Securities and Exchange Commission
Washington D.C. 20549
Form 10-QSB
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended November 30, 1995
-------------------------------------
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
------------- -------------
Commission File Number 0-15304
------------
AVESIS INCORPORATED
- --------------------------------------------------------------------------------
(Exact name of small business issuer as
specified in its charter)
Delaware 86-0349350
(State or other jurisdiction of
incorporation or organization) (IRS Employer Identification No.)
100 West Clarendon Avenue, Suite 2300 Phoenix, Arizona 85013
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(602) 241-3400
-----------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
The number of outstanding shares of the registrant's Common Stock on January 13,
1995 was 4,075,420.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
(Check One) / / Yes /X/ No
<PAGE>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
AVESIS INCORPORATED
BALANCE SHEET
NOVEMBER 30, 1995
ASSETS
Current assets:
Cash and cash equivalents $ 660,192
Receivables, net 304,682
Prepaid expenses and other 261,566
-----------
Total current assets 1,226,440
Property and equipment, net 344,266
Deferred debenture issuance costs, net 3,748
Deposits 212,815
-----------
$ 1,787,269
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 298,263
Accrued expenses-
Compensation 83,181
Other 25,016
Deferred income 38,151
-----------
Total current liabilities 444,611
Convertible subordinated debentures 189,000
Less unamortized debenture discount (3,971)
Accrued rent 94,975
Notes payable to stockholders 160,000
-----------
Total liabilities 884,615
-----------
Stockholders' equity
Preferred stock $.01 par value, authorized
12,000,000 shares:
$100 Class A, nonvoting cumulative convertible preferred
stock, Series 1, $.01 par value; authorized 1,000,000
shares; none issued and outstanding (liquidation
preference of $100 per share) --
$10 Class A, nonvoting cumulative convertible preferred
stock, Series 2, $.01 par value; authorized 1,000,000
shares; 388,180 shares issued and outstanding
(liquidation preference of $10 per share) 3,882
Class A, voting cumulative convertible preferred stock,
Series 3, $.01 par value; authorized 100,000 shares;
none issued and outstanding (liquidation preference of
$100 per share) --
Common stock of $.01 par value, authorized
12,000,000 shares; 4,075,420 shares issued and outstanding 40,754
Additional paid-in capital 9,824,408
Accumulated deficit (8,966,390)
------------
Net stockholders' equity 902,654
-----------
$ 1,787,269
===========
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
AVESIS INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE QUARTER AND SIX MONTHS ENDED NOVEMBER 30, 1995 AND 1994
(Unaudited)
<CAPTION>
Quarters Ended Six Months Ended
November 30 November 30 November 30 November 30
----------- ----------- ----------- -----------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Service revenues:
Administration fees $ 1,001,168 $ 1,135,070 $ 2,114,909 $ 1,952,828
Buying group sales 371,533 375,064 733,687 776,046
Provider fees 51,402 63,455 109,122 142,669
Other 23,614 18,776 51,960 53,027
----------- ----------- ----------- -----------
Total service revenues 1,447,717 1,592,365 3,009,678 2,924,570
Cost of services 962,876 859,610 1,926,272 1,699,373
----------- ----------- ----------- -----------
Income from services 484,841 732,755 1,083,406 1,225,197
General and administrative expenses 296,747 266,641 591,082 532,556
Selling and marketing expenses 228,966 249,111 461,383 448,282
----------- ----------- ----------- -----------
Income (loss) from operations (40,872) 217,003 30,941 244,359
----------- ----------- ----------- -----------
Non-operating income (expense):
Other income (expense) (246) -- 15,171 --
Interest income 5,357 1,434 12,019 2,808
Interest expense (6,805) (9,198) (15,043) (18,422)
----------- ----------- ----------- -----------
Net non-operating income
(expense) (1,694) (7,764) 12,147 (15,614)
----------- ----------- ----------- -----------
Net income (loss) $ (42,566) $ 209,239 $ 43,088 $ 228,745
=========== =========== =========== ===========
Net income (loss) per common
share $ (.03) $ .03 $ (.03) $ .03
=========== =========== =========== ===========
Weighted average common
shares and equivalents
outstanding 4,075,420 6,598,840 4,075,420 6,688,460
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
AVESIS INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1995 AND 1994
(Unaudited)
1995 1994
--------- ---------
Cash flows from operating activities:
Net income $ 43,088 $ 228,745
--------- ---------
Adjustments to reconcile net income to net
cash provided (used) in operating activities:
Depreciation and amortization 57,600 36,107
Gain on fixed asset disposal (8,004) --
Gain on retirement of debentures (7,067) --
Provision for losses on accounts receivable (6,619) (3,899)
Changes in assets and liabilities:
Decrease (increase) in receivables 41,563 (250,158)
Increase in prepaid expenses (174,226) (79,616)
Decrease (increase) in other assets 23,907 (23,861)
Increase (decrease) in accounts payable (3,525) 25,755
Increase (decrease) in accrued expenses (19,123) 31,863
Decrease in deferred income (13,566) (504)
Increase (decrease) in accrued rent 8,484 (27,789)
--------- ---------
Total adjustments (100,576) (292,102)
--------- ---------
Net cash used by operating activities (57,488) (63,357)
--------- ---------
Cash flows from financing activities:
Repurchase of debentures (59,743) --
Disposition of fixed assets 8,250 --
Purchases of fixed assets (46,394) (6,183)
--------- ---------
Net cash used by financing activities (97,887) (6,183)
--------- ---------
Net decrease in cash and cash equivalents (155,375) (69,540)
Cash and cash equivalents at beginning of period 815,567 347,681
--------- ---------
Cash and cash equivalents at end of period $ 660,192 $ 278,141
========= =========
Supplemental information:
(a) Interest paid during the period - Debentures 8,978 --
Notes payable to stockholders 4,839 4,839
The accompanying notes are an integral part of these statements.
<PAGE>
AVESIS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1995 AND 1994
(Unaudited)
1. The condensed financial statements included herein have been prepared by the
Company without audit pursuant to the rules and regulations of the
Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared at the fiscal year end have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that
the disclosures are adequate to make the information presented not
misleading.
In the opinion of Management, the adjustments included in the accompanying
interim financial statements are all of a normal recurring nature and
present fairly the Company's financial position and the results of
operations and cash flows for the periods indicated.
The results of operations for the period ended November 30, 1995, are not
necessarily indicative of the results to be expected for the complete fiscal
year.
2. For the quarter and six months ended November 30, 1995, loss per common
share is computed by dividing net loss, after giving appropriate effect to
undeclared preferred stock dividends payable and accrued during the period
($87,342 and $174,684 for the quarter and six months, respectively) by the
weighted average number of common shares outstanding during the period.
For the quarter and six months ended November 30, 1994, earnings per share
is calculated as follows. Note that the inclusion of common stock
equivalents (Series 2 Preferred stock, options and warrants) and potentially
dilutive convertible debt has an immaterial dilutive effect. Accordingly,
only one earnings per share figure is reported in the Statements of
Operations for each quarter and six month period.
Primary Fully Diluted
Quarter Six Months Quarter Six Months
Net Income $ 209,239 $ 228,745 $ 209,239 $ 228,745
Add: interest expense on
convertible debentures
that are not CSEs based
on the interest rate
test 9,198 18,422
Net income applicable to
common shares 209,239 228,745 218,437 247,167
Shares:
Weighted average common
shares outstanding 4,075,420 4,075,420 4,075,420 4,075,420
Add common stock
equivalents:
Convertible preferred
stock 970,450 970,450 970,450 970,450
Incremental shares from
outstanding options and
warrants 1,552,970 1,642,590 2,729,418 2,729,418
Add convertible debentures
(potentially dilutive
securities which are not
CSEs) 51,800 51,800
Adjusted shares outstanding 6,598,840 6,688,460 7,827,088 7,827,088
Earnings per share .03 .03 .03 .03
<PAGE>
Item 2 Management's Discussion and Analysis or Plan of Operations
For the Quarter and Six Months Ended November 30, 1995
Results of Operations:
- ---------------------
Service revenues totaled $1,447,717 and $3,009,678 for the quarter and six
months ended November 30, 1995, compared to $1,592,365 and $2,924,570 for the
same periods in fiscal 1995, representing a decrease of $144,648 (9%) for the
current quarter compared to the quarter ended November 30, 1994 and an increase
of $85,108 (3%) for the six months ended November 30, 1995 compared to the same
period last year. The Company's vision and hearing programs accounted for
$627,195 (43%) and $1,284,131 (43%) of total service revenues during the quarter
and six months ended November 30, 1995 compared to $612,464 (38%)and $1,096,168
(37%) for the same periods last year. The increase in vision and hearing revenue
during the current fiscal year was the result of the increase in vision
cardholders attributable to one existing sponsor who added insured cardholders
in the latter part of the quarter and six months ended November 1994. Beginning
toward the end of fiscal 1995 and continuing through the six months ended
November 30, 1995, one sponsor, whose cardholders are covered under the
Company's vision, hearing and dental plans, has reduced its total number of
uninsured cardholders by approximately 20,000. At November 30, 1995, there were
approximately 386,000 vision cardholders in force compared to approximately
397,000 cardholders at November 30, 1994. Vision provider fee revenue declined
by $12,053 (19%) and $33,547 (23%) during the quarter and six months ended
November 30, 1995, as compared to the same periods 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 $448,164 (31%) and $913,567 (30%) of
total service revenues during the current quarter and six months compared to
$486,652 (31%) and $802,399 (27%) for the same periods in fiscal 1995. The
decline in this line of business was primarily due to the loss of approximately
20,000 uninsured cardholders as discussed above. Subsequent to November 30,
1995, the Company received a letter of intent from a new sponsor whereby
approximately 60,000 uninsured cardholders will be covered under the Company's
dental plan beginning January and February 1996. There were approximately 77,000
dental cardholders at November 30, 1995, compared to approximately 114,000 at
November 30, 1994.
On December 30, 1992, the Company completed the sale of its pharmacy line of
business to Med Net (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; therefore, the
Company did not generate any revenues related to the pharmaceutical program for
the quarter ended November 30, 1995 compared to $118,171 (7%) for the quarter
ended November 30, 1994. Pharmaceutical revenues constituted $78,281 (3%) of
total service revenues during the six months ended November 30, 1995, compared
to $249,957 (9%) during fiscal 1994.
The Company makes available to its providers, 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 accounted for $371,533 (26%) and $733,687 (24%) of
total service revenues for the quarter and six months ended November 30, 1995
compared to $375,014 (25%) and $776,046 (27%) for the same periods 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 cardholder base
principally is derived from a limited number of sponsors.
<PAGE>
The cost of services increased by $103,266 (12%) and $226,899 (13%) from
$859,610 and $1,699,373 during the quarter and six months ended November 30,
1994 compared to $962,876 and $1,926,272 during the same periods in fiscal 1996.
These costs primarily relate to servicing cardholders, providers, and sponsors
under the Company's vision, hearing and dental benefit programs. The increase in
cost of services during the current quarter and six months was due to
incremental costs incurred related to servicing cardholders.
General and administrative expenses were $296,747 and $591,082 during the
current quarter and six months, which represents an increase of $30,106 (11%)
and $58,526 (10%) compared to the same periods in fiscal 1995. These costs
include depreciation, legal and professional fees, insurance, and consulting
fees related to National Health Enterprises (NHE). The increase in the current
year was primarily due to increased consulting fees to NHE and other
consultants.
Selling and marketing expenses were $249,111 and $448,282 for the quarter and
six months ended November 30, 1995, representing a decrease of $20,145 (8%) and
an increase of $13,101 (2%) from the same periods in the prior year. Selling and
marketing expenses include marketing fees, broker commissions, inside sales and
marketing salaries and related expenses, travel related to the Company's sales
activities and an allocation of other overhead expenses relating to the
Company's sales and marketing functions. A significant amount of the Company's
marketing activities are performed by NHE.
Liquidity and Capital Resources
- -------------------------------
The Company had cash and cash equivalents of $660,192 at November 30, 1995,
compared to $278,141 at November 30, 1994. The increase of $382,051 was due
primarily to positive cash flows generated from operations as well as the sale
of Medi-Mail common stock in January 1995.
At November 30, 1995, the Company had aggregate outstanding long-term
liabilities of $440,004, consisting of $189,000 of Convertible Subordinated
Debentures, less $3,971 of unamortized discount, $160,000 of subordinated notes
payable to stockholders, and $94,975 in accrued rent.
Although the Company has realized a loss from operations during the current
quarter, based on the anticipated increased levels of cardholders, the Company
expects to generate positive cash flows and income from operations beginning in
the latter part of fiscal 1996.
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Information regarding legal proceedings is incorporated by reference
from the Company's report on Form 10-KSB for the year ended May 31,
1995.
Item 3. Defaults Upon Senior Securities
(b) The Company determined not to pay the quarterly dividend otherwise
scheduled for payment in January 1996, on shares of its Series 2
Preferred Stock. The dividend is cumulative. The arrearage is $1,106,850
as of November 30, 1995.
Item 4. Submission of Matters to a Vote of Security Holders
(a) An annual meeting of stockholders of the Company was held on December
10, 1995.
(c) There was one matter voted upon at the meeting, as follows:
The following nominees were elected for one-year terms as directors of
the Company:
William R. Cohen William L. Richter Gerald L. Cohen
Samuel A. Oolie Kenneth L. Blum, Sr.
The results of voting for each nominee were as follows:
Number of votes cast for: 3,186,645
Number of votes cast against: 1,360
Number of abstentions: 0
Number of non-votes: 0
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are being filed with this report:
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended November 30,
1995.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AVESIS INCORPORATED
------------------------------------------------------
(Registrant)
Date: 1/12/96 /s/ Mark L. Smith
--------------------- -----------------------------
Mark L. Smith, Vice President
and Chief Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> NOV-30-1995
<CASH> 660,192
<SECURITIES> 0
<RECEIVABLES> 304,682
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,226,440
<PP&E> 1,281,691
<DEPRECIATION> 937,425
<TOTAL-ASSETS> 1,787,269
<CURRENT-LIABILITIES> 444,611
<BONDS> 189,000
<COMMON> 40,754
0
3,882
<OTHER-SE> 902,654
<TOTAL-LIABILITY-AND-EQUITY> 1,787,269
<SALES> 3,009,678
<TOTAL-REVENUES> 1,447,717
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,978,737
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,043
<INCOME-PRETAX> 43,088
<INCOME-TAX> 0
<INCOME-CONTINUING> 43,088
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,088
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
