with Surgical
Care Affiliates, Inc. ("SCA"), an owner and operator of outpatient health care
facilities, Hospital Corporation of America ("HCA") and HCA Management Company
("HMC"), a division of HCA. Mr. Miller is a certified public accountant and
prior to his association with HCA was employed by a national accounting firm.
THOMAS P. LEWIS has been with the Company since its start-up and has
been a principal architect in the structure and growth of the Company. Mr. Lewis
has been a director since June 1986 when he was first promoted to President and
Chief Executive Officer. Mr. Lewis served as Chief Executive Officer until May
1, 2000. As part of a merger agreement, Mr. Lewis served as Executive Vice
President and Chief Operating Officer from 1988 to 1990 and resumed his position
as President and Chief Executive Officer in March 1990. Mr. Lewis received his
Bachelor's degree from Rice University and a Master's degree in Health Care
Administration from Trinity University.
GHASSAN BARAZI has served as Chief Operating Officer and a director of
the Company since March 2000. Since September 1999 Mr. Barazi has served as
President and Chief Operating Officer of ICON Laser Eye Centers, Inc., an
Ontario, Canada publicly traded company specializing in laser vision correction.
From 1997 to 1999 Mr. Barazi served as President and Chief Executive Officer of
ICON London, A Laser Eye Center, the predecessor of ICON Laser Eye Centers, Inc.
He served as President and Chief Operating Officer of Windsor Laser Eye
Institute and Lasik Center from 1991 to 1997. Mr. Barazi also serves on the
Board of Directors of Eyemakers, Inc., a U.S. publicly traded company
specializing in retail optical business.
ALLEN D. LECK has served as President of Primary Eyecare Network since
1990. Prior to 1990, Mr. Leck held senior marketing positions with Cooper
Vision, Inc., UCO Optics and Bausch and Lomb. Mr. Leck earned a B.A. degree from
the University of South Dakota and attended the Graduate School of Sales
Management and Marketing at Syracuse University.
29
<PAGE> 30
CASSANDRA T. SPEIER has served as Senior Vice President of the Company
since July 1994 with responsibilities in operations and development. In January
1998, she was named to the additional position of chief compliance officer. From
1990 to 1994, Ms. Speier served in various management positions with MedCath,
Inc., of Charlotte, North Carolina. She was previously employed as a regional
director of Medivision, Inc. Ms. Speier has a Bachelor's Degree from the
University of Colorado and a Master's Degree from Loma Linda University.
RANDALL N. REICHLE, O.D., F.A.A.O., is National Optometric Director of
the Company and has served as a Company Vice President since July 1986. Dr.
Reichle has maintained a private optometric practice in Houston, Texas since
July 1976. He has also served as Center Director for the Company's Eye Center in
Houston, Texas since July 1986. Dr. Reichle is a graduate of the University of
Houston College of Optometry.
DAVID M. DILLMAN, M.D. has served as a director of the Company since
August 1997, and at that date became the Company's National Medical Director.
Dr. Dillman has been in private ophthalmic practice since 1981 and is currently
the Medical Director of Dillman Eye Care, an Affiliated Practice, in Danville,
Illinois. He has served on the Scientific Advisory Board for the American
Society of Cataract and Refractive Surgery, on the board of directors for the
American College of Eye Surgeons, and on the panel of the American Academy of
Ophthalmology that drafted the monograph "Preferred Practice Patterns for the
Care of Cataracts in the Human Adult." Dr. Dillman is a graduate of the
University of Notre Dame, received his medical degree from Indiana University
and completed his ophthalmology residency at the Mayo Clinic in Rochester,
Minnesota.
HERMAN L. TACKER, O.D. has served as a director of the Company since
October 1985. Since 1972, Dr. Tacker has conducted a private optometric practice
in Memphis, Tennessee, and has served as a Professor at the Southern College of
Optometry. He graduated from the Southern College of Optometry and earned a M.S.
Degree in Education from Indiana University.
ERNEST B. REMO has served as a director of the Company since March
2000. Since June 1999 Mr. Remo has served as Vice-Chairman of ICON Laser Eye
Centers, Inc., an Ontario, Canada publicly traded company specializing in laser
vision correction. Since June 1999 Mr. Remo has served as Vice Chairman and
Chief Executive Officer of Eyemakers, Inc., a U.S. publicly traded company. Mr.
Remo has served in those positions since October 1999. From May 1998 to
September 1999, Mr. Remo was employed by the Straighter Group, specializing in
investments and corporate finance. Prior to that, Mr. Remo worked for many years
as a corporate finance and mergers and acquisitions advisor and consultant.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has four committees - an Executive Committee, a
Quality Assurance Committee, a Compensation Committee and an Audit and
Compliance Committee. Members of the Executive Committee during 1999 were
Messrs. Miller, Beisner, Lewis and Tacker. Mr. Beisner is no longer a member of
the board of directors. The Executive Committee is authorized by the Board of
Directors to take any action, as individually approved by the Board, which may
be taken by the Board of Directors, except the power to alter or amend the
Bylaws; submit to shareholders any action that needs shareholders'
authorization; fill vacancies on the Board of Directors or any committee
thereof; or declare dividends or make any other distributions. The Executive
Committee held ten meetings during 1999.
Members of the Quality Assurance Committee during 1999 were Messrs.
Dillman, Miller, Lewis and Tacker. The Quality Assurance Committee was appointed
by the Board of Directors to establish and monitor risk management policies. The
Quality Assurance Committee did not hold any meetings during 1999.
Members of the Compensation Committee during 1999 were Messrs. Beisner
(no longer a director), Miller and Tacker. The Compensation Committee was
appointed by the Board of Directors to administer its employee benefit plans.
The Compensation Committee held four meetings during 1999.
30
<PAGE> 31
Members of the Audit and Compliance Committee during 1999 were Messrs.
Beisner (no longer a director), Miller and Tacker. The Audit and Compliance
Committee engages the independent auditors and reviews audit fees, supervises
matters relating to audit functions, reviews audit results with the auditors,
and reviews the scope and results of the company's internal auditing procedures
and the adequacy of the internal controls. The Audit and Compliance Committee
also supervises the activities of the Corporate Compliance Program and the
Compliance Officer, reviews the results of the company's Center Billing and
Coding Audit Program, and provides oversight, input, guidance and resolution
when the Compliance Officer initiates investigations into compliance complaints.
The audit committee held four meetings during 1999.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The federal securities laws require the Company's directors and
officers, and persons who own more than ten percent of a registered class of the
Company's equity securities, to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of any
securities of the Company. To the Company's knowledge, during the fiscal year
ended December 31, 1999, all of the Company's officers and directors made all
required filings.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows the aggregate cash compensation paid by the
Company to (i) the chief executive officer, and (ii) the 5 most highly
compensated executive officers (named executive officers) of the Company for the
years ended December 31, 1999, 1998 and 1997.
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
LONG TERM
OTHER COMPENSATION
NAME AND POSITION SALARY SALARY($) BONUS($) COMPENSATION($) OPTIONS(#)
- ----------------- ------ --------- -------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Thomas P. Lewis 1999 214,423 12,000 -0- 12,000
Chief Executive Officer until 5/2/00 1998 200,000 12,000 -0- -0-
President 1997 175,000 22,500 -0- -0-
Ronald L. Edmonds(1) 1999 155,000 8,000 -0- 8,000
Executive Vice President and 1998 130,000 8,000 -0- -0-
Chief Financial Officer 1997 115,000 20,000 -0- 25,000
Allen D. Leck 1999 179,038 100,979 -0- -0-
Senior Vice President 1998 175,577 66,823 -0- 15,000
Optometric Practice Services 1997 75,519 14,885 -0- 25,000
Randall N. Reichle, O.D. 1999 119,834 31,570 -0- -0-
Vice President and 1998 120,612 17,476 -0- -0-
National Optometric Director 1997 98,875 32,713 -0- -0-
Robert C. Kelly(2) 1999 105,385 39,230 26,700 -0-
Senior Vice President, 1998 95,385 -0- -0- 15,000
Center Operations 1997 -0- -0- -0- -0-
Cassandra T. Speier 1999 111,258 15,540 -0- -0-
Senior Vice President, Development 1998 109,039 7,500 -0- -0-
Corporate Compliance Officer 1997 91,540 -0- -0- -0-
</TABLE>
- -------------------------
(1) Ronald L. Edmonds resigned from the Company on March 24, 2000.
(2) Robert C. Kelley has given notice to the Company of his intention to cease
employment in 2000.
31
<PAGE> 32
OPTION GRANTS IN 1999(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED RATES OF
STOCK APPRECIATION FOR
OPTION TERM
% OF TOTAL OPTIONS EXERCISE
OPTIONS GRANTED TO PRICE
NAME GRANTED EMPLOYEES IN 1999 ($/SH) EXPIRATION DATE 5%($) 10%($)
- ---- ------- ----------------- ------ --------------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Thomas P. Lewis 12,000 27% 4.00 January, 2005 N/A N/A
Ronald L. Edmonds 8,000 18% 4.00 January, 2005 N/A N/A
</TABLE>
AGGREGATED OPTION EXERCISES IN 1999(1) AND YEAR END OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
NAME SHARES ACQUIRED VALUE OPTIONS AT YEAR END IN-THE-MONEY OPTIONS AT YEAR END
ON EXERCISE REALIZED($)(1) EXERCISABLE/UNEXERCISABLE ($) EXERCISABLE/UNEXERCISABLE(2)
--------------- ---------------- ------------------------- --------------------------------
<S> <C> <C> <C> <C>
Thomas P. Lewis 15,625 $125,000 33,332/78,668 0/0
Ronald L. Edmonds 5,208 41,665 0/66,667 0/0
Allen D. Leck -0- -0- 0/15,000 0/0
Randall N. Reichle, O.D. 6,875 55,000 1,666/3,334 0/0
Cassandra T. Speier -0- -0- 23,333/16,667 0/0
Robert C. Kelly -0- -0- 0/15,000 0/0
</TABLE>
(1) Option values are based on market price per share at date of exercise.
(2) Option values are based on a December 31, 1999 market price per share of
$3.00.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The compensation of the company's executive officers is reviewed and
approved by the Compensation Committee. During 1999 and the first quarter of
2000, the Compensation Committee was composed of Mr. Miller, Dr. Donald P.
Beisner and Dr. Tacker, none of whom at any time has been an officer or employee
of the Company, except that Mr. Miller served as the Company's interim chief
executive officer, not as an employee, from September 30, 1990 until March 1,
1991. Furthermore, as of May 2, 2000, Mr. Miller began serving as the Company's
acting chief executive officer. Mr. Miller is serving in such capacity without
compensation. In addition to reviewing and approving executive officers' salary
and bonus arrangements, the Compensation Committee administers the awards of
stock options pursuant to the Company's Stock Option Plan. Dr. Beisner no longer
serves on the Compensation Committee, having resigned from the board of
directors of the Company.
COMPENSATION POLICIES APPLICABLE TO EXECUTIVE OFFICERS FOR 1999
The objectives of the Company's executive compensation program are to
(1) attract, motivate and retain key executives responsible for the success of
the Company, (2) reward key executives based on corporate and individual
performance, and (3) provide incentives designed to maximize shareholder value.
The three primary components of the executive officer compensation program are
base salaries, cash bonuses, and equity awards in the form of stock options.
The base salary of each of the Company's executive officers is
established pursuant to an employment agreement that is approved by the
Compensation Committee. Base salaries are reviewed by the Compensation Committee
and may be increased in the Committee's discretion.
Each executive officer is entitled to receive such bonuses or other
incentive compensation as the Compensation Committee determines in its sole
discretion. In determining bonuses, the Committee considers overall company
performance and the performance of the individual executive in contributing to
the overall company performance. Dr. Reichle has specific bonus arrangements
based on performance, in terms of earnings and revenues, of the business units
of the Company to which he gives leadership.
In order to align long-term interests of executive officers with those
of shareholders, the Compensation Committee, in its subjective discretion, from
time to time considers the award of stock options. The terms of these options,
32
<PAGE> 33
including the sizes of the grants, are determined by the Compensation Committee
based on its subjective judgment and without regard to any specific performance
criteria. Awards of stock options to executive officers have historically been
for a term of six years at then-current market prices with vesting in the third,
fourth and fifth years of the option term.
CEO COMPENSATION
In evaluating the compensation of Thomas P. Lewis, the Company's chief
executive officer during fiscal year 1999, the Compensation Committee utilized
the same compensation policies applicable to executive officers in general. As
of August 1, 1996, the Company entered into an Employment Agreement with Mr.
Lewis. The Agreement increased Mr. Lewis' annual base salary to $150,000 and
provides for a salary increase of $50,000 upon the Company achieving a specific
earnings per share performance goal, which was met in 1997. The Agreement
granted Mr. Lewis qualified options to purchase 100,000 shares of the Company
stock at $5.75 per share, reduced in November 1999 to $4.50, which options do
not vest the first two years and vest 1/3 per year beginning August 1, 1999. The
options terminate August 1, 2002. The Company also agreed to grant Mr. Lewis
options to purchase an additional 100,000 shares of Company common stock, which
grant is contingent upon the Company achieving a specific earnings per share
performance goal. As part of the Agreement, Mr. Lewis agreed to certain
non-competition and confidentiality provisions that would continue after the
termination of his employment. In the event of Mr. Lewis' termination of
employment related to a change in control of the Company, Mr. Lewis shall be
paid by the Company a lump sum payment of one year's salary, and the Company
shall provide for two years certain insurance benefits.
REPORT ON REPRICING OF OPTIONS
On November 3, 1998, the Compensation Committee of the Board of
Directors voted to reprice certain outstanding stock options under the 1995
Plan. All options issued under the 1995 Plan with an exercise price greater than
$4.50 were cancelled and reissued with an exercise price of $4.50, which was the
market price on November 3, 1998, the new grant date. This action was taken
because, in the opinion of the compensation committee, it was necessary to
ensure that the economic value of options continued to align the interests of
executive officers with shareholders and ensure that the Plan was effective in
retaining key executives.
<TABLE>
<CAPTION>
NUMBER OF MARKET PRICE EXERCISE PRICE NEW REMAINING
UNDERLYING STOCK AT TIME OF AT TIME OF EXERCISE TERM
NAME DATE SECURITIES REPRICING REPRICING PRICE (MONTHS)
- ---- ---- ---------- ---------------- -------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ronald L. Edmonds 11/3/98 25,000 4.50 5.75 4.50 33
Ronald L. Edmonds 11/3/98 25,000 4.50 6.50 4.50 38
Thomas P. Lewis 11/3/98 100,000 4.50 5.75 4.50 33
Cassandra T. Speier 11/3/98 25,000 4.50 5.75 4.50 51
Randall N. Reichle, O.D. 11/3/98 5,000 4.50 5.75 4.50 33
Allen D. Leck 11/3/98 15,000 4.50 7.31 4.50 54
</TABLE>
ANDREW W. MILLER HERMAN L. TACKER, O.D.
Donald P. Beisner, M.D. was a member of the Compensation Committee throughout
fiscal year 1999 and the first quarter of 2000. Dr. Beisner is no longer a
director of the Company or a member of the Compensation Committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is currently composed of Mr. Miller, Dr.
Tacker and Dr. Dillman, none of whom at any time has been an officer or employee
of the Company, except that Mr. Miller did serve as the Company's chief
executive officer, not as an employee, from September 30, 1990 until March 1,
1991. Furthermore, Mr. Miller now serves as the acting chief executive officer,
without compensation. No executive officer of the Company served during 1998 or
1999 as a member of a compensation committee or as a director of any entity of
which any of the Company's directors serves as an executive officer.
33
<PAGE> 34
PERFORMANCE TABLE
The following graph compares the cumulative returns of $100 invested on
December 31, 1994 in (a) the Company, (b) the CRSP Index for the Nasdaq Stock
Market ("The Nasdaq Stock Market"), and (3) the CRSP Index for Nasdaq Health
Services Stocks ("Nasdaq Health Services Stocks"), assuming reinvestment of all
dividends.
<TABLE>
<CAPTION>
INDEXED TO 1994 INDEXED TO 1994 INDEXED TO 1994
VISIONAMERICA INCORPORATED THE NASDAQ STOCK MARKET NASDAQ HEALTH SERVICES STOCKS
<S> <C> <C> <C>
1994 100 100 100
1995 116 141 127
1996 147 174 127
1997 166 213 129
1998 96 300 109
1999 67 546 89
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 31, 2000, the Company's records indicated that the
following number of shares were beneficially owned by (i) each person known by
the Company to beneficially own more than 5% of the Company's shares; (ii)
directors and executive officers; and (iii) directors and officers of the
Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS(1)
------------------------ ------------------------ --------------------
<S> <C> <C> <C>
(i) ICON Laser Eye Centers, Inc.(2) 1,440,000 14.1%
Harmeet Chawla, M.D.(3) 535,506 5.2
(ii) Andrew W. Miller(4) 478,492 4.7
Herman L. Tacker, O.D.(5) 125,000 1.2
David M. Dillman, M.D. 66,667 0.7
Thomas P. Lewis(6) 205,582 2.0
Ernest B. Remo(7) 1,440,000 14.1
Ghassan Barazi(7) 1,440,000 14.1
Allen D. Leck 1,633 0.0
Randall N. Reichle, O.D.(8) 21,444 0.2
(iii) Directors and Executive Officers as a 2,364,151 23.0
group (10 persons)(9)
</TABLE>
(1) Unless otherwise indicated, beneficial ownership consists of sole
voting and investing power based on 10,339,777 shares issued and
outstanding, including options and warrants to purchase 126,388 shares
which are exercisable or become exercisable within 60 days.
(2) The purchase by ICON of 1,000,000 shares of Company common stock in
February 2000 has been proposed to be rescinded pursuant to the
renegotiation described in Note 13 of the Notes to Consolidated
Financial Statements.
34
<PAGE> 35
(3) The number of shares for Dr. Harmeet Chawla was obtained from a
Schedule 13-D filed by Dr. Harmeet Chawla on April 7, 2000.
(4) Included in Mr. Miller's shares are options to purchase 20,000 shares.
(5) Of the total of 136,886 shares shown, 16,875 are held jointly by Dr.
Tacker and his wife, Wilma R. Tacker. Included in Dr. Tacker's shares
are options to purchase 20,000 shares.
(6) Included in Mr. Lewis' shares are options to purchase 33,332 shares.
(7) Included in the share ownership for Messrs. Remo and Barazi is
1,440,000 shares owned by ICON Laser Eye Centers, Inc., a company for
which they serve as directors.
(8) Included in Dr. Reichle's shares are options to purchase 1,666 shares.
(9) Included in the ownership of directors and executive officers as a
group are options to purchase 78,331 shares, which are exercisable or
become exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has, and expects to have, transactions in the ordinary
course of its business with directors and officers of the Company and their
affiliates, including members of their families or corporations, partnerships or
other organizations in which such officers or directors have a controlling
interest, on substantially the same terms (including price, or interest rates
and collateral) as those prevailing at the time for comparable transactions with
unrelated parties. The Company has an agreement to perform management services
for Cathleen M. Schanzer, M.D., the Medical Director for the Company's Memphis
Center. Dr. Schanzer is the wife of the Company's President, Thomas P. Lewis.
The management agreement provides that the Company receives 65% of the
collections of Dr. Schanzer's Center subject to a minimum allowance given to Dr.
Schanzer equal to $204,000 or 35% of the collections, whichever is greater. Dr.
Schanzer received approximately $527,000 in 1999 pursuant to the management
agreement.
David M. Dillman, M.D., a director of the Company, was paid $50,000
during 1999 for his services as National Medical Director. Dr. Dillman was also
paid $313,000 during 1999 for his services as the Medical Director and physician
at his local center.
ICON Laser Eye Centers, Inc. ("ICON") and the Company entered into an
Agreement dated February 24, 2000, wherein ICON purchased 1,000,000 shares of
Company common stock for a total purchase price of $4,000,000.00. The Agreement
further provides that a warrant for an additional 1,000,000 shares of Company
common stock would be issued to ICON if, among other things, a registration
statement was not filed for the original 1,000,000 shares by July 31, 2000. ICON
requested re-negotiation of this Agreement and the parties entered into a letter
of intent regarding the re-negotiation on May 12, 2000. Pursuant to this letter
of intent the parties intend to terminate the original Agreement and execute
full mutual releases and the Company intends to issue to ICON a subordinated
convertible debenture note maturing May 31, 2005 with interest at 5% and
convertible into Company common stock at $1.00 per share, and a warrant to
purchase 1,000,000 shares of Company common stock at $.06 per share. These
proposed transactions are subject to a definitive agreement being approved by
the board of directors of both companies, the approval of VisionAmerica's
shareholders and the approval of the Companies' senior lenders.
THE REMAINDER OF THIS PAGE IS LEFT INTENTIONALLY BLANK
35
<PAGE> 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
Consolidated Financial Statements and Supplementary Data. Listed in the
Index to Financial Statements provided in response to Item 8 hereof (see p. 33
for Index).
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 Articles of Incorporation*
3.2 Amendment to Articles of Incorporation**
3.3 Second Amendment to the Articles of Incorporation
3.4 Bylaws*
3.5 Amendment to Bylaws
4.1 Form of Common Stock Certificate*
11 Statement Re: Computation of Per Share Earnings
22 Subsidiaries of the Registrant
23 Consent of Independent Accountants
</TABLE>
* Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-18, Registration No. 33-35262-A.
** Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, registration Statement No.
333-38885.
(c) Reports on Form 8-K
None
36
<PAGE> 37
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Exchange Act, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
VISIONAMERICA INCORPORATED
By /s/ Andrew W. Miller
-------------------------------------------------
Andrew W. Miller
Chairman and Acting Chief Executive Officer
Date May , 2000
In accordance with the requirements of the Exchange Act, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Andrew W. Miller Chairman of the Board, Acting Chief 5/17/00
- ---------------------------------------------- Executive Officer
Andrew W. Miller
/s/ Thomas P. Lewis President, 5/17/00
- ---------------------------------------------- Chief Executive Officer and
Thomas P. Lewis Director
/s/ Todd E. Smith Chief Accounting Officer 5/17/00
- ----------------------------------------------
Todd E. Smith
/s/ Ghassan Barazi Chief Operating Officer and 5/17/00
- ---------------------------------------------- Director
Ghassan Barazi
/s/ Randall N. Reichle, O.D., F.A.A.O. Vice President, National Optometric 5/17/00
- ---------------------------------------------- Director and Director
Randall N. Reichle, O.D., F.A.A.O.
/s/ David M. Dillman, M.D. Director 5/17/00
- ----------------------------------------------
David M. Dillman, M.D.
/s/ Herman L. Tacker, O.D. Director 5/17/00
- ----------------------------------------------
Herman L. Tacker, O.D.
/s/ Ernest Remo Director 5/17/00
- ----------------------------------------------
Ernest Remo
</TABLE>
37
<PAGE> 38
VISIONAMERICA INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(With Independent Auditors' Report Thereon)
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
The Board of Directors
VisionAmerica Incorporated:
We have audited the accompanying consolidated balance sheets of VisionAmerica
Incorporated and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of VisionAmerica
Incorporated and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 5 to
the consolidated financial statements, the Company is in technical default
under the terms of its senior credit facility and has not received any waivers
of noncompliance with related debt covenants. Additionally, the Company's
senior lenders have not to-date extended any commitment to waive such
noncompliance or otherwise renegotiate the terms of the senior credit facility.
Because of these circumstances, all amounts due under the facility can be
deemed immediately due and payable at the lenders' discretion. Accordingly,
such amounts have been classified as a current liability in the accompanying
consolidated financial statements at December 31, 1999. The Company does not
currently have alternative financing arrangements should the lenders demand
repayment. Additionally, the Company must address significant cash flow
concerns in the near-term, continue the negotiation process regarding the
payroll tax matter described in note 14, and manage multiple class action
claims as discussed in note 14. These circumstances raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are described in note 16. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG LLP
Memphis, Tennessee
May 16, 2000
F-2
<PAGE> 40
VISIONAMERICA INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------ -----------
<S> <C> <C>
Current assets:
Cash $ 1,866,616 3,100,145
Accounts receivable, net of allowance for
doubtful accounts of $3,099,000 and
$1,065,000 at December 31, 1999 and
1998, respectively (note 3) 8,705,593 14,469,802
Inventories 900,418 1,862,645
Prepaid expenses 674,901 912,200
Net assets held for disposal (note 10) 3,644,615 1,200,000
------------ -----------
Total current assets 15,792,143 21,544,792
------------ -----------
Equipment, furniture and fixtures (notes 4 and 5):
Owned 17,878,119 17,530,490
Held under capital lease 11,049,436 4,046,613
------------ -----------
28,927,555 21,577,103
Less accumulated depreciation and
amortization (10,978,361) (8,581,509)
------------ -----------
Equipment, furniture and
fixtures, net 17,949,194 12,995,594
------------ -----------
Management agreements, net of
accumulated amortization of $1,863,000
and $2,078,000 at December 31, 1999 and
1998, respectively (notes 2 and 15) 14,229,901 34,748,320
Notes receivable (note 10) 2,830,310 --
Deferred tax asset (note 7) -- 1,923,000
Other assets (notes 5 and 6) 904,154 1,760,668
============ ===========
$ 51,705,702 72,972,374
============ ===========
</TABLE>
F-3
<PAGE> 41
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1999 1998
------------ -----------
<S> <C> <C>
Current liabilities:
Accounts payable $ 5,507,401 4,789,165
Accrued expenses (note 14) 6,505,461 4,025,383
Current installments of obligations under
capital leases and long-term debt
(notes 4 and 5) 35,779,628 1,289,335
------------ -----------
Total current liabilities 47,792,490 10,103,883
Obligations under capital leases, excluding current
installments (note 4) 6,628,636 1,746,094
Long-term debt, excluding current installments (note 5) 348,145 29,724,505
------------ -----------
Total liabilities 54,769,271 41,574,482
------------ -----------
Minority interest in partnerships 77,004 573,278
------------ -----------
Stockholders' equity (deficit) (notes 2 and 8):
Common stock, par value of $0.06;
authorized 25,000,000 shares; issued
9,189,274 and 9,005,588 shares at
December 31, 1999 and 1998, respectively 551,218 540,178
Treasury stock (152,609) (138,346)
Additional paid-in capital 33,028,534 33,885,353
Accumulated deficit (36,567,716) (3,462,571)
------------ -----------
Net stockholders' equity (deficit) (3,140,573) 30,824,614
------------ -----------
Commitments and contingencies (notes 4, 5, 10, 13, 14, and 16)
$ 51,705,702 72,972,374
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 42
VISIONAMERICA INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Center net revenues (note 17) $ 54,724,106 52,399,358 38,289,761
Other revenues 2,377,002 1,587,475 1,466,172
------------ ----------- -----------
Total revenues 57,101,108 53,986,833 39,755,933
Center operating expenses 49,237,664 40,977,020 30,498,611
Selling, general and administrative expenses 7,617,685 4,834,937 3,906,687
Cost of sales 1,305,924 743,652 825,876
Provision for doubtful accounts (note 17) 4,153,874 1,574,890 727,782
Impairment of physician practice management
assets (notes 15 and 17) 19,200,000 -- --
------------ ----------- -----------
Earnings (loss) from operations (24,414,039) 5,856,334 3,796,977
Non-operating revenue (expense):
Gain from sale of investment (note 6) 724,242 -- --
Interest expense (3,215,257) (2,626,055) (1,033,139)
------------ ----------- -----------
Earnings (loss) from continuing operations before
minority interests and income taxes (26,905,054) 3,230,279 2,763,838
Minority interests in income of partnerships (623,720) (624,956) (405,005)
------------ ----------- -----------
Earnings (loss) from continuing operations
before income taxes (27,528,774) 2,605,323 2,358,833
Income tax (expense) benefit (notes 7 and 17) (1,298,000) (944,000) 910,000
------------ ----------- -----------
Net earnings (loss) from continuing operations (28,826,774) 1,661,323 3,268,833
------------ ----------- -----------
Discontinued operations (notes 7, 10 and 17):
Loss on disposal, net of tax (4,540,984) (768,000)
Operations, net of tax 262,613 320,658 614,099
------------ ----------- -----------
Net earnings (loss) from discontinued operations (4,278,371) (447,342) 614,099
------------ ----------- -----------
Net earnings (loss) (33,105,145) 1,213,981 3,882,932
Preferred dividends (note 8) -- -- (19,874)
------------ ----------- -----------
Net earnings (loss) available to common
shareholders $(33,105,145) 1,213,981 3,863,058
============ =========== ===========
</TABLE>
F-5 (Continued)
<PAGE> 43
VISIONAMERICA INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Net earnings (loss) from continuing
operations per common share:
Basic $ (3.20) .19 .44
=========== ========= =========
Diluted $ (3.20) .19 .42
=========== ========= =========
Net earnings (loss) from discontinued
operations per common share:
Basic $ (.47) (.05) .08
=========== ========= =========
Diluted $ (.47) (.05) .08
=========== ========= =========
Net earnings (loss) per common share:
Basic $ (3.67) .14 .52
=========== ========= =========
Diluted $ (3.67) .14 .50
=========== ========= =========
Weighted average shares outstanding:
Basic 9,019,563 8,821,995 7,417,878
=========== ========= =========
Diluted 9,019,563 8,915,453 7,769,656
=========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 44
VISIONAMERICA INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
ADDITIONAL NET
PREFERRED COMMON TREASURY PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK STOCK STOCK CAPITAL DEFICIT EQUITY (DEFICIT)
---------- ---------- --------- ----------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 $ 485,049 411,946 -- 22,685,778 (8,539,610) 15,043,163
Issuance of 113,653 shares of
common stock with
conversion of 59 shares
of preferred stock (485,049) 6,819 -- 478,230 -- --
Issuance of 1,587,106 shares
of common stock -- 95,226 -- 8,378,501 -- 8,473,727
In-kind dividends on
preferred stock -- -- -- 19,874 (19,874) --
Net earnings -- -- -- -- 3,882,932 3,882,932
--------- ------- -------- ----------- ----------- -----------
Balances at December 31, 1997 -- 513,991 -- 31,562,383 (4,676,552) 27,399,822
Purchase of treasury stock -- -- (138,346) -- -- (138,346)
Issuance of 436,755 shares
of common stock -- 26,187 -- 2,322,970 -- 2,349,157
Net earnings -- -- -- -- 1,213,981 1,213,981
--------- ------- -------- ----------- ----------- -----------
Balances at December 31, 1998 -- 540,178 (138,346) 33,885,353 (3,462,571) 30,824,614
Receipt of treasury stock -- -- (14,263) (1,263,496) -- (1,277,759)
Issuance of 183,684 shares
of common stock -- 11,040 -- 406,677 -- 417,717
Net loss -- -- -- -- (33,105,145) (33,105,145)
--------- ------- -------- ----------- ----------- -----------
Balances at December 31, 1999 $ -- 551,218 (152,609) 33,028,534 (36,567,716) (3,140,573)
========= ======= ======== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 45
VISIONAMERICA INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(33,105,145) 1,213,981 3,882,932
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 4,067,096 3,140,307 1,794,838
Disposal items, net 83,543 1,180,397 (260,831)
Deferred income tax (benefit) expense 1,923,000 (567,000) (910,000)
Provision for doubtful accounts 4,153,874 1,574,890 727,782
Impairment of physician practice management assets 19,200,000 --
Minority interests in income of partnerships 623,720 624,956 405,005
Gain on sale of investment (724,242) -- --
Changes, net of acquisition effects, in
operating assets and liabilities:
Accounts receivable, net (2,270,979) (3,989,820) (2,730,364)
Other assets (2,323,635) (1,950,690) (613,576)
Accounts payable and accrued expenses 5,927,715 208,186 266,801
------------ ---------- -----------
Net cash provided by (used in) operating
activities (2,445,053) 1,435,207 2,562,587
------------ ---------- -----------
Cash flows from investing activities:
Capital expenditures (1,256,434) (1,235,108) (1,129,204)
Acquisition of net assets of physician practices (1,298,640) (6,604,640) (12,734,977)
Acquisition of Primary Eyecare Network, net of cash acquired -- -- (1,420,148)
Proceeds from sale of investment 1,234,023 --
Proceeds from sale of interest in ambulatory surgery center 27,900 --
------------ ---------- -----------
Net cash used in investing activities (1,293,151) (7,839,748) (15,284,329)
------------ ---------- -----------
Cash flows from financing activities:
Financing costs incurred -- (87,312) (542,145)
Principal payments on long-term debt (326,780) (855,074) (5,626,083)
Principal payments on obligations under capital leases (1,357,753) (545,569) (659,653)
Proceeds from issuance of debt 4,789,273 8,963,286 20,762,826
Proceeds from issuance of common stock 49,101 -- 501,087
Purchase of treasury stock -- (138,346) --
Distributions to minority interests (649,166) (574,743) (392,934)
------------ ---------- -----------
Net cash provided by financing activities 2,504,675 6,762,242 14,043,098
------------ ---------- -----------
Net increase (decrease) in cash (1,233,529) 357,701 1,321,356
Cash at beginning of period 3,100,145 2,742,444 1,421,088
------------ ---------- -----------
Cash at end of period $ 1,866,616 3,100,145 2,742,444
============ ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 46
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF OPERATIONS
VisionAmerica Incorporated (the Company) is an eye care company
that provides facilities services to ophthalmologists and
optometrists to assist in the integration of primary, medical and
surgical eye care. The Company emphasizes cooperative
professional relationships between ophthalmologists and
optometrists in the formation of integrated eye care networks and
co-management of patient care. The Company's services allow eye
care professionals to devote their time to the delivery of
quality primary, medical and surgical eye care and enable them to
expand and position their practices effectively in an
increasingly competitive eye care environment. The Company
manages 22 affiliated ophthalmology practices through which 45
affiliated ophthalmologists provide medical and surgical eye care
at the Company's co-management eye care centers through 118
service locations and 8 ambulatory surgery centers. The Company
also provides supply and equipment purchasing, mobile surgical
equipment and support services, excimer laser support services,
and certain administrative services to ophthalmologists, networks
of associated optometrists and other eye care providers.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries and majority-owned
partnerships. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(C) INVENTORIES
Inventories, consisting primarily of medical supplies, are stated
at the lower of cost (first-in, first-out method) or replacement
market.
(D) EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are stated at cost. Equipment,
furniture and fixtures under capital leases are stated at the
lower of the present value of minimum lease payments at the
beginning of the lease term or fair value at the inception of the
lease.
Provisions for depreciation on equipment, furniture and fixtures
are computed using the straight-line method based on the
estimated useful lives of the assets ranging from five to ten
years. Leasehold improvements are amortized using the
straight-line method over the lesser of the respective lease term
or their estimated useful lives.
(E) CENTER NET REVENUES
Center net revenues are gross charges for patient services
rendered, net of third-party payor contractual adjustments. Such
revenues are recognized when services are rendered. The
physicians associated with the Company have agreements with
governmental and other third-party payors that provide for
reimbursement at amounts different from their established rates.
Contractual adjustments under third-party reimbursement programs
represent the difference between the billings at established
rates for services and amounts reimbursed by third-party payors.
Services rendered under most third-party payor arrangements,
including the Medicare program, are principally reimbursed based
upon predetermined fee schedules for the procedures performed.
F-9
<PAGE> 47
VISIONAMERICA INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998, and 1997
(F) OTHER REVENUES
The Company operates a mobile surgical service that provides
ophthalmic surgical equipment and supplies to surgical
facilities, including hospitals and ambulatory surgery centers,
on a per-case basis. The costs related to these revenues are
included in cost of sales.
(G) MANAGEMENT AGREEMENTS
Assets related to management agreements arise from business
acquisitions made by the Company. The excess of the cost of these
acquisitions over the fair value of net assets acquired
(including identifiable intangible assets) is allocated to
management agreements and amortized straight-line over terms
ranging from 10 to 25 years.
The Company regularly reviews the carrying value of management
agreements on a practice-by-practice basis to determine if facts
and circumstances exist which would suggest that the value of the
management agreements may be impaired or that amortization
periods need to be modified. Among the factors considered by the
Company in making the evaluation are changes in the practices'
market position, reputation, profitability and geographical
penetration. Based on these factors, if circumstances are present
which may indicate impairment is probable, the Company will
prepare a projection of the undiscounted cash flows before
interest charges of the specific practice and determine if the
management agreements are recoverable based on these undiscounted
cash flows. If impairment is indicated, then an adjustment will
be made to reduce the carrying value of these intangible assets
to fair value.
(H) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which the deferred tax
liability or asset is expected to be settled or realized.
(I) STOCK BASED COMPENSATION
The Company accounts for stock options in accordance with the
provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations (APB 25). As such, compensation expense is
recorded on the date of grant only if the current market price of
the underlying stock exceeds the exercise price. On December 31,
1995, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation"
(SFAS 123), which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on
the date of grant. Alternately, SFAS 123 allows entities to
continue to apply the provisions of APB 25 and provide pro forma
net earnings (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants made in 1996 and
future years as if the fair-value-based method defined in SFAS
123 had been applied. The Company has elected to continue to
apply the financial accounting provisions of APB 25 and provide
the pro forma disclosures required by SFAS 123.
(Continued)
F-10
<PAGE> 48
(J) EARNINGS (LOSS) PER SHARE
Basic net earnings (loss) per share is based on net earnings
(loss) available to common shareholders divided by the weighted
average number of shares outstanding during each year. Diluted
net earnings (loss) per share reflects the potential dilution
that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in the Company's
earnings. The dilutive effect of securities and contracts
potentially convertible to common stock is calculated using the
treasury stock method.
(K) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires that management
make estimates and assumptions affecting the reported amounts of
assets, liabilities, revenues and expenses, as well as disclosure
of contingent assets and liabilities. Actual results could differ
from these estimates.
(L) RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to
the 1999 presentation.
(2) MERGERS, ACQUISITIONS AND DIVESTITURES
In March 1997, the Company completed the acquisition of the assets of
the ophthalmology practice of Sarah J. Hays, M.D. of Birmingham,
Alabama. Simultaneously with the acquisition, the Company entered into a
long-term management agreement with Dr. Hays' professional corporation.
The assets were acquired in exchange for 108,081 shares of the Company's
common stock, valued at $714,414 ($6.61 per share) and $859,500 in cash.
The cash portion of the transaction was financed under the Company's
Credit Agreement described in note 5.
In May 1997, the Company completed the acquisition of the assets of the
ophthalmology practice of Joseph F. Faust, M.D. of Marion, Indiana and a
50% interest in the ambulatory surgery center associated with such
practice. Simultaneously with the acquisitions, the Company entered into
long-term management agreements to manage both the practice and the
surgery center. The assets were acquired in exchange for 169,186 shares
of the Company's common stock, valued at $1,112,400 ($6.58 per share)
and $1.7 million in cash. The cash portion of the transaction was
financed under the Credit Agreement.
In May 1997, the Company completed a merger with Primary EyeCare Network
(PEN), based in San Ramon, California. PEN provides products and services
to independent optometrists, including management, purchasing, education,
training and publications. In connection with the merger, the Company
issued 195,365 shares of its common stock, valued at $1,275,928 ($6.53
per share) to the shareholders of PEN and paid $1.9 million in cash. The
cash portion of the transaction was financed under the Credit Agreement.
As of December 31, 1999, PEN is accounted for as discontinued operations
(see note 10).
In August 1997, the Company completed the acquisition of substantially
all of the assets of Dillman Eye Care Associates, an ophthalmology
practice, and Dillman Eye Care Optical Department, Inc. in exchange for
66,667 shares of common stock, valued at $500,000 ($7.50 per share) and
$725,000 in cash. Simultaneously with the acquisitions, the Company
entered into a long-term management agreement to manage the Dillman
practice. The cash portion of the transaction was financed under the
Credit Agreement.
F-11
<PAGE> 49
VISIONAMERICA INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998, and 1997
In September 1997, the Company completed the acquisition of
substantially all of the assets of Eye Surgeons and Consultants and
Golden Eye Surgeons, two affiliated ophthalmology practices, in exchange
for 89,694 shares of common stock, valued at $672,700 ($7.50 per share)
and $672,700 in cash. Simultaneously with the acquisitions, the Company
entered into a long-term management agreement to manage the practices.
The cash portion of the transaction was financed under the Credit
Agreement.
In December 1997, the Company completed the acquisition of the assets of
the ophthalmology practice of Alan D. Baribeau, M.D., P.A. of San
Antonio, Texas and a 50% interest in the ambulatory surgery center
associated with such practice. Simultaneously with the acquisitions, the
Company entered into long-term management agreements to manage both the
practice and the surgery center. The assets were acquired in exchange
for 131,250 shares of the Company's common stock, valued at $1,050,000
($8.00 per share) and $1.9 million in cash. The cash portion of the
transaction was financed under the Credit Agreement.
In December 1997, the Company completed the acquisition of the stock of
Central Ohio Eye Institute, Inc., an Ohio Corporation, in exchange for
463,206 shares of common stock, valued at $3,525,000 ($7.61 per share)
and $5.0 million in cash. Simultaneously with the acquisition, the
Company entered into a long term management agreement to manage the
practice. The cash portion of the transaction was financed under the
Credit Agreement.
In December 1997, the Company completed the acquisitions of
substantially all of the assets of Providers Optical, Inc. (Providers),
a wholesale optical laboratory focused on managed eye care, in exchange
for 175,000 shares of common stock valued at $1,500,000 ($8.57 per
share). Providers was sold in 1999 as described in note 10.
In January 1998, the Company completed the acquisition of substantially
all 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, valued at $1,000,000 ($7.65 per share) and
$1,000,000 in cash. The cash portion of the transaction was financed
under the Credit Agreement.
In July 1998, the Company completed the acquisitions of substantially all
of the assets of the ophthalmology practice of Mitchell L. Levin, M.D.
of Kissimmee, Florida and a 50% interest in the ambulatory surgery
center associated with such practice. Simultaneously with the
acquisitions, the Company entered into a long-term management agreement
to manage the Levin practice. The assets were acquired in exchange for
151,257 shares of the Company's common stock, valued at $1,022,500
($6.76 per share) and $1.8 million in cash. The cash portion of the
transaction was financed under the Credit Agreement.
In September 1998, the Company completed the acquisition of
substantially all of the assets of the ophthalmology practice of Jeffrey
Straus, M.D. of Metairie, Louisiana. Simultaneously with the
acquisition, the Company entered into a long-term management agreement
to manage the Straus practice. The assets were acquired in exchange for
106,473 shares of the Company's common stock, valued at $625,000 ($5.87
per share) and $937,000 in cash. The cash portion of the transaction was
financed under the Credit Agreement.
F-12
(Continued)
<PAGE> 50
In January 1999, the Company completed the acquisition of the assets of
the ophthalmology practice of George M. Kopf, M.D. of Zanesville, Ohio
in exchange for $430,000 in cash financed under the Credit Agreement.
Simultaneously with the acquisition, the Company entered into a
management agreement to manage the practice.
In October 1999, the Company completed the acquisition of the assets of
the ophthalmology practice of Khalid L. Khan, M.D. of Talladega,
Alabama. 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 61,050 shares of the Company's
common stock, valued at $384,000 ($6.29 per share) and $693,000 in cash.
The cash portion of the transaction was financed under the Credit
Agreement.
Aggregate management agreement intangibles totaling $1,063,115,
$5,386,727 and $18,649,379 in 1999, 1998 and 1997, respectively, were
recognized as a result of the above transactions, all of which were
accounted for as purchases.
The following sets forth certain unaudited pro forma financial
information for the years ended December 31, 1999 and 1998, as if the
1999 and 1998 transactions described above had been completed as of
January 1, 1998:
<TABLE>
<CAPTION>
UNAUDITED
--------------------------------
1999 1998
-------------- ------------
<S> <C> <C>
Revenue $ 58,399,238 57,864,655
Net earnings (loss) from continuing operations
per common share: $(28,090,939) 1,897,227
Basic $ (3.10) .21
Diluted $ (3.10) .21
Weighted average common shares:
Basic 9,065,351 8,994,165
Diluted 9,065,351 9,087,623
</TABLE>
(3) BUSINESS AND CREDIT CONCENTRATIONS
Affiliated ophthalmologists provide health care services through the
Company's eye care centers. These ophthalmologists grant credit to
patients, substantially all of whom are residents local to each center.
The ophthalmologists generally do not require collateral or other
security in extending credit to patients; however, they routinely obtain
assignment of (or are otherwise entitled to receive) patients' benefits
payable under their health insurance programs, plans or polices (e.g.
Medicare, Medicaid, Blue Cross and commercial insurance policies).
The mix of gross receivables from patients and third-party payors
follows:
<TABLE>
<CAPTION>
1999 1998
------ -----
<S> <C> <C>
Other third-party payors 41 % 34 %
Medicare 40 47
Patients 11 11
Medicaid 8 8
----- -----
100 % 100 %
===== =====
</TABLE>
F-13
<PAGE> 51
VISIONAMERICA INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998, and 1997
(4) LEASES
The Company and its wholly-owned subsidiaries are obligated under
capital leases for equipment, furniture and fixtures that expire within
the next five years. Capital lease obligations for such assets of
approximately $7,065,000, $1,105,000, and $642,000 were incurred in
1999, 1998 and 1997, respectively. The Company and its subsidiaries also
are obligated under noncancellable operating leases for equipment and
office space that expire within the next ten years.
Future minimum lease payments under noncancellable operating leases and
the present value of future minimum capital lease payments as of
December 31, 1999 follow:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31: LEASES LEASES
--------------- ------------ ----------
<S> <C> <C>
2000 $ 2,632,669 3,958,700
2001 2,515,156 3,976,443
2002 2,243,819 3,126,000
2003 1,836,479 2,361,432
2004 1,299,230 1,735,327
Thereafter -- 2,469,053
----------- ----------
10,527,353 17,626,955
==========
Less amount representing interest at an
average rate of 11% 2,130,707
----------
8,396,646
Less current installments 1,768,010
----------
Obligations under capital leases, excluding
current installments $ 6,628,636
==========
</TABLE>
Total rental expense for operating leases was approximately $3,408,000,
$3,939,000, and $2,562,000 in 1999, 1998, and 1997, respectively.
(Continued)
F-14
<PAGE> 52
(5) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Borrowings under revolving credit facility $33,674,684 28,937,684
Subordinated note payable in monthly installments
of $11,881, including interest at 7%, through
January 2001, convertible into common stock
at $5.89 per share 148,322 275,630
Subordinated note payable in monthly installments
of $7,425, including interest at 7%, through
September 2002 222,311 293,140
Unsecured note payable in monthly installments
of $4,747, including interest at 8.5%, through
March 2002 116,293 161,278
Unsecured note payable in annual installments
of $166,667 plus interest at 9.5% through
March 2000 (included in net assets held for
disposal at December 31, 1999) -- 333,333
Various notes payable in monthly installments,
including interest at 6% to 15%, through
June 2004, secured by equipment 198,153 232,537
----------- ----------
Total long-term debt 34,359,763 30,233,602
Less current installments 34,011,618 509,097
----------- ----------
Long-term debt, excluding current
installments $ 348,145 29,724,505
=========== ==========
</TABLE>
In February 1997, the Company entered into a $15,000,000 revolving
credit facility with NationsCredit Commercial Corporation. In December
1997, the agreement was increased to $30,000,000 and in December 1998
the agreement was increased again to $50,000,000. Borrowings under the
agreement bear interest at the 30-day commercial paper rate plus 4.25%,
which was 9.77% at December 31, 1999. Interest only is 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. 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 $33,675,000 have been
classified as a current liability in the accompanying consolidated
financial statements at December 31, 1999. 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 new lending agreement, the senior lenders will receive warrants,
F-15
<PAGE> 53
VISIONAMERICA INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998, and 1997
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
4 within six months of their respective effective dates, 50% of the
warrants will be canceled at no cost to the Company. The Company's
lenders have not to-date, however, extended any commitment to waive such
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 intends to pursue the
renegotiation of the Company's credit facility with the current lenders.
However, if the Company cannot resolve these issues with its current
lenders, management expects to pursue alternative financing
arrangements. The Company's objective is to achieve a new financing
arrangement in such a fashion that the Company's financial position will
not be adversely affected. Nevertheless, no new financing arrangements
are in place and there can be no assurances that any such arrangements
will in fact be consummated. Deferred financing costs totaling $743,112,
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.
Future contractual maturities of long term-debt (i.e., assuming that
lenders do not exercise accelerated repayment rights as described above)
follow:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 8,755,606
2001 8,611,217
2002 8,540,290
2003 8,445,063
2004 7,587
---------------
$ 34,359,763
===============
</TABLE>
Interest paid totaled $3,713,000, $2,796,000, and $1,182,000 in 1999,
1998 and 1997, respectively.
(6) OTHER ASSETS
In December 1996, the Company acquired $500,000 face amount of
convertible preferred stock of Clearvision Laser Centers, Inc.
("Clearvision"). The preferred stock was convertible into common stock
of Clearvision based on an exchange ratio of one share of Clearvision
common stock for each $14.85 in face value of convertible preferred
stock. In exchange for the preferred stock, the Company paid $250,000 in
cash and contributed certain marketing and educational materials with an
agreed-upon value of $250,000. The cost of the investment, totaling
$500,000, was included in other assets at December 31, 1998. In 1999,
the Company converted its preferred stock into common stock and
simultaneously sold its interest in Clearvision common stock for
approximately $1,234,000. This transaction resulted in a gain on sale of
$724,242.
F-16
(Continued)
<PAGE> 54
(7) INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 1999,
1998 and 1997 is allocated as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- --------
<S> <C> <C> <C>
Continuing operations $1,298,000 944,000 (910,000)
Discontinued operations 585,000 (237,000) --
---------- -------- --------
$1,883,000 707,000 (910,000)
========== ======== ========
</TABLE>
Income tax expense (benefit) attributable to continuing operations for
the years ended December 31, 1999, 1998 and 1997 consists of the
following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
---------- ----------- ----------
<S> <C> <C> <C>
Year ended December 31, 1999:
U. S. Federal $(315,000) 1,197,000 882,000
State 275,000 141,000 416,000
--------- ---------- ----------
Total $ (40,000) 1,338,000 1,298,000
========= ========== ==========
Year ended December 31, 1998:
U. S. Federal $ 861,000 (16,000) 845,000
State 101,000 (2,000) 99,000
--------- ---------- ----------
Total $ 962,000 (18,000) 944,000
========= ========== ==========
Year ended December 31, 1997:
U. S. Federal $ 326,000 (1,208,000) (882,000)
State 120,000 (148,000) (28,000)
--------- ---------- ----------
Total $ 446,000 (1,356,000) (910,000)
========= ========== ==========
</TABLE>
F-17
<PAGE> 55
VISIONAMERICA INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998, and 1997
Income tax expense (benefit) attributable to earnings (loss) from
continuing operations differs from the amount computed by applying a
federal income tax rate of 34% to earnings (loss) before income
taxes due to the following:
<TABLE>
<CAPTION>
1999 1998 1997
----------- -------- ----------
<S> <C> <C> <C>
Tax expense (benefit) at statutory rate $(9,360,000) 886,000 802,000
Increase (reduction) in taxes resulting from:
State income taxes 275,000 65,000 79,000
Non-deductible portion of impairment
charge 4,924,000 -- --
Permanent basis differences 702,000 422,000 257,000
Non-deductible expenses 44,000 45,000 40,000
Other (271,000) 126,000 (88,000)
Change in the valuation allowance
for deferred tax assets 4,984,000 (600,000) (2,000,000)
----------- -------- ----------
$ 1,298,000 944,000 (910,000)
=========== ======== ==========
</TABLE>
The tax effects of temporary differences that give rise to deferred
tax assets are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Deferred tax assets:
Long-term assets, principally due to timing
and basis differences $ -- 373,000
Receivables, principally due to allowance for
doubtful accounts 1,710,000 107,000
Accrued expenses 547,000 158,000
Net operating loss carryforwards 3,751,000 1,200,000
Discontinued operations 253,000 585,000
----------- ----------
Gross deferred tax assets 6,261,000 2,423,000
Valuation allowance (6,069,000) (500,000)
----------- ----------
Net deferred tax assets 192,000 1,923,000
Deferred tax liabilities - long-term assets,
principally due to timing and basis differences (192,000) --
----------- ----------
$ -- 1,923,000
=========== ==========
</TABLE>
(Continued)
F-18
<PAGE> 56
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences
become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making
this assessment. Based on a number of factors, particularly the going
concern matters outlined in note 16, management cannot make the
assessment that realization of the deferred tax assets at December 31,
1999 is more likely than not. Therefore, a valuation allowance that
fully reserves such assets was established at December 31, 1999.
As of December 31, 1999, the Company had available federal net operating
loss carryforwards, after considering Internal Revenue Code Section 382
limitations, of approximately $9,000,000 expiring from the year 2003 to
2019. The Company also has state net operating loss carryforwards of
approximately $17,000,000.
The Company paid income taxes totaling approximately $222,000 in 1999,
$881,000 in 1998 and $130,000 in 1997.
(8) STOCKHOLDERS' EQUITY
The Company has maintained the 1985 Stock Option Plan (the "1985 Plan")
which was made available to selected employees, including officers of
the Company, directors, key advisors and selected physicians practicing
at Company facilities. The 1985 Plan allowed options to be granted for
up to 450,000 shares through 1995. The following table summarizes
information about options under the 1985 plan:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
---------- ---------------
<S> <C> <C>
Balance at December 31, 1996 359,334 $3.60
Exercised 28,132 3.62
Forfeited 35,000 3.87
Expired 10,000 6.50
------- -----
Balance at December 31, 1997 286,202 3.44
Exercised 51,832 3.00
Expired 15,000 3.42
------- -----
Balance at December 31, 1998 219,370 3.55
Exercised 136,535 3.31
Forfeited 10,335 3.10
------- -----
Balance at December 31, 1999 72,500 $4.04
======= =====
</TABLE>
At December 31, 1999, the range of exercise prices and weighted-average
remaining contractual life of outstanding options under the 1985 plan
was $3.83 - $4.50 and 1.06 years, respectively. At December 31, 1999 and
1998, the number of options exercisable was 72,500 and 181,537,
respectively, and the weighted average exercise price of those options
was $4.04 and $3.47, respectively.
F-19
<PAGE> 57
VISIONAMERICA INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998, and 1997
In 1995 the Company adopted its 1995 Stock Option Plan (the "1995 Plan")
which is made available to selected employees, including officers of the
Company, directors, key advisors and selected physicians practicing at
Company facilities. The 1995 Plan allows options to be granted for up to
450,000 shares. The following table summarizes information about options
under the 1995 Plan:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
----------- ---------------
<S> <C> <C>
Balance at December 31, 1996 182,500 $5.73
Granted 81,500 7.60
------- -----
Balance at December 31, 1997 264,000 6.34
Granted 90,000 6.94
Forfeited 10,000 6.13
------- -----
Balance at December 31, 1998 344,000 4.50
Granted 45,000 4.53
Exercised 8,333 4.50
Forfeited 47,500 4.50
------- -----
Balance at December 31, 1999 333,167 $4.51
======= =====
</TABLE>
At December 31, 1999, the range of exercise prices and weighted-average
remaining contractual life of outstanding options under the 1995 Plan
was $3.44 - $6.13 and 4.07 years, respectively. At December 31, 1999 and
1998, the number of options exercisable were 53,888 and 833,
respectively, and the weighted average exercise price was $4.50. On
November 3, 1998, all options with exercise prices above $4.50 per share
were repriced to $4.50 per share.
The per share weighted-average fair value of stock options granted
during 1999, 1998 and 1997 was $4.98, $7.57, and $8.32, respectively, on
the date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: 1999, 1998 and 1997 - expected
dividend yield of 0%, risk-free interest rate of 6%, an expected life of
6 years, and volatility of 45.21%, 46.08% and 46.85%, respectively.
(Continued)
F-20
<PAGE> 58
Since the Company applies APB 25 in accounting for its plans, no
compensation cost has been recognized for its employee stock options in
the consolidated financial statements. Had the Company recorded
compensation cost based on the fair value at the grant date for its
stock options under SFAS 123, the Company's net earnings (loss) from
continuing operations and net earnings (loss) from continuing operations
per common share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
------------ --------- ---------
<S> <C> <C> <C>
Net earnings (loss) from continuing operations $(29,426,753) 1,103,120 2,894,365
Basic earnings (loss) per share $ (3.26) .13 .39
Diluted earnings (loss) per share $ (3.26) .13 .37
</TABLE>
Pro forma net earnings (loss) reflect only options granted after 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS 123 is not reflected in the pro forma net earnings
amount for 1997 presented above because compensation costs are reflected
over the option's vesting period of three years.
The Company's 1991 Employee Stock Purchase Plan (the "Purchase Plan")
provides for stock purchases by employees of shares of common stock
either on the open market or from available authorized but unissued
shares. The Company has reserved 125,000 shares for issuance under the
Purchase Plan. Each eligible employee is granted on the grant date of
each Purchase Plan year options to purchase 1,250 shares of the
Company's common stock during that Purchase Plan year. The issue price
of the common stock is equal to the lesser of (1) 85% of the market
price on the exercise date of that Purchase Plan year or (2) 85% of the
market price on the grant date of that Purchase Plan year. As of
December 31, 1999, 80,982 shares have been purchased by the Purchase
Plan, and an additional 23,927 shares were issued in 2000 for
contributions made through December 31, 1999.
In May 1996, the Company completed the sale of $7,290,000 in convertible
preferred stock to qualified foreign investors pursuant to Regulation S.
Subject to certain limitations, the preferred stock was convertible into
common stock at an exercise price equal to the lesser of $5.75 or 85% of
the average bid price of the common stock at the time of conversion. The
net proceeds were approximately $6.49 million and were used to repay
bridge financing incurred in the Tallahassee practice affiliation, to
finance a portion of the cost of the Dallas practice affiliation and for
working capital. The shares of preferred stock had been converted into
common stock at December 31, 1997. Through the conversion date, the
Company recognized imputed dividends to the preferred shareholders for
the difference between the conversion price and the value of the related
common stock at the preferred stock sale date.
F-21
<PAGE> 59
VISIONAMERICA INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998, and 1997
(9) BENEFIT PLAN
In 1996, the Company established a 401(k) Profit Sharing Plan (the
"Plan") which allows qualifying employees electing participation to
defer a portion of their income on a pretax basis through contributions
to the Plan. The Plan also permits discretionary contributions to be
made by the Company, as determined by the Company's Board of Directors.
No contributions to the Plan were made by the Company during 1999, 1998
or 1997.
(10) DISCONTINUED OPERATIONS
The Company adopted a plan in the 4th 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 therefore the Company incurred
substantial additional losses in the discontinuance of the remaining
operations of EHN. The remaining contracts of EHN have terminated as of
December 31, 1999, and the operation should be completely discontinued
by the end of May 2000. As a result of these actions, the operations of
EHN have been classified as discontinued operations for each period
presented in the accompanying financial statements, and an estimated
loss on disposal of $768,000 after tax was recognized in the 4th quarter
of 1998. Subsequent revisions to the estimated loss resulted in the
recognition of approximately $2.8 million of additional pre-tax losses
in 1999. No significant financial impact of this operation is expected
in 2000.
In 1999, the Company's board of directors adopted plans of disposal
related to PEN and Providers. Providers was also sold in 1999 as
described below. The Company expects to finalize a sale of PEN during
2000. As a result of these plans, the operations of PEN and Providers
have been classified as discontinued operations for each period
presented in the accompanying consolidated financial statements.
The Company expects a gain from the sale of PEN.
Effective December 14th, 1999, the Company sold all of the stock of
Providers. Consideration for the stock sale, totaling approximately $2.8
million, consisted of the following:
- $100,000 due within 90 days after transaction closing
- $400,000 due within 180 days after transaction closing
- $1.5 million 9% term note payable over 60 months
- $1.3 million non-interest bearing balloon note due December
3, 2004 (interest imputed at the term note's 9% stated
interest rate for financial reporting purposes)
The aggregate pre-tax loss for financial reporting purposes from both
discontinued Providers operations and the disposal described above
totaled approximately $1.3 million for the year ended December 31, 1999.
(Continued)
F-22
<PAGE> 60
The first $100,000 payment described above 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. Because of
these events and the lack of sufficient information concerning the
buyer's current financial condition, the recoverability of the amounts
due from the sale are uncertain and potential write-downs thereof could
have a material adverse effect on future results of the Company.
The following summarizes related assets and liabilities held for
disposal included in the consolidated financial statements at December
31, 1999 and 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
1999 1998
---------- ----------
<S> <C> <C>
Cash $ 742 983
Receivables, net 2,930 1,886
Other, principally intangible assets 2,829 497
Claims liability -- (2,166)
Current liabilities (2,856) --
------- ------
$ 3,645 1,200
======= ======
</TABLE>
(11) SEGMENT INFORMATION
The Company's 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
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.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. There are no material
intersegment sales, and operating income by business segment excludes
interest income, interest expense, and corporate expenses.
Summarized financial information by business segment for 1999, 1998 and
1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Center operations $ 54,724,106 52,399,358 38,289,761
Other 2,377,002 1,587,475 1,466,172
------------ ---------- ----------
Total revenues $ 57,101,108 53,986,833 39,755,933
============ ========== ==========
Earnings (loss) from continuing operations:
Center operations $(18,971,076) 10,112,817 7,155,860
Other 500,596 202,274 152,034
------------ ---------- ----------
Total segments (18,470,480) 10,315,091 7,307,894
</TABLE>
F-23
<PAGE> 61
VISIONAMERICA INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
Corporate (5,219,317) (4,458,757) (3,510,917)
Net interest expense 3,215,257 2,626,055 1,033,139
Minority interest 623,720 624,956 405,005
Income tax expense (benefit) 1,298,000 944,000 (910,000)
------------ ---------- ----------
Net earnings (loss) from
continuing operations $(28,826,774) 1,661,323 3,268,833
============ ========== ==========
Depreciation and amortization:
Center operations $ 3,456,668 2,496,101 1,514,098
Other 133,668 311,321 62,526
------------ ---------- ----------
Total segments 3,590,336 2,807,422 1,576,625
Corporate 476,760 332,885 218,213
------------ ---------- ----------
Total depreciation and
amortization $ 4,067,096 3,140,307 1,794,838
============ ========== ==========
Capital additions:
Center operations $ 788,015 304,597 667,577
Other 153,067 338,630 300,000
------------ ---------- ----------
Total segments 941,082 643,227 967,577
------------ ---------- ----------
Corporate 315,352 591,881 161,627
------------ ---------- ----------
Total capital additions $ 1,256,434 1,235,108 1,129,204
============ ========== ==========
Identifiable assets:
Center operations $ 44,263,544 54,313,307 44,338,991
Other 1,463,050 5,316,337 2,598,069
------------ ---------- ----------
Total segments 45,726,594 59,629,644 46,937,060
------------ ---------- ----------
Corporate 5,979,108 13,342,730 12,829,985
------------ ---------- ----------
Total assets $ 51,705,702 72,972,374 59,767,045
============ ========== ==========
</TABLE>
(Continued)
F-24
<PAGE> 62
(12) FINANCIAL INSTRUMENTS
The Company's financial instruments principally consist of cash, net
receivables, accounts payable and various debt instruments. Due to their
short-term nature, the fair values of net receivables and accounts
payable approximate their carrying value. Because of the variable rate
nature of the material portion of the Company's debt, the fair value of
such instruments approximates the Company's carrying amounts.
Additionally, see note 10 for further information regarding receivables
from Providers.
(13) RESTRICTED STOCK SALE
The Company entered into an agreement with ICON Laser Eye Centers, Inc.
(ICON) on February 24th, 2000 that provides for ICON's purchase of
1,000,000 restricted shares of the Company's common stock for aggregate
proceeds totaling $4,000,000. The agreement also specifies, contingent
upon certain events, ICON 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
original 1,000,000 shares by July 31, 2000.
ICON has subsequently requested that the Company renegotiate the
agreement described above, and such negotiations are currently in
process. As a result of negotiations to-date, the Company and ICON have
entered into a Letter of Intent ("LOI") 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,
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.
Both the Company and ICON have agreed to immediately negotiate a
definitive agreement with respect to the terms of the LOI. There is no
such agreement currently in place nor can achievement of such an
agreement be assured. Additionally, the agreement's terms with respect
to stock purchase revisions would require the approval of both the
Company's shareholders and senior lenders, and the joint operating
arrangement would require the approval of the senior lenders.
(14) CONTINGENCIES
DELINQUENT PAYROLL TAXES AND WITHHOLDINGS
At December 31, 1999 and 1998, the Company had accrued approximately
$5.3 million and $1.9 million, respectively, for unremitted payroll
taxes and withholdings that are included in accrued expenses in the
accompanying 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,
F-25
<PAGE> 63
VISIONAMERICA INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998, and 1997
withholdings, penalties and interest for a lump sum payment no greater
than the current $5.3 million accrual. If applicable, the $5.3 million
accrual in the accompanying consolidated financial statements will not
be adjusted downward until 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 agreed to withdraw existing liens
against Company assets for the unpaid taxes and withholdings and to
refrain from taking any further collection actions against the Company.
In exchange, the senior lenders will provide a $3,000,000 letter of
credit on which the IRS may draw upon under certain conditions, and in
any event after one year if the Company has not settled with the IRS.
LITIGATION
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 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.
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.
(15) 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
(Continued)
F-26
<PAGE> 64
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 4th quarter of fiscal 1999 totaling $19.2
million, comprised primarily of write-downs of related practice
intangible assets.
The 10 practices identified as impaired represent approximately 26% of
the Company's 1999 net revenues from physician practice management
operations (the center operations segment). While the Company's Board of
Directors has not yet formally adopted plans for disposal of the
practice assets discussed above, the Company expects such plans to be
adopted in the 2nd quarter of fiscal 2000 and such assets to be reported
as held for disposal beginning in that quarter.
(16) GOING CONCERN MATTERS AND RELATED SUBSEQUENT EVENTS
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 5;
- Renegotiation of its stock purchase agreement with ICON as
discussed in note 13, as well as finalizing other terms of a
continuing working relationship with ICON;
- Reaching a final settlement of the IRS matter discussed in
note 14; and
- Management of the various class action claims described in
note 14.
The Company, with the assistance of its lenders, certain advisors and
ICON, is 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 throughout 1999 (leading to the impairment analysis
and related material charge to 1999 earnings described in note 15) 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. 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.
The Company continues to negotiate with ICON regarding, among other
things, the prior stock purchase agreement and definitive terms of a
joint laser vision correction initiative. The Company views its
relationship with ICON as critical to its future business objectives,
and therefore the importance of current negotiations with ICON should be
viewed in that light.
F-27
<PAGE> 65
VISIONAMERICA INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998, and 1997
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 consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
(Continued)
F-28
<PAGE> 66
VISIONAMERICA INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998, and 1997
(17) 4TH QUARTER ADJUSTMENTS
The Company recorded the following material charges to operations in the
quarter ended December 31, 1999:
- Recognition of impairment of physician practice management assets
totaling $19.2 million (see note 15);
- Revisions to estimates of the allowances for contractual
adjustments and doubtful accounts totaling $4.8 million;
- Revisions to estimates related to the discontinued operations of
EHN totaling approximately $1.8 million (see note 10); and
- Write-off of beginning-of-year net deferred tax assets totaling
approximately $1.9 million (see note 7).
The adjustments above resulted in an aggregate charge to 4th quarter
results from operations totaling approximately $28.1 million.
(18) SUPPLEMENTARY INFORMATION
The following sets forth supplementary information regarding the
allowances for contractual adjustments and doubtful accounts:
<TABLE>
<CAPTION>
BALANCES AT ADDITIONS CHANGE IN BALANCES AT
YEAR ENDED BEGINNING CHARGED CONTRACTUAL END OF
DECEMBER 31, OF YEAR TO EXPENSE CHARGE-OFFS ADJUSTMENTS YEAR
--------------------- --------------- -------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
1997 $ 1,760,000 727,782 1,095,782 1,167,000 2,559,000
1998 $ 2,559,000 1,574,890 1,456,890 376,000 3,053,000
1999 $ 3,053,000 4,153,874 1,532,874 2,992,000 8,666,000
</TABLE>
F-29
<PAGE> 1
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT TO
CERTIFICATE OF INCORPORATION OF
OMEGA HEALTH SYSTEMS, INC.
*****
Omega Health Systems, Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation") hereby certifies that the amendment set forth below to the
Corporation's Certificate of Incorporation was duly adopted in accordance with
the provisions of Section 242 of the General Corporation Law of the State of
Delaware:
The Certificate of Incorporation of the Corporation is hereby amended
by deleting Article I thereof and by substituting, in lieu thereof, the
following new Article I:
The name of the corporation is VISIONAMERICA INCORPORATED.
All remaining provisions of this Corporation's Certificate of
Incorporation shall remain in full force and effect.
IN WITNESS WHEREOF, said Omega Health Services, Inc. has caused this
Certificate of Amendment to be executed and attested by its officers thereunto
duly authorized this 11th day of August, 1999.
OMEGA HEALTH SYSTEMS, INC.
By: /s/ Thomas P. Lewis
----------------------------------------
Thomas P. Lewis
President and CEO
Attest:
/s/ Ronald L. Edmonds
- --------------------------------------
Ronald L. Edmonds
Secretary
<PAGE> 1
EXHIBIT 11
VISIONAMERICA INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
1999 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
Net earnings from continuing operations per common share:
Basic
Net Earnings $(28,826,774) $1,661,323 $3,268,833
Preferred stock dividends (8%, payable in kind) -- -- 19,874
------------ ---------- ----------
Earnings available to common shareholders (28,826,774) 1,661,323 3,248,959
------------ ---------- ----------
Shares:
Weighted average number of shares outstanding 9,019,563 8,821,995 7,417,878
------------ ---------- ----------
Basic earnings per common share and
common equivalent share: $ (3.20) $ 0.19 $ 0.44
============ ========== ==========
Net earnings
Diluted
Net earnings $(28,826,774) $1,661,323 $3,268,833
Preferred stock dividends (8%, payable in kind) -- -- 19,874
------------ ---------- ----------
Earnings available to common shareholders (28,826,774) 1,661,323 3,248,959
============ ========== ==========
Shares:
Weighted average number of shares outstanding 9,019,563 8,821,995 7,417,878
Assuming exercise of warrants and options, net
of number of shares which could have been
purchased with the exercise of such options
based on the treasury stock method
(using average market price)(1) -- 93,458 351,771
Weighted average number of shares, adjusted 9,019,563 8,915,453 7,769,656
Diluted earnings per common share and common
equivalent share:
Net earnings from continuing operations $ (3.20) $ 0.19 $ 0.42
============ ========== ==========
</TABLE>
- ----------------------------
(1) In 1999, the effect of options and warrants is excluded because they are
antidilutive.
<PAGE> 1
EXHIBIT 22
VISIONAMERICA INCORPORATED
FORM 10-K
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY NAME OF BUSINESS STATE OF INCORPORATION
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Ocumanagement, Inc. Texas
Omega Health Services of Omega Eye Care Center Alabama
Birmingham, Inc.
Omega Health Services of VisionAmerica of Jackson Tennessee
Jackson, Tennessee, Inc.
Omega Health Systems of VisionAmerica of Memphis Tennessee
Memphis, Inc.
Omega Health Systems of Tennessee
Middle Tennessee, Inc.
Ophthalmic Ambulatory Surgical VisionAmerica Tennessee
Center, Inc.
Omega Information Systems, Inc. Tennessee
Omega Health Systems of Omaha Eye Institute Nebraska
Nebraska, Inc.
Omega Health Systems of Utah, Inc. Utah
Omega Health Systems of Capital Eye Consultants Virginia
Virginia, Inc.
Omega Health Services of West Virginia
West Virginia, Inc.
Omega Medical Services, Inc. Tennessee
Ophthalmic Practice Enhancement, Inc. Tennessee
Co-Care Eye Centers, Inc. Pennsylvania
Omega Health Systems of Tampa Bay, Inc. Omega Eye Associates Florida
Springfield OcuCenter, Inc. Missouri Eye Institute Missouri
St. Louis OcuCenter, Inc. VisionAmerica of St. Louis Missouri
The Eye Health Network, Inc. Colorado
Omega Health Systems of Florida, Inc. VisionAmerica of North Florida Florida
Omega Health Systems of
North Texas, Inc. EyeCare and SurgeryCenter Texas
Omega Surgical Associates of
North Texas, Inc. EyeCare and SurgeryCenter Texas
Omega Health Systems of Indiana, Inc. VisionAmerica of Indiana Indiana
Omega Health Systems of the
Great Lakes, Inc. Eye Surgeons and Consultants Illinois
Omega Health Systems of
San Antonio, Inc. Cataract and Laser Institute Texas
Omega Health Systems of Ohio, Inc. VisionAmerica of Ohio Ohio
Omega Health Systems of Illinois, Inc. Dillman Eye Care Associates Illinois
Primary Eyecare Network, Inc. California
PEN Resources, Inc. California
Capital Eye Surgery Center, Inc. Capital Eye Surgery Center Florida
Omega Health Systems of
New Orleans, Inc. VisionAmerica of Louisiana Louisiana
Omega Health Systems of
New Mexico, Inc. New Mexico
Omega Health Systems of Kissimmee, Inc. Levin Eye Center Florida
Ruidoso Optical, Inc. Lincoln County Eye Clinic New Mexico
Optometry Group of Albuquerque, LTD New Mexico
Central Ohio Eye Institute, Inc. Ohio
</TABLE>
<PAGE> 1
EXHIBIT 23
Accountants' Consent
The Board of Directors
VisionAmerica Incorporated:
We consent to incorporation by reference in the Registration Statements (No.
333-65717, 333-65773 and 333-65775) on Form S-8 of VisionAmerica Incorporated of
our report dated May 16, 2000, relating to the consolidated balance sheets of
VisionAmerica Incorporated and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 1999, which report appears in the December 31, 1999 annual report
on Form 10-K of VisionAmerica Incorporated.
Our report dated May 16, 2000 contains an explanatory paragraph that states
that the Company is in technical default with its lenders and subject to
consequences arising from cash flow concerns and other significant issues which
raise substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KPMG LLP
Memphis, Tennessee
May 16, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,867
<SECURITIES> 0
<RECEIVABLES> 11,805
<ALLOWANCES> 3,099
<INVENTORY> 900
<CURRENT-ASSETS> 15,792
<PP&E> 28,928
<DEPRECIATION> 10,978
<TOTAL-ASSETS> 51,706
<CURRENT-LIABILITIES> 47,792
<BONDS> 0
0
0
<COMMON> 551
<OTHER-SE> (3,692)
<TOTAL-LIABILITY-AND-EQUITY> 51,706
<SALES> 57,101
<TOTAL-REVENUES> 57,101
<CGS> 1,306
<TOTAL-COSTS> 50,544
<OTHER-EXPENSES> 26,818
<LOSS-PROVISION> 4,154
<INTEREST-EXPENSE> 3,215
<INCOME-PRETAX> (27,529)
<INCOME-TAX> 1,298
<INCOME-CONTINUING> (28,827)
<DISCONTINUED> (4,278)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,105)
<EPS-BASIC> (3.67)
<EPS-DILUTED> (3.67)
</TABLE>
