Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-15223
OPTICARE HEALTH SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0453392
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
87 GRANDVIEW AVENUE, WATERBURY, CONNECTICUT 06708
(Address of Principal (Zip Code)
Executive Offices)
(203) 596-2236
Registrant's Telephone Number, Including Area Code:
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, $.001 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [ ] Yes [X] No
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant (without admitting that any person whose shares
are not included in such calculation as an affiliate) computed by reference to
the closing market price as reported on the American Stock Exchange on June 28,
2002, the last business day of the registrant's most recently completed second
fiscal quarter, was $3,276,409.
The number of shares outstanding of the registrant's Common Stock, par value
$.001 per share, as of February 28, 2003, was 30,038,990 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required in Part III of this Annual Report on Form 10-K is
incorporated herein by reference to the registrant's Proxy Statement for the
2003 Annual Meeting of Stockholders.
OPTICARE HEALTH SYSTEMS, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS............................................................3
ITEM 2. PROPERTIES.........................................................19
ITEM 3. LEGAL PROCEEDINGS..................................................19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................22
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..............................................26
ITEM 6. SELECTED FINANCIAL DATA............................................28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..............................29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.............................................................43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...............................43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY....................43
ITEM 11. EXECUTIVE COMPENSATION.............................................44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.......................44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................44
ITEM 14. CONTROLS AND PROCEDURES............................................44
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K .............................45
SIGNATURES...................................................................51
CERTIFICATIONS...............................................................52
2
PART I
ITEM 1. BUSINESS
GENERAL
OptiCare Health Systems, Inc. is an integrated eye care services company
focused on providing managed vision and professional eye care products and
services. We operate in three distinct segments of the eye care market which,
together, cover virtually every major sector of that market:
o Our Managed Vision Division contracts with insurers, insurance fronting
companies, employer groups, managed care plans, HMOs and other third
party payers to manage claims payment administration of eye health
benefits for contracting parties in eight states and to provide
insurance coverage relating to certain eye care products and services.
o Our Consumer Vision Division sells retail optical products to consumers
and owns and/or operates integrated eye health centers, professional
optometric practices and surgical facilities in Connecticut where
comprehensive eye care services are provided to patients.
o Our Distribution & Technology Division serves the professional eye care
market through (i) Wise Optical, a distributor of contact and
ophthalmic lenses and other eye care accessories and supplies (see
"--Recent Developments"); (ii) a Buying Group program, which provides
group purchasing arrangements for optical and ophthalmic goods and
supplies to ophthalmologists, optometrists and opticians, and (iii) CC
Systems, which provides systems and software solutions, including
production, management and inventory systems, for eye care
professionals and for eyeglass manufacturing laboratories.
Our principal executive offices are located at 87 Grandview Avenue,
Waterbury, Connecticut, 06708. Our telephone number is (203) 596-2236 and our
web site address is www.opticare.com. We include our web site address in this
Annual Report on Form 10-K only as an inactive textual reference and do not
intend it to be an active link to our web site.
We make available free of charge through the Investor Relations section of
our web site our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports as soon as
reasonably practicable after such material is electronically filed with, or
furnished to, the Securities and Exchange Commission (the "SEC"). The public may
read and copy any materials we file with the SEC at the SEC's Public Reference
Room, 450 Fifth Street, NW, Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. Because we file reports and other information with the SEC
electronically, the public may obtain access to those documents at the SEC's
Internet web site: http://www.sec.gov.
RECENT DEVELOPMENTS
Acquisition of the Business of Wise Optical Vision Group, Inc.
On February 7, 2003, we acquired all of the assets and certain liabilities
of Wise Optical Vision Group, Inc. a Yonkers, New York-based distributor of
contact and ophthalmic lenses to the professional eye care market. Wise Optical
is one of the largest contact lens distributors in the U.S., with FY 2002 sales
in excess of $65 million.
Wise Optical, which carries a large and diverse inventory, has an account
base of approximately 22,500 customers, most of whom are independent eye-care
practitioners. Such practitioners also constitute one of the major market
sectors served by our other operations. Our acquisition of Wise Optical puts at
our disposal a field
3
sales/customer service force of nearly 60 individuals nationwide.
The purchase price consisted of approximately $7.3 million of cash, 750,000
shares of our common stock and our assumption of certain liabilities. Funds for
the acquisition were obtained from our revolving line of credit, which was
increased from $10 million to $15 million.
Managed Vision Division Enters Direct-to-Employer Market
In February 2003, our Managed Vision Division entered the
"direct-to-employer" market through the launch of a new suite of vision benefit
plans. The new plans, which provide for eye exams and optical hardware
(eyeglasses and contact lenses), allow OptiCare, for the first time, to market
eye care benefits directly to employers, unions, trade organizations,
municipalities and other qualified groups.
The new suite of eye care benefit products includes an insured plan,
underwritten on behalf of OptiCare by Fidelity Security Life Insurance Company;
an administrative services only product for self-insured groups; and a "Section
125" (before-tax, voluntary, employee contribution) product. The insured plan
will be offered by means of a new, wholly owned subsidiary, OptiCare Vision
Insurance Company, Inc. (OVIC). OVIC is domiciled in South Carolina and recently
received approval to operate as a captive insurance company from the South
Carolina Department of Insurance.
After administering eye care benefits of this nature for more than a decade
for insurance companies and HMOs--currently to approximately 2 million benefit
lives--we are now able to offer these products in our own name and to offer them
to a much broader spectrum of clients.
OTHER SIGNIFICANT DEVELOPMENTS IN FISCAL 2002
Changes in the Board of Directors and Management
At the Annual Meeting of Stockholders, held on May 21, 2002, the following
individuals were elected to serve as directors until the next annual meeting or
their successor is duly appointed: Dean J. Yimoyines, M.D., Chairman; Norman S.
Drubner, Esq.; Melvin Meskin; Mark S. Hoffman; Eric J. Bertrand; David B.
Cornstein; Clark A. Johnson; and Mark S. Newman. On July 16, 2002, Richard L.
Huber was elected by the Board of Directors to serve as a director until the
next annual meeting.
On June 10, 2002, Lance A. Wilkes, formerly Senior Vice President of
Business Development of CIGNA Health Services, joined OptiCare as our President
and Chief Operating Officer. On November 18, 2002, T. Gregory Eastburn, formerly
President of Axiom Laboratories, Inc., was named President of the distribution
sector of our Distribution & Technology Division. On January 22, 2003, James
Carmona, Jr., former President and Chief Operating Officer of Forte Information
Services, Inc., was named our Chief Information Officer and President of the
technology sector of our Distribution & Technology Division.
New Capital Structure and Steps to Strengthen Balance Sheet
New Capital Structure - On January 25, 2002, we completed a series of
transactions which resulted in a major restructuring of our debt, equity and
voting capital stock. We refer to these as the Capital Restructuring
Transactions and they are described in detail in "Management's Discussion and
Analysis of Financial Condition and Results of Operations --The Capital
Restructuring Transactions." Taken together, the Capital Restructuring
Transactions lowered our long-term debt by approximately $10.3 million and
increased our equity by approximately $6.9 million. As a result of the Capital
Restructuring Transactions, Palisade Concentrated Equity Partnership, L.P., a
fund manager and a stockholder prior to the restructuring, increased its
beneficial ownership of our voting stock from approximately 16% to approximately
81.8%.
Sale of Our North Carolina Retail Operations - On August 12, 2002, we sold
substantially all of the assets relating to the professional optometry practice
locations and retail optical business we owned or operated in the State of North
Carolina to Optometric Eye Care Center, P.A. Excluded from the sale were our
other North
4
Carolina operations (i.e., our Managed Vision Division and Buying Group). The
aggregate consideration we received was approximately $5.7 million, consisting
of approximately $4.2 million of cash, a $1.0 million promissory note, due and
payable on August 1, 2007, the return of 1.3 million shares of our common stock
formerly held by the principal shareholders of Optometric Eye Care Center, P.A.
and Optometric Eye Care Center, P.A.'s assumption of certain liabilities. We
used the cash proceeds from the sale to reduce bank debt and to provide working
capital.
The principal shareholders of Optometric Eye Care Center, P.A. are D. Blair
Harrold, O.D., and Allan L. M. Barker, O.D., two former officers of OptiCare. In
connection with the consummation of the sale, Drs. Harrold and Barker resigned
their positions with OptiCare. The sale of the assets resolved certain claims
that may have existed between us and Optometric Eye Care Center, P.A. and our
respective affiliates arising from previous contractual agreements between us.
The purchase price and all negotiations relating to the transaction were on an
arm's length basis. The sale was unanimously approved by the North Carolina
State Board of Examiners in Optometry.
Key Shareholders Exercise Warrants - In December 2002, two shareholders,
including our majority shareholder, Palisade, exercised warrants which generated
cash proceeds to us of $2,450,000. The proceeds were used in part to pay down
our senior bank debt.
Palisade exercised for cash warrants to purchase 17,375,000 shares of
common stock that it purchased as part of the Capital Restructuring
Transactions. In addition, Linda Yimoyines, wife of Dean J. Yimoyines, M.D., our
Chairman and Chief Executive Officer, exercised for cash warrants to purchase
125,000 shares of common stock. The warrants which were exercised by these
shareholders for $0.14 per share, were scheduled to expire on January 24, 2012.
The portion of our voting stock which Palisade beneficially owns, approximately
81.8%, did not change as a result of this exercise of its warrants.
Re-Alignment of Reporting Segments
During the third quarter of 2002, consistent with a revised strategic
vision, we realigned our business into the following three reportable operating
segments: (1) Managed Vision, (2) Consumer Vision, and (3) Distribution &
Technology. In connection with this re-alignment, historical amounts previously
reported have been restated to conform to our new operating segment
presentation.
THE EYE CARE INDUSTRY
Overview
The eye care market includes both eye care services (including the systems
and equipment for delivering such services) and optical products.
In the eye care services sector, eye health professionals, including
ophthalmologists and optometrists, provide diagnostic eye examinations and
treatment interventions to address complex eye and vision conditions, including
disease and/or lack of functionality of the eyes. The most common conditions
addressed by eye care professionals are nearsightedness, farsightedness and
astigmatism. These eye and vision conditions are treated with surgical
intervention (notably, laser surgery), prescription glasses, contact lenses or
some combination of these treatments.
The optical products sector of the eye care market consists of the
manufacture, distribution and sale of corrective lenses, eyeglasses, frames,
contact lenses and other related optical products.
In the U.S., eye care services have traditionally been delivered by
ophthalmologists and optometrists. Eye wear is typically dispensed by opticians.
Ophthalmologists are specifically trained physicians who have completed four
years of medical school, obtained a medical degree and have received specialty
training in ophthalmology. Ophthalmologists are licensed to conduct diagnostic
examinations and to perform ophthalmic surgery. Optometrists
5
complete four years of optometry school and are generally licensed to perform
routine eye examinations and prescribe corrective optical devices (principally
eyeglasses and contact lenses). Optometrists do not perform surgery, but often
provide pre- and post-operative care. Opticians measure, fabricate, fit and
adjust glasses as requested by patients and as prescribed by doctors. They also
perform routine repairs and dispense eyeglasses and contact lenses. There are
approximately 20,000 practicing ophthalmologists and 31,000 practicing
optometrists in the U.S.
The U.S. market for eye care services and optical products is very large
and growing. Approximately 61% of the U.S. population--169 million
people--require some form of vision correction; and over 100 million--or some
60% of those consumers--purchase eye wear each year. Annual market growth rates
of 2% to 5% are expected to continue for the next several years. The single most
compelling explanation for such growth is demographics, and, specifically the
aging baby boom segment of the population. The need for corrective lenses is
highly correlated with age. While 63% of 25-44 year-olds need such lenses, 95%
of 45-64 year-olds require them. As the median age of the population increases
(the portion of the U.S. population age 45 and over is projected to grow 21%
from 2001 to 2010), the number of Americans requiring vision correction is
expected to grow. Further, the rise of third-party plan providers continues to
fuel growth in the industry. Since 1989, the portion of the eye care population
covered by third-party plan providers has grown from 40% to 54%.
Eye care in the U.S. is a $45 billion market. Of that, approximately $29
billion is spent annually on health care services related to eye care. In
addition, consumers spend approximately $16 billion annually on retail optical
products, of which approximately 84%--or $14 billion--is spent on lenses and
frames, while approximately 12%--or $2 billion--is spent on contact lenses (with
the balance, approximately 4% or $0.6 million, being spent on sunglasses).
We do business in both sectors of this market (i.e., by providing eye care
services and selling optical products). We also do business across both sectors
of this market (i.e., by providing managed vision services with respect to both
eye care services and optical products).
Eye Care Services and Products
We expect the demand for medical intervention and eye surgery to show
steady growth. We believe that the aging of the population, including the "baby
boom" generation, will increase the demand for medical and surgical treatment of
such common disorders as glaucoma, macular degeneration, diabetic retinopathy
and cataracts. Glaucoma affects approximately 3 million people in the U.S. and
is projected by industry sources to double by 2030. 2.7 million cataract
surgeries were performed in 2002, and that number is expected to increase to
approximately 3.2 million by 2007. Since patients over the age of 65 are most
affected by these eye disorders, the Medicare program is the primary payer for
treatment, including surgical treatment, of these disorders.
Managed Vision Services
According to InterStudy, a health care research firm, as of January 2002,
total U.S. enrollment in health maintenance organizations was 76.1 million.
Additionally, approximately 80 million Americans are enrolled in preferred
provider organizations. Almost all health care insurance plans cover
medical/surgical treatment of eye disorders and many also provide vision care
benefits, including routine eye exams and optical products.
We believe that enrollment in health care insurance plans which provide
coverage of eye care services will continue to grow. We expect this trend will
be supported by managed care plans offering enhanced vision and eye care
benefits in order to more aggressively compete for potential membership.
Further, vision care coverage is the fastest growing employee benefit.
Vision is a low-cost, high perceived value benefit, rated by employees as one of
the three most important benefits. The percentage of employers offering vision
benefits rose from 34% in 1996 to 56% in 2000, the latest year for which such
statistics are available.
DESCRIPTION OF BUSINESS DIVISIONS
6
Our business operations are managed through three divisions which,
together, cover virtually every major sector of the eye care market: Managed
Vision; Consumer Vision; and Distribution & Technology.
Managed Vision Division
- -----------------------
Description
Our Managed Vision Division contracts with insurers, insurance fronting
companies, employer groups, managed care plans, HMOs and other third party
payers to manage claims payment and administration of eye health benefits for
those contracting parties in Texas and seven other states. The typical range of
benefits administered include well eye exams, prescription optical products, and
medical and surgical services related to eye care.
We have leveraged our leadership position in key markets to build a strong
provider base of eye care professionals: ophthalmologists, optometrists and
opticians. We verify and approve the credentials of these providers, ensuring
they meet plan and regulatory standards. We educate these providers concerning
the plan benefits which we administer and then streamline the authorization and
claims payment process.
We believe that our managed care services provide significant value to
third-party payers by delivering high quality managed eye care benefits to plan
members and comprehensive, cost-effective administrative services to the
third-party payers. We believe that we are well positioned to compete for all
types of eye care contracts because of our managed care expertise, sophisticated
information systems and operating history.
Strategy
Recognizing the significant growth potential of this market segment, we
are:
o Expanding our sales and marketing capabilities to organically grow in
the Texas-Virginia-Florida triangle;
o Positioning ourselves to contract for business directly with employer
groups and similar associations, thereby reaching another sector of the
third party payer market and broadening the base of our revenue stream;
o Increasing our market density, which will enable us to offer cost
advantages by directing volume to targeted manufacturers, thereby
increasing the value of our services to the practitioners who contract
with us; and
o Offering non-insurance related products, including Administrative
Services Only (ASO) and IRC Section 125 plans, with benefits that
include the administration of well eye examinations and prescription
optical products.
Market Position
As of December 31, 2002, we administered eye care benefit programs,
delivered through networks of eye care professionals nationwide, for 2 million
benefit enrollees under capitation (i.e., payment by an insurer to a managed
care entity or network of a fixed amount per member or per enrollee each month,
quarter or year) and fee-for-service arrangements.
Customers
Our Managed Care Vision Benefits' customers include insurers, managed care
plans, HMOs and other third party payers. With the advent of our
Direct-to-Employer suite of products, our customer base is being enlarged to
include, among others, employers, employer groups, unions, trade organizations
and municipalities. We have multiple contracts with one insurer, which accounted
for 11% of our consolidated revenue in 2002.
7
Most of our contracts have terms of one to three years and contain an
automatic renewal provision for additional one-year periods and grant either
party the right to terminate the contract upon 90-180 days' notice.
Products & Services
OptiCare is unique in the eye care insurance industry because it offers a
number of different risk-bearing contractual relationships for its clients. As
of the end of 2002, we provided only traditional "Managed Care Vision Benefits,"
described in the first point below. In February 2003, we began offering a new
suite of products, which we refer to as our "Direct-to-Employer" products,
described in the second, third and fourth points below.
o Managed Care Vision Benefits - We administer vision benefits for health
plans to over 2 million benefit lives under capitation and fee for
service arrangements. Benefits administered under these programs are
for well vision, preventive exams and optical hardware in addition to
medical and surgical eye care benefits. We assume partial or full
financial risk with respect to nearly all of the lives for which we
administer vision benefits. We have been administering benefits of this
nature for more than ten years.
o Insured Vision Plan - We provide insurance coverage for well vision,
preventive examinations and optical hardware through Fidelity Security
Life Insurance Company and through our captive insurance company,
OptiCare Vision Insurance Company, Inc. We began offering this product
in the first quarter of 2003.
o Section 125 Vision Plan - This vision benefit allows qualified groups
and individuals to participate in vision programs for well vision,
preventive examinations and optical hardware on a pretax basis. We
began offering this product in the first quarter of 2003.
o ASO Vision Plan - We administer benefits on a fee basis for well
vision, preventive examinations and optical hardware for qualified
groups which are self-funded. We began offering this product in the
first quarter of 2003.
Operations
The following are the principal components of our Managed Vision
operations:
o Provider Contracting - Upon obtaining a managed care contract, we
typically develop a network of optometrists, ophthalmologists and
opticians to provide the eye care services required under the contract.
Generally, we attempt to contract first with eye care professionals
with whom we have an existing contractual relationship. Additionally,
we seek to enter into contracts with independent eye care professionals
as well as to work in conjunction with our partners to build networks
that meet set access standards.
o Provider Credentialing - Under most contracts, we "credential" eye care
professionals (i.e., establish to both our, and the third-party
payer's, satisfaction the credentials of such professionals) who
provide the eye care services specified under the contract to the
third-party payer's members. In those instances, we undertake a
thorough review process on each prospective eye care professional,
which includes obtaining a copy of the state license and Drug
Enforcement Agency number, verifying hospital privileges, liability
insurance and board certification, and reviewing work history.
In conducting our credentialing reviews, we apply the national
standards--set by the National Committee for Quality Assurance--by
which health plans are measured for compliance with quality assurance
initiatives. OptiCare was re-awarded accreditation in 2002 as a
Credentialing Verification Organization by the National Committee for
Quality Assurance for 11 out of 11 elements. Eye care professionals,
who are credentialed for our panels, are currently re-credentialed
every two years.
o Claims Payment - For most contracted payers, we pay claims to
contracted providers for services rendered in the fulfillment of vision
benefits for members. We also have Internet capabilities for
authorizations (if needed), direct claim submission and claim tracking.
Additionally, we accept claims via
8
electronic data interchange, allowing providers to send claims through
their own practice management software. We believe these enhancements
have continued to help lower our cost of operations, improve service,
and speed the payment cycle to our providers.
To enhance our claims payment administration, we utilize proprietary
systems, which allow us to strictly follow Center for Medicare and
Medicaid Services' rules for payment of eye care claims. In addition,
we have posted on-line our clinical criteria for treatment of every eye
care condition for which we provide covered services. Our providers can
use our secure web server to check these criteria and to inform
themselves of new or modified criteria as changes occur.
o Utilization Management - Our Utilization Management staff ensures that
established clinical criteria are followed in provision of services and
benefits to members. Using proprietary clinical criteria for eye care
procedures that are based on Center for Medicare and Medicaid Services'
local carrier policy and the American Academy of Ophthalmology's
guidelines, we work with eye care professionals to determine
appropriate eye care treatments. While these practices are intended to
reduce unnecessary procedures--hence costs--there can be no assurance
that costs may not become excessive.
o Plan Member Relations - Service representatives answer plan members'
questions relating to their benefits and the status of their claims and
help resolve complaints relating to their eye care treatment. We
believe that our issue-resolution structure is unique to the industry
and increases plan members' satisfaction with their eye care benefits.
o Provider Relations - We continuously educate providers concerning the
various plan benefits being administered. In addition, with the
assistance of our staff, providers may obtain required authorizations
prior to performing certain eye care procedures.
o Quality Management - Our Quality Management Department tracks
complaints and concerns and conducts surveys for members, providers and
payers to ensure that all parties are satisfied with the services and
the service levels provided. Department personnel also recommend, or
take, steps to address conditions from which valid complaints have
arisen. In addition, we perform prospective-outcome studies and other
quality assessment studies on the care rendered by our network of
providers.
o Claim Data Analysis - Our financial analysts review claim and other
data to provide feedback to management and to the insurance companies
and other payers with which we have claims payment contracts concerning
our performance, enabling management to maintain profitability while
providing excellent service.
Legal & Compliance
Our Managed Vision Division is subject to the following legal requirements
and regulations:
Licensing Requirements. Most states impose strict licensure requirements on
health insurance companies, HMOs, and other companies that engage in the
business of insurance or pre-paid health care. In most states, these laws do not
apply to the discounted fee-for-service or capitation programs, which are our
primary sources of revenue.
Certain states, however, such as Texas, where we work strictly on a
capitated basis, require that the risk-bearing entity (e.g., the managed care
company) be licensed for capitated arrangements unless that entity qualifies
under certain exceptions (such as that it be a professional corporation which is
owned by eye care providers). We do not qualify for such an exception. As a
risk-bearing entity, we are currently licensed only in Texas and operate our
capitated arrangements through a wholly-owned, single-service HMO subsidiary,
AECC Total Vision Health Plan of Texas, Inc. (See "--Regulation of Our HMO
Subsidiary")
We also hold a license as a third-party administrator in Florida and are a
licensed utilization review agent in Texas, Tennessee and New York.
9
If we are required to become licensed under the laws of states other than
Texas for our Managed Care Vision Benefits products, the licensure process can
be lengthy and time consuming. In states where we already are conducting such
business, unless the regulatory authority permits us to continue to operate
while the licensure process is progressing, we could suffer losses of revenue
that would result in material adverse changes in our business while the
licensing process is pending. In addition, licensing requirements may mandate
strict financial and other requirements we may not immediately be able to meet
and which, if waivers or other exemptions are not available, might cause us to
withdraw from those states or otherwise cause a material adverse change to our
business, operations, or financial position. (The same risks may not apply to
the same degree for our Direct-to-Employer suite of products due to our
relationship with Fidelity Security Life Insurance Company, which is licensed to
write life and health insurance in all 50 states (New York, reinsurance only).)
Once licensed, we would be subject to regulatory compliance and required to
report to the licensing authority.
These same requirements, it should be noted, can also serve as a barrier to
entry to competition in states where such licensure is required.
Regulation of Our HMO Subsidiary. Our Texas HMO subsidiary, AECC Total
Vision Health Plan of Texas, Inc. is a licensed single service HMO. It is
subject to regulation and supervision by the Texas Department of Insurance,
which has broad administrative powers relating to standards of solvency, minimum
capital and surplus requirements, maintenance of required reserves, payment of
dividends, statutory accounting and reporting practices, and other financial and
operational matters. The Texas Department of Insurance requires that stipulated
amounts of paid-in-capital and surplus be maintained at all times. Our Texas HMO
subsidiary is required by terms of an Order of the Commissioner of Insurance,
dated August 12, 1999, as modified on February 8, 2001, to maintain a minimum
net worth of $1,000,000. Dividends payable to us by our Texas HMO subsidiary are
generally limited to the lesser of 10% of statutory-basis capital and surplus or
net income of the preceding year excluding realized capital gains.
Third Party Administration Licensing. Some states require licensing for
companies providing administrative services in connection with managed care
business. We currently hold a third party administrator license only in Florida.
We may seek licenses in the states where they are required for eye care
networks, if needed. In the event such licensure is required and we are unable
to obtain a license, we may be forced to withdraw from that state, which could
have a material adverse effect on our business.
Direct-to-Employer Insurance Products. Fidelity Security Life Insurance
Company, a carrier licensed to write life and health insurance in all 50 states
(New York, reinsurance only), underwrites our insured product. Fidelity has been
rated A- (Excellent), based on an analysis of financial position and operating
performance by A.M. Best Company, an independent analyst of the insurance
industry. Our insured product is offered by means of a wholly owned subsidiary,
OptiCare Vision Insurance Company, Inc., which is domiciled in South Carolina
and has received approval to operate as a captive insurance company from the
South Carolina Department of Insurance.
Preferred Provider Networks. In Connecticut, the sponsors of preferred
provider networks are required to register and file annual updates with the
Office of Health Care Access. Disclosure of a number of enumerated items is
required. Newspaper publication is required for the expansion of such a network
into a new county. Among other things, a network is to submit to the Office of
Health Care Access and make available upon request to providers its general
criteria for the selection or termination of health care providers. A provider
cannot be rejected or terminated until the provider has been advised of the
criteria his or her practice fails to meet.
"Any Willing Provider" Laws. Some states have adopted, and others are
considering, legislation that requires managed care networks to include any
qualified and licensed provider who is willing to abide by the terms of the
network's contracts. These laws could limit our ability to develop effective
managed care networks in such states. We believe that the medical management and
eye care claim data analysis services we offer would provide greater value to
our clients if such legislation were adopted in states where we do business.
There are currently no states in which we operate our managed care business that
have "any willing provider" requirements, although Texas does impose certain
anti-discrimination requirements for optometrists and ophthalmologists. Further,
with introduction of our Direct-to-Employer suite of products, we have added
business lines which would not be directly affected by adoption of "any willing
provider" requirements in the states in which we do such business.
10
Health Insurance Portability and Accountability Act - Administrative
Simplification. The Health Insurance Portability and Accountability Act
(referred to as "HIPAA"), passed in 1996 by Congress, requires the Department of
Health and Human Services (referred to as "HHS") to enact standards for
information sharing, security and patient confidentiality. The HHS, in its
administrative simplification provisions, has published two sets of final
regulations implementing healthcare transactions and privacy standards under
HIPAA. These regulations apply to what are termed "covered entities" and, under
terms of the regulations, OptiCare is a covered entity.
The first set of final regulations requires covered entities to use uniform
standards, including data reporting, formatting, and coding, for common
healthcare transactions. The Standards for Electronic Transactions Final Rule
was published August 2000 and became effective October 2000 with a compliance
date of October 2002. This effective date has now been delayed to October 2003.
The second set of final regulations imposes new standards relating to the
privacy of individually identifiable health information. The Standards for
Privacy and Individually Identifiable Health Information Final Rule was
published December 2000 and became effective April 2001 with a compliance date
of April 2003. These standards require covered entities to comply with rules
governing the use and disclosure of protected health information. The standards
also require covered entities to enter into certain contractual provisions with
any business associate to whom individually identifiable information is
disclosed.
A third set of regulations under HIPAA, the Final Rule for Security
Standards, was published in February 2003 with a compliance date of April 2005.
The Final Rule establishes minimum security requirements for covered entities to
protect health information in electronic form. In some cases, we will also have
to comply with applicable state regulations regarding privacy and medical
information.
We are currently assessing the privacy and security standards to ensure
that we have the required systems and procedures in place to comply with the new
HIPPA regulations. While we will incur costs to become compliant with the HIPAA
regulations for electronic transaction processing, we believe this will not have
a significant overall impact on our results of operations.
In addition to its administrative simplification provisions, HIPAA also
imposes criminal penalties for fraud against any healthcare benefit program, for
theft or embezzlement involving healthcare and for false statements in
connection with the payment of any health benefits. These HIPAA fraud and abuse
provisions apply not only to federal programs, but also to private health
benefit programs. HIPAA also broadened the authority of the Department of Health
and Human Services Office of Inspector General, or OIG, to exclude participants
from federal healthcare programs. Although we do not know of any current
violations of the fraud and abuse provisions of HIPAA, if we were found to be in
violation of these provisions, the government could seek penalties against us
including exclusion from participation in government payer programs. Significant
fines could cause liquidity problems and adversely affect our results of
operations.
Interpretation and Implications. The laws described above have civil and
criminal penalties and have been subject to limited judicial and regulatory
interpretation. They are enforced by regulatory agencies that are vested with
broad discretion in interpreting their meaning. Our agreements and activities
have not been examined by federal or state authorities under these laws and
regulations. There can be no assurance that review of our business arrangements
will not result in determinations that adversely affect our operations or that
certain material agreements between us and eye care providers or third-party
payers will not be held invalid and unenforceable.
In addition, these laws and their interpretation vary from state to state.
The regulatory framework of certain jurisdictions may limit our expansion into,
or ability to continue operations within, such jurisdictions if we are unable to
modify our operational structure to conform to such regulatory framework. Any
limitation on our ability to continue operating in the manner in which we have
operated in the past could have an adverse effect on our business, financial
condition and results of operations.
11
Competition
Our Managed Vision Division competes with several regional and national eye
health companies, which provide services to health plans, associations, employer
groups and various other payers. Our largest competitor is Vision Service Plan
of America. We also compete for managed care contracts with HMOs, PPOs and
private insurers, many of which have larger provider networks and greater
financial and other resources than we do. Managed care organizations compete on
the basis of administrative strength, size, quality and geographic coverage of
their provider networks, marketing abilities, information systems, operating
efficiencies and price.
Consumer Vision Division
- ------------------------
Description
The Consumer Vision Division provides eye care services and products to
consumers through a total of 18 integrated eye health centers and professional
optometric practices, a surgery center and a laser correction center we own
and/or operate in Connecticut. (In the integrated eye health centers,
comprehensive eye care services are provided by ophthalmologists and
optometrists.) We also conduct all management, billing, systems and related
procedures for the operation of all centers.
Strategy
We are seeking to improve the profitability of our Consumer Vision Division
by generating higher volume through existing locations. To do so, we are trading
on our promise of "better doctors, better training, better care" and our wide
selection of quality brand name and private label products which span a wide
range of price points. Further, we are developing and executing test marketing
programs to increase optical sales and implementing profit improvement plans
throughout the Consumer Vision Division.
Market Position
We are the second largest optical retailer in Connecticut.
Customers
Our customers and patients are individuals who come to us for eye exams,
corrective lenses, surgery and non-prescription eyewear, such as sunglasses. We
are not dependent upon customers or patients of any particular age, gender,
ethnic origin or from any particular community or economic strata.
Products & Services
Integrated Eye Health Centers. Through our nine integrated eye health
centers, comprehensive eye care services are provided to individual patients.
Such services include medical and surgical treatment of eye diseases and
disorders by ophthalmologists, and vision measuring and non-surgical eye care
correction and treatment services by optometrists.
Professional Optometric Practices. Our professional optometric practice
locations provide vision correction services by optometrists, and/or sell
eyeglasses and other optical products. These facilities are either free-standing
or are located within our fully integrated eye health centers. Our professional
optometric practices provide all customary optical goods and are supported by
our billing, collection, and information systems. We operate 18 retail optical
locations in Connecticut (nine of those facilities also offer medical services
and are referred to as the "integrated eye health centers" discussed above).
Surgical Centers. We own and operate two surgery centers in Connecticut,
one of which is a laser correction center. In our ambulatory surgery center in
Waterbury, Connecticut, ophthalmic surgeons perform a range of eye
12
care surgical procedures, including cataract surgery, and surgical treatment of
glaucoma, macular degeneration and diabetic retinopathy. In our laser center in
Danbury, Connecticut, we use a VISX excimer laser for the correction of
nearsightedness, farsightedness and astigmatism. In these centers, we bill
patients (or their insurers, HMOs, Medicare, Medicaid or other responsible
third-party payers) for use of the surgery facility. Our surgeons bill the
patients separately for their services. For laser correction, patients are
billed directly and, generally, we are not reimbursed by third-party payers. Our
ambulatory facility in Waterbury is state licensed, approved for the payment of
facility fees by most health plans and is Medicare approved.
Manufacturing Laboratory. We also have a complete manufacturing facility in
Connecticut, with state of the art equipment, in which lenses are manufactured,
surfaced and ground to specifications and supplied to all of our Connecticut
locations. Additionally, our lab manufacturing services are integrated into some
of our Managed Vision programs that are administered in Connecticut.
Operations
For our integrated eye health centers, professional optometric practices
and surgical centers, we contract with a professional corporation, OptiCare,
P.C., which employs ophthalmologists and optometrists, to provide surgical,
medical, optometric and other professional services to patients. We provide
management services to OptiCare P.C. under a renewable professional services and
support agreement. We refer to OptiCare, P.C. as our "professional affiliate."
We purchase most of our eyeglasses, contact lenses and other optical goods
and devices through our Buying Group and/or Wise Optical, our optical product
distribution company (See "--Distribution & Technology Division").
Legal & Compliance
The federal and state governments extensively regulate the health care
industry. Our business is subject to numerous federal and state laws and
regulations, including the following:
Surgical Facility Regulations. Our licensed ophthalmic outpatient surgical
facility in Waterbury, Connecticut is subject to the terms of Certificate of
Need approvals from the Office of Health Care Access and licensure under the
provisions of the Connecticut Public Health Code. The facility also is a
participating provider under the federal Medicare and Connecticut Medicaid
programs and has provider agreements with various commercial and governmental
third-party payers. Violation of any of the terms and conditions of the
Certificate of Need approvals and the Connecticut Public Health Code license
governing the facility's operation could result in fines or other sanctions
against the facility and its operators, including OptiCare being enjoined or
precluded from further operation of the facility. Failure to adhere to the terms
of participation for the Medicare or Medicaid programs or a violation of billing
or other requirements for the public and private third-party payment programs
governing the facility could result in civil or criminal sanctions against the
facility and its operators, refund obligations or claims denials and/or
termination or exclusion from participation in Medicare, Medicaid or other payer
programs. The structure of relationships involving the facility and clinicians
providing services in conjunction with the facility also is subject to the
federal fraud and abuse statute (the anti-kickback statute) and related state
and federal authorities.
Excimer Laser Regulation. Medical devices, including the excimer laser used
in our Danbury, Connecticut laser surgery center, are subject to regulation by
the U.S. Food and Drug Administration, referred to as the FDA. Failure to comply
with applicable FDA requirements could subject us, our affiliated providers or
laser manufacturers to enforcement action, product seizures, recalls, withdrawal
of approvals and civil and criminal penalties. Further, failure to comply with
regulatory requirements, or any adverse regulatory action--including a reversal
of the FDA's current position that the use of excimer lasers by physicians
outside FDA approved guidelines is a "practice of medicine" decision, which the
FDA is not authorized to regulate--could result in a limitation on, or
prohibition of, our use of excimer lasers.
Regulation of Laser Vision Marketing. The marketing and promotion of laser
correction and other vision
13
correction surgery procedures in the U.S. is subject to regulation by the FDA
and the Federal Trade Commission, referred to as the FTC. The FDA and FTC have
released a joint communique on the requirements for marketing these procedures
in compliance with the laws administered by both agencies. The FTC staff also
issued more detailed staff guidance on the marketing and promotion of these
procedures. It has been monitoring marketing activities in this area through a
non-public inquiry to identify activities that may require further FTC
attention. The FDA has traditionally taken the position that the promotion and
advertising of lasers by manufacturers and physicians should be limited to the
uses approved by the FDA. Although the FDA does not prevent non-approved uses of
excimer lasers, the FDA reserves the right to regulate advertising and promotion
of non-FDA-approved uses.
Corporate Practice of Optometry and Ophthalmology. The laws of a number of
states prohibit corporations that are not owned entirely by eye care
professionals from:
o Employing eye care professionals;
o Receiving for their own account reimbursements from third-party payers
for health care services rendered by licensed professionals;
o Controlling clinical decision-making; or
o Engaging in other activities that constitute the practice of optometry
or ophthalmology.
To comply with these requirements, we:
o Perform only non-professional services;
o Contract with our professional affiliate (which is owned by one or more
licensed optometrists or ophthalmologists), which in turn employs or
contracts with licensed optometrists or ophthalmologists to provide
professional services to patients;
o Do not represent to the public or customers that we provide
professional eye care services (which is done by the professional
affiliate); and
o Do not exercise influence or control over the practices of the eye care
practitioners employed by the professional corporation.
Our agreement with our professional affiliate specifically provides that
all decisions required by law to be made by licensed ophthalmologists or
optometrists shall be made only by such licensed persons, and that we shall not
engage in any services or activities which would constitute the practice of
ophthalmology or optometry. If health care regulations and their interpretations
change in the future, we may have to revise the terms of such agreement to
comply with regulatory changes.
Prohibitions of Certain Referrals. The Omnibus Budget Reconciliation Act of
1993 includes a provision that significantly expands the scope of the Ethics in
Patient Referral Act, also known as "Stark." The provisions of Stark originally
prohibited a physician from referring a Medicare or Medicaid patient to any
entity for the provision of clinical laboratory services if the physician or a
family member of the physician had an ownership interest in or compensation
relationship with the entity. The revisions to Stark prohibit a referral to an
entity in which the physician or a family member has a prohibited ownership
interest or compensation relationship if the referral is for any of a list of
"designated health services." This list of designated health services includes
"prosthetic devices," which the Stark regulations define to include one pair of
conventional eyeglasses and contact lenses for patients who have undergone
certain ophthalmic procedures. The Stark regulations provide that the
prohibition of referrals for these types of eyewear does not apply if the
arrangement between the physician and the eyewear seller conforms to the
Anti-Kickback Law and other regulatory requirements. There can be no assurance
that future interpretations of such laws and future regulations promulgated
thereunder will not affect our existing relationship with our professional
affiliate.
14
State Fee-Splitting and Anti-Kickback Law. Most states have laws which
prohibit the paying or receiving of any remuneration, direct or indirect, that
is intended to induce referrals for health care products or services and
prohibit "fee-splitting" by health care professionals with any party except
other health care professionals in the same professional corporation or practice
association. In most cases, these laws apply to the paying of a fee to another
person for referring a patient or otherwise generating business, and do not
prohibit payment of reasonable compensation for facilities and services other
than the generation of business, even if the payment is based on a percentage of
the revenues of the professional practice.
Federal Anti-Kickback Law. Federal law prohibits the offer, payment,
solicitation or receipt of any form of remuneration in return for the referral
of "federal health care program" patients, or in return for the purchase, lease
or order of any item or service that is covered by a "federal health care
program." A "federal health care program" includes Medicare, Medicaid,
TriCare/CHAMPUS, and certain other state programs funded by the federal
government, among others. Pursuant to this law, the federal government has
pursued a policy of increased scrutiny of transactions among health care
providers in an effort to reduce potential fraud and abuse relating to
government health care costs. The Medicare and Medicaid anti-kickback statute,
referred to as the Anti-Kickback Statute, provides criminal penalties for
individuals or entities participating in federal health care programs who
knowingly and willfully offer, pay, solicit or receive remuneration in order to
induce referrals for items or services reimbursed under such programs. In
addition to federal criminal penalties, the Social Security Act provides for
civil monetary penalties and exclusion of violators from participation in
federal health care programs. A violation of the Anti-Kickback Statute requires
the existence of all of these elements: (i) the offer, payment, solicitation or
receipt of remuneration; (ii) the intent to induce referrals; (iii) the ability
of the parties to make or influence referrals of patients; (iv) the provision of
services that are reimbursable under any federal health care programs; and (v)
patient coverage under any federal health care program.
To our knowledge, there have been no case law decisions regarding service
agreements similar to that which we have with our professional affiliate that
would indicate that such agreements violate the Anti-Kickback Statute. Because
of the breadth of the Anti-Kickback Statute and the government's active
enforcement thereof, there can be no assurance, however, that future
interpretations of such laws will not require modification of our existing
relationship with our professional affiliate. If our services agreement is ever
determined to be in violation of the Anti-Kickback Statute, it is likely that
there would be a material adverse impact on our business, financial condition
and results of operation.
Advertising Restrictions. Many states have laws which prohibit licensed eye
care professionals from using advertising which includes any name other than
their own, or from advertising in any manner that is likely to mislead a person
to believe that a non-licensed professional is eligible to be engaged in the
delivery of eye care services. Our services agreement with our professional
affiliate provides that all advertising shall conform to these requirements, but
there can be no assurance that the interpretation of the applicable laws or our
advertising will not inhibit us or result in legal violations that could have a
material adverse effect on us.
Health Insurance Portability and Accountability Act - Administrative
Simplification. This federal statute and its regulations, discussed above in
"--Managed Vision Division" is applicable to the Consumer Vision Division as
well.
Interpretation and Implications. The laws described above have civil and
criminal penalties and have been subject to limited judicial and regulatory
interpretation. They are enforced by regulatory agencies that are vested with
broad discretion in interpreting their meaning. Our agreements and activities
have not been examined by federal or state authorities under these laws and
regulations. There can be no assurance that review of our business arrangements
will not result in determinations that adversely affect our operations or that
certain material agreements between us and eye care providers or third-party
payers will not be held invalid and unenforceable. Any limitation on our ability
to continue operating in the manner in which we have operated in the past could
have an adverse effect on our business, financial condition and results of
operations.
In addition, these laws and their interpretation vary from state to state.
The regulatory framework of certain jurisdictions may limit our expansion into
such jurisdictions if we are unable to modify our operational structure to
conform to such regulatory framework.
15
Competition
The most direct competition for our Consumer Vision Division is with
independent ophthalmologists and optometrists, as well as with regional
operators of retail optical locations. On a national basis, companies that
compete in this sector include retail optical chains, such as LensCrafters, Cole
Vision, Pearle Vision, Wal-Mart, Eye Care Centers of America, Eyecare,
Consolidated Vision Group, Costco Wholesale, U.S. Vision, and D.O.C. Optics.
Retail optical operators compete on price, service, product availability and
location.
Several of our competitors have greater financial and other resources than
we have or may charge less for certain services than we do. However, we believe
the integrated nature of our business model provides significant competitive
advantages in the marketplace.
Distribution & Technology Division
- ----------------------------------
Our Distribution & Technology Division serves the professional eye care
practitioner market in the U.S. and Canada with optical products, collective
buying arrangements and software systems and support. We are establishing a
sales function, which will be equipped to communicate, and deliver, to the
professional eye care practitioner market the full range of our Distribution &
Technology Division's products and services.
Description
We sell optical and ophthalmic goods and related medical supplies to
professional eye care practitioners directly, through Wise Optical, one of the
largest contact lens distributors in the U.S. (See "--Recent Developments") and,
indirectly, through a "Buying Group" program, which is a specialized group
purchasing arrangement for ophthalmologists, optometrists and opticians. Under
the tradename CC Systems, OptiCare also designs, develops and markets advanced
practice management / point-of-sale computer systems for optometry and
ophthalmology practices and for retail optical locations as well as management
information systems for optical manufacturing laboratories.
Strategy
As a provider to the professional eye care practitioner of substantially
all of the products, services and software needed to successfully operate an eye
care practice, we intend to capitalize on the uniquely integrated nature of our
business.
We intend to expand our distribution of optical and ophthalmic goods and
medical supplies through leveraging Wise Optical's field sales/customer service
force of nearly 60 individuals nationwide. We also seek--through acquisition and
further internal development--to be in a position to offer a comprehensive suite
of computer software products specifically designed for a professional eye care
practice and/or an optical products manufacturing laboratory.
We further intend to develop a unified selling strategy, which cross-sells
products and services to customers within the Distribution & Technology Division
and which makes such products and services available to our other divisions and
their customers, as well. A common theme of that selling strategy is "operating
efficiency." Through Wise Optical and our Buying Group, we can provide our
professional eye care practitioner customers with one-stop-shopping--enabling
them to compete more effectively. Through CC Systems, we can provide many of
those same customers with the operating efficiencies which arise from
utilization of a fully-integrated suite of practice management and eyeglass
manufacturing software products.
We intend to expand our Buying Group and Wise Optical volume by directing,
as appropriate, our Consumer Vision Division's purchasing requirements through
the Buying Group or Wise Optical and by cross-selling such products and services
to professional eye care practitioners who are members of our Managed Vision
Division provider panels.
16
Market Position
We are one of the leading integrated providers in the U.S. of optical and
ophthalmic goods and related medical supplies and of software systems designed
for eye care practitioners and eyeglass manufacturing laboratories. Within the
contact lens market, Wise Optical is one of the largest distributors (to eye
care professionals) in the U.S. Wise Optical is also a distributor of ophthalmic
lenses, and sales of such lenses are the fastest growing segment of Wise
Optical's distribution business. Our Buying Group is also one of the largest of
its kind in the U.S. wholesale optical goods market. CC Systems' market share
for its practice management / point-of-sale and fabricating management operating
and information systems places it among the top five vendors in North America of
comparable products to the optical industry.
Customers
Our Wise Optical and Buying Group customers include independent
ophthalmology and optometric practices and opticians as well as the integrated
eye health centers and professional optometric practices of our Consumer Vision
Division. Wise Optical has an account base of approximately 22,500 customers,
most of whom are independent eye care practitioners. Over 3,500 eye care
professionals nationwide participate in our Buying Group. While we believe there
is some overlap between these groups of customers, we have not yet determined
its magnitude and potential impact on our operations.
Similarly, our software systems' customers are ophthalmology and optometry
practices, optical product dispensaries, and optical laboratories, based mainly
in North America. As of February 28, 2003, we had approximately 110 retail, 130
lens manufacturing, and 146 other customers using our eye care systems and
software services throughout the U.S. and Canada. The "other" category is
largely comprised of ophthalmology and optometry practices which use our remote
entry software to place with laboratories, which also use our software, orders
for custom manufactured lenses for their patients. We are not dependent on any
one, or on several, large customers. We believe that there will be increasing
demand for management and information systems solutions for independent
practitioners (who comprise the majority of practicing ophthalmologists and
optometrists) as well as for group practices. We believe these doctors and
opticians have the potential to benefit from our services in this area.
Products & Services
We sell optical and ophthalmic goods (e.g., contact lenses, ophthalmic
lenses, eyeglass frames and accessories) and related medical supplies to
professional eye care practitioners directly, through Wise Optical, and,
indirectly, through a "Buying Group" program, which is a specialized group
purchasing arrangement for ophthalmologists, optometrists and opticians. Wise
Optical is an authorized distributor of contact and ophthalmic lenses
manufactured by such major vendors as: Johnson & Johnson, Ciba Vision, Bausch &
Lomb, CooperVision, Ocular Sciences and Essilor. Wise Optical also sells Gelflex
contact lenses, manufactured by Gelflex Laboratories, and Extreme H2O, a contact
lens designed to withstand dehydration. Wise Optical is also an authorized Hilco
distributor, carrying its optical supplies, eyewear accessories, tools and
consumer products.
We also sell practice management and point-of-sale software, including
Internet-based remote order entry software, which captures and links patient
data, provides such data to a remote manufacturing location for immediate custom
processing of optical goods, such as eyeglasses and contact lenses, and
generates invoices and other record-keeping data. This software supports such
aspects of eye health practice management as: billing, collections,
record-keeping, production control and inventory control. Our systems work on a
stand-alone basis or can be integrated as "partners" with the proprietary
products of other manufacturers. One of the advantages of these systems is that
they involve a seamless interface from the point at which the patient orders
glasses, to the computer-driven eyeglass manufacturing phase, and to the billing
phase--reducing expense and minimizing the possibility of error.
Operations
17
Wise Optical purchases and takes possession of inventory and offers it for
sale via catalog and on its web site. Orders are taken by customer service
representatives, who are our employees, or are submitted by customers on-line.
To accommodate time-zone differences and to stay closer to its customers, Wise
Optical has customer service offices through which orders may be placed in
California, Oregon, Texas, Kansas and North Carolina. Orders are immediately
processed, picked, packed and shipped from the Wise Optical warehouse in
Yonkers, New York, on the same day they are received. Most orders are delivered
to customers the day after the orders were placed.
Our Buying Group leverages the purchasing strength of its approximately
3,500 members, making it possible for them to purchase goods on a discounted
basis from one or more suppliers chosen from our national panel of approximately
280 vendors. We enter into a non-exclusive account relationship with each of the
ophthalmologists, optometrists and opticians who are members of the Group. These
members may then place orders directly with our contracted vendors. The vendors
are required to furnish a discount to the purchasers, ship the product directly
to the practice and bill us at the predetermined price. We, in turn, bill the
participating practices and bear the credit risk. Earnings of the Buying Group
are based on the spread between the merchandise cost to us and the prices paid
for the merchandise by Buying Group members. Among our vendors, two, Marchon
Eyewear, Inc., and Safilo USA, Inc., receive approximately 25% of the business
of our Buying Group members. Five others, Silhouette Optical Ltd., Essilor of
America, Inc., Ciba Vision, Coopervision, Inc. and Viva International Group,
account for another 25% of such business. If one or more of these vendors should
cease to allow our members to purchase products from them through our Buying
Group, it could have a material adverse effect on our business.
CC Systems' sales are made on a direct basis and leads are developed
through various sources. These include: customer word-of-mouth and software
partner leads (Misys, IDX, Gerber Coburn, etc.) as well as trade show
attendance. Products are delivered, installed and supported by our installation
and support group and by our subcontractors. We also re-market computer and
network hardware, adding value through our software installation and
configuration.
Competition
There are 17 primary contact lens distributors in the U.S., with Wise
Optical being, we believe, the largest distributor of soft contact lenses. These
distributors compete on price and variety of products, which are based, in part,
on allowances and authorizations from the contact lens manufacturers. Buying
group organizations compete on the basis of price, size and purchasing power of
their members, the strength of their credit, and the strength of their supplier
agreements and relationships. We also compete with a range of systems and
software vendors which cater to eye health professionals. We believe we are
distinguished from our competition by our software products' sophisticated
interfaces, scalability and ease of modification.
While some of our competitors have greater financial and other resources
than we do, we believe that the comprehensive range of products, services and
software, which we offer to the professional eye care practitioner,
distinguishes us from many of those competitors. .
TRADEMARKS, DOMAIN NAMES AND ASSUMED NAMES
We own the following U.S. trademark registrations: OPTICARE(R)and the
miscellaneous curve design, which is the OptiCare Health Systems, Inc. logo; EYE
CARE FOR A LIFETIME(R); EYEWEAR AND EYE CARE FOR A LIFETIME(R); CONNECTICUT
VISION CORRECTION(R); LOSE THE GLASSES, KEEP THE VISION(R); THE DIFFERENCE IS
CLEAR(R); and KEEPING YOU AHEAD OF THE CURVE(R). Other trademarks for which
applications for U.S. registration are pending are: THE VISION OF HEALTH(TM)and
DOCTOR'S EXPRESS(TM). We also maintain a common law trademark in CLAIM IT(TM).
We own the following domain names: opticare.com; opticareeye.com;
opticare.net; opticare-ehn.com; opticarenas.net; opticareonline.com;
optical-online.com, wiseoptical.com, wisecontactus.com, yourlens.com,
wisevisiongroup.com, and wiseopticalonline.com.
18
We operate under the following assumed names: Wise Optical; Wise Optical
Vision Group; Wise/Corniche (California); Wise/Gulf Coast (Florida); Wise/North
Central (Minnesota); Wise/Contact US (New York); Wise/North West (Oregon);
Wise/South West (Texas); Wise/South East (North Carolina); Wise/Mid West
(Kansas).
We consider these trademarks, domain names and assumed names important to
our business. However, our business is not dependent on any individual trademark
or trade name.
EMPLOYEES
We and our professional affiliate have approximately 485 employees,
including 50 licensed ophthalmologists, optometrists and opticians and 39
ophthalmic assistants. These numbers include an aggregate of approximately 55
part-time personnel who work fewer than 30 hours per week. We believe that our
relations with our employees are good. We are not a party to any collective
bargaining agreement.
ITEM 2. PROPERTIES
We have executive offices in Waterbury, Connecticut; Yonkers, New York; and
Rocky Mount, North Carolina.
The Waterbury, CT facility, which contains corporate offices and an
integrated eye health center, is leased under three separate leases with
remaining terms of seven, nine, and nine years, respectively. These leases have
renewal options of 20, 20, and 10 years, respectively. The combined base rent is
$807,364 per year for a total of 43,592 square feet.
The facilities in Rocky Mount, NC, which contain offices for our Managed
Vision Division and Buying Group, are leased under one lease which began on
August 1, 2002 and which has a remaining term of five years. The base rent for
this facility is $184,000 per year for 19,355 square feet.
The Yonkers, NY facility, which contains offices for our Distribution &
Technology Division and a sales, service and fulfillment center for our Wise
Optical business, is leased under one lease which began in August 2000 and which
has a remaining term of eight years. The base rent for this facility is $415,875
per year for 27,575 square feet.
Our Distribution & Technology Division's CC Systems business is primarily
conducted from offices in Largo, Florida, which are leased under one lease which
began on October 1, 1999 and which has a remaining term of 18 months. The base
rent for this facility is $27,000 per year for 2,520 square feet.
The facilities in Waterbury, Connecticut, Rocky Mount, North Carolina and
Largo, Florida, described above, are each leased from parties that are
affiliated or associated with one or more of our present or former directors or
executive officers.
We lease 26 additional offices in the states of Connecticut, North
Carolina, Florida, Minnesota, California, Oregon, Kansas and Texas, principally
for our Consumer Vision and Distribution & Technology Division operations. These
leases have remaining terms of up to ten years. Many of these leases are also
subject to renewal options. We believe our properties are adequate and suitable
for our business as presently conducted.
ITEM 3. LEGAL PROCEEDINGS
HEALTH SERVICE ORGANIZATION LAWSUITS
19
In September and October 2001, the following actions were commenced:
Charles Retina Institute, P.C. and Steven T. Charles, M.D. v. OptiCare Health
Systems, Inc., filed in Chancery Court of Tennessee for the Thirtieth Judicial
District at Memphis; Eye Associates of Southern Indiana, P.C. and Bradley C.
Black, M.D. v. PrimeVision Health, Inc., filed in United States District Court,
Southern District of Indiana; and Huntington & Distler, P.S.C., John A. Distler,
M.D. and Anne C. Huntington, M.D. v. PrimeVision Health, Inc., filed in United
States District Court, Western District of Kentucky. Plaintiffs (ophthalmology
or optometry practices) in each of these actions alleged that our subsidiary,
PrimeVision Health, Inc. (referred to as "PrimeVision") defaulted under
agreements effective as of April 1, 1999 entitled Services Agreement (HSO Model)
(referred to as "Services Agreements") by failing to provide the services
allegedly required under those agreements in exchange for annual fees (referred
to as "HSO Fees") to be paid to PrimeVision. Plaintiffs also alleged that
PrimeVision repudiated any duty to perform meaningful services under the
agreements and never intended to provide meaningful services. Plaintiffs seek
declaratory relief that they are not required to make any payments of HSO Fees
to PrimeVision under the Services Agreements for a variety of reasons, including
that plaintiffs are discharged of any duty to make payments, there was no
termination of the agreements that would trigger an obligation by plaintiffs to
pay PrimeVision the amounts designated in the agreements as being owed upon
early termination (referred to as the "Buy-out Price"), the agreements contained
an unenforceable penalty, there was lack of consideration, and there was a
mutual and material misunderstanding. Plaintiffs also seek damages for
non-performance and breach of duty of good faith and fair dealing, and seek to
rescind the agreements for fraud in the inducement, material misrepresentation,
and mistake. Finally, plaintiffs seek punitive damages and attorneys' fees,
interest and costs.
In November 2001, PrimeVision commenced the following action: PrimeVision
Health, Inc. v. Charles Retina Institute and Steven T. Charles, M.D. filed in
United States District Court for the Eastern District of North Carolina, Western
District. In this action, PrimeVision sued in North Carolina, which is its
principal place of business, one of the practices which had, in an action cited
above, sued it in Tennessee. PrimeVision alleged that the Services Agreement and
a Transition Agreement, also entered into by Defendant and PrimeVision in April
1999, were part of an integrated transaction in which many practices (referred
to as the "Practices") that had previously entered into a physician practice
management (referred to as "PPM") arrangement with PrimeVision converted to a
health service organization (referred to as "HSO") model. As part of that
integrated transaction, the Practices (including Defendant) repurchased assets
that they had sold to PrimeVision in or about 1996 and were able to terminate
agreements entered into with PrimeVision in 1996 and the obligations thereunder.
PrimeVision sought a declaratory judgment that the Services Agreement is
enforceable and that Defendant must pay to PrimeVision the annual HSO Fees
required under the agreement or, alternatively, the Buy-out Price. PrimeVision
also filed denials of all of the material allegations of the complaints in the
Huntington & Distler and Eye Associates of Southern Indiana cases, and asserted
counterclaims to recover HSO Fees and the Buy-out Price.
The Multidistrict Litigation. On March 18, 2002, PrimeVision filed a motion
with the Judicial Panel on Multidistrict Litigation in Washington, D.C.
(referred to as the "Judicial Panel") to transfer the foregoing litigation to a
single federal district court for consolidated or coordinated pretrial
proceedings. Over the opposition of the plaintiffs, the Judicial Panel granted
the motion and ordered that all of the cases be consolidated in the U.S.
District Court for the Western District of Kentucky under the caption In re
PrimeVision Health, Inc. Contract Litigation, MDL 1466 ("MDL 1466").
In October and November 2002, PrimeVision commenced the following actions:
1. PrimeVision Health, Inc. v. The Brinkenhoff Medical Center, Inc.,
Michael Brinkenhoff, M.D., Tri-County Eye Institute, and Mark E. Schneider,
M.D., filed in the United States District Court for the Central District of
California;
2. PrimeVision Health, Inc. v. Robert M. Thomas, Jr., M.D., a medical
corporation, Robert M. Thomas, Jr., M.D., Jeffrey P. Wasserstrom, M.D., a
medical corporation, Jeffrey P. Wasserstrom, M.D., Lawrence S. Rice, a medical
corporation and Lawrence S. Rice, M.D., filed in the United States District
Court for the Southern District of California;
3. PrimeVision Health, Inc. v. The Milne Eye Medical Center, P.C. and
Milton J. Milne, M.D., filed in the United States District Court for the
District of Maryland;
20
4. PrimeVision Health, Inc. v. Eye Surgeons of Indiana, P.C., Michael G.
Orr, M.D., Kevin L. Waltz, M.D. and Surgical Care, Inc., in the United States
District Court for the Southern District of Indiana, Indianapolis Division;
5. PrimeVision Health, Inc. v. Downing-McPeak Vision Centers, P.S.C. and
John E. Downing, M.D., in the United States District Court for the Western
District of Kentucky, Bowling Green Division;
6. Prime Vision Health, Inc. v. HCS Eye Institute, P.C., Midwest Eye
Institute of Kansas City, John C. Hagan, III, M.D. and Michael Somers, M.D.,
filed in the United States District Court for the Western District of Missouri;
and
7. PrimeVision Health, Inc. v. Delaware Eye Care Center, P.A., a
professional corporation; and Gary Markowitz, M.D., filed in the Superior Court
of the State of Delaware, New Castle County.
PrimeVision requested the Judicial Panel to transfer all of the actions
except No. 7 to Kentucky and consolidate them as part of MDL 1466. (Action 7
could not be transferred because it was filed in state court.) The Judicial
Panel entered a conditional transfer order for such actions, and because there
was no opposition to transfer and consolidation in Actions 4, 5 and 6, they are
now part of MDL 1466. One practice defendant in Action 1, and the defendants in
Actions 2 and 3, have opposed transfer to MDL 1466. The issue of whether those
actions should be transferred has been fully briefed and is on the Judicial
Panel's hearing calendar for March 27, 2003. The Judicial Panel has ordered that
the issue will be determined without oral argument.
The actions filed by PrimeVision contain similar allegations as the action
PrimeVision filed against Charles Retina Institute in North Carolina District
Court as described above. Instead of declaratory relief, however, PrimeVision
seeks money damages for payment of the contractual buy-out price.
All of the defendants have denied the material allegations of the
complaints, and the defendants in Milne, Eye Surgeons of Indiana,
Downing-McPeak, HCS Eye Institute and Delaware Eye Institute have asserted
counterclaims and seek relief similar to the claims asserted and relief sought
by the practices in the Charles Retina, Eye Associates of Southern Indiana and
Huntington & Distler cases. PrimeVision has denied all of the material
allegations of the counterclaims.
Under the Court's scheduling order in MDL 1466, discovery is to be
completed by December 1, 2003. Discovery is currently in its initial stages.
Disclosures under Rule 26(a)(1) of the Federal Rules of Civil Procedure,
requests for the production of documents and interrogatories, and written
responses thereto have been exchanged among the parties in the cases initially
made part of MDL 1466, although no documents have yet been produced by any
party. The second wave of cases made part of MDL 1466 are not as far along in
discovery, and there has been no discovery yet in the cases where transfer is
being opposed nor in action No. 7 referred to above. PrimeVision intends to
vigorously defend against the Practices' claims and vigorously prosecute its
claims against the Practices. PrimeVision also is willing to discuss a potential
settlement with any or all of the Practices, although there is no indication
that the Practices are prepared to discuss settlement on the same general basis
or terms as PrimeVision. Because these actions are in their initial stages, we
are unable to form an opinion as to the likely outcome or the amount or range of
potential loss, if any.
During 2002, we reached settlement with one HSO Practice with which we were
in litigation and with 11 other practices with which we were not in litigation
but where there was a mutual desire to disengage from the Services Agreements.
While we continue to meet our contractual obligations by providing the requisite
services under our Services Agreements, we are in the process of disengaging
from a number of these arrangements.
OTHER LITIGATION
OptiVest, LLC v. OptiCare Health Systems, Inc., OptiCare Eye Health
Centers, Inc. and Dean Yimoyines, filed in the Superior Court, Judicial District
of Waterbury, Connecticut on January 14, 2002. Plaintiff is a Connecticut
limited liability corporation that entered into an Asset Purchase Agreement for
certain assets of ours. We believe we properly cancelled the Asset Purchase
Agreement pursuant to its terms. Plaintiff maintains that it incurred expenses
21
in investigating a potential purchase of certain assets, that we misled it with
respect to our financial condition, and, as a result, Plaintiff has suffered
damages. Plaintiff seeks specific performance of the Asset Purchase Agreement
and an injunction prohibiting us from interfering with concluding the
transactions contemplated by the Asset Purchase Agreement. Further, Plaintiff
alleges a breach of contract with regard to the Asset Purchase Agreement.
Plaintiff further alleges we engaged in innocent misrepresentation, negligent
misrepresentation, intentional and fraudulent misrepresentation, and unfair
trade practices with respect to the Asset Purchase Agreement.
We filed an answer to the complaint denying Plaintiff's allegations and
indicating we believe they are baseless and without merit. We also met with
Plaintiff in an unsuccessful settlement effort. As of February 28, 2003, we were
preparing for discovery. We intend to vigorously defend our position, but the
case is in its early stages and, therefore, no assurance can be given of a
favorable outcome.
THREATENED LITIGATION
In the fourth quarter of 2002, we received notice from an attorney
representing a physician employed by our professional affiliate regarding a
possible employment claim and expressing disagreement with the computation of
physicians' salaries in the professional affiliate, alleged mismanagement of our
company and/or the professional affiliate, possible conflicts of interests and
unlawful practice and/or compensation issues. We have reviewed these allegations
and believe they are unmeritorious, however, should such a claim proceed there
can be no assurance of a favorable outcome. In an attempt to amicably resolve
these issues, the parties have agreed to non-binding mediation which is
currently scheduled in the second quarter of 2003.
REGULATORY PROCEEDINGS
North Carolina Board of Optometry Proceedings
On August 2, 2002, the North Carolina Board of Optometry approved the sale
of our North Carolina retail optometry operations to Optometric Eye Care
Centers, P.A. Although regulatory proceedings convened by the North Carolina
Board of Optometry in exercise of its continuing authority to oversee
implementation of a consent order entered in December 1999 remain pending, we
believe our involvement in this matter is at a conclusion.
Optometric Eye Care Center, P.A. Claim
On August 12, 2002, OptiCare and Optometric Eye Care Centers, P.A.
consummated a transaction for the sale of the assets and certain liabilities of
our North Carolina retail optometry operations that resolved a dispute between
us, which had centered on our performance under a services agreement we entered
into with Optometric Eye Care Centers, P.A. in 1999.
Billing Communication Error in Connecticut
OptiCare Eye Health Centers, Inc., our Connecticut subsidiary, and the
Attorney General of Connecticut have agreed to terms of a consensual
administrative order relating to confusing statements sent to certain of our
customers in the 1995-99 period showing balances due to us. Although we deny
liability and believe that any amounts mistakenly paid to us were refunded in
full as soon as the error was discovered, we have agreed to pay a fine
equivalent to $133,047 ($100,462 in cash and $32,585 in glasses for the visually
impaired).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of security holders in the fourth
quarter of 2002.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
22
The following table sets forth the name, age and position of each of our
directors and executive officers. Each director will hold office until the next
annual meeting of stockholders or until his or her successor has been elected
and qualified. Our executive officers are appointed by and serve at the
discretion of the Board of Directors.
NAME AGE POSITION
Dean J. Yimoyines, M.D. 55 Chairman of the Board of Directors and Chief Executive Officer
Eric J. Bertrand 30 Director
Gordon A. Bishop 54 President of Consumer Vision Division
William A. Blaskiewicz 40 Vice President and Chief Financial Officer
James Carmona, Jr. 53 Chief Information Officer
President of technology sector of Distribution & Technology Division
Stephen Cohen 55 President of CC Systems
David B. Cornstein 63 Director
Norman S. Drubner, Esq. 62 Director
T. Gregory Eastburn 46 President of distribution sector of Distribution & Technology Division
Jason M. Harrold 33 President of Managed Vision Division
Mark S. Hoffman 41 Director
Richard L. Huber 66 Director
Clark A. Johnson 71 Director
Melvin Meskin 58 Director
Mark S. Newman 53 Director
Christopher J. Walls 39 Vice President and General Counsel
Lance A. Wilkes 36 President and Chief Operating Officer
Dr. Yimoyines has served as Chairman of the Board and Chief Executive
Officer since August 13, 1999. Dr. Yimoyines also served as our President from
August 13, 1999 to June 10, 2002. Dr. Yimoyines is a founder of OptiCare Eye
Health Centers, Inc. and has served as the Chairman, President and Chief
Executive Officer of OptiCare Eye Health Centers, Inc. since 1985. Dr. Yimoyines
has been instrumental in the development and implementation of OptiCare Eye
Health Centers, Inc.'s business for nearly 20 years. He graduated with
distinction from the George Washington School of Medicine. He completed his
ophthalmology residency at the Massachusetts Eye and Ear Infirmary, Harvard
Medical School. Dr. Yimoyines completed fellowship training in vitreoretinal
surgery at the Retina Associates in Boston. He is a graduate of the OPM (Owner /
President Management) program at Harvard Business School and is a Fellow of the
American Academy of Ophthalmology.
Mr. Blaskiewicz has served as Chief Financial Officer of OptiCare since
September 2001. Prior to that, he was Director of Finance, Corporate Controller,
Vice President of Finance and, most recently, Chief Accounting Officer for
OptiCare from February 1998 to August 2001. Prior to joining OptiCare, Mr.
Blaskiewicz held various positions, including Director of Budgeting, with
Massachusetts Mutual Life Insurance Company (1993 to 1998), Manager with Ernst &
Young (1989 to 1993) and Field Auditor with the Internal Revenue Service (1986
to 1989). He holds a Master of Business Administration from the University of
Hartford and a Bachelor of Science in Accounting from Central Connecticut State
University, and is a member of the American Institute of Certified Public
Accountants (AICPA), the Connecticut Society of Certified Public Accountants
(CSCPA) and the Institute of Management Accountants (IMA). Mr. Blaskiewicz is a
certified public accountant in Connecticut and holds Certified Management
Accountant (CMA) and Certified in Financial Management (CFM) designations from
the IMA.
Mr. Bertrand has been a member of the Board of Directors since January 2002
and is a Vice President of Palisade Capital Management, LLC, an affiliate of
Palisade Concentrated Equity Partnership, L.P., where he has held a series of
positions of increasing responsibility since 1997. From 1996 to 1997, Mr.
Bertrand held a position with Townsend Frew & Company, a healthcare-focused
investment banking boutique. From 1994 to 1996, he held positions with
23
Aetna, Inc.'s private equity group, focusing on middle market leveraged buy-outs
and larger private equity investments. Mr. Bertrand is a Director of Versura,
Inc. and Control F-1. He holds a Bachelor of Science in Business Administration
from Bryant College and a Master of Business Administration in Finance and
Entrepreneurship with a certificate in the Digital Economy from New York
University.
Mr. Bishop has served as President of our Consumer Vision Division since
May 2001. From August 1999 to November 2002, he also was President of our Buying
Group. From June 1998 to August 1999, Mr. Bishop directed the retail operations
of OptiCare Eye Health Centers, Inc. Mr. Bishop has over 30 years' of experience
in the optical industry, having served in a variety of capacities with companies
in the U.S. and Canada. From August 1997 to April 1998, he served as Vice
President of Operations for Public Optical. From July 1994 to April 1997, he
served as Operations Manager for Vogue Optical. From June 1990 to July 1994, he
held positions of increasing responsibility with Standard Optical Ltd.,
ultimately holding the position of Vice President of Operations for that
company. Mr. Bishop received his Business Administration Diploma from
Confederation College of Applied Arts and Technology and subsequently obtained
an Ophthalmic Dispensing Diploma from Ryerson Polytechnic University. He holds a
variety of eye care professional certifications, including certification by the
American Board of Opticianry. He holds a Fellowship in the National Academy of
Opticianry.
Mr. Carmona has served as Chief Information Officer for OptiCare and
President of the technology sector of our Distribution & Technology Division
since January 2003. From May 2000 to September 2002, Mr. Carmona served two
related companies, KPC Information Technologies and Forte Information Services,
Inc., as President and President and Chief Operating Officer, respectively.
Forte Information Services, Inc. is a healthcare information technology and
outsourcing company. From 1998 to 2000, Mr. Carmona was Executive Vice President
and Chief Operating Officer of International Systems Consultants, Inc. While in
that capacity, from September 1999 to April 2000, under a contract between
International Systems Consultants, Inc. and KPC Medical Management, Mr. Carmona
served as Chief Information Officer of the latter. Prior to that, Mr. Carmona
was Vice President and Chief Information Officer for First Physician Care, Inc.
and Chief Information Officer for Blue Cross Blue Shield of Massachusetts. Mr.
Carmona earned a Bachelor of Science degree in Economics and Business
Administration from Park University in Kansas City, Missouri.
Mr. Cohen has served as President of CC Systems, since October 1999. CC
Systems develops and markets software for the ophthalmologic industry, including
production, management and inventory systems for laboratories, ophthalmologists,
optometrists and opticians. Prior to founding CC Systems in 1986, Mr. Cohen was,
from 1981 to 1985, General Manager at Welling International, an optical frame
and lens distributor; from 1976 to 1980, President of Plastic Plus in Toronto,
one of the first plastic lens fabricators in Canada; and, from 1972 to 1975,
National Sales Manager for Monarch Optical, a distributor of frames, lenses and
supplies to the optical industry in Canada. Mr. Cohen has over 30 years' of
experience in the optical industry.
Mr. Cornstein has been a member of the Board of Directors since May 2002
and is Chairman Emeritus and remains a Director of Finlay Enterprises, Inc., one
of the leading retailers of fine jewelry in the United States. He served as
Chairman of Finlay Enterprises from May 1993 until his retirement in 1999, and
has been a Director of Finlay Enterprises since its inception in 1988. From
December 1988 to January 1996, Mr. Cornstein was President and Chief Executive
Officer of Finlay Enterprises, Inc. Mr. Cornstein is a Principal of Pinnacle
Advisors Limited and a Director of TeleHubLink Corporation. Mr. Cornstein is
Chairman of the New York City Off-Track Betting Corporation; Vice Chairman of
the New York City Economic Development Corporation; Chairman of the New York
Olympic Games Commission; and a Commissioner of the Battery Park City Authority.
He is a member of the Board of Trustees of the New York Law School.
Mr. Drubner has been a member of the Board of Directors since November
2001; is senior partner in the law firm of Drubner, Hartley & O'Connor, which he
founded in 1971; and is the owner of Drubner Industrials, a commercial real
estate brokerage firm. Mr. Drubner has been practicing law in Connecticut since
1963, specializing in real estate, zoning, and commercial transactions. He is a
member of the Connecticut Bar and the Waterbury, Connecticut Bar Association.
Mr. Drubner has been admitted to practice before the U.S. District Court,
District of Connecticut. He is a former trustee of Teikyo Post University. Mr.
Drubner holds a Bachelor of Arts degree from Boston University and received his
Juris Doctor degree from Columbia University in 1963.
24
Mr. Eastburn has served as President of the distribution sector of our
Distribution & Technology Division since joining the company in November 2002.
From 1999 to November 2002, Mr. Eastburn was President of Axiom Laboratories,
Inc., a distributor of patented nutritional and personal care products. From
1997 to 1999, Mr. Eastburn was Senior Vice President, Sales and Marketing for
Amrion, Inc., a manufacturer and marketer of dietary supplements and a division
of Whole Foods Markets, Inc. He spent the first 16 years of his career with
Playtex Products, Inc., where he served as Vice President, Field Sales from 1992
to 1996. He holds a Bachelor of Arts degree in communications from California
State University, Northridge.
Mr. Harrold has served as President of the Managed Vision Division since
August 2000. Mr. Harrold served as Chief Operating Officer of the Managed Vision
Division from January 2000 through July 2000, before being appointed its
President. Mr. Harrold served as Vice President of Operations from July 1999 to
December, 1999, and Vice President of Quality Management from July 1996 to June
1999 for the Managed Vision Division. From November 1993 to July 1996, Mr.
Harrold was employed by Alcon Laboratories as a sales representative for its
vision care division. Mr. Harrold graduated from the University of South
Carolina in 1992 with a Bachelor of Science degree with dual majors in Business
Administration for Management Science and Insurance and Economic Security. He
earned a Masters degree in Business Administration from Appalachian State
University in 1993.
Mr. Huber has been a member of the Board of Directors since July 2002; is a
Senior Director of Kissinger McLarty Associates, an international advisory
partnership led by Henry Kissinger and Mack McLarty; and is Chief Executive
Officer of Norte Sur, a private equity firm targeting Latin America. Mr. Huber
is former Chairman, President and Chief Executive Officer of Aetna, Inc., the
Hartford, CT-based insurance company, which he joined in 1995. At Aetna, Mr.
Huber was responsible for a number of strategic acquisitions, such as NYLCare,
PruCare and USHealthcare, making Aetna the largest healthcare insurer in the
world. Prior to Aetna, Mr. Huber had a 35-year career in banking, including four
years as Vice Chairman and Director of Continental Bank and senior management
positions at Chase Manhattan and Citibank. Mr. Huber serves as Director of
Danielson Holding Company and was a member of the Congressional International
Financial Institutions Advisory Commission. He is a former Coast Guard officer
and holds a Bachelor of Arts degree from Harvard College.
Mr. Hoffman has been a member of the Board of Directors since January 2002
and is a Managing Director of Palisade Capital Management, LLC, an affiliate of
Palisade Concentrated Equity Partnership, L.P., which he joined upon its
formation in 1995. He is a Director of Refac, a publicly-traded company, as well
as several privately held companies, including Berdy Medical Systems, C3I,
Telelogue, Marco Group and Neurologix. Mr. Hoffman is a graduate of the Wharton
School at the University of Pennsylvania.
Mr. Johnson has been a member of the Board of Directors since May 2002 and
is Chairman of PSS World Medical, Inc., a national distributor of medical
equipment and supplies to physicians, hospitals, nursing homes, and diagnostic
imaging facilities. He is a Director of MetroMedia International Group,
Neurologix, Inc., World Factory, Inc. and Refac; is retired Chairman and Chief
Executive Officer of Pier 1 Imports; and is former Executive Vice President and
Director of the Wickes Companies, Inc. Mr. Johnson, who attended the University
of Iowa, completed the Advanced Management Program at the Harvard Business
School. He is former Chairman of the American Business Conference, former
trustee of Texas Christian University and is a former Chief Executive Officer
Participant in the National Conference on Ethics in America.
Mr. Meskin has been a member of the Board of Directors since January 2002
and is retired Vice President-Finance-National Operations of Verizon, the
combined Bell Atlantic/GTE telecommunications company. Mr. Meskin joined New
York Telephone in 1970 and held a variety of line and staff assignments with the
company over a 31-year career. In 1994, he was named Vice President-Finance and
Treasurer for NYNEX Telecommunications. When Bell Atlantic and NYNEX merged, he
was appointed Vice President-Finance and Comptroller of Bell Atlantic. Mr.
Meskin is a member of the Board of Trustees of Nyack (New York) Hospital and the
Board of Trustees of the Post Graduate Center for Mental Health.
Mr. Newman has been a member of the Board of Directors since May 2002 and
is Chairman of the Board, President and Chief Executive Officer of DRS
Technologies, Inc., a leading supplier of defense electronics
25
systems to government and commercial customers worldwide. Mr. Newman joined DRS
Technologies in 1973, served many years as its Chief Financial Officer, was
named a Director in 1988, became President and Chief Executive Officer in 1994,
and was elected Chairman of the Board. Mr. Newman serves as Vice Chairman of the
American Electronics Association, and as a Director of the New Jersey Technology
Council, SSG Precision Optronics and the Congoleum Corporation where he chairs
the Audit Committee. He is a member of the Board of Governors of the Aerospace
Industries Association of America, and also serves as a member of the Navy
League of the United States, the National Defense Industrial Association, the
Association of the U.S. Army, and the American Institute of Certified Public
Accountants, among other professional affiliations. Mr. Newman holds a Bachelor
of Arts degree in Economics from the State University of New York at Binghamton
and a Master of Business Administration from Pace University. He is also a
C.P.A.
Mr. Walls has served as Vice President and General Counsel of OptiCare
since February 2002. Prior to joining OptiCare, from December 2000 to February
2002, Mr. Walls was Vice President, Corporate Counsel and Corporate Secretary
for Outpost.com, a technology company in Connecticut. Prior to that, from
October 1999 to December 2000, he was Corporate Counsel, Vice President of
Business Affairs and Assistant Corporate Secretary with Real Media Inc., an
international technology start-up. From December 1995 to October 1999, Mr. Walls
served as an in-house litigator with St. Paul Fire and Marine Insurance Company.
His professional career also included private practice concentrating on
litigation that included medical malpractice defense and complex insurance
administrative proceedings. Mr. Walls received his Bachelor of Arts degree from
the University of Dayton and his Juris Doctor degree from Widener University
School of Law.
Mr. Wilkes has served as President and Chief Operating Officer of OptiCare
since June 10, 2002. From 2001 to June 2002, Mr. Wilkes served as Senior Vice
President of Business Development for CIGNA Health Services, a unit of CIGNA
Corp. During his tenure with CIGNA, Mr. Wilkes was responsible for the
development of new specialty healthcare businesses, including the founding of
CIGNA Vision Care. From 1999 to 2001, Mr. Wilkes was head of strategy and
mergers & acquisitions for Aetna USHealthcare, a unit of Aetna Inc. From 1989 to
1999, Mr. Wilkes held a variety of other executive positions at Aetna in
finance, marketing and business development. A graduate of Brown University, Mr.
Wilkes holds a Masters degree in Economics and Corporate Finance from Trinity
College.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Trading in OptiCare Common Stock
Our common stock is traded on the American Stock Exchange under the symbol
"OPT". The high and low closing prices for the periods presented are based on
trades effected on the American Stock Exchange.
26
2002 HIGH LOW
---- ---- ---
4th Quarter $0.44 $ 0.23
3rd Quarter 0.31 0.20
2nd Quarter 0.45 0.15
1st Quarter 0.45 0.13
2001 HIGH LOW
---- ---- ---
4th Quarter * $0.160 $0.100
3rd Quarter * - -
2nd Quarter * 0.290 0.200
1st Quarter 0.625 0.320
* Trading in our common stock was suspended by the American Stock Exchange from
April 20, 2001 through December 11, 2001.
On February 28, 2003, the last reported sale price of our common stock on
the American Stock Exchange was $0.65 per share. As of February 28, 2003, there
were approximately 200 stockholders of record of our common stock. The number of
record holders was determined from the records of our transfer agent, Mellon
Investor Services, LLC, and does not include beneficial owners of our common
stock whose shares are held in the names of various securities brokers, dealers
and registered clearing agencies. We believe the number of beneficial holders of
our common stock is approximately 1,500.
We have never paid any cash dividends on our common stock and do not intend
to pay any cash dividends on our common stock for the foreseeable future. It is
our present policy that any retained earnings will be used for repayment of
indebtedness, working capital, capital expenditures and general corporate
purposes. Furthermore, we are precluded from declaring or paying any cash
dividends on our common stock, or making a distribution to our stockholders
under the covenants of our loan agreement with our senior lender, until the
termination of such agreement and the repayment of all amounts due to such
lender. Additionally, we are precluded from declaring or paying any cash
dividends on our common stock, or making a distribution to our stockholders
under the terms of a senior subordinated secured note issued to Palisade
Concentrated Equity Partnership, L.P., our majority shareholder, until the
termination of such note and the repayment of all amounts due to Palisade. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources")
American Stock Exchange Listing
On April 20, 2001, the American Stock Exchange suspended trading of our
common stock. The exchange did not permit trading in the stock from that date
until December 12, 2001 principally because we had not filed our Annual Report
on Form 10-K for the year ended December 31, 2000, or our Quarterly Reports on
Form 10-Q for the quarters ended March 31, June 30 and September 30, 2001. We
filed all those reports by December 3, 2001, and the exchange thereafter
permitted trading to resume on December 12, 2001.
By letter dated November 19, 2001, the staff of the American Stock Exchange
advised us that it would recommend to the exchange's Committee on Securities the
delisting of our common stock. We appealed such recommendation and a hearing on
the appeal was held before the Committee on Securities on January 29, 2002. The
Committee decided at that time to postpone a determination of whether or not to
delist our common stock pending timely receipt of our Annual Report on Form 10-K
for the year ended December 31, 2001, and review of that report by the Committee
and the staff of the exchange. On April 12, 2002, the American Stock Exchange
advised us that its Committee on Securities had determined not to recommend to
its Adjudicatory Council to file an application with the Securities and Exchange
Commission to strike our common stock from listing and registration on the
exchange. It did so based upon information we presented, including our Annual
Report on Form 10-K for the fiscal year ended December 31, 2001 and information
concerning our Capital Restructuring Transactions, which were completed on
January 25, 2002. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources") We
remain subject to a 12-
27
month follow-up period during which we are subject to review by the exchange to
ensure that we do not fall below any of the exchange's continued listing
requirements. As of February 28, 2003, we believe we are in compliance with
these requirements.
We cannot provide assurances that our common stock will continue to be
listed without further suspensions, or that the exchange will not de-list our
common stock in the future. The exchange's rules for continued listing include
stockholders' equity requirements, which we may not meet if we experience
further losses; and market value requirements, which we may not meet if the
price of our common stock does not increase.
Recent Sales of Unregistered Securities
In December 2002, we issued an aggregate of 17,500,000 shares of common
stock to two of our shareholders, including Palisade, upon their exercise of
warrants at an exercise price of $0.14 per share. We received proceeds from the
exercise of these warrants totaling $2,450,000.
On December 20, 2002, we granted options to purchase 710,000 shares of
common stock under our Amended and Restated 2002 Stock Incentive Plan, at an
exercise price of $0.36 per share.
On February 7, 2003, we issued 750,000 shares of common stock, with an
estimated fair value of approximately $330,000, as part of the purchase price
consideration for our acquisition of Wise Optical.
On February 28, 2003, under our Amended and Restated 2002 Stock Incentive
Plan, we granted an aggregate of 225,000 shares of restricted stock, with an
estimated fair value of $146,250, and options to purchase an aggregate of
773,000 shares of common stock at an exercise price of $0.65 per share.
The above 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. We have reason to believe that: (i) all of the
foregoing purchasers were familiar with or had access to information concerning
our operations and financial condition, (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 bear, or
will bear, legends to that effect.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data has been
derived from audited historical financial statements and should be read in
conjunction with our consolidated financial statements and the notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
OptiCare in its present form is the result of mergers completed on August
13, 1999 among Saratoga Resources, Inc., PrimeVision Health, Inc. and OptiCare
Eye Health Centers, Inc. For accounting purposes, PrimeVision was treated as the
accounting acquirer and, therefore, the predecessor business for historical
financial statement reporting purposes. During 2002, we sold the net assets of
our retail optometry operations in North Carolina and accounted for the sale as
a discontinued operation. Accordingly, historical amounts presented below have
been restated to reflect discontinued operations treatment. On February 7, 2003
we acquired Wise Optical. (See "Business --Recent Developments") The historical
results presented below do not include the results of Wise Optical and are not
indicative of our future financial condition or results of operations.
28
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
(in thousands, except per share data) 2002 2001 2000 1999 (1) 1998
---- ---- ---- -------- ----
STATEMENT OF OPERATIONS DATA:
Total net revenues $91,531 $94,082 $109,346 $66,944 $44,926
Income (loss) from continuing operations
available to common stockholders (2) $(979) $2,687 $(14,686) $(578) $(6,131)
Weighted average shares outstanding (3):
Basic 12,552 12,795 12,354 4,776 2,256
Diluted 12,552 13,214 12,354 4,776 2,256
Income (loss) from continuing operations
per share available to common stockholders (2) :
Basic and diluted $(0.07) $0.21 $(1.19) $(0.12) $(2.72)
(1) We acquired OptiCare Eye Health Centers, Inc. on August 13, 1999 and Cohen
Systems, Inc. (now doing business as "CC Systems") on October 1, 1999,
which were accounted for as purchases. Accordingly, the results of
operations of OptiCare Eye Health Centers, Inc. and Cohen Systems, Inc. are
included in the historical results of operations since September 1, 1999
and October 1, 1999, respectively, the deemed effective dates of the
acquisitions for accounting purposes.
(2) Includes the effect of goodwill amortization of $943, $943, $605 and $284
in 2001, 2000, 1999 and 1998, respectively. The amortization of goodwill
was discontinued in 2002 pursuant to SFAS No. 142. Also includes preferred
stock dividends of $531, $600 and $1,200 in 2002, 1999 and 1998,
respectively.
(3) The weighted averages of common shares outstanding prior to 2000 have been
adjusted to reflect the conversion associated with the reverse merger with
Saratoga in 1999.
AS OF DECEMBER 31,
-------------------------------------------------------------------
(in thousands) 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Net assets of discontinued operations $ - $ 9,494 $10,051 $10,647 $ 10,078
Total current assets 12,904 20,583 14,913 21,345 20,237
Goodwill and other intangibles, net 21,869 22,050 23,161 25,207 595
Total assets 45,105 59,742 55,513 66,740 26,556
Total current liabilities 10,668 17,128 49,454 20,654 51,198
Total debt (including current portion) 19,486 34,393 34,058 42,956 39,750
Mandatorily redeemable preferred stock 4,487 - - - 9,200
Total stockholders' equity (def