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, 1996
-----------------------------------
| | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
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Commission File Number 0-15304
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AVESIS INCORPORATED
(Exact name of small business issuer as
specified in its charter)
Delaware 86-0349350
(State or other jurisdiction of ---------------------------------
incorporation or organization) (IRS Employer 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 10,
1996 was 4,100,420.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
(Check One) | | Yes | | No
1 of 9
<PAGE>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
<TABLE>
<CAPTION>
AVESIS INCORPORATED
BALANCE SHEET
AUGUST 31, 1996
ASSETS
------
<S> <C>
Current assets:
Cash and cash equivalents $ 510,492
Receivables, net 241,190
Prepaid expenses and other 101,964
-------------
Total current assets 853,646
Property and equipment, net 618,171
Deferred debenture issuance costs, net 2,398
Deposits 183,815
-------------
Total Assets $ 1,658,030
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 218,412
Accrued expenses-
Compensation 63,090
Other 102,984
Deferred income 22,330
-------------
Total current liabilities 406,816
Convertible subordinated debentures 189,000
Less unamortized debenture discount (2,541)
Accrued rent 107,316
Notes payable to stockholders 160,000
-------------
Total liabilities 860,591
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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 $.01 par value, authorized
20,000,000 shares; 4,100,420 shares issued and outstanding 41,004
Additional paid-in capital 9,949,158
Accumulated deficit (9,196,605)
-------------
Net stockholders' equity 797,439
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$ 1,658,030
=============
</TABLE>
The accompanying notes are an integral part of these statements.
- 2 -
<PAGE>
AVESIS INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED AUGUST 31, 1996 AND 1995
(Unaudited)
Quarters Ended
August 31 August 31
------------------------------
1996 1995
----------- -----------
Service revenues:
Administration fees $ 912,084 $ 1,113,741
Buying group sales 388,629 362,154
Provider fees 34,051 57,720
Other 14,277 28,346
----------- -----------
Total service revenues 1,349,041 1,561,961
Cost of services 888,809 963,396
----------- -----------
Income from services 460,232 598,565
General and administrative expenses 254,965 294,335
Selling and marketing expenses 166,384 232,417
----------- -----------
Income from operations 38,883 71,813
Non-operating income (expense):
Other income -0- 15,417
Interest income 6,238 6,662
Interest expense (7,385) (8,238)
----------- -----------
Net non-operating income
(expense) (1,147) 13,841
----------- -----------
Net income $ 37,736 $ 85,654
=========== ===========
Net income per common
share $ (.01) $ (.01)
=========== ===========
The accompanying notes are an integral part of these statements.
- 3 -
<PAGE>
AVESIS INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 31, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended
1996 1995
-------------- ------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 37,736 $ 85,654
-------------- ------------
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 41,634 28,351
Gain on sale of property and equipment -0- (8,250)
Gain on retirement of debentures -0- (7,067)
Provision for losses on accounts receivable (154) (625)
Changes in assets and liabilities:
Decrease (increase) in receivables 74,371 (341,658)
Decrease (increase) in prepaid expenses 11,112 (58,531)
Decrease in other assets -0- 150
Decrease in accounts payable (2,496) (30,949)
Decrease in accrued expenses (20,291) (5,837)
Decrease in deferred income (9,035) (10,194)
Increase in accrued rent 4,114 4,370
------------- ------------
Total adjustments 99,255 (430,240)
------------- ------------
Net cash provided by (used in) operating activities 136,991 (344,586)
------------- ------------
Cash flows from investing activities:
Purchases of property and equipment (62,582) (19,228)
Proceeds from dispositions of property and equipment -0- 8,250
-------------- ------------
Net cash used in investing activities (62,582) (10,978)
------------- ------------
Cash flows from financing activities:
Repurchase of debentures -0- (59,743)
-------------- ------------
Net cash used in financing activities -0- (59,743)
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Net increase (decrease) in cash and cash equivalents 74,409 (415,307)
Cash and cash equivalents at beginning of period 436,083 815,567
------------- ------------
Cash and cash equivalents at end of period $ 510,492 $ 400,260
============= =============
Supplemental information:
- -------------------------
Interest paid during the period:
Debentures -0- -0-
Notes payable to stockholders -0- -0-
</TABLE>
The accompanying notes are an integral part of these statements.
- 4 -
<PAGE>
AVESIS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996 AND 1995
(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, 1996, are not
necessarily indicative of the results to be expected for the complete fiscal
year.
2. Income per common share is computed by dividing net income, after giving
appropriate effect to undeclared preferred stock dividends payable and
accrued during the period ($87,342 for each of the quarters ended August 31,
1996 and 1995) by the weighted average number of common shares outstanding
during the period.
For the quarter ended August 31, 1996, earnings per share is calculated as
follows. Note that the inclusion of common stock equivalents (Series 2
Preferred stock, options and warrants) and potentially dilutive convertible
debt has an immaterial dilutive effect.
<TABLE>
<CAPTION>
Primary Fully Diluted
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<S> <C> <C>
Net income $37,736 $37,736
Add: interest expense on convertible
debentures that are not CSEs based
on the interest rate test 4,489
Subtract: preferred stock dividends 87,342 87,342
Net income applicable to common shares ($49,606) ($45,117)
Shares:
Weighted average common shares
outstanding 4,100,420 4,100,420
Add common stock equivalents:
Convertible preferred stock 970,450 970,450
Incremental shares from outstanding
options and warrants 1,039,834 1,039,834
Add convertible debentures (potentially
dilutive securities which are not CSEs) 51,800
Adjusted shares outstanding 6,110,704 6,162,504
Earnings per share (.01) (.01)
</TABLE>
- 5 -
<PAGE>
Item 2 Management's Discussion and Analysis or Plan of Operations
For the Three Months Ended August 31, 1996
Results of Operations:
- ----------------------
Service revenues totaled $1,349,041 for the quarter ended August 31, 1996,
compared to $1,561,961 for the same period in fiscal 1995, representing a
decrease of $212,920 (14%). The Company's vision and hearing programs accounted
for $535,342 (40%) and $656,123 (42%) of total service revenues during the
quarters ended August 31, 1996 and 1995, respectively. There were approximately
356,000 vision and 82,000 hearing cardholders as of August 31, 1996, compared to
approximately 383,000 vision and 85,000 hearing cardholders as of August 31,
1995. The decrease in vision and hearing revenue during the current quarter was
the result of one sponsor reducing the number of cardholders covered under the
Company's benefit plan. This sponsor, whose cardholders are covered under the
Company's vision, hearing and dental plans, reduced its total number of
cardholders by approximately 27,000. The reduction from this sponsor has been
marginally offset by the addition of a new account that enrolled approximately
30,000 and 52,000 uninsured cardholders under the Company's hearing and dental
plans, respectively. The other changes in the amounts of vision and hearing
cardholders were due to sponsors' employee fluctuations in their normal course
of business. Vision provider fee revenue declined by $23,669 (41%) during the
quarter ended August 31, 1996, as compared to the same period in fiscal 1995 due
in part to a modification of the Company's agreements with its providers. Under
the modified agreement, 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 $409,891 (30%) and $465,403 (30%) of
total service revenues during the quarters ended August 31, 1996 and 1995,
respectively. There were approximately 112,000 and 81,000 dental cardholders as
of August 31, 1996 and 1995, respectively. The change in this line of business
during the current quarter was primarily due to the loss of approximately 27,000
uninsured cardholders and the addition of the new account of approximately
52,000 uninsured cardholders under the Company's dental plan, as discussed
above. The other changes in the amounts of dental cardholders were due to
sponsors' employee fluctuations in their normal course of business.
On December 30, 1992, the Company completed the sale of its pharmacy line of
business to Med Net, Inc. (formerly Medi-Mail, Inc.), for 298,333 unregistered
and 35,000 registered shares of Med Net Common Stock. 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 Med Net
during the conversion of the claims processing, the Company entered into a month
to month agreement to continue to provide administrative services to Med Net.
Med Net terminated the agreement in August 1995. Pharmaceutical revenues
constituted $902 (0%) and $78,281 (5%) of total service revenues during the
quarters ended August 31, 1996 and 1995, respectively.
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 $388,629 (29%) and $362,154 (23%) for the
quarters ended August 31, 1996 and 1995, respectively.
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 cardholder base
principally is derived from a limited number of sponsors.
Other income in the first quarter of 1995 was attributed to the sale of
furniture which was not repeated in 1996.
The cost of services decreased by $74,587 (8%) from $963,396 during the quarter
ended August 31, 1995 to $888,809 during the quarter ended August 31, 1996.
These costs primarily relate to servicing cardholders, providers, and sponsors
under the Company's vision, hearing and dental benefit programs as well as the
cost of frames that are sold through the Company's buying group program as
discussed above. The decrease in cost of services during the current quarter was
due to the associated decrease in revenue during the quarter. The cost of
services did not decrease as greatly as revenue due to the loss of efficiencies
of scale related to the volume of claims paid.
-6-
<PAGE>
General and administrative expenses were $254,965 during the quarter ended
August 31, 1996, which represents a decrease of $39,370 (13%) compared to the
same period in fiscal 1995. The decrease in general and administrative expenses
in the quarter ended August 31, 1996 as compared to the same period in fiscal
1995 is primarily due to legal expenses related to an ongoing lawsuit during the
first quarter of fiscal 1995 that was settled prior to the current quarter, and
a decrease in personnel involved in the accounting and finance functions.
Selling and marketing expenses were $166,384 during the quarter ended August 31,
1996, representing a decrease of $66,033 (28%) from the same period in the prior
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 decrease in expenses during
the current period was primarily due to a decrease in personnel involved in the
Company's sales and marketing activities and reduced broker commissions related
to the reduction in revenue. 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 $510,492 at August 31, 1996,
compared to $436,083 at May 31, 1996. The increase of $74,409 was due primarily
to the Company's ability to reduce expenses and increase timely collections of
accounts receivable during the quarter.
As of August 31, 1996, the Company had aggregate outstanding long-term
liabilities of $453,775, consisting of $189,000 of Convertible Subordinated
Debentures, less $2,541 of unamortized discount, $160,000 of subordinated notes
payable to stockholders, and $107,316 in accrued rent.
Current cash on hand is expected to allow the Company to sustain operations for
at least the next twelve months.
-7-
<PAGE>
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,
1996.
Item 3. Defaults Upon Senior Securities
(b) The Company determined not to pay the quarterly dividend otherwise
scheduled for payment in October 1996, on shares of its Series 2
Preferred Stock. The dividend is cumulative. The arrearage is $1,368,864
as of August 31, 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are being filed with this report:
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended August 31,
1996.
-8-
<PAGE>
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: 10/15/96 /s/ Neal A. Kempler
--------------------- -------------------------------
Neal A. Kempler, Vice President
and Secretary
- 9 -
<PAGE>
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: 10/15/96 /s/ Neal A. Kempler
--------------------- -------------------------------
Neal A. Kempler, Vice President
and Secretary
- 10 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial
infomation extracted from the Company's Form
10-QSB for the quarter ended August 31, 1996, and
is qualified in its entirety by reference to such
Form 10-QSB.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> AUG-31-1996
<EXCHANGE-RATE> 1
<CASH> 510,492
<SECURITIES> 0
<RECEIVABLES> 261,036
<ALLOWANCES> (19,846)
<INVENTORY> 0
<CURRENT-ASSETS> 853,646
<PP&E> 1,659,702
<DEPRECIATION> (1,041,531)
<TOTAL-ASSETS> 1,658,030
<CURRENT-LIABILITIES> 406,816
<BONDS> 0
0
3,882
<COMMON> 41,002
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,658,030
<SALES> 0
<TOTAL-REVENUES> 1,349,041
<CGS> 0
<TOTAL-COSTS> 888,809
<OTHER-EXPENSES> 421,349
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,385
<INCOME-PRETAX> 37,736
<INCOME-TAX> 0
<INCOME-CONTINUING> 37,736
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,736
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
