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 SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 1-15223
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
Incorporation or Organization) Identification No.)
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 X 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
The number of shares outstanding of the registrant's Common Stock, par
value $.001 per share, at October 1, 2002 was 11,462,182 shares.
INDEX TO FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2002 and
December 31, 2001 (unaudited) 3
Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 2002 and 2001 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2002 and 2001 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURE 25
CERTIFICATIONS 26
2
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,440 $ 2,536
Accounts receivable, net 6,977 6,915
Inventories 2,128 1,787
Deferred income taxes, current 2,600 6,000
Assets held for sale - 2,729
Other current assets 1,699 616
-------- --------
Total Current Assets 15,844 20,583
Property and equipment, net 3,261 4,446
Intangible assets, net 1,400 1,534
Goodwill, net 20,516 20,516
Deferred income taxes, non-current 1,800 1,800
Assets held for sale, non-current - 9,000
Other assets 3,960 1,863
-------- --------
TOTAL ASSETS $ 46,781 $ 59,742
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,000 $ 4,045
Accrued expenses 5,814 8,004
Current portion of long-term debt 1,276 1,729
Liabilities of held for sale business - 1,978
Other current liabilities 915 1,372
-------- --------
Total Current Liabilities 12,005 17,128
-------- --------
Long-term debt, less current portion 20,551 32,508
Liabilities of held for sale business - 257
Other liabilities 1,061 2,867
-------- --------
Total Non-Current Liabilities 21,612 35,632
-------- --------
Series B 12.5% voting, mandatorily redeemable , cumulative, convertible
preferred stock, $0.001 par value, 3,500,000
shares authorized, 3,204,959 shares issued and outstanding 4,487 -
-------- --------
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock, $.001 par value, 550,000 shares
authorized; no shares outstanding at September 30, 2002; 418,803 shares
outstanding at December 31, 2001 - 1
Common Stock, $0.001 par value; 75,000,000 shares authorized;
11,462,182 and 12,815,092 shares outstanding at September 30, 2002 and
December 31, 2001, respectively 11 13
Additional paid-in-capital 61,312 60,679
Accumulated deficit (52,646) (53,711)
-------- --------
Total Stockholders' Equity 8,677 6,982
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 46,781 $ 59,742
======== ========
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)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -----------------------------
2002 2001 2002 2001
----------- ------------ ------------ ------------
NET REVENUES:
Managed vision services $ 7,217 $ 6,982 $ 21,970 $ 21,821
Product sales 9,940 10,681 31,572 34,803
Other services 5,182 5,471 15,486 15,603
Other income 671 - 1,317 -
-------- -------- -------- --------
Total net revenues 23,010 23,134 70,345 72,227
-------- -------- -------- --------
OPERATING EXPENSES:
Medical claims expense 5,009 5,490 16,807 17,345
Cost of product sales 7,952 8,581 25,118 27,952
Cost of services 1,855 2,220 6,137 6,422
Selling, general and administrative 6,631 6,032 19,116 18,218
Depreciation 463 486 1,402 1,485
Amortization 45 258 134 849
Interest expense 769 763 2,300 2,255
-------- -------- -------- --------
Total operating expenses 22,724 23,830 71,014 74,526
-------- -------- -------- --------
Income (loss) from continuing operations before income taxes 286 (696) (669) (2,299)
Income tax expense (benefit) 182 41 (200) (139)
-------- -------- -------- --------
Income (loss) from continuing operations 104 (737) (469) (2,160)
Income (loss) from discontinued operations, net of income taxes 130 (58) 313 209
Loss on disposal of discontinued operations (153) - (4,092) -
-------- -------- -------- --------
Income (loss) before extraordinary gain 81 (795) (4,248) (1,951)
Extraordinary gain on early extinguishment of debt, net of
income taxes of $3,475 - - 5,314 -
-------- -------- -------- --------
Net Income (loss) $ 81 $ (795) $ 1,066 $ (1,951)
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE--BASIC AND DILUTED:
Income (loss) from continuing operations available to
Common stockholders $ ( 0.01) $ (0.06) $ (0.07) $ (0.17)
Income (loss) from discontinued operations 0.00 0.00 (0.30) 0.02
Extraordinary gain - - 0.42 -
-------- -------- -------- --------
Net income (loss) available to common stockholders $ (0.01) $ (0.06) $ 0.05 $ (0.15)
======== ======== ======== ========
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 NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2002 2001
-------- --------
OPERATING ACTIVITIES:
Net income (loss) $ 1,066 $ (1,951)
Extraordinary gain on early extinguishment of debt (5,314) -
(Income) loss on discontinued operations 3,779 (209)
-------- --------
Loss from continuing operations (469) (2,160)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization - discontinued operations 470 551
Depreciation - continuing operations 1,402 1,485
Amortization - continuing operations 134 849
Non-cash interest expense 1,461 417
Non-cash settlement income (446) -
Other non-cash 100 104
Changes in operating assets and liabilities
Accounts receivable (388) 678
Inventories (341) (191)
Other assets (1,381) 124
Accounts payable and accrued expenses (2,235) 459
Other liabilities (495) (167)
Cash used in discontinued operations (505) (401)
-------- --------
Net cash provided by (used in) operating activities (2,693) 1,748
-------- --------
INVESTING ACTIVITIES:
Purchase of notes receivable (1,350) -
Net proceeds from sale of discontinued operations 3,862 -
Purchases of equipment (216) (338)
-------- --------
Net cash provided by (used in) investing activities 2,296 (338)
-------- --------
FINANCING ACTIVITIES:
Proceeds from long-term debt 23,474 500
Net increase (decrease) in revolving credit facility (2,180) -
Proceeds from issuance of preferred stock 4,000 -
Principal payments on long-term debt (24,993) (314)
-------- --------
Net cash provided by financing activities 301 186
-------- --------
Increase (decrease) in cash and cash equivalents (96) 1,596
Cash and cash equivalents at beginning of period 2,536 1,445
-------- --------
Cash and cash equivalents at end of period $ 2,440 $ 3,041
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,406 $ 130
Cash paid (received) for income taxes 33 (108)
Non-cash reduction of debt 1,011 -
Non-cash reduction of receivables 565 -
See notes to condensed consolidated financial statements.
5
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 subsidiaries (the
"Company") for the three and nine months ended September 30, 2002 and 2001 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 nine months ended
September 30, 2002 are not necessarily indicative of the results to be expected
for the full year. The condensed consolidated balance sheet as of December 31,
2001 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. 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 ("NCOP"). Accordingly, during the quarter ended June 30, 2002 the
Company recorded a $3,940 loss on 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 the NCOP net assets to Optometric Eye Care
Center, P.A. ("OECC"), an independent professional association owned by two
former officers of the Company and recorded an additional loss on disposal of
$153. In connection with the sale, the Company received $4,200 in cash and a
$1,000 promissory note. Additional consideration included OECC's surrender of
1,321,010 shares of the Company's common stock (for retirement) with an
estimated fair market value of $357 and OECC's assumption of $135 of certain
other liabilities. The aggregate gross consideration from the sale of
approximately $5,692 was offset by approximately $477 of closing and other
direct costs associated with the sale. The Company paid $3,074 million to its
bank from the proceeds it received from the sale, of which $500 was applied as a
payment on the term loan and $2,674 was applied as a payment on the outstanding
credit facility.
This sale was accounted for as a disposal group under Statement of
Financial Accounting Standards ("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.
The unaudited carrying amounts of the assets and liabilities of the
disposal group at December 31, 2001 were as follows:
Assets:
Accounts receivable $ 1,350
Inventory 1,259
Property and equipment, net 1,846
Intangible assets, net 6,605
Other assets 669
-------
Total assets $11,729
=======
Liabilities:
Accounts Payable $ 963
Accrued Expenses 938
Other liabilities 334
-------
Total liabilities $ 2,235
=======
6
Operating results of the discontinued operations are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2002 2001 2002 2001
-------- -------- -------- --------
External revenue $ 2,366 $ 6,608 $ 16,771 $ 21,113
======== ======== ======== ========
Intercompany revenue $ 578 $ 2,281 $ 4,875 $ 7,447
======== ======== ======== ========
Income (loss) from discontinued operations before taxes $ 218 $ (99) $ 523 $ 348
Income tax expense (benefit) 88 (41) 210 139
-------- -------- -------- --------
Income (loss) from discontinued operations 130 (58) 313 209
Loss on disposal of discontinued operations (153) - (4,092) -
-------- -------- -------- --------
Total income (loss) from discontinued operations $ (23) $ (58) $ (3,779) $ 209
======== ======== ======== ========
Income (loss) per share from discontinued operations $ 0.00 $ 0.00 $ (0.30) $ 0.02
======== ======== ======== ========
3. CAPITAL RESTRUCTURING
On January 25, 2002, the Company closed a series of transactions which
resulted in a major restructuring of its debt, equity and voting capital stock
(the "Capital Restructuring Transactions"). The Capital Restructuring
Transactions included, among other things, the following:
Palisade Concentrated Equity Partnership, L.P. ("Palisade"), a fund
manager and stockholder of the Company, purchased, for $3,600 in cash, 2,571,429
shares of the Company's Series B 12.5% Voting Cumulative Convertible
Participating Preferred Stock, par value $.001 per share and Linda Yimoyines,
wife of Dean J. Yimoyines, M.D., Chairman of the Board and Chief Executive
Officer of the Company, purchased for a $400 cash payment 285,714 shares of
Series B Preferred Stock. Each share of Series B Preferred Stock is immediately
convertible into ten shares of common stock and has the voting power equivalent
to ten shares of common stock; accrues cumulative dividends at an annual rate of
12.5%; must be redeemed in full by the Company on December 31, 2008; and with
respect to dividends, redemption rights, and rights on liquidation, winding up,
corporate reorganization and dissolution, ranks senior to the Company's common
stock.
Bank Austria Creditanstalt Corporate Finance, Inc. ("Bank Austria"),
which was, until January 25, 2002, the Company's senior secured lender, forgave
approximately $10,000 of debt and accrued interest due to it and sold the loans
and other obligations of the Company which Bank Austria then held, including
security agreements, pledges of stock by certain of the Company's subsidiaries
and guarantees of loans and other obligations, to CapitalSource Finance LLC
("CapitalSource"), an asset-based lender specializing in the health care
industry.
CapitalSource, as lender, and the Company, as borrower, amended and
restated the terms of the indebtedness acquired by CapitalSource from Bank
Austria by entering into an Amended and Restated Revolving Credit, Term Loan and
Security Agreement, referred to as the Loan and Security Agreement or Credit
Facility.
Palisade made a subordinated loan to the Company of $13,900, and Linda
Yimoyines made a subordinated loan to the Company of $100 which loans are
evidenced by senior subordinated secured notes. These notes are subordinate to
the Company's indebtedness to its senior lender, CapitalSource, and are secured
by second-priority security interests in substantially all of the Company's
assets (the first-priority security interest is held by CapitalSource).
In connection with providing the $13,900 subordinated loan to the
Company, Palisade received warrants to purchase up to 17,375,000 shares of
common stock. In connection with providing the $100 subordinated loan to the
Company, Ms. Yimoyines received warrants to purchase up to 125,000 shares of
common stock. In conjunction with the amendment and restatement of the credit
facility, CapitalSource received warrants to purchase 250,000 shares of common
stock. The warrants were issued at an exercise price of $0.14 per share and are
exercisable during a ten-year
7
period expiring January 24, 2012. The estimated fair value of the warrants of
approximately $1,380 was recorded as a debt discount and is being amortized on
the interest method over the term of the related debt.
The bridge loan from Alexander Enterprise Holdings Corp. ("Alexander
Enterprise") was satisfied in full, as follows: (i) $2,534 in cash was paid to
Alexander Enterprise in full satisfaction of the $2,300 of principal and $234 of
accrued interest due to Alexander Enterprise under the Bridge Loan. Alexander
Enterprise relinquished its security interest in the assets of the Company and
has no further claims against the Company. The cash was provided by the $3,600
purchase by Palisade of Series B Preferred Stock; (ii) The Company issued
309,170.5 shares of Series B Preferred Stock to Palisade to satisfy the $400 of
principal and $33 of accrued interest due to Palisade as a participant under the
Bridge Loan; and (iii) the Company issued 38,646.3 shares of Series B Preferred
Stock to Ms. Yimoyines to satisfy the $50 of principal and $4 of accrued
interest due to Ms. Yimoyines as a participant under the bridge loan.
The Company reacquired from Bank Austria, for a cash payment of $1,350,
certain notes and contractual rights originally issued or made to the company in
connection with the Company's transfers of certain medical practice assets to
physicians engaged in such practices.
Without further consideration, Bank Austria surrendered warrants
previously issued to it to purchase 100,000 shares of the Company's common
stock; surrendered to the Company (for retirement) 418,803 shares of Series A
convertible preferred stock of the Company; and surrendered to the Company (for
the Company to retire) 56,900 shares of common stock.
In connection with the Capital Restructuring Transactions, the number
of shares of authorized common stock was increased from 50,000,000 to
75,000,000. The additional authorized shares provide, among other things, for
the availability of common stock to be issued upon conversion of the Series B
Preferred Stock and exercise of the warrants issued.
The following table sets forth the long-term debt of the Company at
September 30, 2002:
Term note payable to CapitalSource in principal amounts of
$50 per quarter. The final principal payment is payable
for the outstanding principal balance and is due and
payable on January 25, 2004. Principal and interest is due
and payable monthly in arrears. The interest rate equals
the Prime Rate plus 3.5%. The term note is collateralized
by substantially all assets of the Company. $2,383
Revolving credit note to CapitalSource, due January 25, 2005,
interest is due and payable monthly in arrears on the
first of the month at an annual rate of Prime Rate plus
1.5% and is collateralized by substantially all assets of
the Company. As of September 30, 2002, the Company had
$1,153 of availability under its revolving credit note. 4,294
Senior subordinated secured notes payable due January 24,
2012. The interest rate is 11.50% payable on the last day
of each calendar quarter. The notes are secured by
second-priority security interests in substantially all
the Company's assets (the first-priority security interest
is held by CapitalSource). The outstanding loan balance at
September 30, 2002 includes $1,143 of paid-in-kind
interest. 15,143
Subordinated notes payable due at various dates through 2004.
Principal and interest payments are due monthly or
annually. Interest is payable at rates ranging from 7% to
11.4%. 1,295
Unamortized discounts (1,288)
-------
Total $21,827
Less current portion 1,276
-------
Long-term portion $20,551
=======
4. EXTRAORDINARY ITEM
On January 25, 2002, the Company recorded a gain on the early
extinguishment of debt of $8,789 before income tax of $3,475 as a result of the
Company's Capital Restructuring Transactions. 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.
8
5. SEGMENT INFORMATION
During the third quarter of 2002, the Company sold its retail optometry
division in North Carolina and modified the Company's strategic vision to
reflect that of the Company's new President. Accordingly, the Company 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, 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). This
segment operates a buying group program for optical and ophthalmic goods and
medical supplies, and develops and sells technology systems and software, to eye
care 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 and 2001 have been restated to conform to the
Company's current operating segment presentation.
Summarized financial information, by segment, for the three and nine
months ended September 30, 2002 and 2001 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2002 2001 2002 2001
-------- -------- -------- --------
REVENUES:
Managed vision $ 7,217 $ 6,982 $ 21,970 $ 21,821
Consumer vision 7,155 6,969 21,635 21,318
Distribution and technology 9,152 9,384 28,819 30,653
-------- -------- -------- --------
Reportable segment totals 23,524 23,335 72,424 73,792
All other 941 856 2,121 2,147
Elimination of inter-segment revenues (1,455) (1,057) (4,200) (3,712)
-------- -------- -------- --------
Total net revenue $ 23,010 $ 23,134 $ 70,345 $ 72,227
======== ======== ======== ========
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE TAX:
Managed vision $ 1,090(a) $ 501 $ 1,941 $ 1,535
Consumer vision 423 86 1,167 529
Distribution and technology 190 12 677 219
-------- -------- -------- --------
Reportable segment totals 1,703 599 3,785 2,283
All other 653 745 1,632 1,765
Depreciation (463) (486) (1,402) (1,485)
Amortization (45) (258) (134) (849)
Interest expense (768) (763) (2,300) (2,255)
Corporate (794) (533) (2,250) (1,758)
-------- -------- -------- --------
Income (loss) from continuing operations
before income taxes $ 286 $ (696) $ (669) $(2,299)
======== ======== ========= ========
(a) Includes a $600 reduction in claims expense due to a favorable adjustment to
the reserve.
9
6. EARNINGS (LOSS) PER SHARE
The following tables sets forth the computation of basic and diluted
earnings (loss) per share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Income (loss) from continuing operations $ 104 $ (737) $ (469) $ (2,160)
Preferred stock dividend (143) - (388) -
---------- ---------- ---------- ----------
Loss from continuing operations available to
Common stockholders (39) (737) (857) (2,160)
Discontinued operations (23) (58) (3,779) 209
Extraordinary gain - - 5,314 -
---------- ---------- ---------- ----------
Net income (loss) available to common stockholders $ (62) $ (795) $ 678 $ (1,951)
========== ========== ========== ==========
Weighted average common shares
outstanding - Basic and diluted 12,065,252 12,815,092 12,539,200 12,791,447
========== ========== ========== ==========
Earnings (loss) per share - basic and diluted:
Loss from continuing operations available to
common stockholders $ (0.01) $ (0.06) $ (0.07) $ (0.17)
Discontinued operations (0.00) 0.00 (0.30) 0.02
Extraordinary item - - 0.42 -
---------- ---------- ---------- ----------
Net income (loss) per common share $ (0.01) $(0.06) $ 0.05 $ (0.15)
========== ========== ========== ==========
The following table reflects the potential common shares of the Company
at September 30, 2002 and 2001. These potential shares have been excluded from
the calculation of diluted earnings per share because the Company incurred a
loss from continuing operations available to common stockholders in those
periods and their effect would be anti-dilutive.
2002 2001
---------- ---------
Options 4,908,545 920,458
Warrants 21,196,198 3,501,198
Convertible Preferred Stock 32,049,598 418,803
---------- ---------
58,154,341 4,840,459
========== =========
7. 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 September 30, 2002 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.
10
8. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets". The standard changes the accounting for goodwill and
intangible assets with an indefinite life whereby such assets will no longer be
amortized; however the standard does require evaluation for impairment, and a
corresponding write-down, if appropriate. FAS No. 142 requires the Company to
complete a transitional goodwill impairment test six months from the date of
adoption. The Company completed its transitional impairment test during the
quarter ended June 30, 2002 and no impairment write-down was required.
Comparative information as if goodwill had not been amortized is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2002 2001 2002 2001
----------- ---------- ---------- -----------
Net income (loss) as reported $ 81 $(795) $1,066 $(1,951)
Add back: goodwill amortization - 213 - 714
----- ------ ------ -------
Adjusted net income (loss) 81 (582) 1,066 (1,237)
Preferred stock dividend (143) - (388) -
----- ------ ------ -------
Adjusted net income (loss) available to common
Stockholders $ (62) $(582) $ 678 $(1,237)
===== ====== ====== =======
Earnings (loss) per common share - basic and diluted:
Net income (loss) available to common stockholders $0.00 $(0.06) $ 0.05 $ (0.15)
Goodwill amortization - 0.01 - 0.05
----- ------ ------ -------
Adjusted net income (loss) per share $0.00 $ 0.05 $ 0.05 $ (0.10)
===== ====== ====== =======
Intangible assets subject to amortization are as follows:
AT AT
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------- ------------
Gross Carrying Amount $ 1,926 $ 1,926
Accumulated Amortization (526) (392)
-------------- ------------
Total $ 1,400 $ 1,534
============== ============
Amortization of intangibles was $45 for the three months ended
September 30, 2002 and 2001, and $134 for the nine months ended September 30,
2002 and 2001. Estimated annual amortization expense is expected to be $178,
$172, $111, $111 and $111 for the years 2002, 2003, 2004, 2005 and 2006,
respectively.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
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 Company is required to adopt the provisions of SFAS No. 143 at the
beginning of fiscal 2003. The Company has determined that the adoption of this
statement will not have a material impact on its financial position or results
of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement requires that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. This statement also broadens
the definition of discontinued operations to include more disposal transactions.
The provisions of this statement were adopted by the Company on January 1, 2002.
The Company applied SFAS No. 144 to the sale of assets used in its retail
optical and optometry operations in North Carolina and reported a loss on
disposal of $153 and $4,092 for the three and nine month periods ended September
30, 2002.
11
In April 2002, the FASB issued SFAS No. 145, "Recission 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. In
future periods, the Company will classify debt extinguishment costs within
income from operations and will reclassify previously reported debt
extinguishments as such. The provisions of SFAS No. 145 related to lease
modification are effective for transactions occurring after May 15, 2002. Upon
adoption, the Company will reclassify its previously reported gain from
extinguishment of debt of $8,789 and related income tax expense of $3,475 from
an extraordinary item to continuing operations.
In June 2002, the FASB issued Statement 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. The
Company is required to adopt the provisions of SFAS No. 146 effective for exit
or disposal activities initiated after December 31, 2002. The Company does not
expect the provisions of SFAS No. 146 to have a material impact on its financial
position or results of operations.
12
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, 2001, as filed with the Securities and Exchange
Commission.
Overview. OptiCare Health Systems, Inc. is an integrated eye care
services company that delivers a range of services and systems for eye health
professionals and consumers, including managed care and professional eye care
services. During the third quarter of 2002, the Company sold its retail
optometry division in North Carolina and modified the Company's strategic vision
to reflect that of the Company's new President. Accordingly, the Company
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, 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). This segment operates a buying group program for optical and
ophthalmic goods and medical supplies, and develops and sells technology systems
and software, to eye care 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 that do not meet the
quantitative thresholds for a reportable segment.
In May 2002, the company's Board of Directors approved management's
plan to dispose of substantially all of the net assets used in retail optical
and professional optometry practice locations that it owned or operated in the
State of North Carolina. On August 12, 2002, the company consummated the sale of
those net assets to Optometric Eye Care Center, P.A., an independent
professional association owned by two former officers of the company. The sale
was accounted for as a disposal group 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.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2002 Compared to the Three Months Ended
September 30, 2001
Managed vision services revenue. Managed vision services revenue
increased to $7.2 million for the three months ended September 30, 2002 from
$7.0 million for the three months ended September 30, 2001, an increase of $0.2
million. This increase was primarily due to revenue on new contracts and growth
in existing contracts, which were partially offset by decreases in revenue
associated with contracts that are no longer being serviced by the company.
Product sales revenue. Product sales revenue decreased to $9.9 million
for the three months ended September 30, 2002 compared to $10.7 million for the
three months ended September 30, 2001, a decrease of $0.8 million. Of this
decrease $0.7 million represents a decrease in buying group revenue and $0.1
million represents a decrease in retail optical revenue resulting from a
decrease in purchasing volume. The decrease in buying group volume is primarily
due to 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. The company expects this shift to continue and
potentially further reduce the buying group's market share and revenue, however
the company does not expect this trend to have a material impact on its overall
profitability.
Other services revenue. Other services revenue decreased to $5.2
million for the three months ended September 30, 2002 compared to $5.5 million
for the three months ended September 30, 2001, a decrease of $0.3 million. This
decrease was due to a $0.6 million decrease in health service organization
revenue, which was partially offset by a $0.3 million increase in consumer
vision services attributed to improved productivity of service providers. The
company's revenue stream from fees collected under its health service
organization agreements has been decreasing due to disputes with certain
physician practices who are parties to these agreements. The company is in
litigation with several of these practices and intends to continue to pursue
settlement of these matters in the future. While a continued decrease in these
contractual fees could negatively impact our cash flows, the company is
currently focusing on resolving the disputes with these practices and believes
the company will receive cash payments and/or other consideration in settlement
of these disputes.
13
Other income. Other income for the three months ended September 30,
2002 of $0.7 million represents non-recurring settlements on contracts.
Medical claims expense. Medical claims expense was $5.0 million for the
three months ended September 30, 2002 compared to $5.5 million for the three
months ended September 30, 2001. This decrease was due to a $0.6 million
favorable adjustment to the reserve in the current quarter. The medical claims
expense loss ratio (MLR), representing medical claims expense as a percentage of
managed vision revenue decreased to 69.4% for the three months ended September
30, 2002 compared to 78.6% for the same period in 2001, due to the favorable
adjustment of $0.6 million in the current quarter. Excluding this adjustment,
MLR for the three months ended September 30, 2002 would have been 77.7% compared
to 78.6% for the same period in 2001.
Cost of product sales. Cost of product sales decreased to $8.0 million
for the three months ended September 30, 2002 from $8.6 million for the three
months ended September 30, 2001, a decrease of $0.6 million. This decrease
primarily represents a reduction in cost of sales related to the buying group
program as a result of the decrease in sales volume.
Cost of services. Cost of services decreased to $1.9 million for the
three months ended September 30, 2002 from $2.2 million for the three months
ended September 30, 2001, a decrease of $0.3 million. This decrease was largely
due to a decrease in cost of services associated with consumer vision services
as a result of cost containment initiatives.
Selling, general and administrative. Selling, general and
administrative expenses increased to $6.6 million for the three months ended
September 30, 2002 from $6.0 million for the three months ended September 30,
2001, an increase of $0.6 million. This change primarily represents an increase
in compensation due to staff expansion, and an increase in legal and other
professional fees.
Amortization expense. Amortization expense decreased to less than $0.1
million for the three months ended September 30, 2002 from $0.3 million for the
three months ended September 30, 2001 due to the discontinuation of the
amortization of goodwill effective January 1, 2002 in accordance with Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets".
Income tax expense. The income tax expense of $182 for the three months
ended September 30, 2002 represents tax expense on income from continuing
operations for the quarter as well as an adjustment for minimum state tax
expense. For the three months ended September 30, 2001, the $41 tax expense on
the loss from continuing operations was offset by a $41 tax benefit on the loss
from discontinued operations. There was no aggregate income tax benefit on the
net loss for the three months ended September 30, 2001 due to the uncertainty
regarding the company's ability to utilize its net operating loss carryforwards
at that time.
Discontinued operations. In May 2002, the company's Board of Directors
approved management's plan to dispose of the company's net assets used in the
retail optical and optometry practice locations it owned or operated in North
Carolina and on August 12, 2002 consummated the sale of those assets. During the
quarter ended September 30, 2002 the company recorded an additional loss on
disposal of discontinued operations of $0.2 million, primarily due to changes in
estimated closing costs and increases in the carrying value of the net assets
held for sale as a result of operations from June 30, 2002 through the sale
date. The company reported $0.1 million of income from discontinued operations,
net of tax, for the three months ended September 30, 2002 compared to a $0.1
million loss from discontinued operations, net of tax, for the three months
ended September 30, 2001.
Net income (loss). The company reported net income of $0.1 million for
the three months ended September 30, 2002 compared to a net loss of $0.8 million
for the three months ended September 30, 2001, representing an improvement of
$0.9 million. This improvement was primarily due to a net decrease in operating
expenses, as more fully described above.
Nine Months Ended September 30, 2002 Compared to the Nine Months Ended September
30, 2001
Managed vision services revenue. Managed vision services revenue
increased to $22.0 million for the nine months ended September 30, 2002 compared
to $21.8 million for the nine months ended September 30, 2001, an increase of
$0.2 million. Managed vision revenue increased due to new contracts and growth
on existing contracts, which were partially offset by a decrease in revenue
primarily on three contracts that were not renewed.
Product sales revenue. Product sales revenue decreased to $31.6 million
for the nine months ended September 30, 2002 compared to $34.8 million for the
nine months ended September 30, 2001, a decrease of $3.2 million. Of this
14
decrease, $2.8 million represents a decrease in buying group revenue and $0.4
million represents a decrease in retail optical product revenue resulting from
decreases in purchasing volume. The decrease in buying group volume is due to
consolidation in the eye care industry and an accompanying trend toward direct
purchase from vendors. The company expects this shift to continue and
potentially further reduce the buying group's market share and revenue, however,
the company does not expect this trend to have a material impact on its overall
profitability.
Other services revenue. Other services revenue decreased to $15.5
million for the nine months ended September 30, 2002 compared to $15.6 million
for the nine months ended September 30, 2001, a decrease of $0.1 million. This
decrease includes a $1.3 million decrease in health service organization
revenue, which was offset by a $0.7 million increase in consumer vision services
and a $0.5 million increase in software services. The company's revenue stream
from fees collected under its health service organization agreements has been
decreasing due to disputes with certain physician practices which are parties to
these agreements. The company is in litigation with several of these practices
and intends to continue to pursue settlement of these matters in the future.
While a continued decrease in these contractual fees could negatively impact our
cash flows, the company is currently focusing on resolving the disputes with
these practices and believes the company will receive cash payments and/or other
consideration in settlement of these disputes. The $0.7 million increase in
consumer vision services was due to improved productivity in the optometry and
ophthalmology service areas and the $0.5 million increase in software sales was
primarily due to an increase in sales volume.
Other income. Other income for the nine months ended September 30, 2002
was $1.3 million, which represented non-recurring settlements on contracts.
Medical claims expense. Medical claims expense decreased to $16.8
million for the nine months ended September 30, 2002 compared to $17.3 million
for the nine months ended September 30, 2001, a decrease of $0.5 million. This
decrease is primarily due to a $0.6 million favorable adjustment to the claims
reserve in 2002. The medical claims expense loss ratio (MLR), representing
medical claims expense as a percentage of managed vision revenue, decreased to
76.5% in 2002 compared to 79.5 % in 2001, due primarily to the aforementioned
$0.6 million adjustment. Excluding this adjustment, MLR would have remained
relatively unchanged at 79.2% in 2002 compared to 79.5% in 2001.
Cost of product sales. Cost of product sales decreased to $25.1 million
for the nine months ended September 30, 2002 from $28.0 million for the nine
months ended September 30, 2001, a decrease of $2.9 million. This decrease
primarily represents a reduction in cost of sales related to the buying group
program as a result of the decrease in sales volume.
Cost of services. Cost of services decreased to $6.1 million for the
nine months ended September 30, 2002 from $6.4 million for the nine months ended
September 30, 2001, a decrease of $0.3 million. This decrease was comprised of a
$0.4 million decrease in consumer services due to the implementation of cost
containment initiatives. This decrease was offset by a $0.1 million increase in
technology services due to an increase in sales.
Selling, general and administrative. Selling, general and
administrative expenses increased to $19.1 million for the nine months ended
September 30, 2002 from $18.2 million for the nine months ended September 30,
2001, an increase of $0.9 million. This increase is primarily due to increases
in compensation, legal and professional fees.
Amortization expense. Amortization expense decreased to $0.1 million
for the nine months ended September 30, 2002 from $0.8 million for the nine
months ended September 30, 2001 due to the discontinuation of the amortization
of goodwill effective January 1, 2002 in accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets".
Income tax benefit. The income tax benefit on continuing operations for
the nine months ended September 30, 2002 was $200, which represents a tax
benefit at the statutory rate on the loss from continuing operations, offset by
anticipated minimum taxes. For the nine months ended September 30, 2001, the
$139 tax benefit on the loss from continuing operations was offset by $139 of
tax expense on income from discontinued operations. There was no aggregate
income tax benefit on the company's net loss for the nine months ended September
30, 2001 due to the uncertainty regarding the company's ability to utilize its
net operating loss carryforwards.
Discontinued operations. In May 2002, the company's Board of Directors
approved management's plan to dispose of the company's net assets of the retail
optical and optometry practices it owned or operated in North Carolina and on
August 12, 2002 the company consummated the sale. For the nine months ended
September 30, 2002, the company recorded a $4.1 million loss on the disposal of
discontinued operations. Income from discontinued operations, net of
15
tax, was $0.3 million for the nine months ended September 30, 2002 compared to
$0.2 million for the nine months ended September 30, 2001.
Extraordinary item. The company reported a $5.3 million net gain on
early extinguishment of debt for the nine months ended September 30, 2002. The
gain was reported in the first quarter of 2002 and was comprised of
approximately $10.0 million of forgiveness of principal and interest by Bank
Austria, the company's 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, and $3.5 million of income taxes.
Net income (loss). The company reported net income of $1.1 million for
the nine months ended September 30, 2002 compared to a net loss of $1.9 million
for the nine months ended September 30, 2001, an increase in net income of $3.0
million. The improvement was primarily due to the $5.3 million gain on the
extinguishment of debt and a $1.7 million improvement in continuing operations
which was partially offset by a $4.0 million loss on discontinued operations, as
more fully described above.
LIQUIDITY AND CAPITAL RESOURCES
The company's primary sources of liquidity are cash flows generated
from operations and borrowings under its credit facility. The company's
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.
As of September 30, 2002, we had approximately $2.4 million of cash and
cash equivalents, $2.4 million of borrowings outstanding under a term loan, and
$4.3 million outstanding under our revolving credit agreement. Although we have
a $10 million revolving credit facility, the amount available to be borrowed at
any time is based on the value of the collateral underlying the facility and on
the amount outstanding under the facility at such time. As of September 30,
2002, we had $1.2 million of available credit under our revolving credit
facility.
Net cash used in operating activities of $2.7 million for the nine
months ended September 30, 2002 was primarily driven by a $2.7 million reduction
in accounts payable and other liabilities as a result of the company's improved
liquidity after the capital and debt restructuring in January 2002 and a $1.7
million increase in other assets from escrow deposits. Other uses of cash for
the period included increases in accounts receivable and inventory of $0.7
million. These changes were offset by $2.5 million of net income from continuing
operations after adding back non-cash charges for depreciation, amortization and
interest of continuing operations. Net cash provided by operating activities for
the nine months ended September 30, 2001 of $1.7 million included $0.6 million
of income from continuing operations after adding back non-cash charges for
depreciation, amortization and interest of continuing operations, a $0.7 million
decrease in accounts receivable and a $0.5 million increase in accounts payable
and accrued expenses.
Net cash provided by investing activities was $2.3 million for the nine
months ended September 30, 2002 compared to $0.3 million used in investing
activities for the nine months ended September 30, 2001. Net cash provided by
investing activities in 2002 consisted principally of $3.9 million in net cash
received from the sale of discontinued operations, which was offset by $1.4
million paid to reacquire certain notes receivable and contractual rights as
part of the Capital Restructuring Transactions and $0.2 million for the purchase
of fixed assets. Net cash used in investing activities for the nine months ended
September 30, 2001 was $0.3 million for the purchase of fixed assets.
Net cash provided by financing activities was $0.3 million for the nine
months ended September 30, 2002 compared to $0.2 million for the nine months
ended September 30, 2001. Net cash provided by financing activities in 2002
consisted of approximately $27.5 million from the issuance of debt and preferred
stock, which was partially offset by approximately $25.0 million of principal
payments on long-term debt, primarily related to the company's debt
restructuring in January 2002, and a $2.2 million net decrease in the revolving
credit facility. The primary sources of net cash from financing activities for
the nine months ended September 30, 2001 was $0.5 million of net proceeds from
funds borrowed under the company's amended bridge loan which was partially
offset by approximately $0.3 million of principal payments on notes payable.
Under an agreement with the Texas Department of Insurance, the company
is required to maintain a restricted investment of $250,000. The company does
not believe the requirements of the Texas Department of Insurance will have a
material impact on the company's liquidity.
16
The Capital Restructuring Transactions
On January 25, 2002, the company completed a series of transactions
that resulted in a major reduction in, and restructuring of, the debt described
above as well as our issuance of voting capital stock. The transactions
included, among other things, the following:
1. Palisade Concentrated Equity Partnership, L.P., a fund manager and
stockholder of the company, purchased, for $3.6 million in cash,
2,571,429 shares of the company's Series B 12.5% Voting Cumulative
Convertible Participating Preferred Stock, par value $.001 per
share, referred to as the Series B Preferred Stock, convertible
into 25,714,290 shares of common stock. Linda Yimoyines, wife of
Dr. Yimoyines, purchased for a cash payment of $0.4 million,
285,714 shares of Series B Preferred Stock. The Series B Preferred
Stock is described in more detail below.
2. Bank Austria forgave the portion of our indebtedness to it in
excess of $21.8 million and sold the loans and other obligations
of the company which Bank Austria then held, including security
agreements, pledges of stock by certain of our subsidiaries and
guarantees of loans and other obligations, to CapitalSource
Finance LLC, a Delaware limited liability company.
3. CapitalSource, as lender, and the company, as borrower, amended
and restated the terms of the indebtedness acquired by
CapitalSource from Bank Austria by entering into an Amended and
Restated Revolving Credit, Term Loan and Security Agreement,
referred to as the Loan and Security Agreement or the Credit
Facility.
4. Palisade made a subordinated loan to us of $13.9 million, and
Linda Yimoyines, wife of Dean J. Yimoyines, made a subordinated
loan to us of $100,000, which loans are evidenced by senior
subordinated secured notes, the terms of which are described in
more detail below.
5. In connection with providing its $13.9 million subordinated loan
to the company, Palisade received warrants entitling Palisade to
purchase up to 17,375,000 shares of common stock at an exercise
price of $0.14 per share (subject to anti-dilution provisions). In
connection with her providing a $100,000 subordinated loan to the
company, Ms. Yimoyines received warrants entitling her to purchase
up to 125,000 shares of common stock at an exercise price of $0.14
per share (subject to anti-dilution provisions). The warrants
issued to Palisade and to Ms. Yimoyines are exercisable during a
ten-year period expiring January 24, 2012.
6. In conjunction with the amendment and restatement of the credit
facility, we issued 10-year warrants to CapitalSource to purchase
250,000 shares of our common stock at an exercise price of $0.14
per share (subject to anti-dilution provisions).
7. The company applied a portion of the proceeds of the Palisade loan
to pay down the indebtedness under our credit facility now held by
CapitalSource.
8. Our bridge loan from Alexander Enterprise was satisfied in full,
as follows:
a. $2.5 million in cash was paid to Alexander Enterprise in
full satisfaction of the principal and interest owed to
Alexander Enterprise under the bridge loan. Alexander
Enterprise relinquished its security interest in the
assets of the company and has no further claims against
us. The cash was provided by the $3.6 million purchase
by Palisade of Series B Preferred Stock.
b. We satisfied our obligations to Palisade as a
participant under the bridge loan by issuing to Palisade
309,170.5 shares of Series B Preferred Stock. The amount
of such participation, including accrued but unpaid
interest, was $432,839.
c. We satisfied our obligations to Ms. Yimoyines as a
participant under the bridge loan by issuing to Ms.
Yimoyines 38,646.3 shares of Series B Preferred Stock.
The amount of such participation, including accrued but
unpaid interest, was $54,104.
9. We reacquired from Bank Austria, for a cash payment of $1.35
million, certain notes and contractual rights originally issued or
made to the company in connection with the company's transfers of
certain medical practice assets to physicians engaged in such
practices.
17
10. Without further consideration, Bank Austria surrendered to the
company warrants previously issued to it to purchase 100,000
shares of the company's common stock; surrendered to the company
(for retirement) 418,803 shares of Series A convertible preferred
stock of the company; and surrendered to the company (for
retirement) 56,900 shares of common stock.
11. As of the closing of the Capital Restructuring Transactions on
January 25, 2002, Palisade held (i) 2,000,000 shares of our common
stock which were previously acquired, (ii) 2,880,599.5 shares of
Series B Preferred Stock, immediately convertible into 28,805,995
shares of common stock, and (iii) immediately exercisable warrants
to purchase up to an additional 17,775,000 shares of common stock,
of which warrants to purchase 400,000 shares at $0.40 per share
were previously acquired. Thus, 44,864,690 shares of our common
stock (including 12,815,092 shares of common stock outstanding as
of January 25, 2002 (i.e., prior to the Capital Restructuring
Transactions), and 32,049,598 shares of common stock issuable upon
conversion of the Series B Preferred Stock held by Palisade and
Ms. Yimoyines) would be outstanding in the event that all of the
shares of Series B Preferred Stock are converted. Without giving
effect to any warrants, Palisade may be deemed to beneficially own
74.0% of our common stock. Giving effect to the warrants held by
Palisade, Palisade may be deemed to beneficially own 81.8% of our
common stock.
In connection with the Capital Restructuring Transactions, we agreed
that, so long as Palisade owns more than 50% of the voting power of the company,
Palisade shall have the right to designate a majority of our board of directors.
Pursuant to this provision, three nominees of Palisade were elected to the
company's board of directors effective January 25, 2002.
In connection with the Capital Restructuring Transactions, our
stockholders approved various equity-related proposals by written consent in a
solicitation process, which commenced on January 4, 2002. Among those was a
proposal to increase the number of shares of authorized common stock from
50,000,000 to 75,000,000. The additional authorized shares provide the
availability of common stock to be issued upon conversion of the Series B
Preferred Stock and exercise of the warrants, which were issued to Palisade, Ms.
Yimoyines and CapitalSource.
Subject to the reservation shares of common stock for such conversion
and exercise of warrants, the additional shares will be available for issuance
from time to time by the company at the discretion of the board of directors,
normally without further stockholder action or notification (except as may be
required for a particular transaction by applicable law, requirements of
regulatory agencies or by stock exchange rules) to provide for future equity and
convertible debt financings, acquisitions of property or securities of other
corporations, debt conversions and exchanges, exercise of current and future
options and warrants, and for issuance under our current or future employee
benefit plans, stock dividends and stock splits.
In conjunction with the Capital Restructuring Transactions the company
adopted a by-law amendment which provides that, for so long as Palisade holds
more than 50% of our voting power, the approval of the majority of the company's
independent directors (as that term is defined by the American Stock Exchange)
is required to, among other things, redeem the Series B Preferred Stock; issue
any new class or series of preferred stock to Palisade; issue a security
convertible into preferred stock to Palisade; declare or pay any dividend in
cash, property or securities of the company; or amend the special voting
provision of the company's by-laws.
The CapitalSource Credit Facility
The amended and restated credit facility with CapitalSource is
comprised of a $3 million term loan and up to a $10 million revolving credit
facility.
The principal terms of the term loan with CapitalSource are:
o The maximum amount of the term loan is 40% of the value of our
capital equipment, as determined by CapitalSource in its absolute
discretion; the current balance drawn down on the term loan is $3
million.
o The interest rate is 3.5 percentage points over the announced
prime rate of Citibank, N.A., but not less than 9%.
o Principal and interest are payable monthly, on the basis of a
15-year amortization, with payment in full of the balance due on
January 25, 2004, two years from the closing of the Loan and
Security Agreement.
18
The principal terms of the revolving credit facility with CapitalSource are:
o The maximum amount which may be advanced under the revolving
credit facility is the lesser of (i) $10 million or (ii) 80% of
eligible accounts receivable and inventory of the company, plus up
to an additional $750,000.
-- Eligible accounts receivable are accounts
receivable not more than 120 days old, subject to
certain cross-aging requirements, and subject to
determination by CapitalSource.
-- Eligible inventory is inventory meeting a number of
detailed requirements of CapitalSource and valued
at the company's cost less all discounts.
o The interest rate on the revolving credit facility is 1.5
percentage points above the announced prime rate of Citibank,
N.A., but not less than 7% per year. Interest is payable monthly
in arrears.
o All accounts receivable of the company shall be paid into
lockbox accounts and immediately transferred from such lockbox
accounts into a depository account maintained by CapitalSource on
a daily basis.
o The revolving credit facility expires and the outstanding
balance of the revolving credit facility, together with accrued
but unpaid interest, comes due in full on January 25, 2005, three
years from the closing of the amended and restated Loan and
Security Agreement.
With respect to both the term loan and the revolving credit facility,
we must also pay a monthly "unused line fee" that equals the excess, if any, of
$3,000 over all interest accrued for such month.
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 a minimum net worth.
The company's subsidiaries have guaranteed payments and other
obligations under the credit facility and the company (including certain
subsidiaries) has granted a security interest in substantially all its assets in
favor of CapitalSource. The company also pledged the capital stock of certain of
its subsidiaries to CapitalSource.
The occurrence of certain events or conditions described in the Loan
and Security Agreement (subject to grace periods in certain cases) constitutes
an "event of default." If an event of default occurs, the entire outstanding
balance of principal and interest would become immediately due and payable.
Events of default include:
o Our failure to pay any principal or interest when due;
o Our failure to pay any indebtedness to persons other than
CapitalSource in excess of $250,000 (including amounts
payable to Palisade under the note issued to Palisade);
o Our failure to observe any covenant under the credit facility
(including, e.g., the financial covenants);
o Bankruptcy, insolvency or receivership proceedings with
respect to the company;
o Certain changes of control of the company (as defined in the
Loan and Security Agreement);
o Our inability to pay our debts generally as they come due;
and
o The occurrence or expectation of any material adverse change
with respect to the company.
In August 2002, the company paid $3,074,105 to CapitalSource from the
proceeds it received from the sale of its net assets used in its retail optical
and optometry operations in North Carolina. Of the $3,074,105 paid, $500,000 was
applied as a payment on the term loan and $2,674,105 was applied as a payment on
the outstanding credit facility. An additional $400,000 was paid to
CapitalSource in October 2002 from proceeds released from escrow on the
aforementioned sale, which was applied to the outstanding credit facility.
19
The Palisade and Yimoyines Senior Subordinated Secured Loans
Palisade made a subordinated loan to us of $13.9 million, and Ms.
Yimoyines made a subordinated loan to us of $100,000, which loans are evidenced
by senior subordinated secured notes. The senior subordinated secured notes
issued to Palisade and to Ms. Yimoyines rank pari passu with each other. The
notes are subordinate to our indebtedness to CapitalSource and are secured by
second-priority security interests in substantially all the company's assets
(the first-priority security interest is held by CapitalSource).
Principal is due to be paid in 10 years (i.e., on January 25, 2012) and
interest is payable quarterly at the rate of 11.5%. In the first and second
years, the company has 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. In the third through tenth years, the holder of
the note has the right to require the company to defer interest to maturity by
increasing the principal amount of the note by the amount of interest so
deferred. As of September 30, 2002, the Company deferred the payment of interest
on these senior notes to maturity by increasing the principal balance of these
notes by $1,143,000.
The notes contain certain restrictions on the conduct of our business,
including, among other things, restrictions on incurring debt, becoming a party
to a merger, selling or transferring substantially all of the assets of the
company, declaring or paying any cash dividends or making any other payment or
distribution on the company's capital stock or purchasing or redeeming such
stock, entering into any agreements inconsistent with the company's obligations
under the notes, making any redemption or prepayment of any subordinated debt,
creating or suffering liens on the company's assets, or materially changing the
nature of the company's business.
The occurrence of certain events or conditions described in the Notes
(subject to grace periods in certain cases) constitutes a "default." If a
default occurs, the entire outstanding balance of principal and interest would
become immediately due and payable. Such defaults include, but are not limited
to, failure to pay any principal or interest under the notes when due; failure
to pay any principal or interest when due with respect to the CapitalSource
credit facility; failure to perform or comply with any obligation under the
notes; entry of a final judgment against the company, which, together with all
other final judgments, exceeds in the aggregate $250,000, and which judgment is
not stayed, paid or discharged; and bankruptcy, insolvency or receivership
proceedings with respect to the company.
The Series B Preferred Stock
The company issued 3,204,959 shares of Series B 12.5% Voting Cumulative
Convertible Participating Preferred Stock. The Series B Preferred Stock accrues
cumulative dividends at an annual rate of 12.5%. As of September 30, 2002,
accrued and unpaid dividends on the Preferred Stock were approximately $388,000.
Each share of Series B Preferred Stock is immediately convertible into ten
shares of common stock and has the voting power equivalent to ten shares of
common stock, subject to certain anti-dilution adjustments. The Preferred Stock
is redeemable at any time by the company on 30 days' notice and must be redeemed
in full by the company on December 31, 2008, at a price equal to the greater of
the aggregate adjusted redemption value of the Series B Preferred Stock plus
accrued but unpaid dividends or the amount the preferred stockholders would be
entitled to receive if the Series B Preferred Stock plus accrued dividends were
converted at that time into common stock and the company were to liquidate and
distribute all of its assets to its common stockholders.
RECENT ACCOUNTING CHANGES
Effective January 1, 2002, the company adopted Statement of Financial
Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets".
The standard changes the accounting for goodwill and intangible assets with an
indefinite life whereby such assets will no longer be amortized; however the
standard does require evaluation for impairment, and a corresponding write-down,
if appropriate. SFAS No. 142 requires a transitional goodwill impairment test
six months from the date of adoption. The company completed its transitional
impairment test during the quarter ended June 30, 2002 and no impairment
write-down was required.
In June 2001, the Financial Accounting Standards Board ("FASB") issued 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 company is required to adopt
20
the provisions of SFAS No. 143 at the beginning of fiscal 2003. The company has
determined that the adoption of this statement will not have a material impact
on its financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement requires that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. This statement also broadens
the definition of discontinued operations to include more disposal transactions.
The provisions of this statement were adopted by the company on January 1, 2002.
The Company applied SFAS No. 144 to the sale of its North Carolina retail
optical and optometry assets and reported a loss on disposal of $153 and $4,092
for the three and nine months ended September 30, 2002, respectively.
In April 2002, the FASB issued SFAS No. 145, "Recission 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. In
future periods, the company will classify debt extinguishment costs within
income from operations and will reclassify previously reported debt
extinguishments as such. The provisions of SFAS No.145 related to lease
modification are effective for transactions occurring after May 15, 2002. Upon
adoption, the company will reclassify its previously reported gain from
extinguishment of debt of $8,789 and related income tax expense of $3,475 from
an extraordinary item to continuing operations.
In June 2002, the FASB issued 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. The
company is required to adopt the provisions of SFAS No. 146 effective for exit
or disposal activities initiated after December 31, 2002. The company does not
expect the provisions of SFAS No. 146 to have a material impact on its financial
position or results of operations.
IMPACT OF INFLATION AND CHANGING PRICES
The company 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 the company's results of operations if it 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 the
company's non-Medicare business is also affected by changes in Medicare
reimbursement rates.
Management believes that inflation has not had a material effect on the
company's revenues for the three and nine-month periods ended September 30, 2002
and 2001.
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 Future opportunities;
o The outlook of customers;
o The reception of new services, technologies and pricing
methods;
o Existing and potential strategic alliances;
o The likelihood of incremental revenues offsetting expense
related to new initiatives; and
o Expected improvements in the company's financial condition as
a result of the new capital structure.
21
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 the
company's business, including health-care cost containment
efforts by Medicare, Medicaid and other third-party payers;
o Demand and competition for the company's 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;
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 the company's compliance with Health Services
Organization contracts and have ceased or may cease making
payments under such contracts, jeopardizing the company's
cash flow; and
o Other risks and uncertainties discussed in this Form 10-Q and
detailed from time to time in the company's 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.
22
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company is subject to market risk from exposure to changes in
interest rates based on its financing activities under its credit facility with
CapitalSource, due to its variable interest rate. The nature and amount of the
company's indebtedness may vary as a result of future business requirements,
market conditions and other factors. The extent of the company's interest rate
risk is not quantifiable or predictable due to the variability of future
interest rates and financing needs. The company does not expect changes in
interest rates to have a material effect on income or cash flows in the year
2002, although there can be no assurances that interest rates will not
significantly change. A 10% change in the interest rate payable by the company
on its variable rate debt would have increased or decreased the nine month
interest expense by approximately $81,000 assuming that the company's borrowing
level is unchanged. The company did not use derivative instruments to adjust the
company's interest rate risk profile during the nine months ended September 30,
2002.
ITEM 4: CONTROLS AND PROCEDURES
During the 90-day period prior to the filing date of this report,
management, including the company's Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of the
company's disclosure controls and procedures. Based upon, and as of the date of,
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures were effective, in all
material respects, to ensure that information required to be disclosed in the
reports the company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required. There have been no
significant changes in the company's internal controls or in other factors which
could significantly affect internal controls subsequent to the date the company
carried out its evaluation. There were no significant deficiencies or material
weaknesses identified in the evaluation and, therefore, no corrective actions
were taken.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The company and/or its subsidiaries filed lawsuits described below
against eleven (11) medical practices and their shareholders. Each suit involves
a medical practice which was unwound from the former PrimeVision Health network
and which remained affiliated with the company through a Health Service
Organization ("HSO") agreement. These suits were filed in response to the
medical practices' failure to pay the agreed upon HSO services fees. With one
exception involving a state court filing, each of the suits was filed in the
Federal District Court for the district in which a defendant practice is
located. The company intends to move to transfer each matter to the
multi-district litigation currently pending in the Federal District Court for
the Western District of Kentucky in Louisville, KY. The various defendant
practices have not yet filed responsive pleadings. The company continues to
discuss settlement of the HSO matters with some of the defendant practices. The
suits are in the early stages of litigation, and there can be no assurance of a
favorable outcome.
The company has filed suit against Delaware Eye Care Center, Dover DE,
in Delaware Superior Court, New Castle, DE; Downing-McPeak Vision Centers,
P.S.C., Bowling Green, KY, in the United States District Court for the Western
District of Kentucky; Surgical Care Center, Inc., Indianapolis, IN, in the
United States District Court for the District of Indiana; Eye Surgeons of
Indiana, P.C., Indianapolis, IN, in the United States District Court for the
District of Indiana; Jeffrey P. Wasserstrom, M.D., a Medical Corporation, La
Mesa, CA, in the United States District Court for the Southern District of
California; Midwest Eye Institute, Kansas City, MO, in the United States
District Court for the Western District of Missouri (Western Division); The
Milne Eye Medical Center, Inc., Silver Spring, MD, in the United States District
Court for the District of Maryland (Southern Division); Robert M. Thomas, Jr.,
M.D., a Medical Corporation, San Diego, CA, in the United States District Court
for the Southern District of California; The Brinkenhoff Eye Medical Center,
Inc., Ventura, CA, in the United States District Court for the Central District
of California; and Tri-County Eye Institute, a Medical Corporation, Corona, CA,
in the United States District Court for the Central District of California.
In each lawsuit listed above, the company maintains that the defendant
practice has breached its HSO agreement by failing to pay the agreed upon HSO
services fees. The company seeks payment of past due HSO services fees, payment
of the Buy-Out Fee as stated in the HSO agreement, attorneys' fees and interest
as permissible in the HSO agreement and interest. The company's complaints filed
in the above referenced litigation review in detail the history of the
relationship with the defendant practices.
23
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On July 16, 2002, options to purchase 262,500 shares of common stock at
an exercise price of $0.25 were granted under the 2002 Stock Incentive Plan.
On August 12, 2002, in connection with the sale of the net assets of
the company's retail optical and optometry operations in North Carolina, the
company received back 1,321,010 shares of its common stock for retirement. Those
shares of common stock had an aggregate fair market value of approximately
$357,000 on August 12, 2002.
The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
pursuant to Section 4(2) thereof. No underwriter was engaged in connection with
the foregoing sales 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
those individuals purchasing securities represented that they acquired the
shares for investment and not with a view to the distribution thereof, and (iii)
other than with respect to the options, 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 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
------- -----------
2 Asset Purchase Agreement dated as of August 1, 2002 by
and among OptiCare Health Systems, Inc., PrimeVision
Health, Inc. and Optometric Eye Care Center, P.A.
incorporated herein by reference to the Registrant's
Current Report on Form 8-K filed on August 27, 2002,
Exhibit 2.
b. Reports on Form 8-K filed in the period covered by this report:
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on August 27, 2002 relating to the Company's sale
of the net assets of the retail optical business and professional
optometry practices that it operated in North Carolina.
24
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: November 14, 2002 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
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CERTIFICATION
I, Dean J. Yimoyines, certify that:
1. I have reviewed this quarterly report on Form 10-Q of OptiCare Health
Systems, Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Dean J. Yimoyines, M.D.
------------------------------------
Dean J. Yimoyines
Chairman and Chief Executive Officer
Date: November 14, 2002
26
OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CERTIFICATION
I, William A. Blaskiewicz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of OptiCare Health
Systems, Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
By: /s/ William A. Blaskiewicz
------------------------------------------
William A. Blaskiewicz
Vice President and Chief Financial Officer
Date: November 14, 2002
27
CERTIFICATION
Each of the undersigned hereby certifies in his capacity as an officer of
OptiCare Health Systems, Inc. (the "Company") that the Quarterly Report of the
Company on Form 10-Q for the period ended September 30, 2002 fully complies with
the requirements of Section 13(a) of the Securities Exchange Act of 1934 and
that the information contained in such report fairly presents, in all material
respects, the financial condition of the Company at the end of such period and
the results of operations of the Company for such period.
Date: November 14, 2002
/s/ Dean J. Yimoyines, M.D.
--------------------------------------------
Dean J. Yimoyines
Chairman and Chief Executive Officer
/s/ William A. Blaskiewicz
--------------------------------------------
William A. Blaskiewicz
Vice President and Chief Financial Officer