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 February 29, 1996
-------------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
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Commission File Number 0-15304
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AVESIS INCORPORATED
--------------------------------------
(Exact name of small business issuer as
specified in its charter)
Delaware 86-0349350
- ------------------------------- --------------------------------
(State or other jurisdiction of
incorporation or organization) (IRS Employer Identification No.)
100 West Clarendon Avenue, Suite 2300 Phoenix, Arizona 85013
- -------------------------------------------------------------------------------
(Address of principal executive offices)
(602) 241 - 3400
--------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
----- -----
The number of outstanding shares of the registrant's Common Stock on January 13,
1995 was 4,075,420.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
(Check One) [ ] Yes [ ] No
1 of 9
<PAGE>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
AVESIS INCORPORATED
BALANCE SHEET
FEBRUARY 29, 1996
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current assets:
Cash and cash equivalents $ 506,305
Receivables, net 345,551
Prepaid expenses and other 103,515
-------------
Total current assets 955,371
Property and equipment, net 543,435
Deferred debenture issuance costs, net 3,298
Deposits 233,815
-------------
Total Assets $ 1,735,919
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 336,883
Accrued expenses-
Compensation 87,524
Other 70,634
Deferred income 36,505
-------------
Total current liabilities 531,546
Convertible subordinated debentures 189,000
Less unamortized debenture discount (3,494)
Accrued rent 99,089
Notes payable to stockholders 160,000
-------------
Total liabilities 976,141
-------------
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 (9,109,266)
-------------
Net stockholders' equity 759,778
-------------
$ 1,735,919
=============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
AVESIS INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE QUARTER AND NINE MONTHS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
February 29 February 28 February 29 February 28
----------------------------- ----------------------------------
1996 1995 1996 1995
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Service revenues:
Administration fees $ 1,031,131 1,227,367 $ 3,146,040 $ 3,180,195
Buying group sales 370,284 388,506 1,103,971 1,164,552
Provider fees 48,599 67,369 157,721 210,038
Other 18,506 23,053 70,466 76,080
------------- ------------ ------------ -------------
Total service revenues 1,468,520 1,706,295 4,478,198 4,630,865
Cost of services 953,973 986,779 2,880,245 2,686,152
------------- ------------ ------------ -------------
Income from services 514,547 719,516 1,597,953 1,944,713
General and administrative expenses 426,851 378,897 1,017,933 911,453
Selling and marketing expenses 230,784 263,990 692,167 712,272
------------- ------------ ------------ -------------
Income (loss) from operations (143,088) 76,629 (112,147) 320,988
------------- ------------ ------------ -------------
Non-operating income (expense):
Other income (expense) -- 171,469 15,171 171,469
Interest income 7,570 1,638 19,589 4,446
Interest expense (7,358) (9,171) (22,401) (27,593)
------------- ------------ ------------ -------------
Net non-operating income
(expense) 212 163,936 12,359 148,322
------------- ------------ ------------ -------------
Net income (loss) $ (142,876) $ 240,565 $ (99,788) $ 469,310
============== ============ ============= =============
Net income (loss) per common
share $ (.06) $ .02 $ (.09) $ .03
============== ============ ============= =============
Weighted average common
shares and equivalents
outstanding 4,075,420 8,671,728 4,075,420 8,340,169
============= ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
AVESIS INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ (99,788) $ 469,310
-------------- ------------
Adjustments to reconcile net income to net
cash provided by in operating activities:
Depreciation and amortization 91,486 59,172
Gain on sale of property and equipment (8,004) --
Gain on retirement of debentures (7,067) --
Gain on sale of investment -- (171,469)
Provision for losses on accounts receivable (6,948) (4,701)
Changes in assets and liabilities:
Decrease (increase) in receivables 1,023 (80,762)
Increase in prepaid expenses (16,175) (60,458)
Decrease (increase) in other assets 2,907 (23,861)
Increase in accounts payable 35,095 13,743
Increase in accrued expenses 30,838 31,862
(Decrease) increase in deferred income (15,212) 9,392
Increase (decrease) in accrued rent 12,598 (718)
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Total adjustments 120,541 (227,800)
------------ -------------
Net cash provided by operating activities 20,753 241,510
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Cash flows from investment activities:
Sale of investment -- 340,219
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Net cash provided by investing activities -- 340,219
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Cash flows from financing activities:
Repurchase of debentures (59,743) --
Proceeds from sale of property and equipment 8,250 --
Purchases of fixed assets (278,522) (212,050)
------------- -------------
Net cash used in financing activities (330,015) (212,050)
------------- --------------
Net (decrease) increase in cash and cash equivalents (309,262) 369,679
Cash and cash equivalents at beginning of period 815,567 347,681
------------- -------------
Cash and cash equivalents at end of period $ 506,305 $ 717,360
============= =============
Supplemental information:
(a) Interest paid during the period -
Debentures 8,978 --
Notes payable to stockholders 4,839 4,839
</TABLE>
The accompanying notes are an integral part of these statements.
- 4 -
<PAGE>
AVESIS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(Unaudited)
1. The condensed financial statements included herein have been prepared by the
Company without audit pursuant to the rules and regulations of the
Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared at the fiscal year end have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that
the disclosures are adequate to make the information presented not
misleading.
In the opinion of Management, the adjustments included in the accompanying
interim financial statements are all of a normal recurring nature and
present fairly the Company's financial position and the results of
operations and cash flows for the periods indicated.
The results of operations for the period ended February 29, 1996, are not
necessarily indicative of the results to be expected for the complete fiscal
year.
2. For the quarter and nine months ended February 29, 1996, 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 $262,026 for the quarter and nine months, respectively) by the
weighted average number of common shares outstanding during the period.
For the quarter and nine months ended February 28, 1995, earnings per share
is calculated as follows. Note that the inclusion of common stock
equivalents (Series 2 Preferred stock, options and warrants) and potentially
dilutive convertible debt has an immaterial dilutive effect.
<TABLE>
<CAPTION>
Primary Fully Diluted
Quarter Nine Months Quarter Nine Months
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Net income $ 240,565 $ 469,310 $ 240,565 $ 469,310
Add: interest expense on convertible
debentures that are not CSEs based
on the interest rate test 6,804 20,413
Subtract: preferred stock dividends 87,342 262,026 87,342 262,026
Net income applicable to common shares 153,223 207,284 160,027 227,697
Shares:
Weighted average common shares
outstanding 4,075,420 4,075,420 4,075,420 4,075,420
Add common stock equivalents:
Incremental shares from outstanding
options and warrants 3,625,858 3,294,299 4,038,069 4,103,576
Add convertible debentures (potentially
dilutive securities which are not CSEs) 51,800 51,800
Adjusted shares outstanding 7,701,278 7,369,719 8,165,289 8,140,796
Earnings per share .02 .03 .02 .03
</TABLE>
- 5 -
<PAGE>
Item 2 Management's Discussion and Analysis or Plan of Operations
For the Quarter and Nine Months Ended February 29, 1996
Results of Operations:
- ----------------------
Service revenues totaled $1,468,520 and $4,478,198 for the quarter and nine
months ended February 29, 1996, compared to $1,706,295 and $4,630,865 for the
same periods in fiscal 1995, representing a decrease of $237,775 (14%) and
$152,667 (3%) from the corresponding periods last year. The Company's vision and
hearing programs accounted for $624,852 (43%) and $1,909,003 (43%) of total
service revenues during the quarter and nine months ended February 29, 1996
compared to $680,745 (40%) and $1,765,191 (38%) for the same periods last year.
The decrease in vision and hearing revenue during the current quarter was the
result of one sponsor reducing the number of cardholders covered under the
Company's benefit plan. Toward the end of fiscal 1995 and continuing through the
nine months ended February 29, 1996, this sponsor, whose cardholders are covered
under the Company's vision, hearing and dental plans, reduced its total number
of cardholders by approximately 30,000. The reduction from this sponsor has been
marginally offset by the addition of approximately 51,000 uninsured cardholders
under the Company's hearing and dental plans beginning in February 1996. There
were approximately 399,000 vision and 93,000 hearing cardholders in force at
February 29, 1996, compared to approximately 397,000 vision and 109,000 hearing
cardholders at February 28, 1995. Vision provider fee revenue declined by
$18,770 (28%) and $52,317 (25%) during the quarter and nine months ended
February 29, 1996, as compared to the same periods in fiscal 1995 due in part to
a modification of the Company's agreements with its providers. Under the
modified agreement, for new sponsors, the providers are not required to pay a
fee based on gross sales to that sponsor's members.
The Company's dental program accounted for $473,375 (32%) and $1,386,943 (31%)
of total service revenues during the current quarter and nine months compared to
$527,574 (31%) and $1,329,972 (28%) for the same periods in fiscal 1995. The
decline in this line of business during the current quarter was primarily due to
the loss of approximately 30,000 uninsured cardholders as discussed above. The
decline in cardholders was offset by the addition of approximately 51,000
uninsured cardholders as also discussed above. There were approximately 125,000
dental cardholders at February 29, 1996, compared to approximately 115,000 at
February 28, 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 Med Net Common Stock. The Company contracted to
provide certain administrative services with respect to the pharmacy line of
business until December 31, 1993. However, due to delays encountered by Med Net
during the conversion of the claims processing, the Company entered into a month
to month agreement to continue to provide administrative services to Med Net.
Med Net terminated the agreement in August 1995. Therefore, the Company did not
generate any revenues related to the pharmaceutical program for the quarter
ended February 29, 1996 compared to $109,470 (6%) of total service revenues for
the quarter ended February 28, 1995. Pharmaceutical revenues constituted $78,281
(2%) of total service revenues during the nine months ended February 29, 1996,
compared to $324,023 (6%) during the same period in 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 $370,290 (25%) and $1,103,971 (24%) for the
quarter and nine months ended February 29, 1996 compared to $388,506 (23%) and
$1,164,552 (25%) 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.
-6-
<PAGE>
The cost of services decreased by $32,806 (3%) and increased by $266,899 (7%)
from $986,779 and $2,686,152 during the quarter and nine months ended February
28, 1995, respectively, to $953,973 and $2,880,245 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 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
nine months was due to the increased cost associated with paying claims as the
number of insured cardholders increased throughout the current period.
General and administrative expenses were $426,851 and $1,017,933 during the
quarter and nine months ended February 29, 1996 , which represents increases of
$69,672 (18%) and $30,286 (3%) in each respective period compared to the same
periods in fiscal 1995. The increase in the current periods was primarily due to
legal expenses and settlement costs relating to a lawsuit which was settled
during the quarter (see Part II, Item I) and increased depreciation expense
related to a new computer system.
Selling and marketing expenses were $230,784 and $692,167 during the quarter and
nine months ended February 29, 1996, representing a decrease of $33,206 (13%)
and $20,105 (3%) from the same period in the prior year. Selling and marketing
expenses include marketing fees, broker commissions, inside sales and marketing
salaries and related expenses, travel related to the Company's sales activities
and an allocation of other overhead expenses relating to the Company's sales and
marketing functions. The decrease in expenses during the current periods 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 income was $212 and $12,359 for the quarter and nine months ended
February 29, 1996 compared to non-operating income of $171,469 for each of the
same periods in fiscal 1995. The income in the prior periods was from the sale
of Med Net, Inc. stock.
Liquidity and Capital Resources
- -------------------------------
The Company had cash and cash equivalents of $506,305 at February 29, 1996,
compared to $815,567 at May 31, 1995. The decrease of $309,262 was due primarily
to the costs of developing new software for the Company's new computer system
and negative cash flows during the period.
At February 29, 1996, the Company had aggregate outstanding long-term
liabilities of $444,595, consisting of $189,000 of Convertible Subordinated
Debentures, less $3,494 of unamortized discount, $160,000 of subordinated notes
payable to stockholders, and $99,089 in accrued rent.
Although the Company sustained a loss during the current quarter and nine
months, a large portion of the loss was from non-recurring legal costs,
including settlement costs relating to one lawsuit which was settled during the
current quarter. Based on the current marginal losses from operations and
anticipated new revenues, the Company expects to generate positive cash flows
and income from operations beginning in the first part of fiscal 1997. Current
cash on hand is expected to allow the Company to sustain operations for at least
the next twelve months.
-7-
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The parties have executed a settlement agreement providing for the
dismissal of previously-reported litigation captioned Marcus S.
Palkowitsh v. Avesis Incorporated, et al. It is anticipated that a court
order sproviding for the dismissal will be entered shortly.
Item 3. Defaults Upon Senior Securities
(b) The Company determined not to pay the quarterly dividend otherwise
scheduled for payment in April 1996, on shares of its Series 2 Preferred
Stock. The dividend is cumulative. The arrearage is $1,192,192 as of
February 29, 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are being filed with this report:
27 Financial Data Schedule
(b No reports on Form 8-K were filed during the quarter ended February 29,
1996.
-8-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AVESIS INCORPORATED
-----------------------------------------
(Registrant)
Date: 4/15/96 /s/ Mark L. Smith
-----------------------------
Mark L. Smith, Vice President
and Chief Financial Officer
(Principal Financial Officer)
- 9 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> FEB-29-1996
<EXCHANGE-RATE> 1
<CASH> 506,305
<SECURITIES> 0
<RECEIVABLES> 345,551
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 955,371
<PP&E> 1,513,819
<DEPRECIATION> 970,384
<TOTAL-ASSETS> 1,735,919
<CURRENT-LIABILITIES> 531,546
<BONDS> 189,000
0
3,882
<COMMON> 40,754
<OTHER-SE> 759,778
<TOTAL-LIABILITY-AND-EQUITY> 1,735,919
<SALES> 4,478,198
<TOTAL-REVENUES> 4,478,198
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,540,345
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,401
<INCOME-PRETAX> (99,788)
<INCOME-TAX> 0
<INCOME-CONTINUING> (99,788)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (99,788)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
