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, 1996
-------------------------------------
[ ] 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 10,
1996 was 4,100,420.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
(Check One) [ ] Yes [X] No
1 of 10
<PAGE>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
AVESIS INCORPORATED
BALANCE SHEET
NOVEMBER 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current assets:
Cash and cash equivalents $ 605,203
Receivables, net 232,207
Prepaid expenses and other 76,918
-------------
Total current assets 914,327
Property and equipment, net 587,548
Deferred debenture issuance costs, net 1,949
Deposits 183,815
-------------
$ 1,687,639
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 279,085
Accrued expenses-
Compensation 49,632
Other 134,050
Deferred income 25,374
-------------
Total current liabilities 488,142
Convertible subordinated debentures 189,000
Less unamortized debenture discount (2,065)
Accrued rent 108,100
Notes payable to stockholders 160,000
-------------
Total liabilities 943,177
-------------
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; 4,100,420 shares issued and outstanding 41,004
Additional paid-in capital 9,949,158
Accumulated deficit (9,249,582)
-------------
Net stockholders' equity 744,462
-------------
$ 1,687,639
=============
</TABLE>
The accompanying notes are an integral part of these statements.
- 2 -
<PAGE>
AVESIS INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE QUARTER AND SIX MONTHS ENDED NOVEMBER 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
November 30 November 30 November 30 November 30
------------------------------ -------------------------------
1996 1995 1996 1995
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Service revenues:
Administration fees $ 764,385 $ 1,001,168 $ 1,676,469 $ 2,114,909
Buying group sales 370,892 371,533 759,521 733,687
Provider fees 34,284 51,402 68,336 109,122
Other 30,701 23,614 44,978 51,960
------------ ------------ ------------ -------------
Total service revenues 1,200,262 1,447,717 2,549,303 3,009,678
Cost of services 875,251 962,876 1,764,060 1,926,272
------------ ------------ ------------ -------------
Income from services 325,011 484,841 785,244 1,083,406
General and administrative expenses 251,979 296,747 506,944 591,082
Selling and marketing expenses 124,566 228,966 290,951 461,383
------------ ------------ ------------ -------------
Income (loss) from operations (51,534) (40,872) (12,651) 30,941
------------ ------------ ------------ -------------
Non-operating income (expense):
Other income (expense) (79) (246) (79) 15,171
Interest income 5,995 5,357 12,233 12,019
Interest expense (7,359) (6,805) (14,744) (15,043)
------------ ------------ ------------ -------------
Net non-operating income
(expense) (1,443) (1,694) (2,590) 12,147
------------ ------------ ------------ -------------
Net income (loss) $ (52,977) $ (42,566) $ (15,241) $ 43,088
============ ============ ============ =============
Net income (loss) per common
share $ (0.03) $ (0.03) $ (0.05) $ (0.03)
============= ============ ============ =============
Weighted average common
shares and equivalents
outstanding 4,100,420 4,075,420 4,100,420 4,075,420
============= ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
- 3 -
<PAGE>
AVESIS INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ (15,241) $ 43,088
------------- ------------
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 84,542 57,600
Gain on fixed asset disposal -0- (8,004)
Gain on retirement of debentures -0- (7,067)
Provision for losses on accounts receivable (149) (6,619)
Changes in assets and liabilities:
Decrease in receivables 83,349 41,563
Decrease (increase) in prepaid expenses 36,158 (174,226)
Decrease in other assets -0- 23,907
Increase (decrease) in accounts payable 55,175 (3,525)
(Decrease) in accrued expenses (2,683) (19,123)
(Decrease) in deferred income (5,991) (13,566)
Increase in accrued rent 4,899 8,484
------------- ------------
Total adjustments 255,300 (100,576)
------------- ------------
Net cash provided by (used in) operating activities 240,059 (57,488)
------------- ------------
Cash flows from investing activities:
Proceeds from dispositions of property and equipment -0- 8,250
Purchases of property and equipment (70,939) (46,394)
------------- ------------
Net cash (used in) investing activities (70,939) (38,144)
------------- ------------
Cash flows from financing activities:
Repurchase of debentures -0- (59,743)
------------- ------------
Net cash (used in) financing activities -0- (59,743)
------------- ------------
Net increase (decrease) in cash and cash equivalents 169,120 (155,375)
Cash and cash equivalents, beginning of period 436,083 815,567
------------- ------------
Cash and cash equivalents, end of period $ 605,203 $ 660,192
============= ============
Supplemental information:
- -------------------------
(a) Interest paid during the period -
Debentures -0- 8,978
Notes payable to stockholders -0- 4,839
</TABLE>
The accompanying notes are an integral part of these statements.
- 4 -
<PAGE>
AVESIS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996 AND 1995
(Unaudited)
1. The condensed financial statements included herein have been prepared by the
Company without audit pursuant to the rules and regulations of the
Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared at the fiscal year end have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that
the disclosures are adequate to make the information presented not
misleading.
In the opinion of Management, the financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary in
order to make the financial statements not misleading. Results of operations
for the periods presented are not necessarily indicative of the results that
may be experienced for the full year ending May 31, 1997.
2. For the quarter and six months ended November 30, 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 $174,684 for the quarter and six months, respectively) by the
weighted average number of common shares outstanding during the period. (see
Exhibit 11)
- 5 -
<PAGE>
Item 2 Management's Discussion and Analysis or Plan of Operations
For the Quarter and Six Months Ended November 30, 1996 and 1995
Except for the historical information contained herein, the discussion in
this Form 10-QSB contains 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, the loss of a significant sponsor, a major
change in healthcare legislation, and the discussion in this "Item 2 --
Management's Discussion and Analysis or Plan of Operations," as well as those
factors discussed elsewhere herein or in any document incorporated herein by
reference.
Results of Operations
- ---------------------
Service revenues totaled $1,200,262 and $2,549,303 for the quarter and six
months ended November 30, 1996, compared to $1,447,717 and $3,009,678 for the
same periods in fiscal 1996, representing decreases of $247,455 (17%) and
$460,375 (15%) for the quarter and six months ended November 30, 1996 compared
to the same periods in the prior year, respectively. The Company's
administration fees from vision and hearing programs accounted for $472,706
(39%) and $627,195 (43%) of total service revenues for the quarters ended
November 30, 1996 and 1995, respectively, and $973,997 (38%) and $1,284,131
(43%) of total service revenues for the six months ended November 30, 1996 and
1995, respectively. The decrease in vision and hearing revenue during the
current fiscal year was primarily the result of the loss of one sponsor in
October 1996. A "sponsor" is a employer, insurance group, or other organization
that offers the Company's benefits to it employees/members. The loss of this
sponsor reduced total cardholders by approximately 65,000. This loss was
partially offset by the addition of a new sponsor that enrolled approximately
32,000 cardholders in the Company's hearing plan. There were approximately
365,000 and 386,000 vision and hearing cardholders as of November 30, 1996 and
1995, respectively. An additional sponsor was signed during January, 1997, the
revenues, costs, and number of cardholders associated with this sponsor cannot
accurately be determined at this point in time.
Vision provider fee revenue declined by $17,106 (33%) and $40,774 (37%) during
the quarter and six months ended November 30, 1996 compared to the same periods
in fiscal year 1995 due in part to a modification of the Company's agreements
with its providers. A provider is a doctor or other practitioner that has agreed
to provide services to the Company's benefit plan cardholders. 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 $290,778 (24%) and $448,164 (31%) of
total service revenues for the quarters ended November 30, 1996 and 1995,
respectively, and $700,669 (27%) and $913,567 (30%) of total service revenues
for the six months ended November 30, 1996 and 1995, respectively. The net
change in this line of business was due to the loss of 65,000 cardholders, as
discussed above, and the addition of approximately 56,000 cardholders from the
new sponsor who also enrolled in the Company's dental plan. The revenue derived
from the new sponsor is significantly less than the revenue from the lost
sponsor on a per cardholder basis. There were approximately 72,500 and 77,000
dental cardholders as of November 30, 1996 and 1995, respectively.
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. Pharmaceutical revenues were $78,281 (3%)
of total service revenues during the six months ended November 30, 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 accounted for $370,892 (31%) and $371,533 (26%) of
total service revenues for the quarters ended November 30, 1996 and 1995,
respectively, and $759,521 (30%) and $733,687 (24%) of total service revenues
for the six months ended November 30, 1996 and 1995, respectively.
-6-
<PAGE>
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. The Company's four
largest sponsors account for approximately 69% of the total administration fee
revenue for the quarter ended November 30, 1996.
Cost of services were $875,251 and $962,876 for the quarters ended November 30,
1996 and 1995, respectively, and $1,764,060 and $1,926,272 for the six months
ended November 30, 1996 and 1995, respectively. Cost of services decreased
$87,625 (9%) and $162,212 (8%) for the quarter and six months ended November 30,
1996, respectively, compared to the same periods in the prior fiscal year. These
costs primarily relate to servicing cardholders, providers, and sponsors under
the Company's vision, hearing and dental benefit programs as well as the cost of
frames that are sold through the Company's buying group program as discussed
above. The decrease in cost of services during the quarter and six months ended
November 30, 1996 compared to the same periods in the prior fiscal year was due
to the associated decrease in revenue during the quarter. The cost of services
did not decrease as greatly as revenue due to the loss of efficiencies of scale
related to the volume of claims paid. Additionally, due to the reorganization in
the customer service and claims processing area of the Company's activities,
where a portion of the middle management was eliminated, the Company realized a
decrease in personnel expense included in the cost of services.
General and administrative expenses were $251,979 and $296,747 for the quarters
ended November 30, 1996 and 1995, respectively, and $506,944 and $591,082 for
the six months ended November 30, 1996 and 1995, respectively. General and
administrative expenses decreased $44,768 (15%) and $84,138 (14%) for the
quarter and six months ended November 30, 1996, respectively, compared to the
same periods in the prior fiscal year. These costs include depreciation, legal
and professional fees, insurance and consulting fees related to National Health
Enterprises (management consultants). The decrease is primarily due to legal
fees of approximately $40,000 directly related to a lawsuit settled in the prior
fiscal year and a reduction in personnel involved in the finance and accounting
functions.
Selling and marketing expenses were $124,566 and $249,111 for the quarters ended
November 30, 1996 and 1995, respectively, and $290,951 and $448,282 for the six
months ended November 30, 1996 and 1995, respectively. Selling and marketing
expenses decreased $124,545 (50%) and $157,331 (35%) for the quarter and six
months ended November 30, 1996, respectively, compared to the same periods in
the prior fiscal 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 is due to the reduction in broker commissions directly related to the
reduction in revenue, the outsourcing of a portion of the activities performed
by the inside sales and marketing department, and the reduction of travel and
entertainment expenditures. A significant amount of the Company's marketing
activities has been outsourced to management consultants, National Health
Enterprises, for a cost lower than the Company incurred when performing the
functions internally.
-7-
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company had cash and cash equivalents of $605,203 and $660,192 as of
November 30, 1996 and 1995, respectively. The net decrease in cash of $54,989
during the period from November 30, 1995 to November 30, 1996 consists of a
decrease in cash of $224,109 during the first six months of the period (December
1, 1995 through May 31, 1996), and an increase in cash of $169,120 the last six
months of the period (June 1, 1996 through November 30, 1996). The negative cash
flow mentioned above is primarily associated with the software development
project for the Company's new mainframe computer. The positive cash flow for the
six months ended November 30, 1996 is primarily due to the collections of
accounts receivable, decrease in prepaid expenses, and timing of vendor
payments. The Company is maintaining its policy of paying vendors on a net 45
day basis, and continues to be current on all of its trade accounts payable.
Current cash on hand is expected to allow the Company to sustain operations for
at least the next twelve months.
The Company's management has taken the following steps in order to sustain the
viability of the Company and continue positive cash flows: the sublease of
unused office space, thereby reducing monthly rent by approximately $8,000; the
maintenance of the appropriate level of staff, reducing monthly salary expense
by approximately $10,000; the deferral of cash payments made to related parties
(National Health Enterprises) for consulting services of approximately $6,000
per month, the balance of $18,000 as of November 30, 1996 is to be repaid on an
undetermined future date; and the addition of new sponsors, as previously
discussed, replacing most of the reduced number of cardholders caused by the
loss of a major sponsor in the prior fiscal year. The Company has also
established a chiropractic benefit and is planning to expand its dental network
of providers to increase its marketability.
-8-
<PAGE>
PART II OTHER INFORMATION
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 $1,456,206
as of November 30, 1996.
Item 4. Submission to Matters to a Vote of Security Holders
(a) An annual meeting of stockholders of the Company was held on December
18, 1996
(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: 3,092,410
Number of votes cast against: 5,660
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:
11 Statement re: Computation of per Share Earnings
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended November 30,
1996.
-9-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AVESIS INCORPORATED
- - - - - - - - - - - - - - - - - - - - - - - -
(Registrant)
Date: 1/13/97 /s/ Neal A. Kempler
--------------------- ---------------------------------------
Neal A. Kempler, Vice President
and Secretary
Date: 1/13/97 /s/ Joel H. Alperstein
--------------------- ---------------------------------------
Joel H. Alperstein, Director of Finance
(Principal Financial Officer)
-10-
EXHIBIT 11
CALCULATION OF EARNINGS PER COMMON SHARE
FOR THE QUARTER AND SIX MONTHS ENDED NOVEMBER 30, 1996
<TABLE>
<CAPTION>
Primary Primary Fully Diluted Fully Diluted
Quarter Six Months Quarter Six Months
-------------------------------------------------------------
<S> <C> <C> <C> <C>
CSE's:
Common Stock 4,100,420 4,100,420 4,100,420 4,100,420
Series 2 Preferred (CSE) 970,450 970,450 970,450 970,450
Debentures (non-CSE):
# bonds 189 189 189 189
x conversion rate 200 200 200 200
-------------------------------------------------------------
# shares under bonds outstanding 37,800 37,800 37,800 37,800
x exercise price 5 5 5 5
-------------------------------------------------------------
= cash generated 189,000 189,000 189,000 189,000
Market price of common stock:
Average $0.25 $0.25
Closing $0.15625 $0.15625
# treasury shares that could be repurchased 756,000 756,000 1,209,600 1,209,600
-------------------------------------------------------------
Incremental # shares 0 0 0 0
Warrants & options:
# options & warrants outstanding 5,380,763 5,380,763 5,380,763 5,380,763
x exercise price = cash generated 2,463,981 2,463,981 2,463,981 2,463,981
Market price of common stock:
Average $0.25 $0.25
Closing $0.15625 $0.15625
# treasury shares that could be repurchased 9,855,924 9,855,924 15,769,478 15,769,478
-------------------------------------------------------------
Incremental # shares 0 0 0 0
Total CSE 4,100,420 4,100,420 4,100,420 4,100,420
-------------------------------------------------------------
Debentures "if converted" 37,800 37,800
EARNINGS PER SHARE:
Preferred Stock Excluded:
Net income (52,977) (15,241) (52,977) (15,241)
Subtract: preferred stock dividends 87,342 174,684 87,342 174,684
Add: interest expense on non-CSE debt 4,489 8,978
-------------------------------------------------------------
(140,319) (189,925) (135,830) (180,948)
Divided by #CSEs + non-CSE debt 4,100,420 4,100,420 4,138,220 4,138,220
-------------------------------------------------------------
EPS (0.03) (0.05) (0.03) (0.04)
Preferred Stock Included:
Net income (52,977) (15,241) (52,977) (15,241)
Add: interest expense on non-CSE debt 4,489 8,978
-------------------------------------------------------------
(52,977) (15,241) (48,488) (6,264)
Divided by #CSEs + non-CSE debt 5,070,870 5,070,870 5,108,670 5,108,670
-------------------------------------------------------------
EPS (0.01) (0.00) (0.01) (0.00)
</TABLE>
(Preferred Stock is anti-dilutive so it is not included in EPS.)
(Debt is Determined to be non-CSE due to the interest rate test.)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial
information extracted from the Company's Form
10-QSB for the quarter ended November 30, 1996 and
is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-1-1996
<PERIOD-END> NOV-30-1996
<EXCHANGE-RATE> 1
<CASH> 605,203
<SECURITIES> 0
<RECEIVABLES> 252,058
<ALLOWANCES> (19,851)
<INVENTORY> 0
<CURRENT-ASSETS> 914,327
<PP&E> 1,671,059
<DEPRECIATION> (1,083,511)
<TOTAL-ASSETS> 1,687,639
<CURRENT-LIABILITIES> 488,142
<BONDS> 0
0
3,882
<COMMON> 41,004
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,687,639
<SALES> 0
<TOTAL-REVENUES> 2,549,303
<CGS> 0
<TOTAL-COSTS> 1,764,060
<OTHER-EXPENSES> 797,895
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (14,744)
<INCOME-PRETAX> (15,241)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,241)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,241)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.04)
</TABLE>
