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The following is an excerpt from a 10KSB SEC Filing, filed by AVESIS INC on 4/1/2002.
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AVESIS INC - 10KSB - 20020401 - PART_I

PART I

ITEM I. DESCRIPTION OF BUSINESS

GENERAL

Avesis Incorporated, a Delaware corporation (together with its subsidiaries, the "Company"), is an ancillary healthcare management firm, organized in 1978. The Company markets and administers vision, dental and hearing managed care and discount programs ("Programs") nationally and operates AbsoluteCare, Inc. ("AbsoluteCare"), an infectious disease medical center. The Programs are designed to enable participants ("Members"), who are enrolled through various sponsoring organizations such as insurance carriers, HMOs, Blue Cross and Blue Shield organizations, corporations, unions and various associations ("Sponsors"), to realize savings on purchases of products and services through the Company's independent network of providers such as ophthalmologists, optometrists, opticians, dentists and hearing specialists ("Providers"). AbsoluteCare was established in 2000 to create infectious disease treatment centers, with a current emphasis on HIV/AIDS treatment, potentially on a national basis.

Total service revenue has been derived from the product lines in the following percentages:

                                                                                   (unaudited)
                                      Year Ended             Year Ended             Year Ended
                                  December 31, 2001      December 31, 2000      December 31, 1999
                                  -----------------      -----------------      -----------------
Vision and Hearing Program               63%                    73%                    74%
Dental Program                            1%                     7%                     9%
Buying Group Program                     12%                    18%                    16%
AbsoluteCare                             24%                    --                     --
Other                                    --                      2%                     1%

Total Service Revenue                 $9,564,051             $7,808,695             $9,957,445

ABSOLUTECARE, INC.

On July 24, 2000, the Company founded AbsoluteCare, a wholly owned subsidiary, in Delaware. AbsoluteCare combines all of the primary health services that HIV patients need in one facility. These include professional care, in-house pharmacy and laboratory services.

1

AbsoluteCare's first medical center opened in Atlanta, Georgia (the first HIV medical center to open in Atlanta in almost a decade), in late November of 2000. The center has seen its patient base grow to approximately 1,470 patients as of March 21, 2002, from 310 patients as of March 28, 2001. AbsoluteCare provides medical services to patients with private health insurance, Medicaid/Medicare or to those who privately pay for such services.

During February 2002, the Company signed a lease for a second AbsoluteCare location in the Atlanta Metro area. The second location will utilize the pharmacy and laboratory at the initial site and is expected to open for patient visits during April 2002.

VISION PROGRAM

The Company offers provider networks and administrative services for group vision programs ("Vision Program"). The Vision Program is designed to provide savings by reducing the cost of eye examinations and vision products (frames, eyeglass lenses and contact lenses).

Under the Vision Program, a Member is entitled to discount pricing that Providers offer for eye examinations and the purchase of eyewear at network Provider locations. The Member may be fully responsible for paying the Provider unless the Sponsor (a self-funding employer or insurer) is obligated to pay the Provider, or reimburse the Member. In some cases, the Company may act as a third party administrator for the Sponsor and pay the Providers from funds provided by the Sponsor for that purpose.

Under some Programs, each Member pays an annual enrollment fee to the Company for the right to utilize network Providers and receive discounts. In other cases, typically involving Sponsors who pay benefits, the Sponsors pay the Company a periodic enrollment fee for each Member.

If the Program has insured or self-funded benefits, the Sponsor determines the products and services that will be covered, how frequently the benefit is available and, subject to local regulation, whether reimbursement for non-network Provider purchases will be made.

The Company principally derives revenues from fees paid by or on behalf of Members for enrollment, plan administration and services, and claims administration, and in certain cases also derives revenues from fees paid by Providers when Members purchase eyewear and services.

2

The table below sets forth the approximate numbers of Providers and Members enrolled in the Vision Program at the dates indicated:

                           Number of           Number of          Number of
     Date                  Providers            States             Members
     ----                  ---------            ------             -------
December 31, 2001            8,805                50              1,474,000
December 31, 2000            7,064                48              1,401,000
December 31, 1999            6,700                46                687,000

Substantially all of the Providers indicated above are optometrists. The numbers of Members indicated in the above table are as reported to the Company by Sponsors and may not include all eligible spouses and children of Members.

The Company administers a buying group for vision Providers so that they may take advantage of volume buying discounts for eyeglass frames. The Company has entered into arrangements with certain frame manufacturers that enable Providers to obtain frames at prices generally below wholesale prices. The Company is billed directly by the frame manufacturers and is responsible for the billing and collection of amounts due from the Providers. The Company receives a discount, greater than the amount given to the Providers, from the frame manufacturers to pay for the cost of administering the buying group program. Providers are not obligated to purchase from designated suppliers.

HEARING PROGRAM

The Company's hearing program (the "Hearing Program") has been marketed principally as an adjunct to the Vision Program. Revenues from the Hearing Program have not been significant. A Hearing Program Member may obtain a hearing evaluation by a Provider for a reduced fee. In addition, the Member may purchase a hearing aid from a Provider at wholesale cost plus a professional fee or at a discount from the Provider's usual charge, depending on the options selected by the Plan Sponsor. Such benefits are also available to a Member's spouse, children, parents and grandparents.

DENTAL PROGRAM

The Company establishes and maintains dental Provider networks that it also makes available to Sponsors. Fees charged to Members by Providers are based upon fee schedules that the Providers have accepted. Similar to the Vision Program, the Company's dental program (the "Dental Program") is offered both for Members who are themselves responsible for paying 100% of the costs of their care to their Providers, and for Programs under which the Sponsor assumes the obligation of paying Providers (or reimbursing Members) for the agreed-upon costs of specified care. Revenues from the Dental Program principally are derived in the same manner as the Vision Program.

3

The table below sets forth the approximate number of Providers and Members enrolled in the Dental Program at the dates indicated, as reported to the Company by Sponsors:

                           Number of           Number of          Number of
     Date                  Providers            States             Members
     ----                  ---------            ------             -------
December 31, 2001            9,229                43                31,000
December 31, 2000            9,149                43                25,000
December 31, 1999            8,945                43                73,000

See also Item 6 - "Management's Discussion and Analysis or Plan of Operation"

PROVIDER NETWORKS

The Company usually contracts with Providers to provide services simultaneously with the plan Sponsor's development of a membership base in a geographic area; however, some Providers are enlisted in expansion areas where there currently is little or no membership base. The Programs supplement the practices of Providers by enabling them to obtain additional patients who are Members while allowing Providers to retain their existing practices. Although Members generally pay fees and charges less than those of non-Member patients, Member patients can be an important source of incremental revenue to Providers. There can be no assurance that Providers will continue to participate in the Programs even if their participation results in an increase in revenues because the portion of their practices derived from the Programs may be less profitable than other aspects of their practices.

The Company periodically reviews a portion of the Providers. This review includes a patient survey form which is distributed on a random basis by the Company to Members, the investigation of any complaints received from Members and a desk or field audit by a Company auditor to confirm that Members were not charged more than the contracted prices for services and products.

PROGRAM ADMINISTRATION AND ADMINISTRATION OF CLAIMS

The Company receives fees from Sponsors for program administration services. These fees vary depending upon the type of program involved, the number of card-holding Members in a Sponsor's program, and the extent of claims administration and other administrative services involved.

When the Company acts as a third party administrator for Programs under which the Sponsor pays for Provider services, Members obtaining services from Providers present their cards to the Providers, who in certain cases contact the Company to confirm eligibility and, upon performance of services, submit claim forms to the Company. The Company processes the claims, requests funds from the appropriate Sponsors, and forwards payments to the Providers and/or Members from the funds received from Sponsors. Monthly information about the use of the Programs by Members and cost savings is reported to certain Sponsors.

4

Although the Company does not believe it would have any liability due to any malpractice on the part of any Provider, the usual form of Provider Agreement requires each Provider to indemnify the Company against any claim based on the negligence or other wrongdoing of the Provider in the performance of services for Members. In addition, Providers are required to carry malpractice insurance with limits equal to or greater than their state required minimums.

MARKETING

The Company markets nationally to potential Sponsors that have or have access to a large number of potential Members. Marketing is done through the efforts of the Company's sales personnel and unaffiliated insurance brokers, general agents and employee benefit consultants compensated on a commission basis. Substantial marketing services are also provided through National Health Enterprises, Inc. ("NHE"), an affiliate. See Item 12 - "Certain Relationships and Related Transactions - Agreements with National Health Enterprises, Inc." and Item 6 - "Management's Discussion and Analysis or Plan of Operation - Results of Operations."

The Company's sales and marketing personnel market the full range of the Company's products and services. The Company believes that offering a range of products and services in multiple product lines differentiates it from its competitors and enables it to offer a more comprehensive solution to its customers' benefits needs.

The Company's three largest Sponsors accounted for 14%, 11% and 11% of total service revenues for the year ended December 31, 2001. The Company's four largest Sponsors accounted for 22%, 15%, 9% and 9% of total service revenues during the year ended December 31, 2000. The Company is substantially dependent on a limited number of Sponsors and may be materially adversely affected by termination of any of its agreements with Sponsors.

In an effort to minimize the Company's risk related to its dependence on a limited number of Sponsors, the Company has developed the Avesis Advantage Vision Program and the Avesis Advantage Dental Program. These insured products allow the Company to market and contract directly with employers, unions and other groups either through the Company's internal sales staff or the broker community. The Company derived its first revenues from its Avesis Advantage Vision Program in December 1999, and had approximately 9,500 Members as of January 1, 2001 and approximately 106,800 as of January 1, 2002, including approximately 62,100 and 24,500 Members from two employee groups. These two groups arose from direct contracts with single employers. In most instances the sizes of the groups participating in the Avesis Advantage Vision Program are significantly smaller. As with the Company's traditional vision business, the Company may be materially adversely affected by the loss of a large group participating in the Avesis Advantage Vision Program.

5

During July 2001, the Company hired three salespeople, located in Georgia, Pennsylvania and Massachusetts, to market the Company's products, concentrating on sales of the Avesis Advantage Vision Program. Additionally, the Company increased its marketing support staff and network development personnel to further the sales efforts. The Company expects to derive its first revenues from the Avesis Advantage Dental Program during the first half of calendar year 2002. The Company originally anticipated deriving its first revenues from the Avesis Advantage Dental Program during the second half of calendar year 2001, but it has delayed the rollout of the product, as its resources have been concentrated on the geographic expansion of sales of the Avesis Advantage Vision Program.

COMPETITION

The Company competes for potential Sponsors, Members and Providers, depending on the geographic area or market, with various provider organizations, health maintenance organizations and health care membership programs. Most of these competitors have significantly greater financial, marketing and administrative resources than the Company. The Company believes it has a competitive advantage as it is able to offer a full line of ancillary benefits while substantially all of its competitors concentrate on one benefit line.

REGULATION

Certain registration and licensing laws and regulations (including those applicable to third party administrators, reinsurers, preferred provider organizations, franchises and business opportunities) in many states in which the Company operates may have application to various aspects of the Company's programs. In addition, statutes and regulations applicable to insurers and providers, including those relating to fee splitting, referral fees, advertising, patient freedom of choice, provider rights to participate and antidiscrimination in reimbursement, may impact the Company. The Company believes that it is in compliance with applicable laws and regulations as the Company understands they are currently interpreted. However, there can be no assurance that changes in interpretation will not occur in the future or that existing laws and regulations will not be broadened. In that event, the Company could be required to register in various additional states and/or post substantial fidelity or surety bonds. Alternatively, the Company may be required to alter its services, modify its contractual arrangements with Sponsors, Providers and Members, be precluded from providing some or all of its services in some states, or be subject to substantial fines or penalties. Any or all of the foregoing consequences could materially adversely affect the Company.

6

EMPLOYEES

As of March 13, 2002, the Company had 49 full-time employees as compared to 46 full-time employees as of March 12, 2001. The Company believes that its relationship with its employees is good. There are no employees represented by a union.

ITEM 2. DESCRIPTION OF PROPERTIES

The Company maintains its executive offices at 3724 North Third Street, Suite 300, Phoenix, Arizona 85012, in space leased from an unaffiliated party. The property is covered by two lease agreements, one for approximately 3,200 square feet and one for approximately 6,700 square feet, for a total of approximately 9,900 square feet. The term of the leases run concurrently and will expire on September 30, 2002.

The Company maintains sales and administrative offices at 10324 S. Dolfield Road, Owings Mills, Maryland 21117, 790 Turnpike Street, Suite 202, North Andover, Massachusetts 01845, 2398 Lenora Church Road, Suite 200, Snellville, Georgia 30078 and at 5321 First Place NE, Washington, D.C. 20011. The DC office is used pursuant to a verbal agreement with a non-affiliated lessee that is terminable at will and is at no cost to the Company. The Company entered into a lease agreement on June 3, 1999 for approximately 1,500 usable square feet of space in Owings Mills, Maryland for a term of five years, which began November 1, 1999. The lease agreement is with KA Real Estate Associates, LLC, a related entity owned by Messrs. Cohn and Blum, Jr., with the terms being no less favorable than an arm's length transaction. The amounts incurred under the sales office lease agreements in Massachusetts and Georgia are not significant on a monthly basis. The Company owns and leases various computer, data processing and other office equipment. The Company believes that its facilities and equipment are maintained in good operating condition and are adequate for the present level of operations. See Item 12 - "Certain Relationships and Related Transactions."

On August 9, 2000, AbsoluteCare entered into a lease agreement for approximately 5,000 square feet at 2581 Piedmont Road, Suite A400, Atlanta, Georgia 30324, with an unrelated party. The lease term is for three years and began November 1, 2000. AbsoluteCare's first infectious disease center is located on the premises. During February 2002, the Company entered into a lease agreement for a second AbsoluteCare location, at 3565-9 Martin Luther King, Jr. Drive, Atlanta, Georgia 30331, with an unrelated party. The lease is for appromiately 2,000 square feet, has a three-year term and began March 1, 2002.

ITEM 3. LEGAL PROCEEDINGS

The Company currently is not a party to any material pending legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None submitted during the fourth quarter of fiscal year 2001.

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BROKERAGE PARTNERS