Securities and Exchange Commission
Washington D.C. 20549
AMENDMENT NO. 1 TO
Form 10-KSB/A
(Mark One)
[ X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1996
--------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from facilities ___________ 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)
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value per share; Preferred Stock, $10 Class A Nonvoting Cumulative, Series 2
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
---- ----
[ ] Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and will not 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.
Page 1 of 5
<PAGE>
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 closing 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 $951,890. 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 2 of 5
<PAGE>
Avesis Incorporated (the "Company") hereby amends its Report on Form
10-KSB for the year ended May 31, 1996 by replacing the complete text of Items 7
and 13, thereto, as set forth below.
PART II
Item 7. Financial Statements.
Financial Statements appear commencing at page F-1 immediately
hereafter.
Page 3 of 5
<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
Buying group 1,554,757 1,588,775
Other 95,645 103,483
------------------ ------------------
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). The Company also 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.
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, in
accordance with generally accepted accounting principles, during the
month that the member is entitled to use the benefit. Substantially all
administrative fee revenue is received in the month the member is
entitled to use the benefit. Any amounts received in advance are recorded
as deferred income and recognized ratably over the membership period.
Provider fee revenue, based on member utilization, is recognized when the
service is performed. Buying group revenue is recognized in the month the
providers purchase merchandise through the Company.
Stock Options and Warrants
All stock options and warrants are granted at fair market value or
greater on the date of grant (notes 8 and 9).
F-6
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
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.
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
=================
F-7
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(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
=================
(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.
F-8
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
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
================
(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.
F-9
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
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 $ --
===============
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.
F-10
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
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
===============
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.
The management agreement discussed above and related transactions with
NHE and certain other substantial were structured and negotiated for the
Company by Richter & Co., Inc. (RCI), a New York investment banking firm,
whose principal, William L. Richter, is a member of the Company's Board
of Directors, which received cash consideration of $50,000 and ten-year
warrants to purchase 400,000 shares of common stock. 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.
F-11
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(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.
(10) Major Customers
The Company's programs and services are offered throughout the United
States. Most of the Company's customers are located in the southwestern
states, the D.C. metropolitan area, and Florida. Two major customers
provided 27% and 13% 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.
F-12
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
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. Additionally, the Company has contracted with the same Company to
lease its computer system for approximately $2,500 per month.
The Company entered into a Registration Rights Agreement (the
"Registration Rights Agreement") effective March 18, 1993 with NHE, and
two Directors. The Registration Rights Agreement provides two demand
registrations with respect to 100,000 shares previously purchased and the
shares issuable pursuant to the ten-year options discussed in note 8
("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 marketing prices.
The Company entered into an agreement with a director of the Company, a
principal of NHE, and an individual 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 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.
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.
F-13
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(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.
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.
F-14
<PAGE>
PART IV
-------
Item 13. Exhibits and Reports on Form 8-K
(a) See Exhibit index following Signatures Page which is
incorporated herein by this reference.
(b) Reports on Form 8-K.
Not applicable.
Page 4 of 5
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities and Exchange
Act of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AVESIS INCORPORATED
- - - - - - - - - - - - - - - - - - - - - - - - - -
(Registrant)
Date: 2/05/97 /s/ Neal A. Kempler
---------------------------- --------------------------------------
Neal A. Kempler, Vice President
and Secretary
Date: 2/05/97 /s/ Joel H. Alperstein
---------------------------- ---------------------------------------
Joel H. Alperstein, Director of Finance
(Principal Financial Officer)
Page 5 of 5
<PAGE>
EXHIBIT INDEX TO
AMENDMENT NO. 1 TO
FORM 10-KSB/A
The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<C> <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)
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)
</TABLE>
<PAGE>
<TABLE>
<C> <C>
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)
11 Statement recomputation of per-share earnings (filed herewith)
21 Subsidiary of Registrant (13)
27 Amended 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).
(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 (File No. 1-9758).
</TABLE>
<PAGE>
<TABLE>
<C> <C>
(11) Incorporated by reference from the Company's Report on Form 10-QSB for the three months ended
February 28, 1995 (File No. 1-9758).
(12) Incorporated by reference form the Company's Report on Form 10-QSB for the three months ended
August 31, 1995 (File No. 1-9758).
(13) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended
May 31, 1996 (File No. 1-9758).
</TABLE>
EXHIBIT 11
CALCULATION OF EARNINGS PER COMMON SHARE
FOR THE YEAR ENDED MAY 31, 1996
<TABLE>
<CAPTION>
Primary Fully Diluted
----------------------------------------
<S> <C> <C>
CSE's:
Common Stock 4,079,530 4,079,530
Series 2 Preferred (CSE) 970,450 970,450
Debentures (non-CSE):
# bonds 189 189
x conversion rate 200 200
----------------------------------------
# shares under bonds outstanding 37,800 37,800
x exercise price 5 5
----------------------------------------
= cash generated 189,000 189,000
Market price of common stock:
Average $0.90
Closing $0.6875
# treasury shares that could be repurchased 210,073 274,909
----------------------------------------
Incremental # shares 0 0
Warrants & options:
# options & warrants outstanding 5,380,763 5,380,763
x exercise price = cash generated 2,413,218 2,413,218
Market price of common stock:
Average $0.90
Closing $0.6875
# treasury shares that could be repurchased 2,682,285 3,510,136
----------------------------------------
Incremental # shares 0 0
----------------------------------------
Total CSE 4,079,530 4,079,530
========================================
Debentures "if converted" 37,800
=================
EARNINGS PER SHARE:
Net income (124,859) (124,859)
Subtract: preferred stock dividends 349,162 349,162
--------------------
Add: interest expense on non-CSE debt 8,978
----------------------------------------
(474,021) (465,044)
Divided by #CSEs + non-CSE debt 4,079,530 4,117,330
----------------------------------------
EPS (0.12) (0.11)
========================================
Net income (124,859) (124,859)
Add: interest expense on non-CSE debt 8,978
----------------------------------------
(124,859) (115,882)
Divided by #CSEs + non-CSE debt 5,049,980 5,087,780
----------------------------------------
EPS (0.02) (0.02)
========================================
</TABLE>
(Preferred Stock is anti-dilutive so it is not included in EPS.) (Warrants and
options are anti-dilutive and are 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-KSB/A for the year ended May 31, 1996 and is
qualified in its entirety by reference to such
Form 10-KSB/A.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-1-1995
<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> 1,641,984
<DEPRECIATION> (1,015,686)
<TOTAL-ASSETS> 1,650,527
<CURRENT-LIABILITIES> 441,644
<BONDS> 0
0
3,882
<COMMON> 41,004
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,650,527
<SALES> 0
<TOTAL-REVENUES> 6,019,896
<CGS> 0
<TOTAL-COSTS> 3,916,304
<OTHER-EXPENSES> 2,190,390
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,786
<INCOME-PRETAX> (124,859)
<INCOME-TAX> 0
<INCOME-CONTINUING> (124,859)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (124,859)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.11)
</TABLE>
