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
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
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.
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.
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.
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.
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.
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.
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"
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.
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
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.
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.
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.
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.
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