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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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 001-15223
OPTICARE HEALTH SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0453392
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
87 GRANDVIEW AVENUE, WATERBURY, CONNECTICUT 06708
(Address of Principal Executive Offices) (Zip Code)
(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 Exchange Act Rule 12b-2 ). [ ]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 is an affiliate) computed by reference to
the closing market price as reported on the American Stock Exchange on June 30,
2003, the last business day of the registrant's most recently completed second
fiscal quarter, was $4,920,389.
The number of shares outstanding of the registrant's Common Stock, par value
$.001 per share, as of March 1, 2004, was 30,386,061 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
2004 Annual Meeting of Stockholders.
OPTICARE HEALTH SYSTEMS, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS ............................................................3
ITEM 2. PROPERTIES ........................................................18
ITEM 3. LEGAL PROCEEDINGS .................................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...............21
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ..............................................24
ITEM 6. SELECTED FINANCIAL DATA ............................................25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ..............................26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .........42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ........................42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE .............................................42
ITEM 9A. CONTROLS AND PROCEDURES ............................................43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY ....................43
ITEM 11. EXECUTIVE COMPENSATION .............................................43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS .......................43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .....................44
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES .............................44
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K ...............................44
SIGNATURES ..........................................,........................51
2
PART I
ITEM 1. BUSINESS
THE FOLLOWING BUSINESS SECTION CONTAINS FORWARD-LOOKING STATEMENTS, WHICH
INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS. (SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--RISK FACTORS").
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, 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. We also own a manufacturing laboratory in Connecticut, in
which prescription eyeglasses are fabricated and supplied to all of
our Connecticut locations.
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; (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 Corporate Code of Conduct and Ethics and 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.
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.
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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., ophthalmologists and optometrists have traditionally delivered
eye care services. Optical products are 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 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 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 optical products and eye care services to show
steady growth. We believe that the aging of the population, including the "baby
boom" generation, will increase the demand for optical products and eye care
services such as the medical and surgical treatment of such common disorders as
glaucoma, macular degeneration, diabetic retinopathy and cataracts. For
instance, 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
4
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
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 Connecticut, Colorado, Georgia, Missouri, New York,
North Carolina, Tennessee and Texas. The typical range of benefits administered
includes 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, third party provider relationships 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
certain South-East and North-East markets;
o Positioning ourselves to contract for business directly with employer
groups and other 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/or
prescription optical products.
5
Market Position
As of December 31, 2003, we administered eye care benefit programs,
delivered through networks of eye care professionals nationwide, for
approximately 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/or 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 six managed vision contracts with two insurers,
CIGNA and United St. Louis, which account for 14 % of the our consolidated
revenue in 2003. CIGNA experienced a decline in membership in January 2004,
which translates into a $2.0 million decline in our annual revenue, however, a
new contract with a different payor became effective March 1, 2004, which will
offset this decrease in revenue.
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 distinguished in the eye care insurance industry because it
offers a number of different risk-bearing contractual relationships for its
clients. In addition to traditional "Managed Care Vision Benefits," described in
the first point below, we began offering a new suite of products in February of
2003, 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.
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.
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.
Operations
The following are the principal components of our Managed Vision
operations:
o Provider Contracting - Upon obtaining a managed care contract, we
typically define and/or develop a network of ophthalmologists,
optometrists 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.
6
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 addition to our network enrollment
process, we credential when requested by the health plan or as
required by state law consistent with the standards established by
those plans or applicable law. In those instances, we undertake a
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 2003 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 three years.
o Claims Payment - For most contracted payers, we pay claims to our
network 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 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--and therefore 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.
7
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, pre-paid health care or defined managed care activities. In some
states, these laws do not apply to the discounted fee-for-service or capitation
programs between insurers and provider networks contracting with those insurers.
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")
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.
We also hold a license as a third-party administrator in North Carolina,
South Carolina and Texas and are a licensed utilization review agent in South
Carolina, Texas, Tennessee and New York. In addition, we have applied for a
preferred provider network license in Connecticut.
In New Jersey we have applications on file to become a Certified Organized
Delivery System and a third-party administrator.
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 Capitve Insurance Subsidiary. Our Captive Insurance
Company subsidiary, Opticare Vision Insurance Company (OVIC) is a licensed
Captive Insurance Company domiciled in South Carolina. It is subject to
regulation and supervision by the South Carolina Department of Insurance who
requires us to maintain $500,000 of unencumbered capital and surplus.
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 in November 2003, to maintain a minimum net
worth of $500,000. 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
8
services in connection with managed care business. We currently hold third party
administrator licenses in North Carolina and Texas. 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, offered through Fidelity, is reinsured through
OptiCare Vision Insurance Company, Inc., our wholly-owned subsidiary, 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. We previously registered as a preferred
provider network (PPN) with the Connecticut Office of Health Care Access. In
2003 this regulatory function was transferred to the Department of Insurance and
the definition of a PPN was revised to focus on entities assuming financial
risk. We have an application pending with the Department of Insurance for a PPN
in Connecticut. Many states have provider network licensure registration
requirements and many of these mandate that an organization have specified
financial reserves or insolvency protections and provide financial reporting and
disclosures to state officials. Our activities over time in Connecticut and/or
in various other states may subject us to regulation under such arrangements,
and our ability to comply with these requirements or to secure the necessary
regulatory approval, cannot be assured.
"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 ophthalmologists and optometrists .
Further, with the 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.
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 the use, disclosure and confidentiality of
patients' protected health information. The HHS, in its administrative
simplification provisions, has published three sets of final regulations
implementing healthcare transactions and privacy standards under HIPAA. These
regulations apply to what are termed "covered entities" (i.e., health plan,
health care clearinghouse, healthcare provider) and, under terms of the
regulations, in certain instances we may be a covered entity and in other
instances we may be classified as a business associate of an independent covered
entity. In addition, state laws may place additional limitations on the use or
disclosure of patients' information.
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. The effective date was later delayed to October 2003. We
implemented the appropriate compliance initiatives, including systems
enhancements, to implement the electronic transaction and code set requirements
and we believe we are in compliance with this regulation.
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. We implemented appropriate
9
compliance initiatives, including systems enhancements, training and
administrative efforts, required to be compliant with the HIPPA Privacy
Regulations and we believe we are in compliance with this regulation.
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 have has created a security plan that includes administrative,
technical and physical security safeguards to ensure appropriate compliance by
the effective date.
We are currently assessing the 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, we believe this will not have a significant overall impact on our
results of operations. We will continue to monitor new developments under HIPAA
and the regulations and pronouncements issued thereunder to ensure compliance.
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. Many of the laws described may involve
civil and criminal penalties and have been subject to limited judicial and
regulatory interpretation. These laws often 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, some of 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.
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
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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 locations.
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 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 farbricated,
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
11
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 eyeglass frames, ophthalmic lenses, 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 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 Ophthalmology and Optometry . 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;
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o Controlling clinical decision-making; or
o Engaging in other activities that constitute the practice of
ophthalmology or optometry.
To comply with these requirements, we:
o Perform only non-professional services;
o Contract with our professional affiliate (which is owned by a licensed
ophthalmologist), which in turn employs or contracts with licensed
ophthalmologists or optometrists 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 professional practices
or clinical judgements of eye care practitioners employed by the
professional affiliate.
o Only dispense prescription ophthalmic products under the sole
supervision of the employees of the professional affiliate.
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", which includes "prosthetic devices." Under federal
authority and the standards imposed by various state Medicaid programs,
eyeglasses and contact lenses for patients who have undergone certain ophthalmic
procedures would be considered prosthetic devices covered by Stark. 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.
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. In addition, to the extent we are
engaged in the direct delivery of vision care services in a jurisdiction we have
to comply with those statutes. There is no express statute on this specific
subject in Connecticut.
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
13
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
(42 USC Section 1320a-7b), 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. Advertising is prohibited if it is undertaken in
a manner that is deemed inappropriate for a professional or likely to mislead
and there are regulatory requirements in Connecticut delineating certain
specific requirements in this regard to which we must comply. 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 types of 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.
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
14
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 continue to establish 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. and, indirectly, through a "Buying
Group" program, which is a specialized group purchasing arrangement for
ophthalmologists, optometrists and opticians. Under the trade name 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 continue the expansion of our distribution of optical and
ophthalmic goods and medical supplies through leveraging Wise Optical's field
sales/customer service force of nearly 50 individuals nationwide.
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.
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.
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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 and our Buying Group each have approximately 2,700 and 1,800 active
customers, respectively, most of whom are independent eye care practitioners.
Similarly, our software systems' customers are ophthalmology and optometry
practices, optical product dispensaries and optical laboratories, based mainly
in North America. As of March 1, 2004, we had approximately 70 retail, 100 lens
manufacturing, and 20 combined customers using our eye care systems and software
services throughout the U.S. and Canada. In addition, ophthalmology and
optometry practices use our remote entry software to place orders with
laboratories, which also use our software, 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 H(2)O, 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
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, 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. Among our vendors, two, Vistakon and Ciba
Vision, receive approximately 72% of the business of Wise Optical. Three others,
Bausch & Lomb, Coopervision and Ocular Sciences, account for another 22% of such
business. If one or more of these vendors should cease to sell products to Wise
Optical, it could have a material adverse effect on our business.
Our Buying Group leverages the purchasing strength of its approximately
2,500 members, of which 1,800 are active, making it possible for them to
purchase goods on a discounted basis from one or more suppliers chosen from our
national panel of approximately 230 different vendors. We enter into a
non-exclusive account relationship
16
with each of the ophthalmologists, optometrists and opticians who are members of
the Buying 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, one of the largest distributors 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 and the
miscellaneous curve design, which is the OptiCare Health Systems, Inc. logo; EYE
CARE FOR A LIFETIME; EYEWEAR AND EYE CARE FOR A LIFETIME; CONNECTICUT VISION
CORRECTION; LOSE THE GLASSES, KEEP THE VISION; THE DIFFERENCE IS CLEAR; and
KEEPING YOU AHEAD OF THE CURVE. Other trademarks for which applications for U.S.
registration are pending are: THE VISION OF HEALTH and DOCTOR'S EXPRESS. We also
maintain a common law trademark in CLAIM IT.
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.
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.
17
EMPLOYEES
We and our professional affiliate have approximately 482 employees,
including 78 ophthalmologists, optometrists and opticians and 39 ophthalmic
assistants. These numbers include an aggregate of approximately 58 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 facility, which contains corporate offices and an integrated
eye health center, is leased under three separate leases with remaining terms of
six, eight, and eight 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 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 four years. The base rent for this
facility is $184,000 per year for 19,355 square feet.
The Yonkers 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 seven 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 expires in September 2004. The base rent for this
facility is $27,000 per year for 2,520 square feet.
The facilities in Waterbury, Connecticut and Largo, Florida, described
above, are each leased from parties that are affiliated or associated with one
of our executive officers.
We lease 22 additional offices in the states of Connecticut, California,
New York, North Carolina, 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
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 Services Agreements and never
intended to provide meaningful
18
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 Services 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 Services Agreements for fraud in the
inducement, material misrepresentation, and mistake. Finally, plaintiffs seek
punitive damages and attorneys' fees, interest and costs. 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.
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 Services Agreement or, alternatively, 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;
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
19
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 opposed transfer to MDL 1466. On April 11, 2003, the Judicial
Panel denied those defendants' motions to vacate the Judicial Panel's order to
conditionally transfer the actions to the Western District of Kentucky and
ordered the remaining three actions transferred to the Western District of
Kentucky for inclusion in the coordinated or consolidated pretrial proceedings
occurring there.
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 Actions 3, 4, 5, 6 and 7, above, 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.
The parties have exchanged written discovery and have begun taking
depositions. 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. At this stage of the actions, we are unable to form an opinion as
to the likely outcome or the amount or range of potential loss, if any.
During 2002 and 2003, we reached settlement with two HSO Practices 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 of our assets. We believe we properly cancelled the Asset Purchase
Agreement pursuant to its terms. Plaintiff maintains that it incurred expenses
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.
The parties agreed to non-binding mediation, which began in April 2003 and
will continue at a later date to be agreed by the parties. At the mediation,
OptiVest, LLC agreed to withdraw its lawsuit and continue to attempt to resolve
this matter through non-binding mediation. Optivest LLC has withdrawn its
lawsuit however non-binding mediation has not been successful and the parties
will submit this matter to binding arbitration to be scheduled in the future.
20
THREATENED LITIGATION
As previously reported, 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. In
April 2003 the parties proceeded with non-binding mediation and believed the
matter had been resolved, however, since that time the parties have been in
discussion regarding the resolution reached at the mediation and no formal
settlement agreement has been entered into at this time.
In the normal course of business, the Company is both a plaintiff and
defendant in lawsuits incidental to its current and former operations. Such
matters are subject to many uncertainties and outcomes are not predictable with
assurance. Consequently, the ultimate aggregate amount of monetary liability or
financial impact with respect to these matters at December 31, 2003 cannot be
ascertained. Management is of the opinion that, after taking into account the
merits of defenses and established reserves, the ultimate resolution of these
matters will not have a material adverse effect in relation to the Company's
consolidated financial position or results of operations.
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 2003.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the name, age and position of each of our
directors and executive officers as of March 1 2004. 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. 56 Chairman of the Board of Directors and Chief Executive Officer
Eric J. Bertrand 31 Director
Gordon A. Bishop 55 President of Consumer Vision Division and Distribution Sector of
Distribution and Technology Division
William A. Blaskiewicz 41 Vice President and Chief Financial Officer
Norman S. Drubner, Esq. 64 Director
Jason M. Harrold 35 President of Managed Vision Division
Mark S. Hoffman 42 Director
Richard L. Huber 67 Director
Clark A. Johnson 72 Director
Melvin Meskin 59 Director
Mark S. Newman 54 Director
Christopher J. Walls, Esq. 40 Vice President and General Counsel
Lance A. Wilkes 37 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
21
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. Bertrand has been a member of the Board of Directors since January 2002
and is a Director 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 Aetna, Inc.'s private equity
group, focusing on middle market leveraged buy-outs and larger private equity
investments. Mr. Bertrand is a Director of U.S. Vision, Control F-1 and Versura,
Inc. 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 and in September 2003 he replaced Gregory Eastburn as President of the
Distribution sector of the Distribution and Technology Division. 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. 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 Financial Management (CFM) designations from the
IMA.
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 and
was a Director of American Bank of Connecticut from 1985 - 2001. Mr. Drubner
holds a Bachelor of Arts degree from Boston University and received his Juris
Doctor degree from Columbia University in 1963.
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
22
Security. He earned a Masters degree in Business Administration from Appalachian
State University in 1993.
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 and Neurologix, publicly-traded
companies, as well as several privately held companies, including Berdy Medical
Systems, C3I, Telelogue and Marco Group. Mr. Hoffman is a graduate of the
Wharton School at the University of Pennsylvania.
Mr. Huber has been a member of the Board of Directors since July 2002 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, Connecticut-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. 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 Chairman of Refac, a publicly held company on the American Stock
Exchange. Mr Meskin retired as 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 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 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 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, General Counsel and Corporate
Secretary 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 Cyberian Outpost, Inc. 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
23
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.
2003 HIGH LOW
---- ---- ---
4th Quarter $0.99 $ 0.55
3rd Quarter 0.74 0.53
2nd Quarter 0.90 0.52
1st Quarter 0.90 0.29
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
On March 1, 2004, the last reported sale price of our common stock on the
American Stock Exchange was $0.71 per share. As of March 1, 2004, 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.
RECENT SALES OF UNREGISTERED SECURITIES.
None.
24
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.
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------
(in thousands, except per share data) 2003 (1) 2002 2001 2000 1999 (2)
STATEMENT OF OPERATIONS DATA:
Total net revenues $125,702 $91,531 $94,082 $109,346 $66,944
Income (loss) from continuing operations
available to common stockholders (3)(5) (12,971) $4,335 $2,687 $(14,686) $(578)
Weighted average shares outstanding (4):
Basic 30,067 12,552 12,795 12,354 4,776
Diluted 30,067 51,172 13,214 12,354 4,776
Income (loss) from continuing operations
per share available to common
stockholders:
Basic $(0.43) $0.35 $0.21 $(1.19) $(0.12)
Diluted $(0.43) $0.10 $0.21 $(1.19) $(0.12)
BALANCE SHEET DATA:
Net assets of discontinued operations - $ - $9,494 $10,051 $10,647
Total current assets 17,654 12,904 20,583 14,913 21,345
Goodwill and other intangibles, net 20,374 21,869 22,050 23,161 25,207
Total assets 45,855 45,105 59,742 55,513 66,740
Total current liabilities 13,827 10,668 17,128 49,454 20,654
Total debt (including current portion) 12,603 19,486 34,393 34,058 42,956
Redeemable preferred stock 5,635 5,018 - - -
Total stockholders' equity 14,412 $10,652 $6,982 $3,877 5,274
(1) We acquired Wise Optical on February 7, 2003, which was accounted for as a
purchase. Accordingly, the results of operations of Wise Optical are
included in the historical results of operations since February 1, 2003,
the deemed effective date of the acquisition for accounting purposes.
(2) 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.
(3) Includes the effect of goodwill amortization of $943, $943 and $605 in
2001, 2000 and 1999, respectively. The amortization of goodwill was
discontinued in 2002 pursuant to Statement of Financial Accounting
Standards (SFAS) No. 142. Also includes preferred stock dividends of $618,
$531, and $600 in 2003, 2002 and 1999, respectively.
25
(4) The weighted averages of common shares outstanding in 1999 have been
adjusted to reflect the conversion associated with the reverse merger with
Saratoga in August 1999.
(5) As a result of the Company's adoption of SFAS No. 145, the Company
reclassified its previously reported gain from extinguishment of debt of
approximately $8.8 million and related income tax expense of approximately
$3.5 million in 2002 from an extraordinary item to continuing operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our consolidated financial statements and notes thereto which are included
elsewhere in this Annual Report on Form 10-K. (See "Index to Financial
Statements" beginning at page F-1.)
Overview. We are an integrated eye care services company focused on vision
benefits management (managed vision), retail optical sales and eye care services
to patients and the distribution of products and software services to eye care
professionals.
On February 7, 2003, we acquired substantially all of the assets and
certain liabilities of the contact lens distribution business of Wise Optical
Vision Group, Inc. (Wise Optical), a New York corporation. The results of
operations of Wise Optical are included in the consolidated financial statements
from February 1, 2003, the deemed effective date of the acquisition for
accounting purposes. We have experienced substantial losses at Wise Optical in
2003. These losses were largely attributable to significant expenses incurred by
Wise Optical, including integration costs (primarily severance and stay bonuses,
legal and professional fees), weakness in gross margins and an operating
structure built to support a higher sales volume. In September 2003, we began
implementing strategies and operational changes designed to improve the
operations of Wise Optical. These efforts include developing our sales force,
improving customer service, enhancing productivity, eliminating positions and
streamlining our warehouse and distribution processes. In addition, effective
September 3, 2003, Gordon Bishop, President of our Consumer Vision division,
replaced the former President of the Distribution division. Mr. Bishop brings
industry expertise and a strong optical background to Wise, along with a focus
on operating expenses. We believe these changes will lead to increased sales,
improved gross margins and reduced operating costs in 2004, however if the
losses at Wise Optical continue it could have a material adverse effect on our
profitability and/or liquidity.
On May 12, 2003, Palisade Concentrated Equity Partnership, L.P., our
majority shareholder, and Linda Yimoyines, wife of Dean J. Yimoyines, M.D., our
Chairman of the Board and Chief Executive Officer, each exchanged the entire
amount of principal and interest due to them under our senior subordinated
secured notes payable, totaling an aggregate of $16.2 million, for a total of
406,158 shares of Series C Preferred Stock.
In the third and fourth quarters of 2003 we failed to comply with the
minimum fixed charge ratio covenant under our revolving credit facility with
CapitalSource Finance, LLC, for which we received a waiver.
Due to our covenant failure in the third quarter of 2003 and anticipated
cash constraints in December 2003 through February 2004, both of which are
mainly due to operating losses at Wise Optical and seasonality in our business,
on November 14, 2003, we amended our term loan and revolving credit facility. As
part of the amendment, we received (i) an additional $0.3 million term loan,
(ii) an extension of the maturity dates of our term loan and revolving credit
facility to January 25, 2006, (iii) a waiver for non-compliance with the minimum
fixed charge ratio covenant through March 31, 2004 and (iv) a $0.7 million
temporary over-advance on our revolving credit facility, which was fully repaid
by March 1, 2004. Management believes it will comply with its future financial
covenants beyond the date of the current waiver, however, if operating losses
continue and we fail to comply with financial covenants in the future or
otherwise default on our debt, our creditors could foreclose on our assets.
26
Our business is comprised of three reportable operating segments: (1)
Managed Vision, (2) Consumer Vision, and (3) Distribution & Technology. Our
Managed Vision Division contracts with insurers, managed care plans and other
third-party payers to manage claims payment administration of eye health
benefits for contracting parties. Our Consumer Vision Division sells retail
optical products to consumers and operates integrated eye health centers and
surgical facilities in Connecticut where comprehensive eye care services are
provided to patients. Our Distribution & Technology Division provides products
and services to eye care professionals (ophthalmologists, optometrists and
opticians) through (i) Wise Optical, a distributor of contact and ophthalmic
lenses and other eye care accessories and supplies; (ii) a Buying Group program,
which provides group purchasing arrangements for optical and ophthalmic goods
and supplies and (iii) CC Systems, which provides systems and software solutions
to eye care professionals.
In addition to these segments, we receive income from other non-core
operations and transactions, including our health service organization (HSO)
operation which receives fee income for providing certain support services to
individual ophthalmology and optometry practices. While we continue to provide
the required services to these practices, we are in the process of generally
disengaging from a number of these operations. (See "Legal Proceedings --Health
Services Organization Lawsuits")
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the U.S.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amount of assets and liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities at the
date of our financial statements. Estimates are adjusted as new information
becomes available. Actual results may differ from these estimates under
different assumptions or conditions.
For a detailed discussion on the application of these and other accounting
policies, see Note 2 to the consolidated financial statements." We believe the
following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial statements.
Services Revenue
Through our affiliated professional corporation, OptiCare P.C., our Consumer
Vision Division provides to consumers comprehensive eye care services, including
medical and surgical treatment of eye diseases and disorders by
ophthalmologists, and vision measuring and non-surgical treatments and
correction services by optometrists. We charge a fee for providing the use of
our ambulatory surgery center to professionals for surgical procedures. Our
ophthalmic, optometric and ambulatory surgery center services are recorded at
established rates, reduced by an estimate for contractual allowances and
doubtful accounts. Contractual allowances arise due to the terms of certain
reimbursement contracts with third-party payers that provide for payments to us
at amounts different from our established rates. The contractual allowance
represents the difference between the charges at established rates and estimated
recoverable amounts and is recognized in the period the services are rendered.
The contractual allowance recorded is estimated based on an analysis of
historical collection experience in relation to amounts billed and other
relevant information. Any differences between estimated contractual adjustments
and actual final settlements under reimbursement contracts are recognized as
adjustments to revenue in the period of final settlements. Historically, we have
not had significant adjustments to this estimate.
Medical Claims Expense
Claims expense is recorded as provider services are rendered and includes
an estimate for claims incurred but not reported. Reserves for estimated
insurance losses are determined on a case by case basis for reported claims, and
on estimates based on our experience for loss adjustment expenses and incurred
but not reported claims. These liabilities give effect to trends in claims
severity and other factors which may vary as the losses are ultimately settled.
We believe that our estimates of the reserves for losses and loss adjustment
expenses are reasonable; however, there is considerable variability inherent in
the reserve estimates. These estimates are continually reviewed and, as
adjustments to these liabilities become necessary, such adjustments are
reflected in current
27
operations in the period of the adjustment. Historically, we have not had
significant adjustments to this estimate.
Goodwill
Goodwill, which arises from the purchase price exceeding the assigned value
of net assets of acquired businesses, represents the value attributable to
unidentifiable intangible elements being acquired. Of the total goodwill
included on our consolidated balance sheet, approximately 61% is recorded in our
Managed Vision segment, 25% in our Consumer Vision segment and 14% in our
Distribution & Technology segment.
On an annual basis, or as circumstances dictate, management reviews
goodwill and evaluates events or other developments that may indicate impairment
in the carrying value. The evaluation methodology for potential impairment is
inherently complex, and involves significant management judgment in the use of
estimates and assumptions. We use multiples of revenue and earnings before
interest, taxes, depreciation and amortization of comparable entities to value
the reporting unit being evaluated for goodwill impairment.
We evaluate impairment using a two-step process. First, we compare the
aggregate fair value of the reporting unit to its carrying amount, including
goodwill. If the fair value exceeds the carrying amount, no impairment exists.
If the carrying amount of the reporting unit exceeds the fair value, then we
compare the implied fair value of the reporting unit's goodwill with its
carrying amount. The implied fair value is determined by allocating the fair
value of the reporting unit to all the assets and liabilities of that unit, as
if the unit had been acquired in a business combination and the fair value of
the unit was the purchase price. If the carrying amount of the goodwill exceeds
the implied fair value, then goodwill impairment is recognized by writing the
goodwill down to the implied fair value. In the third and fourth quarters of
2003, we recorded an impairment charge to goodwill as a result of a loss of a
major customer in our Buying Group and poor operating performance in our Wise
Optical reporting unit. Adverse changes in our business climate, revenues or
profitability could require further reductions to the carrying value of our
goodwill in future periods.
Events that may indicate goodwill impairment include significant or adverse
changes in business or economic climate, an adverse action or assessment by a
regulator, unanticipated competition, loss of key personnel, and the sale or
expected sale/disposal of a reporting unit. Due to uncertain market conditions
it is possible that that the financial information used to support our goodwill
may change in the future, which could result in non-cash charges that would
adversely affect our results of operations and financial condition. See note 10
to consolidated financial statements.
Income Taxes
We account for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" which
requires an asset and liability method of accounting for deferred income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis using enacted tax rates expected to
apply to taxable income in the years the temporary differences are expected to
reverse. Our determination of the likelihood that deferred tax assets can be
realized is based on our examination of available evidence, which involves
estimates and assumptions. We consider future market growth, forecasted
earnings, future taxable income and known future events in determining the need
for a valuation allowance. In the event we were to determine that we would not
be able to realize all or part of our net deferred tax assets in the future, an
adjustment to the deferred tax assets would be charged to earnings in the period
such determination is made. In the third quarter of 2003, we recorded a
valuation reserve against our entire deferred tax assets due to historical
operating losses. As we experience future profitability, we expect to reduce or
eliminate the valuation reserve. See note 19 to consolidated financial
statements.
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RESULTS OF OPERATIONS
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Managed Vision revenue. Managed Vision revenue represents fees received
under our managed care contracts. Managed Vision revenue decreased to
approximately $28.1 million for the year ended December 31, 2003, from
approximately $29.4 million for the year ended December 31, 2002, a decrease of
approximately $1.3 million or 4.5%. During the second quarter of 2003 the Texas
state legislature made changes to its Medicaid program and as a result HMO Blue,
with whom we maintained a Medicaid contract, withdrew from Texas' Medicaid
program effective September 1, 2003. Therefore, our contract with HMO Blue
terminated on September 1, 2003. This contract generated revenue of
approximately $1.7 million in 2003 compared to approximately $2.5 million in
2002. In addition and also effective September 1, 2003, the Texas state
legislature decided to no longer fund a vision benefit in its Children's Health
Insurance Program or provide vision hardware benefits to those over the age of
21. We maintained a number of contracts through this program that reduced
benefits and/or terminated on Se