SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X Annual Report under Section 13 or 15(d) of the Securities Exchange Act
- ----- of 1934 [Fee required]
For the fiscal year ended May 31, 1996 or
- ----- Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No fee required]
For the transition period from___________________to___________________
Commission File Number: 1-9758
AVESIS INCORPORATED
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(Name of small business issuer in its charter)
Delaware 86-0349350
- ------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) No.)
100 West Clarendon, Suite 2300
Phoenix, Arizona 850l3
- ------------------------------ -----------
(Address of principal executive (Zip Code)
offices)
Issuer's telephone number: (602) 241-3400
-----------------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
$l0 Class A Nonvoting Cumulative Convertible Preferred Stock, Series 2
- ----------------------------------------------------------------------
(Title of Class)
Check whether the issuer (l) 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
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Check if no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year:
$6,019,895.
The aggregate market value of the voting stock held by
non-affiliates of the registrant, based upon the average bid and asked prices of
the registrant's Common Stock in the over-the-counter market reported by the
Electronic Bulletin Board of the National Association of Securities Dealers,
Inc. ("NASD") on August 19, 1996 was approximately $1,223,571. Shares of Common
Stock held by each officer and director and by each person who owns 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily conclusive.
The number of outstanding shares of the registrant's Common
Stock on August 19, 1996 was 4,100,420.
<PAGE>
AVESIS INCORPORATED
FORM l0-KSB ANNUAL REPORT
YEAR ENDED MAY 31, 1996
TABLE OF CONTENTS
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Page
<S> <C>
PART I........................................................................................ 1
Item 1. Description of Business..................................................... 1
Item 2. Description of Properties................................................... 6
Item 3. Legal Proceedings........................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......................... 6
PART II....................................................................................... 7
Item 5. Market for Common Stock and Related Stockholder Matters..................... 7
Item 6. Management's Discussion and Analysis and Results of Operations
For the Fiscal Years Ended May 31, 1996 and 1995............................ 9
Item 7. Financial Statements........................................................ 12
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................................... 12
PART III...................................................................................... 13
Item 9. Directors and Executive Officers of the Registrant.......................... 13
Item 10. Executive Compensation...................................................... 16
Item 11. Security Ownership of Certain Beneficial Owners and
Management.................................................................. 17
Item 12. Certain Relationships and Related Transactions.............................. 19
PART IV....................................................................................... 24
Item 13. Exhibits and Reports on Form 8-K............................................ 24
SIGNATURES.................................................................................... 27
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PART I
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Item 1. Description of Business
General
Avesis Incorporated, a Delaware corporation (together with its
subsidiary, the "Company"), established in June 1978, markets and administers
dental, chiropractic, vision and hearing managed care and discount programs
("Programs") nationally which are designed to enable participants ("Members"),
who are enrolled through various sponsoring organizations such as insurance
carriers, Blue Cross and Blue Shield organizations, corporations, unions and
various associations ("Sponsors"), to realize savings on purchases of products
and services through networks of providers such as dentists, opticians,
optometrists, ophthalmologists and hearing specialists ("Providers"). The
Company formerly operated a pharmaceutical discount program, which was sold in
December 1992. See "Pharmaceutical Program" below.
Revenue has been derived from the product lines in the
following proportions:
Fiscal Years Ended May 31,
--------------------------
1996 1995
---- ----
Vision and Hearing Programs 68% 63%
Dental Program 31% 29%
Pharmaceutical Program(1) 1% 8%
- --------------------------
(1) The pharmaceutical line was sold in December 1992. The Company provided
services related to the pharmaceutical program through July 1995.
Vision Program
The Company offers provider networks and administrative
services for group vision programs. Its Vision Program is designed to provide
savings by reducing the cost of frames, eyeglass and contact lenses, and eye
examinations.
Under the Company's Vision Program, a Member has the right to
discounted pricing Providers offer for eye examinations and the purchase of
eyewear at network Provider locations. The Member is 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 such
claims from funds provided by the Sponsor for that purpose.
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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
an enrollment fee for each Member.
If the Program has insured or self-funded benefits, the
Sponsor determines the products and services which will be covered, how
frequently the benefit is available and, subject to local law, 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:
No. of No. of
Date Providers States No. of Members
---- --------- ------ --------------
May 31, 1996 3,332 48 396,242
May 31, 1995 2,500 48 387,900
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 generally do not include eligible spouses and children of Members.
The Company has entered into arrangements with certain frame
manufacturers which enable Providers to obtain frames at prices below wholesale.
The Company has formed a formal buying group for Providers to seek larger
discounts on frames. 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 program.
Such benefits are also available to the Member's spouse, children, parents and
grandparents. The Company has developed and is marketing a Medicare HMO Hearing
Program.
2
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Dental Program
The Company establishes and maintains dental Provider networks
which it also makes available to Sponsors. Fees charged to Members by Providers
are based upon panel fee schedules which the Providers have agreed to accept.
Like 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 in the case of 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:
No. of No. of
Date Providers States No. of Members
---- --------- ------ --------------
May 31, 1996 3,776 41 94,729
May 31, 1995 3,600 41 90,700
See Item 6 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Chiropractic Program
The Company has developed a program for cost-effective and
budgetable delivery of chiropractic services. Members pay reduced fees for
history and physical examinations, spinal manipulation, non-manual procedures,
physiotherapy, acupuncture and additional care.
Provider Networks
The Company usually contracts with Providers to provide
services to Members simultaneously with the development of a membership base in
a geographic area; however, some Providers are enlisted in expansion areas where
there 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, the
incremental revenues from Member patients can be an important source of revenue
to Providers. There can be no assurance that Providers will continue to
participate in the Programs even if their participation results in such an
increase in revenues since the portion of their practices derived from the
Programs may become less profitable than other aspects of their practices.
3
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The Company periodically reviews some 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 from any
claim based on the negligence of the Provider in the performance of services for
Members. In addition, Providers are required to carry malpractice insurance.
Marketing
The Company markets nationally to potential Sponsors which
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"). See Item 12 - Certain Relationships
and Related Transactions - Agreements with National Health Enterprises, Inc."
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 following customers accounted for more than 10% of the
Company's revenues during the periods indicated.
4
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Year ended Year ended
May 31, 1996 May 31, 1995
------------ ------------
National Insurance Services Inc. 26% 36%
Fraternal Order of Police/
Department of Corrections 13% 13%
Blue Cross Blue Shield of Arizona 12% 8%
The Company is substantially dependent on a limited number of
customers and will be materially adversely affected by termination of its
agreements with such customers. For information regarding a termination notice
received from National Insurance Services, Inc., see Item 6 - "Management's
Discussions and Analysis of Financial Condition and Results of Operations."
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.
Regulation
Certain registration and licensing laws and regulations
(including those applicable to third party administrators, preferred provider
organizations, franchises and business opportunities) in many states in which
the Company operates may have application to various 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 indirectly impact the Company. The Company believes that the
extent of its compliance with such laws and regulations as they are currently
enforced and applicable to the Company is consistent with current industry
standards and practices. However, there can be no assurance that changes in
enforcement and compliance practices will not occur in the future, or that
existing laws and regulations will not be broadened. In any such event, the
Company could be required to effect registration in various additional states
and/or post substantial fidelity or surety bonds in connection therewith.
Alternatively, the Company may be required to alter substantially the services
offered by it, modify its contractual arrangements with Sponsors, Providers and
Members, or be precluded from providing some or all of its services in some
states. Any or all of the foregoing consequences could materially adversely
affect the Company.
5
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Employees
As of August 15, 1996, the Company had 33 employees, compared
to 43 employees at August 18, 1995. The Company believes that its relationship
with its employees is good.
Item 2. Description of Properties
The Company maintains its executive offices at 100 West
Clarendon, Suite 2300, Phoenix, Arizona 85013, in space leased from an
independent party. The lease agreement covers approximately 13,300 usable square
feet of space and expires on August 31, 2000. The Company owns and leases
various computer equipment, data processing and other office equipment. A lease
for office space has been secured in the state of Florida. This office serves as
a satellite sales office and encompasses a total of approximately 200 square
feet. The Company has also leased approximately 200 square feet in Washington,
D.C.
Item 3. Legal Proceedings
In July 1993, Avesis was served with a complaint titled Marcus
S. Palkowitsh v. Avesis Incorporated, et al, filed in the Superior Court of the
State of Arizona, Maricopa County. The complaint alleged that the Company and
the other defendants induced plaintiff to provide funds for a joint venture
designed to sell discount dental services. The complaint alleged securities
fraud, racketeering, negligence and negligent misrepresentation. Plaintiff
sought $384,500 in damages, to be trebled, unspecified punitive damages,
attorneys' fees, costs and interest. The Company answered the complaint in
September 1993, denying the allegations, and the Court dismissed plaintiff's
claims of securities fraud in March 1994. The parties entered into a Settlement
and Release Agreement as of March 12, 1996, pursuant to which the Company agreed
to pay plaintiff $25,000 in cash and grant him 25,000 shares of common stock of
the Company. On April 22, 1996, the lawsuit was dismissed with prejudice as to
the Company.
Except for the foregoing, the Company is not party to any
material litigation proceeding.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
6
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PART II
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Item 5. Market for Common Stock and Related Stockholder Matters
Market Information. The Company's Common Stock and $10 Class A
Nonvoting Cumulative Convertible Preferred Stock, Series 2 ("Series 2
Preferred") are traded in the over-the-counter market and quotations are
reported in the "pink sheets" published by the National Quotation Bureau, Inc.
and via the NASD's Electronic Bulletin Board. The following table sets forth the
high and low bid price for the Company's Common Stock as reported by the
National Quotation Bureau, Inc. for each quarterly period during fiscal 1996 and
fiscal 1995. Such market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
Bid Quotation Range
-----------------------
High Low
-------- -------
Fiscal Year 1996
- ----------------
First Quarter.......................... $1.375 $0.9375
Second Quarter......................... 1.01 0.5625
Third Quarter ......................... 1.00 0.75
Fourth Quarter ........................ 0.875 0.6875
High Low
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Fiscal Year 1995
First Quarter.......................... $ 1.00 $ 1.00
Second Quarter......................... .938 .875
Third Quarter ......................... 2.06 .812
Fourth Quarter ........................ 1.50 .875
As of August 19, 1996, there were 4,100,420 shares outstanding
of the Common Stock of the Company held by approximately 165 stockholders of
record. Trading activity with respect to the Common Stock has been limited and
the volume of transactions should not of itself be deemed to constitute an
"established public trading market." A public trading market having the
characteristics of depth, liquidity and orderliness depends upon the existence
of market makers as well as the presence of willing buyers and sellers, which
are circumstances over which the Company does not have control.
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Dividends. The Company has not paid any dividends on its
Common Stock since its inception and does not expect to pay dividends on its
Common Stock at any time in the foreseeable future. Moreover, the terms of the
Series 2 Preferred provide that as long as any shares of the Series 2 Preferred
remain outstanding, the Company may not declare or pay any dividend, whether in
cash or property, on the Common Stock of the Company unless the full dividends
on the Series 2 Preferred for all past dividend periods and the then current
dividend period shall have been paid or declared and a sum set aside for payment
thereof. As of August 19, 1996, there were 388,180 shares of Series 2 Preferred
outstanding, with each share entitled to receive a cumulative dividend at an
annual rate of 9% ($.90 per share), payable when and if declared by the Board of
Directors. Dividend arrearages as of July 31, 1996 totalled $1,339,762.
Selected Financial Data
The following table sets forth selected financial information
regarding the Company. This information should be read in conjunction with the
Company's Financial Statements and related notes and Management's Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in
this Form l0-KSB.
The selected financial data for each of the five years in the
period ended May 31, 1996 have been derived from the Company's audited financial
statements and should be read in conjunction with the financial statements and
related notes thereto and other financial information appearing elsewhere herein
and in Item 6. The selected financial data is not required by Form 10-KSB and is
included herein as an unnumbered item.
<TABLE>
<CAPTION>
Years Ended May 31,
-------------------------------------------------------------
Selected Operating Data: 1996 1995 1994 1993 1992(1)
- ------------------------ ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Operating revenues $6,019,896 $6,351,106 $4,418,512 $4,762,632 $5,225,536
Operating expenses 6,016,694 5,986,897 4,620,972 5,699,019 6,461,827
Net income (loss) (124,859) 505,411 (134,550) (676,231) (847,075)
Net income (loss) per
common share (2) (.12) .02 (.12) (.29) (.35)
</TABLE>
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<TABLE>
<CAPTION>
Years Ended May 31,
-----------------------------------------------------------------------------
Selected Balance 1996 1995 1994 1993 1992(1)
- ---------------- ------------ -------------- -------------- ------------- -------------
Sheet Data:
- -----------
<S> <C> <C> <C> <C> <C>
Working capital $422,922 $ 747,566 $ 229,740 $ 388,863 $1,915,503
Current assets 864,566 1,242,534 647,522 1,025,394 2,692,073
Total assets 1,650,527 1,839,377 1,195,831 1,649,797 3,264,804
Current liabilities 441,644 494,968 417,782 636,545 776,570
Long term obligations 449,183 484,850 423,901 524,554 417,015
Total liabilities 890,827 979,818 841,683 1,161,099 1,193,585
Net stockholders' equity 759,700 859,559 354,148 488,698 2,071,219
</TABLE>
(1) Reflects a restatement of certain 1992 amounts to give effect to the
forgiveness of $100,000 of indebtedness previously reported as
extraordinary gain and now reported as a capital transaction.
(2) After provision for preferred stock dividends as follows: $349,368 in
1996; $349,368 in 1995; $349,590 in 1994; and $349,812 in each of 1993
and 1992.
Item 6. Management's Discussion and Analysis and Results of Operations For the
Fiscal Years Ended May 31, 1996 and 1995
Except for the historical information contained herein, the
discussion in this Form 10-KSB contains or may contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed here. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Item 1 -- Description of Business" and this "Item 6 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as those factors discussed elsewhere herein or in any document incorporated
herein by reference.
Results of Operations:
- ----------------------
The loss of business from National Insurance Services Inc.
("NIS") and the discontinuation of the pharmaceutical services program reduced
1996 revenues by $1,145,000. In spite of this, service revenues totaled
$6,019,896 in fiscal 1996, compared to $6,351,106 in fiscal 1995, representing a
decrease of $331,211 (5%). The Company's vision and hearing programs accounted
for $2,553,275 (68%) of total service revenues during fiscal 1996 compared to
$2,429,463 (63%) in fiscal 1995. The decrease in vision and hearing revenue
during the current fiscal year was the result of one sponsor, NIS, reducing the
number of its cardholders
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covered under the Company's benefit plan. Beginning toward the latter part of
fiscal 1995 and continuing through the end of fiscal 1996, this sponsor, whose
cardholders are covered under the Company's vision, hearing and dental plans,
has reduced its total number of cardholders by approximately 55,000. Subsequent
to year end the Company received notice from this sponsor, who at May 31
represented 20% of total service revenues, of its intent to terminate its
contract with the Company effective October 1, 1996. The reduction from this
sponsor during the current fiscal year has been marginally offset by the
addition of approximately 66,000 uninsured cardholders under the Company's
hearing and dental plans beginning in February 1996. There were approximately
396,000 vision and 82,000 hearing cardholders in force at May 31, 1996, compared
to approximately 388,000 vision and 84,000 hearing cardholders at May 31, 1995.
Vision provider fee revenue declined by $78,351 (28%) during fiscal 1996,
compared to the same period in fiscal 1995 due in part to a modification of the
Company's agreements with its providers that for certain 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 $1,833,583 (31%) of
total service revenues during the current fiscal year compared to $1,847,605
(29%) in fiscal 1995. The decline in this line of business during the current
quarter was primarily due to the loss of approximately 50,000 uninsured
cardholders as discussed above. The decline in cardholders was partially offset
by the addition of approximately 51,000 uninsured cardholders as also discussed
above. There were approximately 94,700 dental cardholders at May 31, 1996,
compared to approximately 91,000 at May 31, 1995.
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 Medi-Mail 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 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 (1%) of total service
revenues during fiscal 1996, compared to $485,263 (8%) during fiscal 1995.
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 $1,554,757 (26%) during fiscal 1996
compared to $1,588,775 (25%) in fiscal 1995.
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 principally is derived from a limited number of sponsors.
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The cost of services increased by $83,785 (2%) from $3,832,519
during fiscal 1995 to $3,916,304 in fiscal 1996. These costs primarily relate to
servicing cardholders, Provider network development, 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 increase in cost of services during the current fiscal year was due
to the increased cost associated with paying claims as the number of funded
cardholders increased throughout the current period.
General and administrative expenses were $1,275,536 during the
current fiscal year, which represents an increase of $65,738 (5%) compared to
fiscal 1995. The increase in the current year was primarily due to an increase
in depreciation expense associated with the Company's software development
project and increases in personnel costs.
Selling and marketing expenses were $914,853 during fiscal
1996, representing a decrease of $29,726 (3%) from fiscal 1995. 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 in fiscal 1996 was primarily due to a decrease in broker
commissions related to a reduction in revenue from one sponsor as discussed
above. A significant amount of the Company's marketing activities are performed
by National Health Enterprises.
Non-operating expense was $38,061 in fiscal 1996, compared to
non-operating income of $141,202 in fiscal 1995. The decrease was primarily due
to the sale of Medi-Mail stock for net proceeds of over $338,000 in fiscal 1995
which created a gain of $171,469.
Liquidity and Capital Resources
- -------------------------------
The Company had cash and cash equivalents of $436,083 at May
31, 1996, compared to $815,567 at May 31, 1995. The decrease of $379,484 was due
primarily to the negative cash flows associated with the software development
project during fiscal 1996.
At May 31, 1996, the Company had aggregate outstanding
long-term liabilities of $449,183, consisting of $189,000 of Convertible
Subordinated Debentures, less $3,018 of unamortized discount, $160,000 of
subordinated notes payable to stockholders, and $103,202 in accrued rent.
Due to the loss of the sponsor discussed above, the Company
anticipates that it will continue to incur negative cash flows. However, the
Company is implementing cost reduction initiatives that will help to offset the
reduction in revenue from this one sponsor. Additionally, the Company
anticipates that it will be adding members under new contracts during the second
and third fiscal quarters which will further offset the reduction in revenue,
although there can be no assurances that such members will be added. The Company
anticipates that it will incur negative cash flows throughout fiscal 1997. If
the Company is required to obtain
11
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additional financing, there can be no assurances that sources of financing will
be available on terms favorable to the Company, if at all.
Recent Accounting Pronouncements
- --------------------------------
Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" (SFAS No. 121), which the Company will adopt for its fiscal year
ending May 31, 1997, will require "that long-lived assets and certain
identifiable intangible assets to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable." In the opinion of
management, the adoption of SFAS No. 121 will not have a material effect on the
Company's financial position.
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," (SFAS No. 123) establishes financial
accounting and reporting standards for stock-based employee compensation plans.
These plans include all arrangements by which employees receive shares of stock
or other equity instruments of the employer or the employer incurs liabilities
to employees in amounts based on the price of the employer's stock. Examples
include stock purchase plans, stock options, restricted stock, and stock
appreciation rights. SFAS No. 123 also applies to transactions in which an
entity issues its equity instruments to acquire goods or services from
nonemployees. These transactions must be accounted for, or at least disclosed in
the case of stock options, based on the fair value of the consideration received
or the equity instruments issued, whichever is the more reliable measure. The
Company will adopt the disclosure requirements of SFAS No. 123 for its fiscal
year ending May 31, 1997.
Item 7. Financial Statements
Financial Statements appear commencing at page F1 immediately
hereafter.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
12
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AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Financial Statements
May 31, 1996
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Avesis Incorporated:
We have audited the accompanying consolidated balance sheet of Avesis
Incorporated and subsidiary as of May 31, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the two-year period ended May 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Avesis Incorporated
and subsidiary as of May 31, 1996, and the results of their operations and their
cash flows for each of the years in the two-year period ended May 31, 1996, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Phoenix, Arizona
July 12, 1996
F-1
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Balance Sheet
May 31, 1996
<TABLE>
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 436,083
Receivables, net (note 2) 315,407
Prepaid expenses and other 113,076
------------------
Total current assets 864,566
Property and equipment, net (note 3) 599,298
Deferred debenture issuance costs, less accumulated amortization of $17,528 2,848
Deposits 183,815
------------------
$ 1,650,527
==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 223,914
Accrued expenses:
Compensation 72,232
Other 114,133
Deferred income 31,365
------------------
Total current liabilities 441,644
Convertible subordinated debentures (note 4) 189,000
Less unamortized debenture discount (3,018)
Accrued rent (note 5) 103,201
Notes payable to stockholders (note 12) 160,000
------------------
Total liabilities 890,827
------------------
Stockholders' equity (notes 4, 8 and 9):
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) and $1,281,522 of dividends in arrears at $.90 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 9,949,159
Accumulated deficit (9,234,345)
------------------
Total stockholders' equity 759,700
Commitments and contingencies (notes 5, 10, 11 and 13)
------------------
$ 1,650,527
==================
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Statements of Operations
Years ended May 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
<S> <C> <C>
Service revenues (note 10):
Administration fees $ 4,170,599 4,381,548
Provider fees 198,895 277,300
Other 1,650,402 1,692,258
------------------ ------------------
Total service revenues 6,019,896 6,351,106
Cost of services 3,916,304 3,832,519
------------------ ------------------
Income from services 2,103,592 2,518,587
General and administrative expenses 1,275,537 1,209,799
Selling and marketing expenses (note 11) 914,853 944,579
------------------ ------------------
Income (loss) from operations (86,798) 364,209
------------------ ------------------
Non-operating income (expense):
Gain on sale of investment -- 171,469
Interest income 26,546 6,050
Interest expense (note 12) (29,786) (36,817)
Other income (expense) (34,821) 500
------------------ ------------------
Total non-operating income (38,061) 141,202
------------------ ------------------
Income (loss) before income taxes (124,859) 505,411
Income taxes (note 7) -- --
------------------ ------------------
Net income (loss) (124,859) 505,411
Preferred stock dividends (349,162) (349,162)
------------------ ------------------
Net income (loss) available to common shareholders $ (474,021) 156,249
================== ==================
Net income (loss) per common and equivalent share $ (.12) .02
================== ==================
Weighted average common and equivalent shares outstanding 4,079,530 7,516,160
================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended May 31, 1996 and 1995
<TABLE>
<CAPTION>
Preferred stock Additional Total
------------------------------------------ Common paid-in Accumulated stockholders'
Series 1 Series 2 Series 3 stock capital deficit equity
------------ ------------ -------------- ------------ -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1994 $ -- 3,882 -- 40,754 9,924,409 (9,614,897) 354,148
Net income -- -- -- -- -- 505,411 505,411
------------ ------------ -------------- ------------ -------------- ------------- --------------
Balance, May 31, 1995 -- 3,882 -- 40,754 9,924,409 (9,109,486) 859,559
Net loss -- -- -- -- -- (124,859) (124,859)
Issuance of common stock -- -- -- 250 24,750 -- 25,000
------------ ------------ -------------- ------------ -------------- ------------- --------------
Balance, May 31, 1996 $ -- 3,882 -- 41,004 9,949,159 (9,234,345) 759,700
============ ============ ============== ============ ============== ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended May 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (124,859) 505,411
------------------ ------------------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 143,001 90,297
Provision for losses on accounts receivable 17,090 17,055
Gain on sale of fixed assets (8,006) (500)
Gain on sale of marketable securities -- (171,469)
Gain on repurchase of debentures (10,257) --
Common stock issued for professional services 25,000 --
Changes in assets and liabilities:
Decrease (increase) in receivables 7,130 (91,804)
Increase in prepaid expenses and other (25,736) (52,377)
Decrease (increase) in deposits 51,053 (23,861)
Increase (decrease) in accounts payable (77,883) 105,410
Decrease in deferred income (20,352) (13,069)
Increase in accrued rent 16,710 17,020
Increase in other accrued expenses 58,805 26,162
------------------ ------------------
Net cash provided by operating activities 51,696 408,275
------------------ ------------------
Cash flows from investing activities:
Purchases of property and equipment (379,687) (281,108)
Proceeds from dispositions of property and equipment 8,250 500
Proceeds from sale of marketable securities -- 340,219
------------------ ------------------
Net cash provided by (used in) investing activities (371,437) 59,611
------------------ ------------------
Cash flows from financing activities:
Repurchase of convertible subordinated debentures (59,743) --
------------------ ------------------
Net cash used in financing activities (59,743) --
------------------ ------------------
Net increase (decrease) in cash and cash equivalents (379,484) 467,886
Cash and cash equivalents, beginning of year 815,567 347,681
------------------ ------------------
Cash and cash equivalents, end of year $ 436,083 815,567
================== ==================
Supplemental information:
Interest paid during the year was $30,602 in 1996 and 1995.
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
May 31, 1996 and 1995
(1) Summary of Significant Accounting Policies
Nature of Business and Consolidation Policy
Avesis Incorporated, a Delaware Corporation, and its wholly-owned
subsidiary, a District of Columbia Corporation (collectively, the
Company), markets and administers vision, hearing and dental discount
programs which are designed to enable participants (members), who are
enrolled through various sponsoring organizations such as insurance
carriers, Blue Cross and Blue Shield organizations, corporations, unions,
and various associations (sponsors) to realize savings on purchases of
products and services through Company-organized networks of providers,
such as opticians, optometrists, ophthalmologists, hearing specialists
and dentists (providers). Through July 1995, the Company also provided
claims processing services for a company which operates a pharmaceutical
benefit plan. The Company receives a fee for its services which varies
according to the volume of activity. The consolidated financial
statements include the accounts of Avesis Incorporated and its
wholly-owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash Equivalents
Cash and cash equivalents include cash on hand, money market funds, and
short-term investments with original maturities of 90 days or less.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over estimated useful lives which range from five to
ten years. Leasehold improvements are amortized over the shorter of
either the asset's useful life or the related lease term. Software is
amortized over the estimated useful life of six years.
Revenue Recognition
Administrative fee revenue is recognized on an accrual basis during the
month that the member is entitled to use the benefit. Provider fee
revenue, based on member utilization, is recognized when the service is
performed.
Net Income (Loss) Per Common and Equivalent Share
For fiscal year 1996, net loss per common and equivalent share is
calculated by dividing net loss, after giving appropriate effect for
preferred stock dividends, by the weighted average number of common
shares outstanding during the year.
For fiscal year 1995, net income per common and equivalent share is
calculated by dividing net income, after giving appropriate effect for
preferred stock dividends, by the weighted average number of common stock
and dilutive common stock equivalent shares outstanding during the year.
F-6
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Dilutive common equivalent shares consist of stock options and warrants
(computed using the treasury stock method) and the assumed conversion of
subordinated convertible debentures into common stock. Fully diluted net
income (loss) per common and equivalent share approximates net income
(loss) per common and equivalent share.
Income Taxes
The Company accounts for income taxes under the asset and liability
method. Under this 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 bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
be in effect during the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Convertible Debentures
The Company incurred debenture issuance costs which have been deferred
and are being amortized over the term of the debentures on the
straight-line basis. Debenture discount is being amortized as interest
expense over the life of the debentures using the interest method.
Use of Estimates
Management of the Company has made certain estimates and assumptions
relating to the reporting of assets and liabilities and revenues and
expenses to prepare the financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
(2) Receivables
At May 31, 1996 receivables consists of:
Trade $ 335,407
Less allowance for doubtful accounts (20,000)
----------------
$ 315,407
================
(3) Property and Equipment
At May 31, 1996 property and equipment consists of:
Furniture and fixtures $ 223,497
Equipment 809,873
Leasehold improvements 72,650
Software 508,964
----------------
1,614,984
Less accumulated depreciation and amortization (1,015,686)
----------------
$ 599,298
================
F-7
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Convertible Subordinated Debentures
The Company's 9-1/2% convertible subordinated debentures are due December
1, 1997 and require semi-annual interest payments on June 1 and December
1. The debentures are convertible into shares of the Company's common
stock at any time prior to maturity, unless previously redeemed, at a
conversion price of $5 per share, subject to adjustment under certain
circumstances.
The debentures are redeemable at the Company's option at any time, in
whole or in part, at a redemption price of 101% of the principal amount
and declining annually to 100% of such principal amount on or after
December 1, 1996. The debentures are subordinated to all senior
indebtedness, as defined in the debenture agreement. During fiscal year
1996, the Company repurchased $70,000 of the debentures from a related
party. The resulting gain on the repurchase, after taking into account
the related write-offs of deferred debenture issuance costs and
unamortized debenture discount, was $10,257.
(5) Operating Leases
The Company leases office space under an agreement which expires
September 30, 2000. The Company is obligated to pay its proportionate
share of the building's operating costs not to exceed stated maximums.
The Company also leases equipment under long-term operating lease
agreements. For the years ended May 31, 1996 and 1995, rent expense for
all operating leases was $244,130 and $288,104, respectively.
The Company records rent expense using the straight-line method.
Accordingly, the difference between rent expense and actual rent paid has
been recorded as accrued rent for financial reporting purposes.
Future minimum cash lease payments for operating leases are as follows:
Years ending May 31,
1997 $ 227,936
1998 232,034
1999 244,242
2000 182,091
Thereafter 119,464
---------------
Total future minimum lease payments $ 1,005,767
===============
F-8
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(6) Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires the Company to disclose estimated fair values for its financial
instruments. The following table presents the carrying amounts and
estimated fair values of the Company's financial instruments at May 31,
1996, together with a description of the methodologies and assumptions
used to determine such amounts.
Carrying Fair
Amount Value
---------- ---------
Financial assets:
Cash and cash equivalents $ 436,083 436,083
Receivables (net) 315,407 315,407
Financial liabilities:
Accounts payable and accrued expenses 410,279 410,279
Convertible subordinated debentures (net) 185,982 185,982
Notes payable to stockholders 160,000 144,618
The carrying amount of cash and cash equivalents approximates fair value
because their maturity is generally less than three months. The carrying
amount of receivables, accounts payable and accrued expenses approximates
fair value since they are expected to be collected or paid within 90 days
of year-end. The fair values of notes payable to stockholders are
estimated by discounting the future cash flows at rates currently offered
to the Company for similar debt instruments.
(7) Income Taxes
Income tax expense for 1996 differs from the amount computed by applying
the federal income tax rate of 34% to income before income taxes due to
an offsetting valuation allowance.
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows:
Deferred tax assets:
Net operating loss carryforwards (NOL) $ 2,648,000
Accrued expenses 29,000
Property and equipment 10,000
Valuation allowance (2,687,000)
----------------
Net deferred tax assets $ --
================
F-9
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Management estimates that it is more likely than not that it will not
realize a substantial portion of the benefits of its deferred tax assets.
Accordingly, it has established a valuation allowance to reflect this
uncertainty. The net change in the valuation allowance for the year ended
May 31, 1996 was an increase of $47,000. The net change for the year
ended May 31, 1995 was a decrease of $409,000.
The Company's federal NOLs of $7,300,000 expire between 1999 and 2010.
(8) Stock Options and Warrants
The Company has reserved 600,000 shares of common stock for exercise of
options under a 1993 stock option plan which includes incentive and
non-qualified stock options. At May 31, 1996, there were 180,000
incentive options outstanding under this plan exercisable at $.48 per
share, and 300,000 nonqualified options exercisable at $.40 per share.
All of the outstanding options are exercisable for 10 years after the
date of grant.
At May 31, 1996, all incentive stock options and 255,000 non-qualified
options outstanding under this plan were exercisable. The vesting period
of the non-qualified options was 25% at the time of grant with the
remaining 75% in equal increments over the next 10 calendar quarters.
The Company has also reserved 520,000 shares of common stock for exercise
of options under an incentive stock option plan. At May 31, 1996, there
were options to purchase 1,325 shares outstanding under this plan,
exercisable for 5 years after date of grant at a price of $1.00 per
share. At May 31, 1996, all options outstanding under this plan were
exercisable. The options expire on July 23, 1996. Management intends to
issue no new options under this plan.
In connection with the Long-Term Management Agreement (note 11), National
Health Enterprises, Inc. of Owing Mills, Maryland (NHE) received ten-year
options to purchase up to 4,400,000 shares of the Company's common stock.
Options to purchase 1,400,000 shares at an exercise price of $.40 per
share were vested at inception, and the remaining options to purchase
shares at an exercise price of $.48 per share vested on December 5, 1994,
in connection with a Board of Directors resolution. NHE transferred all
of the options in March 1993 to certain individuals affiliated with NHE.
Effective December 5, 1994, these individuals collectively transferred an
aggregate of 125,000 of the options exercisable at $.48 per share to
Richter & Co., Inc.
The following table summarizes stock option activity:
Common Stock
------------------------------
Per Share
Options Exercise Price
------------- ----------------
Balance outstanding, May 31, 1994 4,856,325 $.40-1.00
Options granted 50,000 $.48
Options exercised --
Options canceled --
-------------
Balance outstanding, May 31, 1995 4,906,325
=============
F-10
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
At May 31, 1995, options to purchase 4,861,325 shares at prices ranging
from $.40 to $1.00 were exercisable.
Common Stock
--------------------------------
Per Share
Options Exercise Price
------------ -----------------
Balance outstanding, May 31, 1995 4,906,325 $.40-1.00
Options granted --
Options exercised --
Options canceled 25,000
------------
Balance outstanding, May 31, 1996 4,881,325
============
At May 31, 1996, options to purchase 4,881,325 shares at prices ranging
from $.40 to $1.00 were exercisable.
During fiscal 1993, a former employee was granted warrants to purchase
100,000 shares of common stock. The purchase price is $.50 per share for
50,000 shares and $1.00 per share for the remaining 50,000 shares. The
warrants expire on February 1, 1998.
Ten-year warrants to purchase 400,000 shares of common stock are held by
Richter & Co., Inc., a New York investment banking firm whose principal,
William L. Richter, is a member of the Company's Board of Directors. At
May 31, 1996, 127,273 warrants were exercisable at an exercise price of
$.40 per share and 272,727 warrants were exercisable at an exercise price
of $.48 per share. At May 31, 1996, 160,000 of these warrants had been
assigned to William L. Richter.
(9) Preferred Stock
The Company has authorized 1,000,000 shares of $10 Class A, Nonvoting
Cumulative Convertible Preferred Stock, Series 2 (the Series 2 Preferred)
with a par value of $.01 per share and quarterly dividends at the fixed
annual rate of $.90 per share. In August 1993, the Board of Directors of
the Company resolved that no dividends would be declared or paid without
its specific authorization. The Series 2 Preferred is convertible at the
option of the holder into common stock of the Company at $4.00 per share,
subject to adjustment under certain conditions. There is a liquidation
preference which entitles holders to receive, out of the assets of the
Company, $10.00 per share plus all accrued and unpaid dividends, before
any amounts are distributed to the holders of common stock. The Series 2
Preferred may be redeemed at any time, in whole or in part, by the
Company, at its option at $10 per share plus all the accrued but unpaid
dividends.
No dividends may be paid on common stock unless all accrued and unpaid
dividends have been paid on the Series 2 Preferred.
F-11
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(10) Major Customers
The Company's programs and services are offered throughout the United
States. Two major customers provided 27% and 31% of total service
revenues in 1996 and 36% and 13% in 1995, respectively.
(11) Long-Term Management and Marketing Agreement
In March 1993, the Company entered into a Long-Term Management Agreement
with NHE, which provides for NHE to manage all aspects of the Company's
business. The initial term of the agreement is five years and is
renewable for two two-year periods. The Company paid NHE $220,000 in
fiscal 1994 and is obligated to pay $200,000 each year thereafter. NHE
also received options to purchase up to 4,400,000 shares of the Company's
common stock.
Additionally, the Company entered into a Marketing Representation
Agreement with NHE, whereby NHE is entitled to receive a commission of
7.5% of enrollment fees from sponsor contracts generated by NHE, or 2.5%
of enrollment fees where marketing assistance is rendered. The Company
paid approximately $85,000 and $66,000 to NHE under the terms of this
agreement in fiscal 1996 and 1995, respectively.
(12) Related Party Transactions
In March 1993, the Company obtained loans in the amount of $80,000 each
from two stockholders of the Company who are also affiliates of NHE. The
entire principal of the notes is due March 18, 1998 and bears interest at
the rate of 6% per annum. Repayment on the notes may be accelerated by
the holders if the Company terminates the NHE Management Agreement
without cause. Interest is payable semiannually, in arrears. The notes
are subordinated to the Company's outstanding 9-1/2% debentures and
future indebtedness of the Company. The Company paid $10,442 in interest
under the terms of these notes in fiscal 1996 and 1995.
During fiscal 1996, the Company purchased approximately $326,000 in
software and related programming services from a company owned by the
President and two stockholders of the Company who are also affiliates of
NHE.
(13) Commitments and Contingencies
In June 1992, the California Department of Corporations notified the
Company to cease and desist from operating in California as a health care
service plan without a license under California's Knox-Keene Act.
Approximately 5% of the Company's revenue is derived from California
related business. Since that time, the Company has sold its pharmacy line
of business and taken certain other steps to restructure portions of its
business in California so as to be exempt from coverage under the
Knox-Keene Act. The Department has taken no further action in this
matter, however, there can be no assurance that these steps will be
considered sufficient by the Department in the event of any future
challenge by the Department. A material interruption of the Company's
California business would materially adversely affect the Company's
financial position and results of operations.
F-12
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's financial position or results of operations.
(14) Liquidity
The Company has suffered recurring losses from operations and negative
cash flows. Management is currently seeking methods to maximize service
revenues and control operating expenses; however, management anticipates
it will incur negative cash flows throughout fiscal 1997. If the Company
is required to obtain additional financing, there can be no assurances
that sources of financing will be available on terms favorable to the
Company, if at all.
<PAGE>
PART III
--------
Item 9. Directors and Executive Officers of the Registrant
The following table sets forth the names of the directors and
executive officers of the Company and certain biographical information relating
to them.
Name Age Position(s) with Company
- ---- --- ------------------------
William R. Cohen 65 Co-Chairman and Director
William L. Richter 53 Co-Chairman and Director
Kenneth L. Blum, Sr. 69 Director
Gerald L. Cohen 52 Director
Sam Oolie 60 Director
Frank Cappadora 50 President and Chief Executive
Officer
Neal Kempler 28 Corporate Secretary
Shannon R. Barnett 28 Controller
William R. Cohen, 65, Co-Chairman of the Board, has served as
a Director of the Company since April 1986. Mr. Cohen is the President of Star
Uniform Rental Company and Go Lightly Candy Company. Mr. Cohen has served as
Chairman of American Mobile Communications, a cellular communications company
and has also held various positions with CFC Associates, a venture capital
partnership, and its predecessor organizations. Mr. Cohen serves as a lifetime
trustee of the Hospital Center, Orange, New Jersey. Mr. Cohen is not related to
Gerald L. Cohen.
William L. Richter, 53, Co-Chairman of the Board, has been a
director of the Company since August 1993. Mr. Richter has been President of
Richter Investment Corp. and its wholly-owned subsidiary, Richter & Co., Inc., a
registered broker-dealer firm (or its predecessor organization) for the past
five years. Mr. Richter was Co-Chairman of Rent-A- Wreck of America, Inc., a
franchisor of automobile rental agencies, from November 1989 to June 1993 and
has been Vice Chairman of that Company since June 1993.
Kenneth L. Blum, Sr., 69, has served as a Director of the
Company since August 1993. Mr. Blum has been Chairman of the Board of
Rent-A-Wreck of America, Inc. since June
13
<PAGE>
1993 and President and Chief Executive Officer since January 1994. Mr. Blum
co-founded United HealthCare, Inc., a Baltimore, Maryland-based healthcare
company, in 1974 and served as its President and Chief Executive Officer until
1990. Since 1990, Mr. Blum has been a management consultant to a variety of
companies, including National Computer Services, Inc., a computer service
bureau; American Business Information Systems, Inc., a high-volume laser
printing company; and Mail-Rx, a mail-order prescription drug company. Mr. Blum
is the father of Kenneth L. Blum, Jr. and the father-in-law of Alan S. Cohn. See
"Executive Officers; NHE." Mr. Blum has commenced undertaking certain executive
responsibilities on behalf of the Company.
Gerald L. Cohen, 52, has served as a Director of the Company
since March 1985. Mr. Cohen is a managing director of Greenley Capital Company,
a limited partnership which is a New York-based investment banking firm. Mr.
Cohen is the sole shareholder of the general partner (Greenley Corp.) of
Greenley Capital Company. From August 1982 through April 1989, Mr. Cohen was a
managing director of Richter, Cohen & Co., a New York-based investment banking
firm. Mr. Cohen also serves as a Director of Marketing Systems of America. Mr.
Cohen is not related to William R. Cohen.
Sam Oolie, 60, has served as a Director of the Company since
March 1985. Mr. Oolie is Chairman and CEO of NoFire Technologies, Inc., a
manufacturer of fire retardent materials since August 1995. Mr. Oolie has been
Chairman of Oolie Enterprises, an investment company, since July 1985. Mr. Oolie
has held various positions with CFC Associates, a venture capital partnership,
and its predecessor companies since January 1984, and also has been Chairman of
New Thermal Corp., an extruder of plastic profiles for the window industry,
since January 1991. He was Vice Chairman of American Mobile Communications, Inc.
a cellular telephone company, from February 1987 until July 1989 and Chairman of
the Nostalgia Network, a 24-hour cable television program service, from April
1987 until January 1990. Mr. Oolie also serves as a Director of Noise
Cancellation Technologies, Inc., and Comverse Technology, Inc.
Frank Cappadora, 50, has been President and Chief Executive
Officer of the Company since September 1992 and was designated to such positions
by the Board of Directors in connection with the management services arrangement
between the Company and National Health Enterprises, Inc., a Maryland
corporation ("NHE"). Mr. Cappadora is Vice President and Chief Executive Officer
of National Computer Services, Inc., a computer service bureau; and Vice
President and Chief Executive Officer of American Business Information Systems,
Inc., a high volume laser printing company. See "Item 12 - Certain Relationships
and Related Transactions."
Neal Kempler, 28, has been the Corporate Secretary of the
Company since June 1996. Mr. Kempler has been the Vice President of Marketing &
Operations of the Company since August 1996 and was Assistant to the
President/Director of Marketing from January 1993 until August 1996. Mr. Kempler
served as Account Executive of National Health Enterprises, Inc., a management
company, from June 1990 until 1993.
Shannon R. Barnett, 28, has been Controller of the Company
since August 1996 and was Senior Accountant of the Company from November 1995
until August 1996. Ms. Barnett was Assistant Controller of Quality Hotel and
Marlyn Nutraceuticals, a vitamin manufacturer, from September 1994 until
14
<PAGE>
November 1995 and Staff Accountant of General Atlantic Resources, Inc. an oil
and gas company, from November 1992 until June 1994, and Advantages Resources,
Inc., another oil and gas company, from February 1991 to November 1992.
All directors will hold office until the next annual meeting
of stockholders and the election and qualification of their successors. Officers
are elected annually and serve at the pleasure of the Board of Directors.
Management Services Agreement
Effective March 18, 1993, the Company entered into a
Management Agreement (the "Management Agreement") with National Health
Enterprises, Inc., a Maryland corporation ("NHE") pursuant to which NHE agreed
to manage substantially all aspects of the Company's business, subject to
certain limitations and the direction of the Company's Board of Directors.
See "Item 12 - Certain Relationships and Related Transactions."
The following individuals, though not necessarily deemed
executive officers of the Company, are providing significant services to the
Company pursuant to the Management Services Agreement:
Kenneth L. Blum, Jr., 32, is President and Chief Executive
Officer and the sole stockholder of NHE. Mr. Blum is also President of
Rent-A-Wreck of America, Inc., an automobile rental franchise operation,
President of National Computer Services, Inc., a computer service bureau, and
President of American Business Information Systems, Inc., a high-volume laser
printing company. Alan S. Cohn, 41, is providing sales and marketing services on
behalf of the Company through an arrangement with NHE for sales and marketing
services. Kenneth L. Blum, Sr., a member of the Company's Board of Directors, is
the father of Kenneth L. Blum, Jr. and the father-in-law of Alan S. Cohn.
Compliance with Section 16(a) Reporting Requirements.
Under the securities laws of the United States, the Company's
directors, its executive officers, and any persons holding more than ten percent
of the Company's Common Stock are required to report their initial ownership of
the Company's Common Stock and any subsequent changes in that ownership to the
Securities and Exchange Commission. Specific due dates for these reports have
been established and the Company is required to disclose any failure to file by
these dates. All of these filing requirements were satisfied, except that the
Company believes that 10% stockholder Benjamin D. Ward completed one or more
transactions during the fiscal year, though the Company did not receive a copy
of any report which may have been filed with respect to such transactions. In
making these disclosures, the Company has relied solely on representations
obtained from certain of its former and current directors, executive officers
and ten percent holders and/or copies of the reports that they have filed with
the Commission.
15
<PAGE>
Item 10. Executive Compensation
SUMMARY COMPENSATION TABLE
The following table and related notes set forth information regarding
the compensation awarded to, earned by or paid to the Company's Chief
Executive Officer for services rendered to the Company during the years
ended May 31, 1996, 1995 and 1994. No other executive officer who was
serving as an executive officer at the end of fiscal 1996 received
salary and bonus which aggregated at least $100,000 for services
rendered to the Company during the year ended May 31, 1996.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
-------------------------------------------- --------------------------------------
Awards Payouts
----------------------- -----------
Other Annual Restricted All Other
Name and Compensation Stock Options/ LTIP Compensation
Principal Position Year Salary ($) Bonus ($) ($) Award(s)($) SARs (#) Payouts ($) ($)
- ------------------- ---- ---------- --------- ------------ ----------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Frank Cappadora 1996 $24,000(1) --- --- --- (2) --- ---
CEO 1995 $14,000(1) --- --- --- (2) --- ---
1994 (1) --- --- --- (2) --- ---
</TABLE>
(1) Mr. Cappadora has been President and Chief Executive Officer of the
Company since September 1992 and was designated to such position by the
Board of Directors in connection with the Management Agreement between
the Company and NHE. NHE received cash compensation of $220,000 under the
Management Agreement for the year ended March 18, 1994 and $200,000 per
year thereafter plus expense reimbursements and is entitled to receive
commissions pursuant to a Marketing Agreement. Mr. Cappadora is not a
stockholder of NHE, and his compensation from NHE and its affiliated
entities is not tied directly to the services performed by Mr. Cappadora
on behalf of the Company. During 1995 and 1996 Mr. Cappadora received a
portion of his compensation directly from the Company, while the
remaining portion was paid to him by NHE.
(2) NHE received options for the purchase of 4,400,000 shares of the
Company's Common Stock in March 1993 in connection with the Management
Agreement. Mr. Cappadora holds options for 485,500 shares of the
Company's Common Stock, which options were transferred to Mr. Cappadora
by NHE in March 1993. The options are exercisable at $.48 per share
through March 18, 2003.
See also Item 12 -- "Certain Relationships and Related Transactions - Agreements
with National Health Enterprises, Inc. -- Stock Option Grant."
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUE TABLE (1)
The following table sets forth information with respect to the executive
officer named in the Summary Compensation Table concerning the number and
value of options outstanding at the end of the last fiscal year. The
executive officer named in the Summary Compensation Table did not
exercise any options during the last fiscal year.
16
<PAGE>
Number of Unexercised Value of Unexercised
Options at FY-End (#) in-the-Money Options
at FY-End ($)
---------------------------- ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Frank Cappadora 485,500 --- $146,257 -----
(1) Based on the average of the bid and asked prices on May 31, 1996 as
reported by the National Quotation Bureau, Inc. and an exercise price of
$.48 per share. See Note 2 to the Summary Compensation Table and "Item 12
- Certain Relationships and Related Transactions - Agreements with
National Health Enterprises, Inc. - - Stock Option Grant."
Employment Contracts, Termination of Employment, and Change-in-Control
Arrangements
In the event of termination of the Management Agreement with NHE
without cause, all options granted to NHE in connection with the Management
Agreement remain outstanding for the balance of their 10-year term. See Item 12
- -- "Certain Relationships and Related Transactions -- Agreements with National
Health Enterprises, Inc. -- Stock Option Grant."
Director Compensation
Directors are reimbursed for out-of-pocket expenses incurred in
connection with each Board of Directors or committee meeting attended. Directors
who also are employees of the Company are eligible to participate in the
Company's Incentive Stock Option Plan and the Company's 401(k) Plan, and all
directors are eligible to participate in the Company's 1993 Stock Option Plan
(the "1993 Plan"). Pursuant to the 1993 Plan, options for 100,000 shares of the
Company's Common Stock were granted on April 8, 1993 to each of directors
William R. Cohen, Gerald L. Cohen, and Sam Oolie. The exercise price of such
options is $.40 per share, which was at least the fair market value of the
Company's Common Stock on the date of grant. Options for 25,000 shares of Common
Stock were exercisable by each of the optionees as of the date of grant, with
the balance vesting in equal parts at the end of each of the 10 three-month
periods following the date of grant. At May 31, 1996 options for 100,000 shares
of Common Stock were exercisable by each of the optionees.
Item 11. Security Ownership of Certain Beneficial Owners and Management
At August 19, 1996 there were 4,100,420 shares of Common Stock
outstanding. The table below sets forth as of August 19, 1996, certain
information regarding the shares of Common Stock beneficially owned by each
director of the Company and each named executive officer in the Summary
Compensation table set forth in Item 10, by all of the Company's executive
officers and directors as a group, and by those persons known by the Company to
have owned beneficially 5% or more of the outstanding shares of Common Stock,
which information as to beneficial ownership is based upon statements furnished
to the Company by such persons.
17
<PAGE>
<TABLE>
<CAPTION>
Common issuable
upon conversion
or exercise of: (1)
-------------------
Total Common
Common Series 2 Options Beneficially Percent of
Name and Address Stock Preferred Stock Or Warrants Owned (1) Common (2)
- ---------------- ----- --------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Gerald L. Cohen* 153,359 55,685 100,000 309,044 7.3
William R. Cohen* 48,521(5) 17,630 100,000 166,151 4.0
William L. Richter 417,120 114,282(3) 521,000(3) 1,052,403(3) 22.8
c/o Richter & Co., Inc.
950 Third Avenue
New York, NY 10022
Sam Oolie* 210,075(7) 60,058 100,000 370,133 8.8
Frank Cappadora* --- --- 485,500 485,500 10.6
Kenneth L. Blum, Sr. 140,000(8) 5,000 --- 145,000 3.5
17133 Ericarose Street
W. Boca Raton, FL 33496
Kenneth L. Blum, Jr.(4) 50,000 --- 1,839,750 1,889,750 31.8
11460 Cronridge Drive
Suite 120
Owings Mills, MD 21117
Alan S. Cohn(4) 50,000 --- 1,829,750 1,879,750 31.7
11460 Cronridge Drive
Suite 120
Owings Mills, MD 21117
Benjamin D. Ward., Sr. 956,888 --- --- 956,888 23.3
4712 North 41st Place
Phoenix, Arizona 85018
All directors and 970,226 252,656 1,408,325 2,631,247 47.8
executive officers as (5)(6)(7)
a group (7 persons)(4)
</TABLE>
* Address: 100 West Clarendon, Suite 2300, Phoenix, Arizona 85013.
(1) Includes shares of Common Stock with respect to which the identified
person had the right to acquire beneficial ownership on or within 60 days
of the date of the above table pursuant to the Series 2 Preferred or
options or warrants, as indicated.
(2) The percentages shown include Common Stock actually owned as of the date
of the above table and Common Stock of which the person had the right to
acquire beneficial
18
<PAGE>
ownership within 60 days of such date pursuant to the Series 2 Preferred,
options or warrants, as indicated. In calculating the percentage of
ownership, all shares of Common Stock which the identified person had the
right to acquire within 60 days of the date of the above table are deemed
to be outstanding when computing the percentage of Common Stock owned by
such person but are not deemed to be outstanding when computing the
percentage of Common Stock owned by any other person.
(3) Includes common shares issuable upon conversion or exercise of 27,300
shares of Series 2 Preferred, 240,000 warrants and 71,000 options
indirectly owned via a corporation, Richter & Co., Inc. ("RCI"), which
thereby beneficially owns in its own name 8.3% of the Company's Common
Stock. Also includes common shares issuable upon conversion of 3,883 and
4,530 shares of Series 2 Preferred held via two other corporations. Also
includes common shares issuable upon conversion of 2,500 shares of Series
2 Preferred and 10,169 shares of Common Stock held by family members, as
to which Mr. Richter disclaims beneficial ownership.
(4) Mr. Blum, Jr. and Mr. Cohn perform substantial services for the Company
pursuant to the Management Agreement but are not necessarily deemed
executive officers of the Company.
(5) Includes 6.67% of the 498,619 shares held by CFC Associates, with respect
to which William R. Cohen owns 6.67% of the outstanding stock.
(6) William R. Cohen and Sam Oolie own 6.67% and 20% of the outstanding stock
of CFC Associates, respectively.
(7) Includes 20% of the 498,619 shares held by CFC Associates, with respect
to which Mr. Oolie owns 20% of the outstanding stock. Also includes
30,000 shares, owned by Mr. Oolie's daughters, as to which Mr. Oolie
disclaims beneficial ownership.
(8) The indicated shares are held by Mr. Blum's spouse.
Item 12. Certain Relationships and Related Transactions
Agreements with National Health Enterprises, Inc.
Management Agreement. Effective March 18, 1993, the Company
entered into a Management Agreement (the "Management Agreement") with NHE
pursuant to which NHE agreed to manage substantially all aspects of the
Company's business, subject to certain limitations and the direction of the
Company's Board of Directors. The Management Agreement provided cash
compensation of $220,000 in the first year and $200,000 per year thereafter, as
well as options for the purchase of up to 4,400,000 shares of the Company's
Common Stock, as described below. The Management Agreement has an initial term
of five years, and the
19
<PAGE>
Company has the right to extend it for up to two additional two-year periods.
The Management Agreement is terminable by the Company for cause, as defined.
Pursuant to the Management Agreement, the Company has agreed that it will not,
without NHE's consent, issue (i) securities for consideration less than the fair
market value thereof; (ii) shares of Common Stock to any director, officer,
employee, or affiliate for less than $.40 per share; or (iii) securities to any
director, officer, employee, or affiliate except to the extent of 300,000 shares
of Common Stock plus options previously issued to such persons.
The Management Agreement includes certain representations and
warranties and limitations on solicitation by NHE of customers and employees of
the Company during the term of the Management Agreement and for two years
thereafter. The Management Agreement also requires that NHE hold in confidence
the Company's confidential information, provides that confidential information
developed by NHE shall belong to NHE, and further provides that the Company
shall have a nonexclusive, royalty-free, perpetual license to confidential
information developed by NHE.
Stock Option Grant. Effective March 18, 1993, the Company issued
10-year options (the "Options") to NHE for the purchase of up to 4,400,000
shares of the Company's Common Stock, of which Options for the purchase of
1,400,000 shares were exercisable as of the date of grant at an exercise price
of $.40 per share. The remaining Options (an aggregate of 3,000,000 Options)
could become exercisable under their original terms at prices ranging from $.40
to $.80 contingent upon achievement of profitability targets. Pursuant to such
provisions, Options for the purchase of 500,000 shares became exercisable at
$.432 based upon the Company's results for the quarter ended May 31, 1994.
Effective December 5, 1994, the Board of Directors approved the vesting of the
remaining 2,500,000 of these Options at an exercise price of $.48 per share, and
NHE and the Company agreed that the exercise price of the 500,000 Options which
had vested at $.432 per share would be increased to $.48 per share. The actions
of the Board of Directors were predicated upon the Board's view of the Company's
performance relative to the original vesting criteria and other relevant
considerations. Options remain exercisable throughout the 10-year term of the
Options, except that Options terminate 120 days after termination of the
Management Agreement by the Company for cause.
The Options are transferable only to employees or affiliates of
NHE performing substantial services for or on behalf of the Company or to
employees of the Company, subject to compliance with applicable law. NHE
transferred all of the Options in March 1993, principally to Kenneth L. Blum,
Jr., Alan S. Cohn and Frank Cappadora. Effective December 5, 1994, Messrs. Blum,
Jr., Cohn and Cappadora transferred an aggregate of 125,000 of the Options
exercisable at $.48 per share to Richter & Co., Inc. ("RCI") in consideration of
services performed and to be performed by RCI on behalf of NHE in connection
with NHE's provision of management services to the Company. RCI in turn
transferred 50,000 of such Options to William L. Richter effective December 5,
1994. Transferred Options may revert to NHE if a transferee ceases performing
substantial services for or on behalf of the Company.
20
<PAGE>
Stock Purchase. Kenneth L. Blum, Jr. and Alan S. Cohn each
acquired 50,000 shares (the "Shares") of the Company's Common Stock on March 18,
1993 for consideration of $.40 per share.
Subordinated Promissory Notes. On March 18, 1993, the Company
obtained loans in the amount of $80,000 from each of Mr. Blum and Mr. Cohn. The
notes are due March 18, 1998 and bear interest at the rate of 6% per annum,
provided that the notes may be accelerated by the holders thereof if the Company
terminates the Management Agreement without cause. Interest is payable
semiannually in arrears, commencing September 18, 1993. The notes are unsecured
and subordinated to the Company's outstanding 9 1/2% Debentures and future
indebtedness of the Company for borrowed money.
Registration Rights Agreement. The Company entered into a
Registration Rights Agreement (the "Registration Rights Agreement") effective
March 18, 1993 with NHE, Mr. Blum, and Mr. Cohn. The Registration Rights
Agreement provides two demand registrations with respect to the Shares and the
shares issuable pursuant to the Options ("Registrable Securities"). The first
demand registration is exercisable at the request of holders of at least 900,000
Registrable Securities after the exercise by NHE and/or its transferees of at
least 900,000 Options. The second demand registration is exercisable at the
request of holders of at least 1,000,000 Options after completion of a fiscal
year in which the Company has Profits of at least $1,000,000. The Registration
Rights Agreement also provides piggyback registration rights with respect to
registrations in which other selling stockholders are participating. The Company
is obligated to pay the offering expenses of each such registration, except for
the selling stockholders' pro rata portion of underwriting discounts and
commissions. No precise prediction can be made of the effect, if any, that the
availability of shares pursuant to registrations under the Registration Rights
Agreement will have on the market price prevailing from time to time.
Nevertheless, sales of substantial amounts of the Common Stock pursuant to such
registrations could adversely affect prevailing market prices.
Marketing Agreement. Effective March 18, 1993, the Company and
NHE entered into a Marketing Representation Agreement (the "Marketing
Agreement") pursuant to which NHE is entitled to receive a commission equal to 7
1/2% of the enrollment fees (as defined) from Sponsor contracts generated by
NHE. The Company also agreed to pay NHE commissions equal to 2 1/2% of the
enrollment fees from Sponsor contracts with respect to which NHE provides
marketing assistance in procuring the contract, but does not itself generate the
initial Sponsor contact. The term of the Marketing Agreement is coextensive with
that of the Management Agreement. In fiscal 1996 and 1995, the Company paid
approximately $200,000 and $66,000, respectively, to NHE under the Marketing
Agreement.
Litigation Agreement. The Company entered into an agreement with
Kenneth L. Blum, Sr., a director of the Company; Kenneth L. Blum, Jr., a
principal of NHE; and Alan S. Cohn, who provides marketing services for the
Company through an arrangement with NHE, with respect to potential liabilities
and expenses in connection with a suit initiated by United HealthCare, Inc.
("United") against the Company and these individuals in June 1994 and a
countersuit filed against United in December 1994 by these individuals. The
agreement provided that the Company would indemnify the individuals in an amount
based upon the gross profit
21
<PAGE>
earned on the contract which was the subject of the action brought by United and
overall Company pretax profitability and gave the Company an interest in any net
proceeds received in connection with the countersuit. All litigation between the
parties was dismissed with prejudice in May 1995 pursuant to a settlement. The
Company paid approximately $140,000 in legal fees during fiscal 1995 pursuant to
the agreement, which did not exceed the gross profit earned on the contract in
question. See "Item 3 -- Legal Proceedings."
Investment Banking Services. The Management Agreement and related
transactions with NHE and certain other substantial transactions were structured
and negotiated for the Company by Richter & Co., Inc., a New York investment
banking firm ("RCI"), which received cash consideration of $50,000 and 10-year
warrants (the "Warrants") to acquire 400,000 shares of the Company's Common
Stock, of which 127,273 were exercisable upon grant at $.40 per share. Under the
original terms of the Warrants, the balance of the Warrants became exercisable
contingent upon achieving profitability targets in the same manner originally
applicable to the Options, as described above. The shares of Common Stock
issuable pursuant to the Warrants are entitled to piggyback registration rights
with respect to any registration in which the shares of Common Stock sold to Mr.
Blum, Jr. and Mr. Cohn or the Common Stock issuable pursuant to the Options are
included. A principal of RCI, William L. Richter, is a member of the Company's
Board of Directors. RCI has assigned Warrants for the purchase of 160,000 shares
of the Company's Common Stock to Mr. Richter. Mr. Richter and his firm have
provided and expect to continue to provide substantial investment services for
Messrs. Blum, Sr. and Jr., Mr. Cohn and various of their affiliated entities. To
that extent, RCI may be deemed to have had a conflict of interest with respect
to its efforts on behalf of the Company in effecting the Management Agreement
and related agreements with NHE. The Company's Board of Directors took into
account the potential conflict of interest issues referred to above in
structuring and entering into the investment banking agreement with RCI and
believes that the agreement was desirable and in the best interests of the
Company notwithstanding such possibility.
As a result of actions taken by the Board of Directors on
December 5, 1994 in connection with the Options, the 400,000 Warrants referred
to in the preceding paragraph have the following terms: 50,909 Warrants held by
Mr. Richter and 76,364 Warrants held by RCI are exercisable at $.40 per share;
and 109,091 Warrants held by Mr. Richter and 163,636 Warrants held by RCI are
exercisable at $.48 per share.
Effective December 5, 1994, Messrs. Blum, Jr., Cohn and Cappadora
transferred an aggregate of 125,000 options exercisable at $.48 per share to RCI
(of which 50,000 were transferred in turn by RCI to Mr. Richter), in
consideration of services rendered and to be rendered by RCI on behalf of NHE in
connection with NHE's provision of management services to the Company.
Software Development Services
During fiscal 1995, the Company contracted with National Computer
Services, Inc. ("NCS") to develop software related to the Company's vision,
dental and hearing programs. The Company paid approximately $324,000 and
$162,000 to NCS for such services during fiscal
22
<PAGE>
1996 and 1995, respectively. Additionally, the Company has contracted with NCS
to lease its computer system. Once the software development is completed and the
system is converted, the Company will pay NCS a monthly lease fee of $2,500.
Frank Cappadora, President and Chief Executive Officer of the Company, is Vice
President and Chief Executive Officer and a stockholder of NCS. Kenneth L. Blum,
Jr., a principal of NHE, is President and a stockholder of NCS and the son of
Kenneth L. Blum, Sr., a director of the Company.
Financial Advisor Agreement
Effective January 18, 1995, the Company retained RCI as exclusive
financial advisor and placement agent. RCI's fees under this arrangement are
payable only upon completion of defined transactions and, in such event, are
calculated upon the basis of a percentage of the transaction value. The
agreement is terminable by the Company upon 90 days notice, provided that RCI is
entitled to receive certain fees for two years following termination in the
event a transaction is concluded with an entity introduced to the Company by
RCI.
RCI provides substantial ongoing financial management and other
services to the Company at no charge. In the opinion of management, the terms of
the Company's arrangements with RCI, NHE and NCS taken as a whole are at least
as favorable to the Company as could be obtained from third parties.
23
<PAGE>
PART IV
-------
Item 13. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
3(a) Amended and Restated Certificate of Incorporation of the Company, as amended (4)
3(b) Bylaws of the Company (l)
3(c) Amendments to Bylaws adopted December 6, 1991 (6)
4(a) Indenture between the Company and Continental Stock Transfer & Trust Company,
as Trustee, including form of Convertible Subordinated Debenture (4)
4(b) Statement of Designations, Preferences, Privileges, Voting Powers, Restrictions,
Qualifications and Rights of the Series l Preferred (5)
4(c) Statement of Designations, Preferences, Privileges, Voting Powers, Restrictions,
Qualifications and Rights of the Series 2 Preferred (8)
4(d) Specimen Certificate representing $.0l par value Common Stock (l)
4(e) Specimen Certificate representing $10 Class A Nonvoting Cumulative Convertible
Preferred Stock, Series 2 (7)
l0(a)* Incentive Stock Option Plan of the Company, as amended (4)
l0(b)* 401(k) Plan of the Company (2)
10(c)* Management Agreement dated March 18, 1993 between the Company and NHE (9)
10(d)* Stock Option Grant to NHE dated March 18, 1993 relating to options
for the purchase of 4,400,000 shares of the Company's Common Stock (9)
10(e) Subordinated Promissory Note dated March 18, 1993 in the amount of $80,000
payable by the Company to Mr. and Ms. Blum (9)
10(f) Subordinated Promissory Note dated March 18, 1993 in the amount of $80,000
payable by the Company to Mr. and Mrs. Cohn (9)
</TABLE>
24
<PAGE>
<TABLE>
<S> <C>
10(g) Registration Rights Agreement dated March 18, 1993 among NHE, Mr. Blum, and
Alan S. Cohn (9)
10(h)* Marketing Agreement dated March 18, 1993 between the Company and NHE (9)
10(i) Option Transfer Documents dated March 31, 1993 (9)
10(j)* Stock Purchase Warrant issued to Richter & Co., Inc. dated March 18, 1993 for the
purchase of 240,000 shares of the Issuer's Common Stock (9)
10(k)* Stock Purchase Warrant issued to William L. Richter dated March 18, 1993 for the
purchase of 160,000 shares of the Issuer's Common Stock (9)
10(l)* 1993 Stock Option Plan (3)
10(m) Lease Agreement between the Company and Phoenix City Square (11)
10(n) Fee agreement between the Company and Richter & Co., Inc. (11)
10(o) Software Development Agreement between the Company and National Computer
Services, Inc. (12)
21 Subsidiary of Registrant (filed herewith)
27 Financial Data Schedule (filed herewith)
- ------------------
* Identified as a compensatory arrangement as required by Item 13(a) of Form 10-KSB.
(1) Incorporated by reference from the Company's Registration Statement on Form S-18
(No. 33-6366-LA) filed July 11, 1986 and declared effective July 14, 1986.
(2) Incorporated by reference from the Company's annual report on Form 10-K for the
year ended May 31, 1989 (File No. 1-9758).
(3) Incorporated by reference from the Company's annual report on Form 10-KSB for the
year ended May 31, 1993 (File No. 1-9758).
(4) Incorporated by reference from the Company's Registration Statement on Form S-1
(No. 33-17217) filed January 12, 1988, and declared effective January 12, 1988.
(5) Incorporated by reference from the Company's report on Form 8-K filed July 9, 1988
(File No. l-9758).
</TABLE>
25
<PAGE>
<TABLE>
<S> <C>
(6) Incorporated by reference from the Company's Annual Report on Form 10-K for the
year ended May 31, 1992 (File No. 1-9758).
(7) Incorporated by reference from Amendment No. l to the Company's Registration
Statement on Form S-l filed June 29, 1989 (No. 33-28756).
(8) Incorporated by reference from the Company's Registration Statement on Form S-l
filed May 17, 1989 (No. 33-28756).
(9) Incorporated by reference from the Company's report on Form 8-K dated March 18,
1993 (File No. 1-9758).
(10) Incorporated by reference from the Company's Report on Form 10-Q for the three
months ended November 30, 1992 (No. 1-9758).
(11) Incorporated by reference from the Company's Report on Form 10-QSB for the three
months ended February 28, 1995 (No. 1-9758).
(12) Incorporated by reference from the Company's Report on Form 10-QSB for the three
months ended August 31, 1995
(b) Reports on Form 8-K.
Not applicable.
</TABLE>
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
AVESIS INCORPORATED
By: /s/Frank Cappadora
-------------------
Frank Cappadora
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/Frank Cappadora President and Chief August 26, 1996
- ------------------------ Executive Officer
Frank Cappadora (Principal Execu-
tive Officer)
/s/Neal Kempler Corporate Secretary August 26, 1996
- ------------------------
Neal Kempler
/s/Shannon R. Barnett Controller August 26, 1996
- ------------------------
Shannon R. Barnett
- ------------------------ Co-Chairman of the August ___, 1996
William R. Cohen Board of Directors
/s/William L. Richter Co-Chairman of the August 26, 1996
- ------------------------ Board of Directors
William L. Richter
/s/Kenneth L. Blum, Sr. Director August 26, 1996
- ------------------------
Kenneth L. Blum, Sr.
- ------------------------ Director August ___, 1995
Gerald L. Cohen
/s/Sam Oolie Director August 26, 1996
- ------------------------
Sam Oolie
27
Exhibit 22
Subsidiary of Registrant
Avesis of Washington, D.C., Inc.
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial
information extracted from the Company's Form
10-KSB for the year ended May 31, 1996, and is
qualified in its entirety by reference to such
Form 10-KSB.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> MAY-31-1996
<EXCHANGE-RATE> 1
<CASH> 436,083
<SECURITIES> 0
<RECEIVABLES> 335,407
<ALLOWANCES> (20,000)
<INVENTORY> 0
<CURRENT-ASSETS> 864,556
<PP&E> 1,614,984
<DEPRECIATION> (1,015,686)
<TOTAL-ASSETS> 1,650,527
<CURRENT-LIABILITIES> 441,644
<BONDS> 0
0
3,882
<COMMON> 41,004
<OTHER-SE> 0
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</TABLE>
