UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-15223
OPTICARE HEALTH SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0453392
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
87 GRANDVIEW AVENUE, WATERBURY, CONNECTICUT 06708
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(203) 596-2236
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ]No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X]No
The number of shares outstanding of the registrant's Common Stock, par
value $.001 per share, at July 31, 2003 was 30,148,277 shares.
INDEX TO FORM 10-Q
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2003
(unaudited) and December 31, 2002 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2003 and 2002 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2003 and 2002 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURE 25
2
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2003 2002
---------------- -----------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,881 $3,086
Accounts receivable, net 11,177 5,273
Inventories 6,535 2,000
Deferred income taxes, current 1,660 1,660
Other current assets 848 885
---------------- -----------------
TOTAL CURRENT ASSETS 24,101 12,904
Property and equipment, net 5,609 3,337
Intangible assets, net 1,265 1,353
Goodwill, net 20,834 20,516
Deferred income taxes, non-current 3,320 3,140
Other assets 3,133 3,855
---------------- -----------------
TOTAL ASSETS $ 58,262 $ 45,105
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,171 $ 2,902
Accrued expenses 5,396 5,255
Current portion of long-term debt 2,061 1,266
Other current liabilities 1,361 1,245
---------------- -----------------
TOTAL CURRENT LIABILITIES 16,989 10,668
---------------- -----------------
Long-term debt--related party - 15,588
Other long-term debt, less current portion 10,388 2,564
Other liabilities 550 615
---------------- -----------------
TOTAL NON-CURRENT LIABILITIES 10,938 18,767
---------------- -----------------
Series B 12.5% voting, mandatorily redeemable, convertible preferred
stock--related party ($5,317 aggregate liquidation preference); 5,000,000
shares authorized (with Series C preferred stock); 3,204,959 shares issued
and outstanding. 5,317 5,018
---------------- -----------------
STOCKHOLDERS' EQUITY:
Series C preferred stock, $0.001 par value ($16,190 aggregate liquidation
preference); 406,158 shares issued and outstanding at June 30, 2003;
No shares authorized, issued or outstanding at December 31, 2002 1 -
Common stock, $0.001 par value; 150,000,000 shares authorized;
30,148,277 and 28,913,990 shares outstanding at June 30, 2003 and
December 31, 2002, respectively. 30 29
Additional paid-in-capital 79,966 63,589
Accumulated deficit (54,979) (52,966)
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 25,018 10,652
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 58,262 $ 45,105
================ =================
See notes to condensed consolidated financial statements.
3
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ----------------------------
2003 2002 2003 2002
------------ ----------- ------------ ------------
NET REVENUES:
Managed vision $ 7,480 $ 7,241 $ 14,888 $ 14,753
Product sales 19,131 10,867 36,853 21,633
Other services 5,756 5,292 10,784 10,304
Other income 530 646 2,368 646
------------ ----------- ------------ ------------
Total net revenues 32,897 24,046 64,893 47,336
------------ ----------- ------------ ------------
OPERATING EXPENSES:
Medical claims expense 5,513 5,901 11,257 11,798
Cost of product sales 14,574 8,522 28,475 17,166
Cost of services 2,326 2,145 4,452 4,283
Selling, general and administrative 9,930 6,342 18,738 12,485
Depreciation 371 465 726 939
Amortization 44 45 88 89
Interest 645 834 1,396 1,531
------------ ----------- ------------ ------------
Total operating expenses 33,403 24,254 65,132 48,291
------------ ----------- ------------ ------------
Gain (loss) from early extinguishment of debt (1,847) - (1,847) 8,789
------------ ----------- ------------ ------------
Income (loss) from continuing operations before
income taxes (2,353) (208) (2,086) 7,834
Income tax expense (benefit) (180) (83) (73) 3,093
------------ ----------- ------------ ------------
Income (loss) from continuing operations (2,173) (125) (2,013) 4,741
Income (loss) from discontinued operations, net of tax - (5) - 184
Loss on disposal of discontinued operations - (3,940) - (3,940)
------------ ----------- ------------ ------------
Net income (loss) $ (2,173) (4,070) (2,013) 985
Preferred stock dividends (160) (142) (300) (245)
------------ ----------- ------------ ------------
Net income (loss) available to common stockholders $ (2,333) $ (4,212) $ (2,313) $ 740
============ =========== ============ ============
EARNINGS (LOSS) PER SHARE:
Income (loss) per common share from continuing
operations:
Basic $ (0.08) $ (0.02) $ (0.08) $ 0.35
Diluted $ (0.08) $ (0.02) $ (0.08) $ 0.10
Income (loss) per common share from discontinued operations:
Basic - $ (0.31) - $ (0.29)
Diluted - $ (0.31) - $ (0.08)
Net income (loss) per common share:
Basic $ (0.08) $ (0.33) $ (0.08) $ 0.06
Diluted $ (0.08) $ (0.33) $ (0.08) $ 0.02
See notes to condensed consolidated financial statements.
4
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
--------------------------------------
2003 2002
-------------- --------------
OPERATING ACTIVITIES:
Net income (loss) $ (2,013) $ 985
Plus loss from discontinued operations -- 3,756
-------------- --------------
Income (loss) from continuing operations (2,013) 4,741
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 726 939
Amortization 88 89
Non-cash interest expense 855 908
Non-cash settlement income (530) --
Non-cash (loss) gain on early extinguishment of debt 1,847 (8,789)
Deferred taxes (180) 3,300
Changes in operating assets and liabilities:
Accounts receivable 579 186
Inventory 1,197 (387)
Other assets (51) 21
Accounts payable and accrued expenses (3,046) (1,784)
Other liabilities 19 (228)
Cash provided by discontinued operations -- 809
-------------- --------------
Net cash used in operating activities (509) (195)
INVESTING ACTIVITIES:
Cash received on notes receivable 75 --
Refunds of deposits 775 --
Purchase of assets from acquisition, excluding cash (6,192) --
Purchase of restricted certificates of deposit (600) --
Purchase of fixed assets (582) (244)
Purchase of notes receivable -- (1,350)
-------------- --------------
Net cash used in investing activities (6,524) (1,594)
-------------- --------------
FINANCING ACTIVITIES:
Net increase in revolving credit facility 8,777 617
Principal payments on long-term debt (798) (24,322)
Principal payments on capital lease obligations (28) (36)
Proceeds from issuance of common stock 86 --
Payment of financing costs (209) (1,445)
Proceeds from long-term debt -- 23,474
Proceeds from issuance of preferred stock -- 4,000
-------------- --------------
Net cash provided by financing activities 7,828 2,288
-------------- --------------
Increase in cash and cash equivalents 795 499
Cash and cash equivalents at beginning of period 3,086 2,536
-------------- --------------
Cash and cash equivalents at end of period $ 3,881 $ 3,035
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 508 $ 476
Cash paid for income taxes 76 --
See notes to condensed consolidated financial statements.
5
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands except share data)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of OptiCare
Health Systems, Inc., a Delaware corporation, and its subsidiaries (collectively
the "Company") for the three and six months ended June 30, 2003 and 2002 have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the instructions
to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of
1934 and are unaudited. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of only normal recurring accruals)
necessary for a fair presentation of the consolidated financial statements have
been included. The results of operations for the three and six months ended June
30, 2003 are not necessarily indicative of the results to be expected for the
full year. The condensed consolidated balance sheet as of December 31, 2002 was
derived from the Company's audited financial statements, but does not include
all disclosures required by accounting principles generally accepted in the
United States of America.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003 the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 143, "Accounting For Asset Retirement
Obligations". This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The adoption of this statement did not have a
material impact on the Company's financial position or results of operations.
Effective January 1, 2003 the Company adopted SFAS No. 145, "Rescission of
FASB Statements 4, 44 and 64, Amendment of FASB Statement 13, and Technical
Corrections". SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires
companies to classify certain gains and losses from debt extinguishments as
extraordinary items, eliminates the provisions of SFAS No. 44 regarding
transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS
No.13 to require that certain lease modifications be treated as sale leaseback
transactions. The provisions of SFAS No.145 related to classification of debt
extinguishment are effective for fiscal years beginning after May 15, 2002. As a
result of the Company's adoption of SFAS No. 145, the Company reclassified its
previously reported gain from extinguishment of debt of $8,789 and related
income tax expense of $3,475 in 2002 from an extraordinary item to continuing
operations.
Effective January 1, 2003 the Company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" and nullified EITF Issue No.
94-3. SFAS No.146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred, whereas EITF
No 94-3 had recognized the liability at the commitment date of an exit plan.
There was no effect on the Company's financial statements as a result of such
adoption.
In November 2002, FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. The interpretation provides
guidance on the guarantor's accounting and disclosure requirements for
guarantees, including indirect guarantees of indebtedness of others. The Company
adopted the disclosure requirements of the interpretation as of December 31,
2002. Effective January 1, 2003, additional provisions of FIN No. 45 became
effective and were adopted by the Company. The accounting guidelines are
applicable to guarantees issued after December 31, 2002 and require that the
Company record a liability for the fair value of such guarantees in the balance
sheet. The adoption of FIN No. 45 did not have a material impact on its
financial position or results of operations.
6
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of Statement of Financial
Accounting Standard No. 123." This statement provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. This statement also amends the disclosure
requirements of SFAS No. 123 and Accounting Principles Board Opinion ("APB") No.
28, "Interim Financial Reporting," to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company elected to adopt the disclosure only provisions of SFAS No.
123, as amended by SFAS No. 148, and will continue to follow APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for the stock options granted to its employees and directors.
Accordingly, employee and director compensation expense is recognized only for
those options whose price is less than fair market value at the measurement
date.
Had compensation cost for the Company's stock option plans been determined
in accordance with SFAS No. 123, the Company's reported net income (loss) and
earnings (loss) per share would have been adjusted to the pro forma amounts
indicated below:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ----------------------------
2003 2002 2003 2002
------------ ----------- ----------- ------------
Net income (loss) as reported $ (2,173) $ (4,070) $ (2,013) $985
Less: Total stock-based employee compensation
expense determined under Black-Scholes
option pricing model, net of related tax effects (114) (185) (222) (260)
------------ ----------- ----------- ------------
Pro forma net income (loss) $ (2,287) $ (4,255) $ (2,235) $725
============ =========== =========== ============
Earnings (loss) per share - As reported(1):
Basic $ (0.08) $ (0.33) $ (0.08) $ 0.06
Diluted $ (0.08) $ (0.33) $ (0.08) $ 0.02
Earnings (loss) per share - Pro forma(1):
Basic $ (0.08) $ (0.34) $ (0.09) $ 0.04
Diluted $ (0.08) $ (0.34) $ (0.09) $ 0.01
(1) Includes effect of preferred stock dividends.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires an investor with
a majority of the variable interests in a variable interest entity to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest entity is
an entity in which the equity investors do not have a controlling interest or
the equity investment at risk is insufficient to finance the entity's activities
without receiving additional subordinated financial support from the other
parties. The consolidation provisions of this interpretation are required
immediately for all variable interest entities created after January 31, 2003,
and the Company's adoption of these provisions did not have a material effect on
its financial position or results of operations. For variable interest entities
in existence prior to January 31, 2003, the consolidation provisions of FIN 46
are effective July 1, 2003 and are not expected to have a material effect on the
Company's financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments. This
statement is generally effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003. The
adoption of this statement is not expected to have a material impact on the
Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Most of the guidance in SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. Adoption of SFAS No. 150 is not expected
to have a material impact on the Company's financial position or results of
operations.
7
3. ACQUISITION OF WISE OPTICAL VISION GROUP, INC.
On February 7, 2003, the Company acquired substantially all of the assets
and certain liabilities of the contact lens distribution business of Wise
Optical Vision Group, Inc. ("Wise Optical"), a New York corporation. The Company
acquired Wise Optical to become a leading optical product distributor. The
aggregate purchase price of $7,949 consisted of approximately $7,290 of cash,
750,000 shares of the Company's common stock with an estimated fair market value
of $330, and transaction costs of approximately $329. Funds for the acquisition
were obtained via the Company's revolving credit note with CapitalSource, which
was increased from $10 million to $15 million in connection with the acquisition
of Wise Optical.
The aggregate purchase price of $7,949 has been allocated to the estimated
fair value of the assets acquired and liabilities assumed with the excess
identified as goodwill. Fair values were based on valuations and other studies.
The goodwill resulting from this transaction, of $318, was assigned to the
Company's Distribution and Technology operating segment and is expected to be
deductible for tax purposes. The results of operations of Wise Optical are
included in the consolidated financial statements from February 1, 2003, the
deemed effective date of the acquisition for accounting purposes.
The following table sets forth the allocation of purchase price
consideration to the assets acquired and liabilities assumed at the date of
acquisition.
(Unaudited)
Assets:
Cash and cash equivalents $ 1,427
Accounts receivable 6,626
Inventory 5,732
Property and equipment, net 2,416
Other assets 148
Goodwill 318
--------------
Total assets $16,667
==============
Liabilities:
Accounts payable and accrued expenses $ 8,657
Other liabilities 61
--------------
Total liabilities $ 8,718
==============
The following is a summary of the unaudited pro forma results of operations
of the Company as if the Wise Acquisition had closed effective January 1, of the
respective periods below:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
2003 2002 2003 2002
----------- ------------ ----------- --------------
Net Revenues $32,897 $40,795 $71,571 $80,605
Income (loss) from continuing operations (2,173) (206) (1,866) 4,660
Net income (loss) (2,173) (4,151) (1,866) 704
Income (loss) per common share from continuing
operations (1):
Basic $ (0.08) $ (0.03) $ (0.07) $ 0.31
Diluted $ (0.08) $ (0.03) $ (0.07) $ 0.09
Net income (loss) per common share available to
common stockholders (1):
Basic $ (0.08) $ (0.31) $ (0.07) $ 0.03
Diluted $ (0.08) $ (0.31) $ (0.07) $ 0.01
(1) Includes effect of preferred stock dividends.
8
The unaudited pro forma information presented above is for informational
purposes only and is not necessarily indicative of the results that would have
been obtained had these events actually occurred at the beginning of the periods
presented, nor does it intend to be a projection of future results.
4. DISCONTINUED OPERATIONS
In May 2002, the Company's Board of Directors approved management's plan to
dispose of substantially all of the net assets relating to the retail optical
business and professional optometry practice locations it operated in North
Carolina and on August 12, 2002 the Company consummated the sale of those net
assets.
The sale was accounted for as a disposal group under SFAS No. 144.
Accordingly, amounts in the financial statements and related notes for all
periods presented have been reclassified to reflect SFAS No. 144 treatment.
Operating results of the discontinued operations for the three and six
months ended June 30, 2002 are as follows:
Three Six
Months Months
Ended Ended
June 30, June 30,
2002 2002
----------- -------------
External revenue $ 6,996 $14,405
=========== =============
Intercompany revenue $ 2,100 $ 4,297
=========== =============
Income (loss) from discontinued operations before taxes $ (8) $ 306
Income tax expense (benefit) (3) 122
----------- -------------
Income (loss) from discontinued operations (5) 184
Loss on disposal of discontinued operations (3,940) (3,940)
----------- -------------
Total loss from discontinued operations $(3,945) $(3,756)
=========== =============
Loss per share from discontinued operations:
Basic $ (0.31) $ (0.29)
Diluted $ (0.31) $ (0.08)
5. SEGMENT INFORMATION
OptiCare Health Systems, Inc. is an integrated eye care services company
focused on providing managed vision and professional eye care products and
services. During the third quarter of 2002, the Company sold its retail
optometry division in North Carolina, modified the Company's strategic vision
and realigned its business into the following three reportable operating
segments: (1) Managed Vision, (2) Consumer Vision, and (3) Distribution and
Technology. These operating segments are managed separately, offer separate and
distinct products and services, and serve different customers and markets.
Discrete financial information is available for each of these segments and the
Company's President assesses performance and allocates resources among these
three operating segments.
The Managed Vision segment contracts with insurers, insurance fronting
companies, employer groups, managed care plans and other third party payors to
manage claims payment administration of eye health benefits for those
contracting parties. The Consumer Vision segment sells retail optical products
to consumers and operates integrated eye health centers and surgical facilities
where comprehensive eye care services are provided to patients. The Distribution
and Technology segment provides products and services to eye care professionals
(ophthalmologists, optometrists and opticians) through (i) Wise Optical, a
distributor of contact and ophthalmic lenses and other eye care accessories and
supplies; (ii) a Buying Group program, which provides group purchasing
arrangements for optical and ophthalmic goods and supplies and (iii) CC Systems,
which provides systems and software solutions to eye care
9
professionals. In addition to its reportable operating segments, the Company's
"All Other" category includes other non-core operations and transactions,
including its health service organization operation, which do not meet the
quantitative thresholds for a reportable segment.
As a result of the changes discussed above, historical amounts previously
reported in 2002 have been restated to conform to the Company's current
operating segment presentation.
Summarized financial information, by segment, for the three and six months
ended June 30, 2003 and 2002 is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ---------------------------
2003 2002 2003 2002
------------ ----------- ------------ -----------
REVENUES:
Managed vision $ 7,480 $ 7,241 $ 14,888 $ 14,753
Consumer vision 7,796 7,515 15,102 14,480
Distribution and technology 18,356 9,815 34,776 19,667
------------ ----------- ------------ -----------
Reportable segment totals 33,632 24,571 64,766 48,900
All other 573 878 2,434 1,180
Elimination of inter-segment revenues (1,308) (1,403) (2,307) (2,744)
------------ ----------- ------------ -----------
Total net revenue $ 32,897 $ 24,046 $ 64,893 $ 47,336
============ =========== ============ ===========
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE TAX:
Managed vision $ 643 $ 298 $1,069 $ 850
Consumer vision 797 501 1,362 743
Distribution and technology (731) 328 (1,001) 487
------------ ----------- ------------ -----------
Reportable segment totals 709 1,127 1,430 2,080
All other 335 789 2,012 979
Gain (loss) from extinguishment of debt (1,847) - (1,847) 8,789
Depreciation (371) (465) (726) (939)
Amortization (44) (45) (88) (89)
Interest expense (645) (834) (1,396) (1,531)
Corporate (490) (780) (1,471) (1,455)
------------ ----------- ------------ -----------
Income (loss) from continuing
operations before tax $ (2,353) $ (208) $ (2,086) $ 7,834
============ =========== ============ ===========
Total assets by reportable operating segment as of June 30, 2003 were as
follows: Managed Vision $15,620, Consumer Vision $11,040 and Distribution and
Technology $20,290.
6. INTANGIBLE ASSETS
Intangible assets subject to amortization are comprised of the following:
JUNE 30, 2003 DECEMBER 31, 2002
---------------------------------- ---------------------------------
GROSS ACCUMULATED GROSS ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
---------------- ----------------- ---------------- ----------------
Service Agreement $ 1,658 $(424) $ 1,658 $ (368)
Non-compete agreements 265 (234) 265 (202)
---------------- ----------------- ---------------- ----------------
Total $ 1,923 $ (658) $ 1,923 $ (570)
================ ================= ================ ================
Amortization expense for the three months ended June 30, 2003 and 2002 was
$44 and $45, respectively and for the six months ended June 30, 2003 and 2002
was $88 and $89, respectively. Estimated annual amortization expense is expected
to be $174 in 2003 and $111 for each of the years 2004 through 2007.
10
7. LONG-TERM DEBT
On May 12, 2003, Palisade Concentrated Equity Partnership L.P., the
Company's majority shareholder, and Linda Yimoyines, wife of Dean J. Yimoyines,
M.D., Chairman of the Board and Chief Executive Officer of the Company, each
exchanged the entire amount of principal and interest due to them under the
Company's senior subordinated secured notes payable totaling an aggregate of
$16.2 million, for a total of 406,158 shares of Series C Preferred Stock, par
value $0.001 per share (the "Series C Preferred Stock"). The aggregate principle
and interest was exchanged at a rate equal to $.80 per share, the agreed upon
value of our common stock on May 12, 2003, divided by 50 (or $40.00 per share).
Each share of Series C Preferred Stock is convertible into 50 shares of common
stock. The Series C Preferred Stock has the same dividend rights, on an as
converted basis, as the Company's common stock and an aggregate liquidation
preference of $16.2 million.
On February 7, 2003, in connection with the Company's acquisition of Wise
Optical, the Company's credit facility with CapitalSource was amended. The
amendment resulted in an increase in the Company's revolving credit facility
from $10,000 to $15,000 and an increase in the required monthly principal
payments on the term loan from approximately $17 per month to $24 per month.
The details of the Company's long-term debt at June 30, 2003 are as
follows:
Term loan payable to CapitalSource in principal amounts of $24 per month. The $ 1,905
final principal payment is due and payable on January 25, 2004.
Revolving credit facility to CapitalSource, due January 25, 2005. 10,334
Subordinated notes payable in 2004. Principal and interest payments are due 210
monthly.
----------------
Total 12,449
Less current portion (2,061)
----------------
$ 10,388
================
8. GAIN (LOSS) ON EXTINGUISHMENT OF DEBT
On May 12, 2003, the Company recorded a $1.8 million loss on the exchange of
$16.2 million of debt for Series C Preferred Stock. The $1.8 million loss
represents the write-off the deferred financing fees and debt discount
associated with the extinguished debt.
On January 25, 2002, the Company recorded a gain on the extinguishment of
debt of $8,789 before income taxes as a result of the Company's restructuring of
its debt. The $8,789 gain was comprised principally of approximately $10,000 of
debt and interest forgiveness by Bank Austria, the Company's former senior
secured lender, which was partially offset by $1,200 of unamortized deferred
financing fees and debt discount.
11
9. EARNINGS (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations $ (2,173) $ (125) $ (2,013) $ 4,741
Preferred stock dividend (160) (142) (300) (245)
------------ ------------ ------------ ------------
Income (loss) from continuing operations available
to common stockholders (2,333) (267) (2,313) 4,496
Discontinued operations -- (3,945) -- (3,756)
------------ ------------ ------------ ------------
Net income (loss) available to common stockholders $ (2,333) $ (4,212) $ (2,313) $ 740
============ ============ ============ ============
Average common shares outstanding (basic) 30,013,991 12,783,192 29,779,834 12,780,101
Basic earnings (loss) per share:
Income (loss) from continuing operations available
to common stockholders $ (0.08) $ (0.02) $ (0.08) $ 0.35
Loss from discontinued operations, net -- (0.31) -- (0.29)
------------ ------------ ------------ ------------
Net income (loss) per common share $ (0.08) $ (0.33) $ (0.08) $ 0.06
============ ============ ============ ============
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations available
to common stockholders $ (2,333) $ (267) $ (2,313) $ 4,496
Assumed conversions of preferred stock dividends * * * 245
------------ ------------ ------------ ------------
Income (loss) from continuing operations available
to common stockholders plus assumed conversions (2,333) (267) (2,313) 4,741
Discontinued operations -- (3,945) -- (3,756)
------------ ------------ ------------ ------------
Net income (loss) available to common stockholders $ (2,333) $ (4,212) $ (2,313) $ 985
============ ============ ============ ============
Average common shares outstanding (basic) 30,013,991 12,783,192 29,779,834 12,780,101
Effect of dilutive securities:
Options * * * 636,703
Warrants * * * 6,788,097
Convertible Preferred stock * * * 27,799,929
------------ ------------ ------------ ------------
Diluted shares 30,013,991 12,783,192 29,779,834 48,004,830
============ ============ ============ ============
Diluted earnings (loss) per share:
Income (loss) from continuing operations available
to common stockholders $ (0.08) $ (0.02) $ (0.08) $ 0.10
Discontinued operations -- (0.31) -- (0.08)
------------ ------------ ------------ ------------
Net income (loss) per common share $ (0.08) $ (0.33) $ (0.08) $ 0.02
============ ============ ============ ============
* Anti-dilutive
12
The following table reflects the potential common shares of the Company at
June 30, 2003 and 2002 that have been excluded from the calculation of diluted
earnings per share because their effect would be anti-dilutive.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
--------------- -------------- -------------- ---------------
Options 6,132,066 4,908,545 6,132,066 2,620,000
Warrants 3,125,000 21,196,198 3,125,000 3,401,198
Convertible Preferred Stock 58,302,314 32,049,588 58,302,314 -
--------------- -------------- -------------- ---------------
67,559,380 58,154,331 67,559,380 6,021,198
=============== ============== ============== ===============
10. CONTINGENCIES
The Company is both a plaintiff and defendant in lawsuits incidental to its
current and former operations. Such matters are subject to many uncertainties
and outcomes are not predictable with assurance. Consequently, the ultimate
aggregate amount of monetary liability or financial impact with respect to these
matters at June 30, 2003 cannot be ascertained. Management is of the opinion
that, after taking into account the merits of defenses and established reserves,
the ultimate resolution of these matters will not have a material adverse impact
on the Company's consolidated financial position or results of operations.
13
ITEM 2:MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion may be understood more fully by reference to the
financial statements, notes to the financial statements, and management's
discussion and analysis contained in the company's Annual Report on Form 10-K
for the year ended December 31, 2002, as filed with the Securities and Exchange
Commission.
Overview. We are an integrated eye care services company focused on vision
benefits management (managed vision), retail optical sales and eye care services
to patients and the distribution of products and software services to eye care
professionals.
On May 12, 2003, Palisade Concentrated Equity Partnership, L.P., our
majority shareholder, and Linda Yimoyines, wife of Dean J. Yimoyines, M.D., our
Chairman of the Board and Chief Executive Officer, each exchanged the entire
amount of principal and interest due to them under our senior subordinated
secured notes payable, totaling an aggregate of $16.2 million, for a total of
406,158 shares of Series C Preferred Stock.
On February 7, 2003, we acquired substantially all of the assets and
certain liabilities of the contact lens distribution business of Wise Optical
Vision Group, Inc. ("Wise Optical"), a New York corporation. The results of
operations of Wise Optical are included in the consolidated financial statements
from February 1, 2003, the deemed effective date of the acquisition for
accounting purposes.
In May 2002, our Board of Directors approved management's plan to dispose
of substantially all of the net assets relating to our retail optometry
operations in North Carolina. The sale was completed in August 2002 and was
accounted for as a discontinued operation under Statement of Financial
Accounting Standards ("SFAS") No. 144. Accordingly, amounts in the financial
statements (and described below) for all periods presented have been
reclassified to reflect SFAS No. 144 treatment.
During the third quarter of 2002, we modified our strategic vision and
realigned our business into the following three reportable operating segments:
(1) Managed Vision, (2) Consumer Vision, and (3) Distribution & Technology.
Our Managed Vision segment contracts with insurers, managed care plans and
other third party payers to manage claims payment administration of eye health
benefits for those contracting parties. Our Consumer Vision segment sells retail
optical products to consumers and operates integrated eye health centers and
surgical facilities in Connecticut where comprehensive eye care services are
provided to patients. The Distribution and Technology segment provides products
and services to eye care professionals (ophthalmologists, optometrists and
opticians) through (i) Wise Optical, a distributor of contact and ophthalmic
lenses and other eye care accessories and supplies; (ii) a Buying Group program,
which provides group purchasing arrangements for optical and ophthalmic goods
and supplies and (iii) CC Systems, which provides systems and software solutions
to eye care professionals.
In addition to these segments, we receive income from other non-core
operations and transactions, including our health service organization ("HSO")
operation, which receives fee income for providing certain support services to
individual ophthalmology and optometry practices. While we continue to provide
the services under existing contracts to these practices, we are in the process
of generally disengaging from a number of these operations.
As a result of the sale of our retail optometry division in North Carolina
and the realignment of our business into these three reportable operating
segments, historical amounts previously reported have been restated to reflect
discontinued operations treatment and to conform to our current operating
segment presentation.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2003 Compared to the Three Months Ended June 30,
2002
Managed Vision revenue. Managed Vision revenue represents fees received
under our managed care contracts. Managed Vision revenue increased to $7.5
million for the three months ended June 30, 2003, from $7.2 million for the
three months ended June 30, 2002, an increase of $0.3 million or 3%. The net
increase in managed vision revenue resulted from contract growth and settlement
of prior period contract activity, partially offset by contracts not renewed.
During the second quarter of 2003 the Texas state legislature made changes to
its Medicaid program and as a result HMO Blue, with whom we maintain a Medicaid
contract, has decided to withdraw from Texas' Medicaid program effective
14
September 1, 2003. Therefore, our contract with HMO Blue will terminate on
September 1, 2003. For the three months ended June 2003, this contract generated
revenue of $0.6 million. In addition and also effective September 1, 2003, the
Texas state legislature will no longer fund a vision benefit in its Children's
Health Insurance Program. We maintain a number of contracts through this program
that will terminate on September 1, 2003. Those contracts generated revenues of
$0.8 million for the three months ended June 30, 2003.
Product sales revenue. Product sales include the retail sale of optical
products in our Consumer Vision segment, the sale of optical products through
our Buying Group and, effective February 2003, the sale of contact and
ophthalmic lenses through Wise Optical. Product sales revenue increased to $19.1
million for the three months ended June 30, 2003, from $10.9 million for the
three months ended June 30, 2002, an increase of $8.2 million or 76%. This
increase is primarily due to our acquisition of Wise Optical on February 7,
2003, which generated product sales revenue of $11.4 million for the three
months ended June 30, 2003. This increase in revenue is partially offset by a
$3.0 million decrease in Buying Group revenue, due to a decrease in sales volume
and a $0.2 million decrease in Consumer Vision sales during the period. We
expect the shift in Buying Group revenue to continue as consolidation in this
market continues, however, we do not expect this trend to have a material impact
on our overall profitability.
Other services revenue. Other services revenue includes revenue earned from
providing eye care services in our Consumer Vision segment, software services in
our Distribution & Technology segment and HSO services. Other services revenue
increased to $5.8 million for the three months ended June 30, 2003 from $5.3
million for the three months ended June 30, 2002, an increase of $0.5 million or
9%. This increase is comprised of a $0.4 million increase in Consumer Vision
services revenue due to increased services volume in the optometry and surgical
areas and a $0.3 million increase in software services revenue due to an
increase in sales volume. These increases were offset by a $0.2 million decrease
in fees collected under our HSO agreements primarily due to disputes with
certain physician practices, which are parties to these agreements. We continue
litigation with several of these practices and intend to continue to pursue
settlement of these matters in the future.
Other income. Other income represents non-recurring settlements on HSO
contracts. Other income for the three months ended June 30, 2003 was $0.5
million compared to $0.6 million for the three months ended June 30, 2002,
representing a decrease of $0.1 million.
Medical claims expense. Medical claims expense decreased to $5.5 million
for the three months ended June 30, 2003, from $5.9 million for the three months
ended June 30, 2002, a decrease of $0.4 million. The medical claims expense loss
ratio (MLR) representing medical claims expense as a percentage of Managed
Vision revenue improved to 73.7% in 2003, from 81.5% in 2002. This improvement
in MLR is primarily the result of contract performance improvement as well as
settlement of prior period contracts.
Cost of product sales. Cost of product sales increased to $14.6 million for
the three months ended June 30, 2003, from $8.5 million for the three months
ended June 30, 2002, an increase of $6.1 million or 71%. This increase includes
a $9.1 million increase resulting from an increase in sales volume attributed to
our Wise Optical business, which we acquired in February 2003, and is partially
offset by a $2.9 million decrease in the Buying Group cost of sales and a $0.1
million decrease in Consumer Vision cost of sales due to decreases in sales
volume.
Cost of services. Cost of services increased to $2.3 million for the three
months ended June 30, 2003 from $2.1 million for the three months ended June 30,
2002, an increase of $0.2 million or 8%. This increase is primarily due to the
increase in software sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $9.9 million for the three months ended
June 30, 2003, from $6.3 million for the three months ended June 30, 2002, an
increase of $3.6 million or 56%. Of this increase, approximately $3.1 million
represents operating expenses of Wise Optical and the remaining $0.5 million
primarily represents increased compensation and professional fees.
Interest expense. Interest expense decreased to $0.6 million for the three
months ended June 30, 2003 from $0.8 million for the three months ended June 30,
2002, a decrease of $0.2 million. This decrease in interest expense is primarily
due to a decrease in the average outstanding debt balance.
Gain (loss) from early extinguishment of debt. The $1.8 loss on early
extinguishment of debt for the three months ended June 30, 2003 represents the
write-off of deferred financing fees and debt discount associated with the
exchange of
15
$16.2 million of debt for Series C Preferred Stock, which occurred on May 12,
2003. There was no gain or loss on the extinguishment of debt for the
corresponding quarter in 2002.
Income tax benefit. We recorded an income tax benefit of $0.2 million and
$0.1 million for the three months ended June 30, 2003 and 2002, respectively,
representing the tax benefit on the loss from continuing operations at the
statutory rate after adjusting for non-deductible expenses.
Discontinued operations. In May 2002, the company's Board of Directors
approved management's plan to dispose of the company's North Carolina retail
optometry division. Accordingly, during the quarter ended June 30, 2002 the
company recorded a $3.9 million loss on the disposal of discontinued operations
based on the estimated fair value of the net assets held for sale. On August 12,
2002 the company consummated the sale of its North Carolina retail optometry
operations.
Six Months Ended June 30, 2003 Compared to the Six Months Ended June 30, 2002
Managed Vision revenue. Managed Vision revenue increased slightly to $14.9
million for the six months ended June 30, 2003, from $14.8 million for the six
months ended June 30, 2002, an increase of $0.1 million or 1%. This increase
resulted from contract growth and settlement of prior period contract activity,
partially offset by contracts that were not renewed. During the second quarter
of 2003 the Texas state legislature made changes to its Medicaid program and as
a result HMO Blue, with whom we maintain a Medicaid contract, has decided to
withdraw from Texas' Medicaid program effective September 1, 2003. Therefore,
our contract with HMO Blue will terminate on September 1, 2003. For the six
months ended June 2003, this contract generated revenue of $1.3 million. In
addition and also effective September 1, 2003, the Texas state legislature will
no longer fund a vision benefit in its Children's Health Insurance Program. We
maintain a number of contracts through this program that will terminate on
September 1, 2003. Those contracts generated revenues of $1.6 million for the
six months ended June 30, 2003.
Product sales revenue. Product sales revenue increased to $36.9 million for
the six months ended June 30, 2003, from $21.6 million for the six months ended
June 30, 2002, an increase of $15.3 million or 70%. This increase is primarily
due to our acquisition of Wise Optical on February 7, 2003, which generated
product sales revenue of $20.7 million for the six months ended June 30, 2003.
This increase in revenue is partially offset by a $5.5 million decrease in
Buying Group revenue, due to a decrease in sales volume and consolidation in the
eye care industry whereby smaller independent eye care businesses are being
replaced by larger eye care chains that purchase directly from vendors. We
expect this shift to continue and potentially further reduce the Buying Group's
market share and revenue, however, we do not expect this trend to have a
material impact on our overall profitability.
Other services revenue. Other services revenue increased to $10.8 million
for the six months ended June 30, 2003 from $10.3 million for the comparable
period in 2002, and increase of $0.5 million or 5%. This increase is comprised
of a $0.6 million increase in Consumer Vision services revenue due to increased
services volume in the optometry and surgical areas and a $0.3 million increase
in software services revenue due to an increase in sales volume. These increases
were offset by a $0.4 million decrease in fees collected under our HSO
agreements primarily due to disputes with certain physician practices, which are
parties to these agreements. We continue to be in litigation with several of
these practices and intend to continue to pursue settlement of these matters in
the future.
Other income. Other income for the six months ended June 30, 2003 was $2.4
million compared to $0.6 million for the six months ended June 30, 2002, an
increase of $1.8 million. This increase is due to an increase in settlements on
HSO contracts.
Medical claims expense. Medical claims expense decreased to $11.3 million
for the six months ended June 30, 2003, from $11.8 million for the six months
ended June 30, 2002, a decrease of $0.5 million. The medical claims expense loss
ratio (MLR) representing medical claims expense as a percentage of Managed
Vision revenue improved to 75.6% in 2003, from 80.0% in 2002. This improvement
in MLR resulted from improvement in contract performance as well as the
settlement of prior period contracts.
Cost of product sales. Cost of product sales increased to $28.5 million for
the six months ended June 30, 2003, from $17.2 million for the six months ended
June 30, 2002, an increase of $11.3 million or 66%. This increase is primarily
due to a $16.8 million increase in product costs from an increase in sales
volume due to the acquisition of Wise Optical in February 2003. This increase is
partially offset by a $5.3 million decrease in product costs related to the
decrease in
16
sales volume generated by our Buying Group and a $0.2 million decrease in
product costs in our Consumer Vision business.
Cost of services. Cost of services increased to $4.5 million from $4.3
million for the six months ended June 30, 2003 and 2002, respectively,
representing an increase of $0.2 million or 4%. This increase is primarily due
to the increase in software sales volume.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $18.7 million for the six months ended June
30, 2003, from $12.5 million for the six months ended June 30, 2002, an increase
of $6.2 million or 50%. Of this increase, approximately $5.2 million represents
operating expenses of Wise Optical and the remaining $1.0 million primarily
represents increased compensation and professional fees.
Interest expense. Interest expense decreased to $1.4 million for the six
months ended June 30, 2003 from $1.5 million for the six months ended June 30,
2002, a decrease of $0.1 million. This decrease in interest expense is primarily
due to the decrease in the average outstanding debt balance.
Gain (loss) on extinguishment of debt. The $1.8 loss on extinguishment of
debt for the six months ended June 30, 2003 represents the write-off of deferred
financing fees and debt discount associated with the exchange of $16.2 million
of debt for Series C Preferred Stock, which occurred on May 12, 2003. The $8.8
million gain on extinguishment of debt for the six months ended June 30, 2002
was the result of our capital restructuring in January 2002. The gain is
comprised of approximately $10.0 million of forgiveness of principal and
interest by Bank Austria, our former senior secured lender, and was partially
offset by the write-off of $1.2 million of related unamortized deferred
financing fees and debt discount.
Income tax expense (benefit). We recorded an income tax benefit of $0.1
million for the six months ended June 30, 2003, representing a tax benefit on
the loss from continuing operations at the statutory rate after adjusting for
non-deductible expenses. The tax expense for the six months ended June 30, 2002
of $3.1 million was primarily due to $3.5 million of tax expense associated with
the $8.8 million gain on extinguishment of debt, partially offset by $0.4
million of tax benefit on other operating losses of $1.0 million.
Discontinued operations. In May 2002, the company's Board of Directors
approved management's plan to dispose of the company's North Carolina retail
optometry division. Accordingly, for the six months ended June 30, 2002 the
company recorded a $3.9 million loss on the disposal of discontinued operations
based on the estimated fair value of the net assets held for sale. Income
generated by the discontinued operations for the six months ended June 30, 2002
was $0.2 million. On August 12, 2002 the company consummated the sale of its
North Carolina retail optometry operations.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash flows generated from operations
and borrowings under our credit facility. Our principal uses of liquidity are to
provide working capital, meet debt service requirements and finance capital
expenditures. We believe that our cash flow from operations, borrowings under
our credit facility, and operating and capital lease financing will provide us
with sufficient funds to finance our operations for the next 12 months. If,
however, additional funds are needed, we may attempt to raise such funds through
the issuance of equity or convertible debt securities. If additional funds are
raised through the issuance of equity or convertible debt securities, the
percentage ownership of our stockholders will be reduced and our stockholders
may experience dilution of their interest in us. If additional funds are needed
and are not available or are not available on acceptable terms, our ability to
fund our operations, take advantage of unanticipated opportunities, develop or
enhance services or products or otherwise respond to competitive pressures may
be significantly limited.
On February 7, 2003, in connection with our acquisition of the assets of
Wise Optical Vision Group, Inc., our revolving credit note with CapitalSource
was increased from $10 million to $15 million. See "- The CapitalSource Loan and
Security Agreement" for a more complete discussion of the terms of this credit
facility.
In February 2003, we received approval from the South Carolina Department
of Insurance to operate a captive insurance company domiciled in South Carolina.
We obtained $0.6 million in letters of credit to establish and collateralize a
new wholly owned subsidiary, OptiCare Vision Insurance Company, Inc., to operate
as the captive
17
insurance company, as part of our Managed Vision Division's entrance into the
"direct-to-employer" market. This letter of credit is collateralized by $0.6
million of restricted certificates of deposits.
On May 12, 2003, Palisade Concentrated Equity Partnership, L.P. our
majority shareholder, and Linda Yimoyines, wife of Dean J. Yimoyines, M.D., our
Chairman of the Board and Chief Executive Officer, each exchanged the entire
amount of principal and interest due to them under our senior subordinated
secured notes payable, totaling an aggregate of $16.2 million, for 406,158
shares of Series C Preferred Stock. The aggregate principal and interest was
exchanged at a rate equal to $0.80 per share, the agreed upon value of our
common stock on May 12, 2003, divided by 50 (or $40.00 per share). Each share of
Series C Preferred Stock is convertible into 50 shares of common stock and has
the same dividend rights, on an as converted basis, as our common stock and an
aggregate liquidation preference of $16.2 million.
As of July 31, 2003, we had cash and cash equivalents of approximately $2.6
million, $1.9 million of borrowings outstanding under our term loan with
CapitalSource, $9.2 million of advances outstanding under our revolving credit
facility with CapitalSource and $2.3 million of additional availability under
our revolving credit facility. (Although we may borrow up to $15 million under
the revolving credit facility, availability is based on the value of the
collateral underlying the facility at any given time and on the amount
outstanding under the facility at such time.)
Cash Flows
Net cash used in operating activities was $0.5 million for the six months
ended June 30, 2003 and primarily consisted of a $2.0 million net loss and a
$3.1 million decrease in accounts payable and accrued expenses, which were
partially offset by net non-cash charges of $2.8 million, a $1.2 million
decrease in inventory and a $0.6 million decrease in accounts receivable. Net
cash used in operating activities for the six months ended June 30, 2002 of $0.2
million was primarily driven by income from continuing operations of $4.7
million, and cash provided by discontinued operations of $0.8 million, which
were partially offset by net non-cash income of $3.6 million and a $1.7 million
decrease in accounts payable and accrued expenses.
Net cash used in investing activities was $6.5 million and $1.6 million for
the six months ended June 30, 2003 and 2002, respectively. Net cash used in
investing activities in 2003 included $6.2 million to purchase the net assets
(excluding cash) of Wise Optical, a deposit of $0.6 million into restricted
certificates of deposit to secure standby letters of credit in connection with
establishing our captive insurance company and $0.6 million used to purchase
fixed assets. These uses of cash were offset by $0.9 million of cash resulting
from refunds of escrow deposits and payments on our notes receivable. Net cash
used in investing activities in 2002 was primarily the result of a $1.4 million
payment we made to reacquire certain notes receivable and contractual rights as
part of our capital restructuring in January 2002.
Net cash provided by financing activities was $7.8 million for the six
months ended June 30, 2003 compared to $2.3 million for the six months ended
June 30, 2002. Net cash provided by financing activities in 2003 included an
$8.8 million increase in borrowings under our revolving credit facility, which
was primarily used to finance our purchase of the net assets of Wise Optical.
This $8.8 million increase was partially offset by $0.8 million in principal
payments on debt and $0.2 million in financing fees related to the increase in
our credit facility in connection with the acquisition of Wise Optical in
February 2002 and the conversion of debt to equity in May 2003. Net cash
provided by financing activities in 2002 consisted of approximately $27.5
million from the issuance of debt and preferred stock and a $0.6 million net
increase in our revolving credit facility, which was partially offset by $24.3
million of principal payments on long-term debt (primarily related to our
capital restructuring in January 2002) and $1.5 million in financing costs.
The CapitalSource Loan and Security Agreement
In January 2002, we entered into a credit facility with CapitalSource
Finance, LLC consisting of a $3.0 million term loan and a $10.0 million
revolving credit facility. The interest rate applicable to the term loan equals
the prime rate plus 3.5% and the interest rate applicable to the revolving
credit facility is prime rate plus 1.5%. In connection with our acquisition of
Wise Optical in February 2003, the revolving credit facility was amended to
$15.0 million. The revolving credit facility is due January 25, 2005. We are
required to make payments of $24,000 per month on the term loan and the final
principal payment is due and payable on January 25, 2004.
18
The term loan and credit facility with CapitalSource are subject to a Loan
and Security Agreement. The Loan and Security Agreement contains certain
restrictions on the conduct of our business, including, among other things,
restrictions on incurring debt, purchasing or investing in the securities of, or
acquiring any other interest in, all or substantially all of the assets of any
person or joint venture, declaring or paying any cash dividends or making any
other payment or distribution on our capital stock, and creating or suffering
liens on our assets. We are required to maintain certain financial covenants,
including a minimum fixed charge ratio and to maintain a minimum net worth. Upon
the occurrence of certain events or conditions described in the Loan and
Security Agreement (subject to grace periods in certain cases), the entire
outstanding balance of principal and interest would become immediately due and
payable. As of June 30, 2003, we believe we are in compliance with the covenants
and are not in default under the credit facility.
Our subsidiaries guarantee payments and other obligations under the credit
facility and we (including certain subsidiaries) have granted a first-priority
security interest in substantially all our assets to CapitalSource. We also
pledged the capital stock of certain of our subsidiaries to CapitalSource.
The Senior Subordinated Secured Loans
In January 2002, Palisade Concentrated Equity Partnership, L.P. and Linda
Yimoyines, wife of Dean Yimoyines, our Chairman and Chief Executive Officer made
subordinated secured loans to us in the amount of $13.9 million and $0.1
million, respectively. The subordinated secured loans were evidenced by senior
subordinated secured notes that ranked pari passu with each other. The notes
were subordinated to our indebtedness to CapitalSource and were secured by
second-priority security interests in substantially all of our assets. Principal
was due on January 25, 2012 and interest was payable quarterly at the rate of
11.5%. In the first and second years, we had the right to defer 100% and 50%
respectively, of interest to maturity by increasing the principal amount of the
note by the amount of interest so deferred. On May 12, 2003 Palisade and Ms.
Yimoyines exchanged the entire amount of principal and interest due to them
under the senior secured loans, totaling an aggregate of $16.2 million, for a
total of 406,158 shares of Series C Preferred Stock. See "-The Series C
Preferred Stock" for a more complete discussion regarding the terms of the
Series C Preferred Stock. As a result, the senior subordinated secured loans are
no longer outstanding.
The Series B Preferred Stock
As of June 30, 2003, we had 3,204,959 shares of Series B Preferred Stock
issued and outstanding. Subject to the senior liquidation preference of the
Series C Preferred Stock described below, the Series B Preferred Stock ranks
senior to all other currently issued and outstanding classes or series of our
stock with respect to dividends, redemption rights and rights on liquidation,
winding up, corporate reorganization and dissolution. Each share of Series B
Preferred Stock is convertible into a number of shares of common stock equal to
such share's current liquidation value, divided by a conversion price of $0.14,
subject to adjustment for dilutive issuances. The number of shares of common
stock into which each share of Series B Preferred Stock is convertible will
increase over time because the liquidation value of the Series B Preferred
Stock, which was $1.66 per share as of June 30, 2003, increases at a rate of
12.5% per year, compounded annually.
The Series C Preferred Stock
As noted above, on May 12, 2003, we issued a total of 406,158 shares of
Series C Preferred Stock in exchange for $16.2 million of senior subordinated
secured notes payable and accrued interest. 403,256 shares were issued to
Palisade Concentrated Equity Partnership, L.P. and 2,902 shares were issued to
Linda Yimoyines. The aggregate principle and interest was exchanged at a rate
equal to $.80 per share, the agreed upon value of our common stock on May 12,
2003, divided by 50 (or $40.00 per share). The Series C Preferred Stock has an
aggregate liquidation preference of $16.2 million and ranks senior to all other
currently issued and outstanding classes or series of our stock with respect to
liquidation rights. Each share of Series C Preferred Stock is convertible into
50 shares of common stock and has the same dividend rights, on an as converted
basis, as our common stock.
19
RECENT ACCOUNTING CHANGES
Effective January 1, 2003 we adopted Statement of Financial Accounting
Standards ("SFAS") No. 143, "Accounting For Asset Retirement Obligations". This
statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The adoption of this statement did not have a material
impact on our financial position or results of operations.
Effective January 1, 2003 we adopted SFAS No. 145, "Rescission of FASB
Statements 4, 44 and 64, Amendment of FASB Statement 13, and Technical
Corrections". SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires
companies to classify certain gains and losses from debt extinguishments as
extraordinary items, eliminates the provisions of SFAS No. 44 regarding
transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS
No.13 to require that certain lease modifications be treated as sale leaseback
transactions. The provisions of SFAS No.145 related to classification of debt
extinguishment are effective for fiscal years beginning after May 15, 2002. As a
result of our adoption of SFAS No. 145, we reclassified our previously reported
gain from extinguishment of debt of $8.8 million and related income tax expense
of $3.5 million in 2002 from an extraordinary item to continuing operations.
Effective January 1, 2003 we adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" and nullified EITF Issue No. 94-3.
SFAS No.146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred, whereas EITF No
94-3 had recognized the liability at the commitment date of an exit plan. There
was no effect on our financial statements as a result of such adoption.
In November 2002, FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. The interpretation provides
guidance on the guarantor's accounting and disclosure requirements for
guarantees, including indirect guarantees of indebtedness of others. We adopted
the disclosure requirements of the interpretation as of December 31, 2002.
Effective January 1, 2003, additional provisions of FIN No. 45 became effective
and were adopted by us. The accounting guidelines are applicable to guarantees
issued after December 31, 2002 and require that we record a liability for the
fair value of such guarantees in the balance sheet. The adoption of FIN No. 45
did not have a material impact on its financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of Statement of Financial
Accounting Standard No. 123." This statement provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. This statement also amends the disclosure
requirements of SFAS No. 123 and Accounting Principles Board Opinion ("APB") No.
28, "Interim Financial Reporting," to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. We elected to adopt the disclosure only provisions of SFAS No. 148 and
will continue to follow APB Opinion No. 25 and related interpretations in
accounting for the stock options granted to its employees and directors.
Accordingly, employee and director compensation expense is recognized only for
those options whose price is less than fair market value at the measurement
date. For disclosure regarding stock options had compensation cost been
determined in accordance with SFAS No. 123, see Note 2 to the condensed
consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires an investor with
a majority of the variable interests in a variable interest entity to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest entity is
an entity in which the equity investors do not have a controlling interest or
the equity investment at risk is insufficient to finance the entity's activities
without receiving additional subordinated financial support from the other
parties. The consolidation provisions of this interpretation are required
immediately for all variable interest entities created after January 31, 2003,
and our adoption of these provisions did not have a material effect on our
financial position or results of operations. For variable interest entities in
existence prior to January 31, 2003, the consolidation provisions of FIN 46 are
effective July 1, 2003 and are not expected to have a material effect on our
financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments. This
statement is generally effective for contracts entered into or modified after
June 30, 2003 and for
20
hedging relationships designated after June 30, 2003. The adoption of this
statement is not expected to have a material impact on our financial position or
results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Most of the
guidance in SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. Adoption of SFAS No. 150 is
not expected to have a material impact on our financial position or results of
operations.
IMPACT OF REIMBURSEMENT RATES
Our revenue is subject to pre-determined Medicare reimbursement rates
which, for certain products and services, have decreased over the past three
years. A decrease in Medicare reimbursement rates could have an adverse effect
on our results of operations if we cannot manage these reductions through
increases in revenues or decreases in operating costs. To some degree, prices
for health care are driven by Medicare reimbursement rates, so that our
non-Medicare business is also affected by changes in Medicare reimbursement
rates.
FORWARD-LOOKING INFORMATION AND RISK FACTORS
The statements in this Form 10-Q and elsewhere (such as in other filings by
the company with the Securities and Exchange Commission, press releases,
presentations by the company or its management and oral statements) that relate
to matters that are not historical facts are "forward-looking statements" within
the meaning of Section 27A of the Securities Exchange Act of 1934. When used in
this document and elsewhere, words such as "anticipate," "believe," "expect,"
"plan," "intend," "estimate," "project," "will," "could," "may," "predict" and
similar expressions are intended to identify forward-looking statements. Such
forward-looking statements include those relating to:
o Our opinion that with respect to lawsuits incidental to our
current and former operations, after taking into account the
merits of defenses and established reserves, the ultimate
resolution of these matters will not have a material adverse
impact on our financial position or results of operations;
o The expectation that the consolidation in the eye care industry
will continue and could further reduce our Buying Group's market
share and revenue, and that we do not expect this trend to have a
material impact on our overall profitability; and
o Our belief that cash from operations, borrowings under our credit
facility, and operating and capital lease financings will provide
sufficient funds to finance operations for the next 12 months.
In addition, such forward-looking statements involve known and unknown
risks, uncertainties, and other factors which may cause the actual results,
performance or achievements of the company to be materially different from any
future results expressed or implied by such forward-looking statements. Also,
our business could be materially adversely affected and the trading price of our
common stock could decline if any of the following risks and uncertainties
develop into actual events. Such risk factors, uncertainties and the other
factors include:
o Changes in the regulatory environment applicable to our business,
including health-care cost containment efforts by Medicare,
Medicaid and other third-party payers;
o Reduction in demand and increased competition for our products
and services;
o General economic conditions;
o Risks related to the eye care industry, including the cost and
availability of medical malpractice insurance, and adverse
long-term experience with laser and other surgical vision
correction;
o Risks related to the managed care and insurance industries,
including risks relating to class action litigation seeking to
broaden the scope of covered services;
o Our ability to successfully integrate and profitably manage our
operations;
21
o Loss of the services of key management personnel;
o Our ability to execute our growth strategy, without which we may
not become profitable or sustain our profitability;
o Our ability to obtain additional capital, without which our
growth could be limited;
o The fact that we have a history of losses and may incur further
losses in the future;
o The fact that if we default on our debt, our creditors could
foreclose on our assets;
o The possibility that we may not compete effectively with other
eye care services companies which have more resources and
experience than us;
o Failure to negotiate profitable capitated fee arrangements;
o The possibility that we may have potential conflicts of interests
with respect to related party transactions which could result in
certain of our officers, directors and key employees having
interests that differ from us and our stockholders;
o Health care regulations or health care reform initiatives, which
could materially adversely affect our business, financial
condition and results of operations;
o The fact that the nature of our business could subject us to
potential malpractice, product liability and other claims;
o The fact that managed care companies face increasing threats of
private-party litigation, including class actions, over the scope
of care that the managed care companies must pay for;
o The fact that the company is dependent upon letters of credit or
other forms of third party security in connection with certain of
its contractual arrangements and, thus, would be adversely
affected in the event it was unable to obtain such credit as
needed;
o The fact that certain parties are challenging the validity of
and/or our compliance with HSO contracts and have ceased or may
cease making payments under such contracts;
o Failure to timely and effectively integrate our acquisition of
Wise Optical; o Failure to effectively compete in the marketplace
with other distributors, including an entity created by the
former owner of Wise Optical; and
o Other risks and uncertainties discussed elsewhere in this Form
10-Q and detailed from time to time in our periodic earnings
releases and reports filed with the Securities and Exchange
Commission.
We undertake no obligation to publicly update or revise forward-looking
statements to reflect events or circumstances after the date of this Form 10-Q
or to reflect the occurrence of unanticipated events.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risk from exposure to changes in interest rates
based on our financing activities under our credit facility with CapitalSource,
due to its variable interest rate. The nature and amount of our indebtedness may
vary as a result of future business requirements, market conditions and other
factors. The extent of our interest rate risk is not quantifiable or predictable
due to the variability of future interest rates and financing needs.
We do not expect changes in interest rates to have a material effect on
income or cash flows in the year 2003, although there can be no assurances that
interest rates will not significantly change. A 10% change in the interest rate
payable by us on our variable rate debt would have increased or decreased the
six-month interest expense by approximately $44,000 assuming that our borrowing
level is unchanged. We did not use derivative instruments to adjust our interest
rate risk profile during the six months ended June 30, 2003.
22
ITEM 4: CONTROLS AND PROCEDURES
Our chief executive officer and chief financial officer, after evaluating
the effectiveness of our disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered
by this Quarterly Report on Form 10-Q, have concluded that, based on such
evaluation, our disclosure controls and procedures were adequate and effective
to ensure that material information relating to us, including our consolidated
subsidiaries, was made known to them by others within those entities,
particularly during the period in which this Quarterly Report on Form 10-Q was
being prepared.
There were no changes in our internal control over financial reporting,
identified in connection with the evaluation of such internal control that
occurred during our last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On May 12, 2003, we issued a total of 406,158 shares of Series C Preferred
Stock to two investors in exchange for $16.2 million of senior subordinated
secured notes payable and accrued interest. Such $16.2 million in aggregate
principle and interest was exchanged at a rate equal to $.80 per share, the
agreed upon value of our common stock on May 12, 2003, divided by 50 (or $40.00
per share). The Series C Preferred Stock has an aggregate liquidation preference
of $16.2 million and ranks senior to all other currently issued and outstanding
classes or series of our stock with respect to liquidation rights. Each share of
Series C Preferred Stock is convertible into 50 shares of common stock and has
the same dividend rights, on an as converted basis, as our common stock.
The above transaction was a private transactions not involving a public
offering and was exempt from the registration provisions of the Securities Act
pursuant to Section 4(2) thereof. No underwriter was engaged in connection with
the foregoing sale of securities. The company has reason to believe that (i) all
of the foregoing purchasers were familiar with or had access to information
concerning the operations and financial conditions of the company, (ii) all of
the foregoing purchasers represented that they acquired the shares for
investment and not with a view to the distribution thereof, and (iii) the
foregoing purchasers are accredited investors within the meaning of Regulation D
promulgated under the Securities Act. At the time of issuance, all of the
foregoing securities were deemed to be restricted securities for purposes of the
Securities Act and the certificates representing such securities bore or will
bear legends to that effect.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders of OptiCare Health Systems, Inc. was
held on May 19, 2003. There were represented, in person or by proxy, 26,474,226
shares of common stock entitled to vote at the meeting, constituting a quorum.
The following matters were voted upon and approved by the company's stockholders
at the meeting:
(i) At the meeting, the directors nominated were elected by the following votes:
NUMBER OF NUMBER OF
SHARES SHARES
VOTED FOR: WITHHELD:
---------------- ----------------
Dean J. Yimoyines, M.D. 26,185,583 288,643
Eric J. Bertrand 26,250,243 223,983
Norman S. Drubner 26,246,494 227,732
Mark S. Hoffman 26,250,243 223,983
Richard L. Huber 26,252,243 221,983
Clark A. Johnson 26,250,243 221,983
Melvin Meskin 26,250,243 223,983
Mark S. Newman 26,252,243 221,983
23
(ii) An amendment to the Certificate of Incorporation to increase from
75,000,000 to 150,000,000 the aggregate number of shares of common stock
authorized to be issued by the Company was approved by a vote of 26,021,769 in
favor, 438,375 votes against and 14,082 abstentions.
(iii) The appointment of Deloitte & Touche LLP as independent auditors of
the company, for the year ending December 31, 2003 was ratified by a vote of
26,258,816 in favor, 188,073 votes against and 27,337 abstentions.
There were no broker non-votes on any of the above proposals.
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
The following Exhibits are filed as part of this Quarterly Report on Form
10-Q:
EXHIBIT DESCRIPTION
3.1 Certificate of Incorporation of Registrant, dated January 17,
1994, as filed with the Delaware Secretary of State on January
19, 1994.
3.2 Certificate of Amendment of the Certificate of Incorporation,
dated August 10, 1999, as filed with the Delaware Secretary of
State on August 13, 1999, incorporated herein by reference to
Exhibit 3.1 to Registrant's Current Report on Form 8-K filed
on August 30, 1999.
3.3 Certificate of Designation with respect to the Registrant's
Series A Convertible Preferred Stock, dated August 19, 1999,
as filed with the Delaware Secretary of State on August 13,
1999, incorporated herein by reference to Exhibit 3.2 to
Registrant's Current Report on Form 8-K filed on August 30,
1999.
3.4 Certificate of Amendment of the Certificate of Incorporation,
dated January 21, 2002, as filed with the Delaware Secretary
of State on January 23, 2002, increasing the authorized common
stock of the Company from 50,000,000 to 75,000,000 shares,
incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated January 25, 2002, Exhibit 3.1.
3.5 Certificate of Designations, Rights and Preferences of the
Series B 12.5% Voting Cumulative Convertible Participating
Preferred Stock of the Company, dated January 21, 2002, as
filed with the Delaware Secretary of State on January 23,
2002, incorporated herein by reference to the Registrant's
Current Report on Form 8-K dated January 25, 2002, Exhibit
3.2.
3.6 Certificate of Designations, Rights and Preferences of the
Series C Preferred Stock of the Company, dated May 10, 2003,
as filed with the Delaware Secretary of State on May 12, 2003.
3.7 Certificate of Amendment of the Certificate of Incorporation,
dated May 28, 2003, as filed with the Delaware Secretary of
State on May 29, 2003, increasing the authorized common stock
of the Company from 75,000,000 to 150,000,000 shares.
10.1 Letter Agreement, dated May 12, 2003, by and among the
Registrant, Palisades Concentrated Equity Partnership, L.P.
and Linda Yimoyines.
10.2 Amendment No. 1 to Registration Rights Agreement, dated May
12, 2003, by and among the Registrant, Palisades Concentrated
Equity Partnership, L.P., Linda Yimoyines and CapitalSource
Finance, LLC.
10.3 Third Amendment to Restructure Agreement, dated May 12, 2003,
by and among the Registrant, Palisades Concentrated Equity
Partnership, L.P. and Linda Yimoyines.
10.4 Second Amendment to Lease Agreement dated September 30, 1997
by and between French's Mill Associates II, LLP, as landlord,
and OptiCare Eye Health Center, Inc., as tenant, for premises
located at 160 Robbins Street, Waterbury, Connecticut.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as
amended.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as
amended.
32 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
24
b. Reports on Form 8-K filed in the period covered by this report:
On April 23, 2003, we filed Amendment No. 1 on Form 8-K/A amending the
Current Report on Form 8-K for the February 7, 2003 event to provide the
information required by Item 7.
On May 21, 2003 we filed a Current Report on Form 8-K pursuant to Item 9
(Regulation FD Disclosures) to furnish a press release reporting results of our
first quarter of fiscal 2003.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be filed on its behalf by the
undersigned, hereunto duly authorized.
Date: August 12, 2003 OPTICARE HEALTH SYSTEMS, INC.
By: /s/ William A. Blaskiewicz
------------------------------------------
William A. Blaskiewicz
Vice President and Chief Financial Officer
(Principal Financial and Accounting
Officer and duly authorized officer)
25
EXHIBIT INDEX
EXHIBIT DESCRIPTION
3.1 Certificate of Incorporation of Registrant, dated January 17,
1994, as filed with the Delaware Secretary of State on January
19, 1994.
3.2 Certificate of Amendment of the Certificate of Incorporation,
dated August 10, 1999, as filed with the Delaware Secretary of
State on August 13, 1999, incorporated herein by reference to
Exhibit 3.1 to Registrant's Current Report on Form 8-K filed
on August 30, 1999.
3.3 Certificate of Designation with respect to the Registrant's
Series A Convertible Preferred Stock, dated August 19, 1999,
as filed with the Delaware Secretary of State on August 13,
1999, incorporated herein by reference to Exhibit 3.2 to
Registrant's Current Report on Form 8-K filed on August 30,
1999.
3.4 Certificate of Amendment of the Certificate of Incorporation,
dated January 21, 2002, as filed with the Delaware Secretary
of State on January 23, 2002, increasing the authorized common
stock of the Company from 50,000,000 to 75,000,000 shares,
incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated January 25, 2002, Exhibit 3.1.
3.5 Certificate of Designations, Rights and Preferences of the
Series B 12.5% Voting Cumulative Convertible Participating
Preferred Stock of the Company, dated January 21, 2002, as
filed with the Delaware Secretary of State on January 23,
2002, incorporated herein by reference to the Registrant's
Current Report on Form 8-K dated January 25, 2002, Exhibit
3.2.
3.6 Certificate of Designations, Rights and Preferences of the
Series C Preferred Stock of the Company, dated May 10, 2003,
as filed with the Delaware Secretary of State on May 12, 2003.
3.7 Certificate of Amendment of the Certificate of Incorporation,
dated May 28, 2003, as filed with the Delaware Secretary of
State on May 29, 2003, increasing the authorized common stock
of the Company from 75,000,000 to 150,000,000 shares.
10.1 Letter Agreement, dated May 12, 2003, by and among the
Registrant, Palisades Concentrated Equity Partnership, L.P.
and Linda Yimoyines.
10.2 Amendment No. 1 to Registration Rights Agreement, dated May
12, 2003, by and among the Registrant, Palisades Concentrated
Equity Partnership, L.P., Linda Yimoyines and CapitalSource
Finance, LLC.
10.3 Third Amendment to Restructure Agreement, dated May 12, 2003,
by and among the Registrant, Palisades Concentrated Equity
Partnership, L.P. and Linda Yimoyines.
10.4 Second Amendment to Lease Agreement dated September 30, 1997
by and between French's Mill Associates II, LLP, as landlord,
and OptiCare Eye Health Center, Inc., as tenant, for premises
located at 160 Robbins Street, Waterbury, Connecticut.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as
amended.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as
amended.
32 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002