Securities and Exchange Commission
Washington D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1995
-----------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
----------------- ----------------
Commission File Number 0-15304
-----------------
AVESIS INCORPORATED
--------------------------------------------------------------
(Exact name of small business issuer as
specified in its charter)
Delaware 86-0349350
------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 West Clarendon Avenue, Suite 2300 Phoenix, Arizona 85013
----------------------------------------------------------------------
(Address of principal executive offices)
(602) 241 - 3400
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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. Yes X No
-------- --------
The number of outstanding shares of the registrant's Common Stock on
October 12, 1995 was 4,075,420.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
(Check One) [ ] Yes [X] No
<PAGE>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
AVESIS INCORPORATED
BALANCE SHEET
AUGUST 31, 1995
ASSETS
------
Current assets:
Cash and cash equivalents $ 400,260
Receivables, net 681,909
Prepaid expenses and other 145,871
-----------
Total current assets 1,228,040
Property and equipment, net 345,671
Deferred debenture issuance costs, net 4,197
Deposits 236,572
-----------
$ 1,814,480
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 270,840
Accrued expenses-
Compensation 75,589
Other 45,894
Deferred income 41,523
-----------
Total current liabilities 433,846
Convertible subordinated debentures 189,000
Less unamortized debenture discount (4,447)
Accrued rent 90,861
Notes payable to stockholders 160,000
-----------
Total liabilities 869,260
-----------
Stockholders' equity:
Preferred stock $.01 par value,
authorized 12,000,000 shares:
$100 Class A, nonvoting cumulative
convertible preferred stock, Series 1,
$.01 par value; authorized
1,000,000 shares; none issued
and outstanding (liquidation preference
of $100 per share) --
$10 Class A, nonvoting cumulative
convertible preferred stock, Series 2,
$.01 par value; authorized
1,000,000 shares; 388,180 shares issued
and outstanding (liquidation preference
of $10 per share) 3,882
Class A, voting cumulative convertible
preferred stock, Series 3, $.01 par value;
authorized 100,000 shares;
none issued and outstanding
(liquidation preference of $100 per share) --
Common stock of $.01 par value, authorized
12,000,000 shares; 4,075,420
shares issued and outstanding 40,754
Additional paid-in capital 9,824,408
Accumulated deficit (8,923,824)
-----------
Net stockholders' equity 945,220
-----------
$ 1,814,480
===========
The accompanying notes are an integral part of these statements.
<PAGE>
AVESIS INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED AUGUST 31, 1995 AND 1994
(Unaudited)
Quarters Ended
August 31 August 31
---------------------------
1995 1994
---- ----
Service revenues:
Administration fees $ 1,113,741 $ 817,758
Buying group sales 362,154 400,982
Provider fees 57,720 79,214
Other 28,346 34,251
------------ ------------
Total service revenues 1,561,961 1,332,205
Cost of services 963,396 839,763
------------ ------------
Income from services 598,565 492,442
General and administrative expenses 294,335 265,915
Selling and marketing expenses 232,417 199,171
------------ ------------
Income from operations 71,813 27,356
------------ ------------
Non-operating income (expense):
Other income 15,417 --
Interest income 6,662 1,374
Interest expense (8,238) (9,224)
------------ ------------
Net non-operating income 13,841 (7,850)
------------ ------------
Net income $ 85,654 $ 19,506
============ ============
Net income (loss) per common
share $ .00 $ (.02)
============ ============
Weighted average common
shares and equivalents
outstanding 4,075,420 4,075,420
============ ============
The accompanying notes are an integral part of these statements.
<PAGE>
AVESIS INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 31, 1995 AND 1994
(Unaudited)
1995 1994
---- ----
Cash flows from operating activities:
Net income $ 85,654 $ 19,506
----------- -----------
Adjustments to reconcile net income to net
cash provided (used) in
operating activities:
Depreciation and amortization 28,351 17,525
Gain on fixed asset disposal (8,250) --
Gain on retirement of debentures (7,067) --
Provision for losses on accounts receivable (625) 211
Changes in assets and liabilities:
Increase in receivables (341,658) (73,476)
Decrease (increase) in prepaid expenses (58,531) 509
Decrease in other assets 150 --
Increase (decrease) in accounts payable (30,949) 34,631
Decrease in accrued expenses (5,837) (13,061)
Decrease in deferred income (10,194) (5,212)
Increase (decrease) in accrued rent 4,370 (14,260)
----------- -----------
Total adjustments (430,240) (53,133)
----------- -----------
Net cash used by operating
activities (344,586) (33,627)
----------- -----------
Cash flows from financing activities:
Repurchase of debentures (59,473) --
Disposition of fixed assets 8,250 --
Purchases of fixed assets (19,228) --
----------- -----------
Net cash used by financing
activities (70,721) --
----------- -----------
Net decrease in cash and cash
equivalents (415,307) (33,627)
Cash and cash equivalents at beginning of period 815,567 347,681
----------- -----------
Cash and cash equivalents at end of period $ 400,260 $ 314,054
=========== ===========
The accompanying notes are an integral part of these statements.
<PAGE>
AVESIS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1995 AND 1994
(Unaudited)
1. The condensed financial statements included herein have been prepared by
the Company without audit pursuant to the rules and regulations of the
Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared at the fiscal year end have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that
the disclosures are adequate to make the information presented not
misleading.
In the opinion of Management, the adjustments included in the accompanying
interim financial statements are all of a normal recurring nature and
present fairly the Company's financial position and the results of
operations and cash flows for the periods indicated.
The results of operations for the period ended August 31, 1995, are not
necessarily indicative of the results to be expected for the complete
fiscal year.
2. Loss per common share is computed by dividing net loss, after giving
appropriate effect to undeclared preferred stock dividends payable and
accrued during the period ($87,342 in each of the quarters ended August 31,
1995 and 1994) by the weighted average number of common shares outstanding
during the period.
Item 2 Management's Discussion and Analysis or Plan of Operations
For the Three Months Ended August 31, 1995
Results of Operations:
- ----------------------
Service revenues totaled $1,561,961 for the three months ended August 31, 1995,
compared to $1,332,205 for the same period in fiscal 1995, representing an
increase of $229,756 (17%). The Company's vision and hearing programs accounted
for $656,123 (42%) of total service revenues during the quarter ended August 31,
1995 compared to $496,142 (37%) for the same quarter last year. The increase in
vision and hearing revenue during the current quarter was the result of an
increase in vision cardholders attributable to three sponsors. Two of the
sponsors were existing sponsors that added an additional combined total of
approximately 125,000 cardholders and the third sponsor was a new contract
whereby approximately 3,400 members receive vision benefits. There were
approximately 383,000 vision cardholders in force at August 31, 1995, compared
to approximately 248,000 cardholders at August 31, 1994. Vision provider fee
revenue declined by $21,494 (27%) during the current quarter as compared to
fiscal 1994 due in part to a modification of the Company's agreements with its
providers that for new sponsors, the providers are not required to pay a fee
based on gross sales to that sponsor's members.
The Company's dental program accounted for $465,403 (30%) of total service
revenues during the quarter ended August 31, 1995 compared to $315,747 (23%)
during the quarter ended August 31 1994. The 47% growth in this line of business
was primarily due to the addition of approximately 73,000 uninsured cardholders
from one sponsor, which have been added intermittently beginning October 1993,
and 3,400 insured cardholders related to a new sponsor effective July 1994.
There were approximately 81,000 dental cardholders at August 31, 1995, compared
to approximately 75,000 at August 31, 1994.
On December 30, 1992, the Company completed the sale of its pharmacy line of
business to Medi-Mail, Inc. The Company contracted to provide certain
administrative services with respect to the pharmacy line of business until
December 31, 1993. However, due to delays encountered by Medi-Mail during the
conversion of the claims processing, the Company entered into a month to month
agreement to continue to provide administrative services to Medi-Mail. Medi-Mail
terminated the agreement in August 1995. Pharmaceutical revenues constituted
$78,281 (5%) of total service revenues during the current quarter, compared to
$130,775 (9%) during the quarter ended August 31, 1994.
The Company makes available to its providers, a buying group program that
enables the provider to purchase frames from the manufacturers at discounts from
wholesale costs. These discounted prices are generally lower than a provider
could negotiate individually, due to the large volume of purchases of the buying
group. Buying group revenues were $362,154 (23%) of total service revenues for
the quarter ended August 31, 1995, compared to $400,982 (30%) for the same
quarter last year.
Past and future revenues in all lines of business are directly related to the
number of cardholders enrolled in the Company's benefit programs. However, there
may be significant pricing differences depending on whether the benefit is
insured in part or whole by the plan sponsor. The Company's current cardholder
base pricipally is derived from a limited number of sponsors.
The cost of services increased by $123,633 (15%) from $839,763 during the
quarter ended August 31, 1994 to $963,396 during the quarter ended August 31,
1995. These costs primarily relate to servicing cardholders, providers, and
sponsors under the Company's vision, hearing and dental benefit programs and
under the pharmaceutical program sold to Medi-Mail in December 1992. The
increase in cost of services during the current quarter was due to the
incremental costs incurred related to servicing the new cardholders as discussed
above.
General and administrative expenses were $294,335 during the quarter ended
August 31, 1995, which represents an increase of 28,420 (11%) compared to the
same period in fiscal 1994. The increase in the current quarter was due to
slight increases in several expenses such as wages, depreciation and an
increased allocation of rent.
Selling and marketing expenses were $232,417 for the quarter ended August 31,
1995, representing an increase of $33,246 (17%) from the same period last year.
Selling and marketing expenses include marketing fees, broker commissions,
inside sales and marketing salaries and related expenses, travel related to the
Company's sales activities and an allocation of other overhead expenses relating
to the Company's sales and marketing functions. The increase in expenses during
the quarter ended August 31, 1995, was primarily due to an increase in broker
commissions related to the new cardholders that were added as discussed above. A
significant amount of the Company's marketing activities are performed by
National Health Enterprises.
Liquidity and Capital Resources
- -------------------------------
The Company had cash and cash equivalents of $400,260 at August 31, 1995,
compared to $815,567 at May 31, 1995. The decrease of $415,307 was due primarily
to an increase in receivables as a result of not receiving payments from clients
until after the end of the quarter.
At August 31, 1995, the Company had aggregate outstanding long-term liabilities
of $435,414, consisting of $189,000 of Convertible Subordinated Debentures, less
$4,447 of unamortized discount, $160,000 of subordinated notes payable to
stockholders, and $90,861 in accrued rent.
The Company has generated income from operations for the last six consecutive
quarters, and based on the existing and anticipated levels of cardholders, the
Company expects to generate positive cash flows and income from operations for
fiscal 1996.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Information regarding legal proceedings is incorporated by reference
from the Company's report on Form 10-KSB for the year ended May 31,
1995.
Item 3. Defaults Upon Senior Securities
(b) The Company determined not to pay the quarterly dividend otherwise
scheduled for payment in October 1995, on shares of its Series 2
Preferred Stock. The dividend is cumulative. The arrearage is $1,019,508
as of August 31, 1995.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are being filed with this report:
10.1 Software development agreement between the Company and National
Computer Services, Inc.
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended August 31,
1995.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AVESIS INCORPORATED
-----------------------
(Registrant)
Date: 10/13/95 /s/ Mark L. Smith
---------------------- --------------------------------
Mark L. Smith, Vice President
and Chief Financial Officer
(Principal Financial Officer)
SOFTWARE DEVELOPMENT
AND
COMPUTER USAGE AGREEMENT
This AGREEMENT is made and entered into as of this 12th day of May
1995, by and between AVESlS INCORPORATED (hereinafter, "Avesis"), a Delaware
corporation, maintaining its principal place of business at 100 West Clarendon
Avenue, Suite 2300, Phoenix, Arizona, 85013, and NATIONAL COMPUTER SERVICES,
INC. (hereinafter, "National"), a Maryland corporation maintaining its principal
place of business at 11460 Cronridge Drive, Suite 118, Owings Mills, Maryland,
21117.
1. TERM: This agreement shall be in effect for a period of 5 years from
the date of its acceptance by National. Thereafter, should either party hereto
desire to terminate or modify any provision herein as of the termination date,
said party shall notify the other of its desire for such termination or
modification in writing at least 60 days prior to such termination date. Failing
such notice, this Agreement shall automatically renew itself for one year terms
and continue in full force and effect from term to term thereafter unless either
party hereto shall notify the other of its desire for such changes not later
than 60 days prior to the anniversary of any renewal date. Either party may
terminate this agreement for cause at any time by giving 30 days written notice
and opportunity to cure.
2. COMPUTER OPERATIONS: National will provide computer usage services
to Avesis. A fee for Services in the amount of $2,500 will be paid to National
each month. The computer will be available 7 days a week, 24 hours a day except
time for scheduled backup. National will not be responsible to Avesis for delays
or failure in performance caused by events beyond National's control including
but not limited to fire, strikes, floods, utility failure, war and other
disasters. National agrees:
(a) To back up the Avesis database and all programs and secure off
site to prevent any loss of data due to any catastrophe.
(b) To maintain a security system within the database so that each
user can access only those records in the common databases that pertain to that
specific user's business requirements and needs.
3. PROGRAMMING: National will provide programming services as needed to
meet the requirements of Avesis in accordance with the specifications and
schedule set forth on Exhibit "A". National will bill for these services monthly
on a time and expenses basis as work is performed. National's total fee for
developing the vision, dental and hearing claims, eligibility, and reporting
systems and providing complete documentation for all software as mutually
agreed, will not exceed $250,000 without the written approval from Avesis Board
of Directors. National will be free to use all ideas, concepts, know-how and
techniques related to data processing and computer programs in its own behalf
during the course of this agreement, subject to the provisions of Sections 11
and 12 of this agreement.
4. IT IS EXPRESSLY AGREED AND UNDERSTOOD THAT: The fee payable to
National hereunder includes and shall cover all of the services set forth in
this agreement and there will be no additional charges whatsoever to Avesis for
changes to the case system required by programming errors. National agrees to
provide reasonable documentation for its fees and expenses to Avesis upon
request.
5. WARRANTY: In the event of an error or omission by National in
connection with the services to be performed hereunder by National which is the
proximate cause of damages or loss to Avesis, National will either (a) rerun the
work correctly at no extra cost to Avesis, or (b) credit Avesis' account for the
improper work. This election shall be determined jointly by Avesis and National.
National warrants that all software developed for Avesis will be National's
original work and will not incorporate any material created by or belonging to
others.
6. MAINTENANCE: National agrees to pay for maintenance of all computer
equipment, workstations, PC's and printers located in National's office.
Likewise, Avesis agrees to pay for maintenance on all computer equipment,
workstations, PC's and printers located at Avesis' office.
7. COMPUTER SUPPLIES AND EQUIPMENT: National agrees to pay for all data
processing equipment, workstations, PC's, software products, etc. and any
necessary computer supplies such as green bar stock paper, computer tapes and
printer ribbons used in National's operations. Likewise, Avesis agrees to pay
for all data processing equipment, workstations, PC's, software products, etc.
and any necessary computer supplies such as green bar stock paper, computer
tapes and printer ribbons used in Avesis' operations.
8. OUT-OF-POCKET EXPENSES: Any out-of-pocket expenses such as long
distance telephone calls, travel or any other out-of-pocket expenses made by
National in conjunction with services provided to Avesis shall be billed back to
Avesis each month.
9. INSURANCE: Avesis will be responsible for maintaining all insurance
on equipment located in its office. National will be responsible for maintaining
all insurance for equipment located in its office.
10. WAIVER OF AGREEMENT: A term of condition of this Agreement can be
waived as modified only by written consent by both parties.
11. CONFlDENTlALlTY: National agrees that it will not disclose any
proprietary information, knowledge or data of Avesis obtained in connection with
this Agreement except as authorized by Avesis in writing.
12. OWNERSHIP AND LICENSE: All of the information, data and contents of
data bases and reports developed and compiled by National for Avesis pursuant to
this agreement shall be the property of Avesis, and shall be delivered to Avesis
promptly whenever requested by Avesis and upon the termination or expiration of
this agreement. The software, programs and related documentation developed by
National for Avesis pursuant to this agreement Shall be owned by National.
National hereby grants to Avesis and its successors and assigns, without further
compensation, an irrevocable, perpetual license to use all such software,
programs and related documentation in any manner and at any place and time.
Copies of the software, programs and related documentation, including without
limitation the source code, shall be delivered to Avesis promptly whenever
requested by Avesis and upon the termination or expiration of this agreement .
National further agrees that while this agreement is in effect, the license
granted to Avesis shall be exclusive, and National will not market, sell,
license or provide any of the software, programs or documentation developed for
Avesis pursuant to this agreement to any other person or entity.
This Agreement will be governed by the laws of the State of Maryland:
NATIONAL ACKNOWLEDGES THAT THIS AGREEMENT HAS BEEN READ AND
UNDERSTOOD, AND AGREES TO BE BOUND BY ITS TERMS AND FURTHER AGREES THAT IT IS
THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN PARTIES, WHICH
SUPERSEDES ALL PROPOSALS ORAL OR WRITTEN AND ALL OTHER COMMUNICATIONS BETWEEN
THE PARTIES RELATING TO THE SUBJECT OF THIS AGREEMENT.
AVESIS INCORPORATED NATIONAL COMPUTER SERVICES, lNC.
By: /s/ Mark L. Smith By: /s/ Frank Cappadora
--------------------------------- ---------------------------------
Mark L. Smith Frank Cappadora
Title: CFO Title: CEO
------------------------------- --------------------------------
Date: 5/12/95 Date: 5/12/95
-------------------------------- --------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> AUG-31-1995
<CASH> 400,260
<SECURITIES> 0
<RECEIVABLES> 681,909
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,228,040
<PP&E> 1,378,512
<DEPRECIATION> 1,032,841
<TOTAL-ASSETS> 1,814,480
<CURRENT-LIABILITIES> 433,846
<BONDS> 189,000
<COMMON> 40,754
0
3,882
<OTHER-SE> 945,220
<TOTAL-LIABILITY-AND-EQUITY> 1,814,480
<SALES> 1,561,961
<TOTAL-REVENUES> 1,561,961
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,490,148
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,238
<INCOME-PRETAX> 85,654
<INCOME-TAX> 0
<INCOME-CONTINUING> 85,654
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85,654
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
