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 August 31, 1997
----------------------------------------
[_] 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
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(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
October 10, 1997 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
<TABLE>
<CAPTION>
AVESIS INCORPORATED
BALANCE SHEET
AS OF AUGUST 31, 1997
ASSETS
------
<S> <C>
Current assets:
Cash and cash equivalents $ 924,282
Receivables, net 288,799
Prepaid expenses and other 89,199
-----------
Total current assets 1,302,280
Property and equipment, net 215,729
Deferred debenture issuance costs, net 600
Deposits 247,913
-----------
Total Assets $ 1,766,522
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 593,292
Accrued expenses-
Compensation 50,341
Other 41,773
Convertible subordinated debentures 189,000
Less unamortized debenture discount (635)
Notes payable to stockholders 160,000
Deferred income 15,118
-----------
Total current liabilities 1,048,889
Accrued rent 86,953
-----------
Total liabilities 1,135,842
-----------
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
20,000,000 shares; 4,100,420 shares issued and outstanding 41,004
Additional paid-in capital 9,949,158
Accumulated deficit (9,363,364)
-----------
Net stockholders' equity 630,680
-----------
$ 1,766,522
===========
</TABLE>
The accompanying notes are an integral part of these statements.
-2-
<PAGE>
AVESIS INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED AUGUST 31, 1997 AND 1996
(Unaudited)
Quarters Ended
August 31 August 31
--------------------------
1997 1996
----------- -----------
Service revenues:
Administration fees $ 1,364,712 $ 912,084
Buying group sales 418,530 388,629
Provider fees 26,466 34,051
Other 1,504 14,277
----------- -----------
Total service revenues 1,811,212 1,349,041
Cost of services 1,382,649 888,809
----------- -----------
Income from services 428,563 460,232
General and administrative expenses 227,139 254,965
Selling and marketing expenses 143,260 166,384
----------- -----------
Income from operations 58,164 38,883
Non-operating income (expense):
Other income 1,710 --
Interest income 8,753 6,238
Interest expense (7,385) (7,385)
----------- -----------
Net non-operating income (expense) 3,078 (1,147)
----------- -----------
Net income $ 61,242 $ 37,736
=========== ===========
Net income per common share $ (.00) $ (.01)
=========== ===========
The accompanying notes are an integral part of these statements.
-3-
<PAGE>
AVESIS INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED AUGUST 31, 1997 AND 1996
(Unaudited)
Quarters Ended
1997 1996
--------- ---------
Cash flows from operating activities:
Net income $ 61,242 $ 37,736
--------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 25,609 41,634
Provision for losses on accounts receivable -- (154)
Changes in assets and liabilities:
Decrease in receivables 51,557 74,371
Decrease in prepaid expenses 10,317 11,112
(Increase) in other assets (48,775) --
Increase (Decrease) in accounts payable 128,917 (2,496)
(Decrease) in accrued expenses (50,298) (20,291)
(Decrease) in deferred income (8,114) (9,035)
(Decrease) Increase in accrued rent (5,091) 4,114
--------- ---------
Total adjustments 104,122 99,255
--------- ---------
Net cash provided by operating activities 165,364 136,991
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (58,617) (62,582)
--------- ---------
Net cash used in investing activities (58,617) (62,582)
--------- ---------
Cash flows from financing activities:
--------- ---------
Net cash used in financing activities -- --
--------- ---------
Net increase in cash and cash equivalents 106,747 74,409
Cash and cash equivalents at beginning of period 817,535 436,083
--------- ---------
Cash and cash equivalents at end of period $ 924,282 $ 510,492
========= =========
Supplemental information:
- -------------------------
Interest paid during the period:
Debentures -- --
Notes payable to stockholders -- --
The accompanying notes are an integral part of these statements.
-4-
<PAGE>
AVESIS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996
(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 include all adjustments, which are all of a
normal recurring nature, necessary in order to make the financial
statements not misleading, 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 August 31, 1997, are not
necessarily indicative of the results to be expected for any other period
or the complete fiscal year.
2. For the quarter ended August 31, 1997, 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 for the
quarter) 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 Quarters Ended August 31, 1997 and 1996
The statements contained in this discussion and analysis regarding management's
anticipation of adequacy of cash reserves for operations, adequacy of reserves
for claims, adequacy of capital allocation for debentures, sustained viability
of the Company, continued positive cash flows and increased marketability of the
Company, constitute "forward-looking" statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Management's anticipation is
based upon assumptions regarding the market in which the Company operates, the
level of competition, demand for services, stability of costs, retention of
sponsors and cardholders enrolled in the Company's benefit programs, and
stability of the regulatory environment. Any of these assumptions could prove
inaccurate, and therefore there can be no assurance that the forward-looking
information will prove to be accurate.
Avesis Incorporated, a Delaware corporation (together with its subsidiary, the
"Company"), incorporated in June 1978, markets and administers dental,
chiropractic, vision and hearing managed care and discount programs ("Programs")
nationally which are designed to enable participants ("Members"), who are
enrolled through various Sponsoring organizations such as insurance carriers,
Blue Cross and Blue Shield organizations, corporations, unions and various
associations ("Sponsors"), to realize savings on purchases of products and
services through networks of providers such as dentists, chiropractors,
opticians, optometrists, ophthalmologists and hearing specialists ("Providers").
The Company derives its administration fee revenue from plan Sponsors who
customarily pay a set fee per member per month. There are arrangements with
certain Sponsors to pay for services rendered by the Company on a fee for
service basis. Based upon the type of program (e.g., managed care, discount,
third party administration) the Provider's claim for service provided to Members
is paid either by the Company, Sponsor, Member or combination thereof. Buying
group revenues are recorded as the total amount billed to participating
Providers. Vision Provider fee revenue is based upon a percentage of materials
sold by certain participating providers under certain plans.
Results of Operations:
- ----------------------
The Company's total service revenues totaled $1,811,212 for the quarter ended
August 31, 1997, compared to $1,349,041 for the same period in fiscal 1996,
representing a increase of $462,171 (34%). The increase is principally due to
the addition of a vision plan Sponsor who added approximately 95,000 cardholders
during January 1997 and a second vision plan Sponsor who added approximately
130,000 cardholders during July 1997.
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 to Sponsors depending on whether the
benefit is funded in part or whole by the plan Sponsor. A substantial portion of
the Company's cardholder base is derived from a limited number of sponsors.
Administration fees from the Company's vision and hearing programs accounted for
$1,057,207 (58%) and $535,342 (40%) of total service revenues during the
quarters ended August 31, 1997 and 1996, respectively. There were approximately
579,000 vision and 7,000 hearing cardholders as of August 31, 1997, compared to
approximately 356,000 vision and 82,000 hearing cardholders as of August 31,
1996. The increase in vision and hearing revenue during the current quarter was
the result of the two new vision plan Sponsors mentioned above. The decrease in
hearing cardholders was largely due to the discontinuation of services for two
hearing plan Sponsors with approximately 70,000 total cardholders. The loss of
hearing cardholders did not have a material impact on total service revenues.
The other changes in the number of vision and hearing cardholders were due to
Sponsors' employee or Member fluctuations. Vision provider fee revenue declined
by $7,585 (22%) during the quarter ended August 31, 1997, as compared to the
same period in fiscal 1996 due in part to a modification of the Company's
agreements with its Providers in response to competitive pressures. 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.
-6-
<PAGE>
Administration fees from the Company's dental program accounted for $297,389
(16%) and $409,891 (30%) of total service revenues during the quarters ended
August 31, 1997 and 1996, respectively. There were approximately 124,000 and
112,000 dental cardholders as of August 31, 1997 and 1996, respectively. The
Company's dental program revenue has decreased while the number of dental
cardholders has increased due to pricing differences among the different plan
benefits, as discussed above. The changes in the number of dental cardholders
were due to Sponsors' Member and employee fluctuations.
The Company makes available to its Providers a buying group program that enables
the Provider to order eyeglass 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 $418,530 (23%) and $388,629 (29%) for the
quarters ended August 31, 1997 and 1996, respectively.
The cost of services increased by $493,840 (56%) to $1,382,649 during the
quarter ended August 31, 1997 from $888,809 during the quarter ended August 31,
1996. These costs relate to servicing cardholders, Providers, and Sponsors under
the Company's vision, hearing, dental and chiropractic 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 quarter
was primarily due to the payment of benefits for Members of the new plan
Sponsors of approximately $432,000, which did not exist in the prior year, and
an increase of other benefit payments for other plans of approximately $53,000.
The Company's cost of services increased as a percentage of total service
revenues due to a shift in product mix from discount to managed care programs
which have greater associated costs due to additional customer service and
claims payment functions.
General and administrative expenses were $227,139 during the quarter ended
August 31, 1997, which represents a decrease of $27,826 (11%) compared to the
same period in fiscal 1996. The decrease in general and administrative expenses
in the quarter ended August 31, 1997 as compared to the same period in fiscal
1996 is due to a decrease in personnel involved in the accounting and finance
functions, a decrease in rent expense resulting from the sublease of excess
office space, and a decrease in depreciation expense as the Company abandoned a
significant portion of software prior to the start of the current quarter.
Selling and marketing expenses were $143,260 during the quarter ended August 31,
1997, representing a decrease of $23,124 (14%) 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 period was primarily due to a decrease in personnel involved in the
Company's sales and marketing activities. 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.
Liquidity and Capital Resources
- -------------------------------
The Company had cash and cash equivalents of $924,282 as of August 31, 1997,
compared to $817,535 as of May 31, 1997. The increase of $106,747 was due
primarily to the Company's ability to reduce expenses, increase timely
collections of accounts receivable and advantageously time payments to vendors
during the quarter. 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 and cash provided from operations is expected to
allow the Company to sustain operations for at least the next twelve months.
During the first quarter of fiscal 1998 the Company entered into an agreement
with a third party to develop new software systems. The cost of the project,
including necessary hardware, of approximately $250,000 will be financed through
cash from operations.
As of August 31, 1997, the Company had $593,292 of Accounts Payable, compared to
$218,412 in the prior fiscal year. The increase is predominately due to reserves
for claims of $286,472 in the current year for the two new Sponsors, for claim
reimbursements to Providers who participate in certain managed care programs.
The Company believes this reserve is conservative and adequate.
-7-
<PAGE>
As of August 31, 1997, the Company had $189,000 of Convertible Subordinated
Debentures, less $635 of unamortized discount, due December 1, 1997 and $160,000
of subordinated notes payable to stockholders due March 18, 1998. The Company
has allocated the required capital to repay the debenture holders upon maturity
and has reported the amount on the Balance Sheet in cash and cash equivalents.
The Company signed a new lease agreement for office space during the first
quarter of fiscal 1998, and is scheduled to move the weekend of October 17,
1997. The Company's new office lease agreement is expected to reduce monthly
rent expense by approximately $6,000 as compared to the monthly rent expense
paid for the prior office space, which has been subleased at a rate at least
equal to the Company's expense.
-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 October 1997, on shares of its Series 2 Preferred
Stock. The dividend is cumulative. The arrearage is $1,747,340 as of
September 30, 1997.
Item 5. Other Information
Effective October 17, 1997, the Company will move its principal executive
offices to:
3724 North Third Street
Suite 300
Phoenix, Arizona 85012
(602) 241-3400
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 August 31, 1997.
-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: October 13, 1997 /s/ Neal A. Kempler
------------------------ ----------------------------------------
Neal A. Kempler, Vice President
and Secretary
Date: October 13, 1997 /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 Ended August 31, 1997
Primary Fully Diluted
-----------------------------
CSE's:
Common Stock 4,100,420 4,100,420
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 $ 0.2864
Closing $ 0.23375
# treasury shares that could be repurchased 659,929 808,556
-----------------------------
Incremental # shares 0 0
Warrants & options:
# options & warrants outstanding 5,360,000 5,360,000
x exercise price = cash generated 2,458,818 2,458,818
Market price of common stock:
Average $ 0.2864
Closing $ 0.23375
# treasury shares that could be repurchased 8,585,432 10,519,008
-----------------------------
Incremental # shares 0 0
-----------------------------
Total CSE 4,100,420 4,100,420
=============================
Debentures "if converted" 37,800
===========
EARNINGS PER SHARE:
Net income 61,242 61,242
Subtract: preferred stock dividends 87,342 87,342
-----------
Add: interest expense on non-CSE debt 4,489
-----------------------------
(26,100) (21,611)
Divided by #CSEs + non-CSE debt 4,100,420 4,138,220
-----------------------------
EPS (0.00) (0.00)
=============================
Net income 61,242 61,242
Add: interest expense on non-CSE debt 4,489
-----------------------------
61,242 65,731
Divided by #CSEs + non-CSE debt 5,070,870 5,108,670
-----------------------------
EPS 0.01 0.01
=============================
(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 August 31,
1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-31-1997
<EXCHANGE-RATE> 1
<CASH> 924,282
<SECURITIES> 0
<RECEIVABLES> 308,650
<ALLOWANCES> (19,851)
<INVENTORY> 0
<CURRENT-ASSETS> 1,302,280
<PP&E> 1,241,457
<DEPRECIATION> (1,025,728)
<TOTAL-ASSETS> 1,766,522
<CURRENT-LIABILITIES> 1,048,889
<BONDS> 0
0
3,882
<COMMON> 41,004
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,766,522
<SALES> 0
<TOTAL-REVENUES> 1,811,212
<CGS> 0
<TOTAL-COSTS> 1,382,649
<OTHER-EXPENSES> 370,399
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (7,385)
<INCOME-PRETAX> 61,242
<INCOME-TAX> 0
<INCOME-CONTINUING> 61,242
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,242
<EPS-PRIMARY> (.00)
<EPS-DILUTED> (.00)
</TABLE>
