SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended May 31, 1998 or
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
----------- ------------
Commission File Number: 0-15304
AVESIS INCORPORATED
----------------------------------------------
(Name of small business issuer in its charter)
Delaware 86-0349350
- ------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) No.)
3724 North Third Street, Suite 300
Phoenix, Arizona 85012
- ------------------------------- ----------
(Address of principal executive (Zip Code)
offices)
Issuer's telephone number: (602) 241-3400
-----------------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock &
$l0 Class A Nonvoting Cumulative Convertible Preferred Stock, Series 2
----------------------------------------------------------------------
(Title of Class)
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 [ ]
<PAGE>
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B is not contained in this form, and no
disclosure will 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. [ ]
State issuer's revenues for its most recent fiscal year:
$8,336,631.
The aggregate market value of the voting common stock held by
non-affiliates of the registrant, based upon the average of the last 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 24, 1998 was $400,990. 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 24, 1998 was 8,243,185.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE>
AVESIS INCORPORATED
FORM l0-KSB ANNUAL REPORT
YEAR ENDED MAY 31, 1998
TABLE OF CONTENTS
PART I
------
Page
ITEM l. Description of Business ...........................................1
ITEM 2. Description of Properties .........................................6
ITEM 3. Legal Proceedings .................................................7
ITEM 4. Submission of Matters to a Vote of
Security Holders ..................................................7
PART II
-------
ITEM 5. Market for Common Equity and
Related Stockholder Matters .......................................8
ITEM 6. Management's Discussion and Analysis or Plan
of Operation......................................................12
ITEM 7. Financial Statements .............................................16
ITEM 8. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure ...........................17
PART III
--------
ITEM 9. Directors, Executive Officers, Promoters,
and Control Persons; Compliance with Section 16(a)
of the Exchange Act ..............................................17
ITEM 10. Executive Compensation ...........................................21
ITEM 11. Security Ownership of Certain Beneficial
Owners and Management ............................................22
ITEM 12. Certain Relationships and Related Transactions....................25
ITEM 13. Exhibits and Reports on Form 8-K .................................27
SIGNATURES ..................................................................28
<PAGE>
PART I
------
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Avesis Incorporated, a Delaware corporation (together with its
subsidiary, Avesis of Washington, D.C., Inc., the "Company"), incorporated in
June 1978, markets and administers vision, dental, chiropractic and hearing
managed care and discount programs ("Programs") nationally. The Programs are
designed to enable participants ("Members"), who are enrolled through various
Sponsoring organizations such as insurance carriers, HMOs, 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 opticians, optometrists, ophthalmologists,
dentists, chiropractors and hearing specialists ("Providers").
Administration fee and provider fee revenue has been derived from the product
lines in the following proportions:
Fiscal Years Ended May 31,
--------------------------
1998 1997
---- ----
Vision and Hearing Programs 80% 69%
Dental Program 20% 31%
Chiropractic Program 0% 0%
VISION PROGRAM
The Company offers provider networks and administrative
services for group vision programs. Its Vision Program is designed to provide
savings by reducing the cost of eye examinations and vision products (frames,
eyeglass lenses and contact lenses).
Under the Company's Vision Program, a Member is entitled to
discounted pricing that Providers offer for eye examinations and the purchase of
eyewear at network Provider locations. The Member is fully responsible for
paying the Provider unless the Sponsor (a self-funding employer or insurer) is
obligated to pay the Provider, or reimburse the Member. In some cases, the
Company may act as a third party administrator for the Sponsor and pay such
claims from funds provided by the Sponsor for that purpose.
Under some Programs, each Member pays an annual enrollment fee
to the Company for the right to utilize network Providers and receive discounts.
In other cases, typically involving Sponsors who pay benefits, the Sponsors pay
an enrollment fee for each Member.
1
<PAGE>
If the Program has insured or self-funded benefits, the
Sponsor determines the products and services which will be covered, how
frequently the benefit is available and, subject to local law, whether
reimbursement for non-network Provider purchases will be made.
The Company principally derives revenues from fees paid by or
on behalf of Members for enrollment, plan administration and services, and
claims administration, and in certain cases also derives revenues from fees paid
by Providers when Members purchase eyewear and services.
The table below sets forth the approximate numbers of
Providers and Members enrolled in the Vision Program at the dates indicated:
Date Number of Number of Number of
---- Providers States Members
--------- ------ -------
May 31, 1998 4,550 48 649,000
May 31, 1997 3,220 48 385,000
Substantially all of the Providers indicated above are optometrists. The numbers
of Members indicated in the above table are as reported to the Company by
Sponsors and generally do not include eligible spouses and children of Members.
The Company administers a buying group for vision Providers so
that they may take advantage of volume buying discounts for eyeglass frames. The
Company has entered into arrangements with certain frame manufacturers that
enable Providers to obtain frames at prices below wholesale. The Company is
billed directly by the frame manufacturers and is responsible for the billing
and collection of amounts due from the Providers. The Company receives a
discount, above the amount given to the Providers, by the frame manufacturers to
pay for the cost of administering the buying group program. Providers are not
obligated to purchase from designated suppliers.
HEARING PROGRAM
The Company's hearing program (the "Hearing Program") has been
marketed principally as an adjunct to the Vision Program. Revenues from the
Hearing Program have not been significant. A Hearing Program Member may obtain a
hearing evaluation by a Provider for a reduced fee. In addition, the Member may
purchase a hearing aid from a Provider at wholesale cost plus a professional fee
or at a discount from the Provider's usual charge, depending on the options
selected by the Plan Sponsor. Such benefits are also available to the Member's
spouse, children, parents and grandparents.
2
<PAGE>
DENTAL PROGRAM
The Company establishes and maintains dental Provider networks
that it also makes available to Sponsors. Fees charged to Members by Providers
are based upon panel fee schedules that the Providers have agreed to accept.
Similar to the Vision Program, the Company's dental program (the "Dental
Program") is offered both for Members who are themselves responsible for paying
100% of the costs of their care to their Providers, and for Programs under which
the Sponsor assumes the obligation of paying Providers (or reimbursing Members)
for the agreed-upon costs of specified care. Revenues from the Dental Program
principally are derived in the same manner as the Vision Program.
The table below sets forth the approximate number of Providers
and Members enrolled in the Dental Program at the dates indicated, as reported
to the Company by Sponsors:
Date Number of Number of Number of
---- Providers States Members
--------- ------ -------
May 31, 1998 10,683 43 123,000
May 31, 1997 11,082 43 118,000
Included in the number of providers in the table above as of May 31, 1998 and
1997 are 5,553 and 6,180 providers, respectively, who participate in a third
party's Provider network. The Company has a network rental agreement that allows
Members to utilize the services of the third party's Provider network.
See also Item 6 - "Management's Discussion and Analysis or Plan of Operation."
CHIROPRACTiC PROGRAM
The Company has developed a program for the delivery of
chiropractic services. Members pay reduced fees to the Provider for history and
physical examinations, spinal manipulation, non-manual procedures,
physiotherapy, acupuncture and additional care. The Company derived its first
revenues from the chiropractic program in the first quarter of fiscal 1997.
Although the Company has not generated significant revenues from the
Chiropractic Program, the Program is important as it enables the Company to
offer to Sponsors a complete line of ancillary benefits.
3
<PAGE>
PROVIDER NETWORKS
The Company usually contracts with Providers to provide
services simultaneously with the plan Sponsor's development of a membership base
in a geographic area; however, some Providers are enlisted in expansion areas
where there currently is little or no membership base. The Programs supplement
the practices of Providers by enabling them to obtain additional patients who
are Members while allowing Providers to retain their existing practices.
Although Members generally pay fees and charges less than those of non-Member
patients, the incremental revenues from Member patients can be an important
source of revenue to Providers. There can be no assurance that Providers will
continue to participate in the Programs even if their participation results in
such an increase in revenues since the portion of their practices derived from
the Programs may become less profitable than other aspects of their practices.
The Company periodically reviews a portion of the Providers.
This review includes a patient survey form which is distributed on a random
basis by the Company to Members, the investigation of any complaints received
from Members and a desk or field audit by a Company auditor to confirm that
Members were not charged more than the contracted prices for services and
products.
PROGRAM ADMINISTRATION AND ADMINISTRATION OF CLAIMS
The Company receives fees from Sponsors for program
administration services. These fees vary depending upon the type of program
involved, the number of card-holding Members in a Sponsor's program, and the
extent of claims administration and other administrative services involved.
When the Company acts as a third party administrator for
Programs under which the Sponsor pays for Provider services, Members obtaining
services from Providers present their cards to the Providers, who in certain
cases contact the Company to confirm eligibility and, upon performance of
services, submit claim forms to the Company. The Company processes the claims,
requests funds from the appropriate Sponsors, and forwards payments to the
Providers and/or Members from the funds received from Sponsors. Monthly
information about the use of the Programs by Members and cost savings is
reported to certain Sponsors.
Although the Company does not believe it would have any
liability due to any malpractice on the part of any Provider, the usual form of
Provider Agreement requires each Provider to indemnify the Company against any
claim based on the negligence of the Provider in the performance of services for
Members. In addition, Providers are required to carry malpractice insurance with
limits equal to or greater than their state required minimums.
4
<PAGE>
MARKETING
The Company markets nationally to potential Sponsors that have
or have access to a large number of potential Members. Marketing is done through
the efforts of the Company's sales personnel and unaffiliated insurance brokers,
general agents and employee benefit consultants compensated on a commission
basis. Substantial marketing services are also provided through National Health
Enterprises, Inc. ("NHE"). See Item 12 - "Certain Relationships and Related
Transactions - Agreements with National Health Enterprises, Inc." See also Item
6 - "Management's Discussion and Analysis or Plan of Operations - Results of
Operations."
The Company's sales and marketing personnel market the full
range of the Company's products and services. The Company believes that offering
a range of products and services in multiple product lines differentiates it
from its competitors and enables it to offer a more comprehensive solution to
its customers' benefits needs.
Three major customers accounted for 28%, 15% and 10% of total
service revenues in fiscal 1998 and three major customers accounted for 17%, 15%
and 14% in fiscal 1997. The Company is substantially dependent on a limited
number of customers and will be materially adversely affected by termination of
its agreements with such customers.
COMPETITION
The Company competes for potential Sponsors, Members and
Providers, depending on the geographic area or market, with various provider
organizations, health maintenance organizations and health care membership
programs. Most of these competitors have significantly greater financial,
marketing and administrative resources than the Company. The Company believes it
has a competitive advantage as it is able to offer a full line of ancillary
benefits while substantially all of its competitors concentrate on one benefit
line.
5
<PAGE>
REGULATION
Certain registration and licensing laws and regulations
(including those applicable to third party administrators, preferred provider
organizations, franchises and business opportunities) in many states in which
the Company operates may have application to various of the Company's programs.
In addition, statutes and regulations applicable to insurers and providers,
including those relating to fee splitting, referral fees, advertising, patient
freedom of choice, provider rights to participate and antidiscrimination in
reimbursement, may impact the Company. The Company believes that it is in
compliance with such laws and regulations as they are currently interpreted and
applicable to the Company. However, there can be no assurance that changes in
interpretation will not occur in the future or that existing laws and
regulations will not be broadened. In any such event, the Company could be
required to effect registration in various additional states and/or post
substantial fidelity or surety bonds in connection therewith. Alternatively, the
Company may be required to alter its services, modify its contractual
arrangements with Sponsors, Providers and Members, be precluded from providing
some or all of its services in some states, or be subject to substantial fines
or penalties. Any or all of the foregoing consequences could materially
adversely affect the Company.
EMPLOYEES
As of August 10, 1998, the Company had 42 full-time and 2
part-time employees, compared to 38 total employees as of August 20, 1997. The
Company believes that its relationship with its employees is good.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company maintains its executive offices at 3724 North
Third Street, Suite 300, Phoenix, Arizona 85012, in space leased from an
unaffiliated party. The lease covers approximately 6,700 usable square feet and
expires on September 30, 2002.
Until October 1997 the Company maintained its executive
offices at 100 West Clarendon, Suite 2300, Phoenix, Arizona 85013. The lease
agreement covers approximately 13,300 usable square feet of space and expires on
September 30, 2000. On October 29, 1996 the Company entered into an agreement to
sublease approximately 9,090 usable square feet of space through October 1, 1997
and all 13,300 usable square feet thereafter, until the expiration of the
Company's lease agreement. For the years ended May 31, 1998 and 1997, rent
expense related to the subleased premises was $159,623 and $25,688,
respectively, and sublease rental income was $161,720 and $27,692, respectively.
6
<PAGE>
The Company maintains sales and administrative offices at
11460 Cronridge Drive, Suite 118, Baltimore, Maryland 21117 and at 5321 First
Place NE, Washington, D.C. 20011. The offices are used pursuant to verbal
agreements with the lessees that are terminable at will and are at no cost to
the Company. The Company owns and leases various computer , data processing and
other office equipment. The Company believes that its facilities and equipment
are maintained in good operating condition and are adequate for the present
level of operations.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
7
<PAGE>
PART II
-------
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market Information. The Company's Common Stock and its $10
Class A Nonvoting Cumulative Convertible Preferred Stock, Series 2 ("Series 2
Shares") Shares are quoted in the over-the-counter market and quotations are
reported in the "pink sheets" published by the National Quotation Bureau, Inc.
and via the National Association of Securities Dealers' Inc. Electronic Bulletin
Board. The following table sets forth the high and low bid price for the
Company's Series 2 Shares and Common Stock as reported by the National Quotation
Bureau, Inc. for each quarterly period during fiscal 1998 and 1997. Such market
quotations reflect inter-dealer prices, without retail markup, markdown or
commission and may not represent actual transactions.
Series 2 Shares Common Stock
------------------- -------------------
Bid Quotation Range Bid Quotation Range
------------------- -------------------
Fiscal Year 1998 High Low High Low
---------------- ---- --- ---- ---
First Quarter ended Aug. 31, 1997 $1.25 $1.25 $0.25 $0.1875
Second Quarter ended Nov. 30, 1997 1.25 1.00 0.21875 0.15625
Third Quarter ended Feb. 28, 1998 1.125 1.0625 0.27 0.1875
Fourth Quarter ended May 31, 1998 1.125 1.125 0.27 0.1875
Fiscal Year 1997
----------------
First Quarter ended Aug. 31, 1996 $2.75 $2.50 $0.6875 $0.375
Second Quarter ended Nov. 30, 1996 2.50 1.00 0.4375 0.125
Third Quarter ended Feb. 28, 1997 1.00 1.00 0.2188 0.125
Fourth Quarter ended May 31, 1997 1.25 1.00 0.25 0.1875
RECENT EXCHANGE OFFER
During fiscal 1998 the Company completed an Exchange Offer
which offered one share of its Class A, Senior Nonvoting Cumulative Convertible
Preferred Stock, Series A, par value $.01 ("Series A Shares"), for each
outstanding share of the Class A, Nonvoting Cumulative Convertible Preferred
Stock, Series 2, par value $.01 ("Series 2 Shares"), of the Company. The purpose
of this offer was to eliminate or significantly reduce the number of Series 2
Shares outstanding including the related dividend arrearage and to adjust the
Company's capital structure.
The Exchange Offer expired on May 27, 1998, and resulted in
the tendering of 317,880 (approximately 82%) of the 388,180 outstanding Series 2
Shares for the Series A Shares.
8
<PAGE>
As of August 24, 1998, there were 6,500 Series 2 Shares outstanding,
with each share entitled to receive a cumulative dividend at an annual rate of
9% of the face value of $10.00 ($0.90 per share). Dividend arrearages on those
Series 2 Shares as of July 31, 1998 totaled $34,125 or $5.25 per share. As of
August 24, 1998, there were 315,260 Series A Shares outstanding, with each share
entitled to receive a cumulative dividend at an annual rate of $0.3375 per share
paid semi-annually. The Series A Share dividends shall accrue through the last
day of each semi-annual period and shall be payable to holders of record on the
last day of such semi-annual period, commencing June 1, 1998.
The exchange of the Series 2 Shares pursuant to the Exchange
Offer significantly reduced the number of the Series 2 Shares that trade
publicly and the number of holders of such shares and may adversely affect the
liquidity and the "pink sheet" market value of remaining shares. At the same
time, there is no assurance that any market will develop for the Series A Shares
issued pursuant to the Exchange Offer. The Series A Shares were not quoted
during fiscal 1998 and quotes are currently not available pursuant to the
National Quotation Bureau, Inc. and via the National Association of Securities
Dealers' Inc. Electronic Bulletin Board.
As of August 24, 1998, there were 8,243,185 shares outstanding
of the Common Stock of the Company held by approximately 165 stockholders of
record. Trading activity with respect to the Common Stock has been limited and
the volume of transactions should not of itself be deemed to constitute an
"established public trading market." A public trading market having the
characteristics of depth, liquidity and orderliness depends upon the existence
of market makers as well as the presence of willing buyers and sellers, which
are circumstances over which the Company does not have control.
Dividends. The Company has not paid any dividends on its
Common Stock since its inception and does not expect to pay dividends on its
Common Stock at any time for the foreseeable future. The Series A Shares are
senior in rights to annual dividends and redemptions to the Series 2 Shares.
Under the Certificate of Designation for the Series A Shares, no dividends may
be paid on the Series 2 Shares or the Common Stock until the Series A Shares
have received all current and cumulative dividends and the earliest of any of
the following events occur (i) every outstanding share of Series A Shares has
been either redeemed or converted, (ii) any time after May 31, 2005, or (iii)
the first day of any fiscal year following two consecutive fiscal years in which
the Company had net income and net cash flow in each year in excess of $1.5
million and the Company's tangible net equity at the end of the second fiscal
year is at least $5 million. Moreover, the terms of the Series 2 Shares provide
that as long as any of the Series 2 Shares remain outstanding, the Company may
not declare or pay any dividend, whether in cash or property, on the Common
Stock of the Company unless the full dividends on the Series 2 Shares for all
past dividend periods and the then current dividend period shall have been paid
or declared and a sum set aside for payment thereof.
Recent Sales of Unregistered Securities. On May 27, 1998 the
Company's Offer to Exchange one share of Class A, Senior Nonvoting Cumulative
Convertible
9
<PAGE>
Preferred Stock, Series A, par value $.01 for each outstanding share of Class A,
Nonvoting Cumulative Convertible Preferred Stock, Series 2, par value $.01
expired. The Offer resulted in 317,880 of the 388,180 outstanding Series 2
Shares being tendered for the Series A Shares.
The Exchange Offer was made by the Company in reliance on the
exemption from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), afforded by Section 3(a)(9) thereof and under
certain state law exemptions. The Company did not pay any commission or other
remuneration to any broker, dealer, salesman or other person for soliciting
tenders of the Series 2 Shares.
Each Series A Share is initially convertible into 10 shares of
Common Stock. This conversion ratio is subject to adjustment for any
subdivisions, combinations or any other adjustments made to the Company's Common
Stock.
Subsequent to year-end, on July 30, 1998 the Company's Board
of Directors approved a modification providing all outstanding stock option and
warrant holders the opportunity to exercise any or all of their vested options
and warrants at a discounted exercise price from their original grant, during
the period from August 1, 1998 to August 31, 1998. The discounted price was
calculated by discounting the stated exercise price of each stock option or
warrant by 10% per annum from the expiration date back to August 1998, and
rounding the calculated price to the nearest whole cent. The discounted price in
no case was allowed to be less than the prevailing market price of the Company's
common stock at the time of exercise of the options, defined as the high bid
price, and rounded to the nearest whole cent. After August 31, 1998, the
modification will expire and all terms will return to the original exercise
terms.
Pursuant to the revised terms, the following individuals
exercised their stock options or warrants as of August 24, 1998, in the
following amounts at the following exercise prices per option or warrant:
10
<PAGE>
Number of Number of Modified Exercise
Options Warrants Price
------- -------- -----
Option/Warrant Holder
Alan S. Cohn 1,054,750 $0.31
Alan S. Cohn 700,000 $0.26
Kenneth L. Blum, Jr. 1,064,750 $0.31
Kenneth L. Blum, Jr. 700,000 $0.26
William L. Richter 50,000 $0.31
William L. Richter 109,091 $0.31
William L. Richter 50,909 $0.26
Richter & Co., Inc. 72,500 $0.31
Richter & Co., Inc. 163,636 $0.31
Richter & Co., Inc. 76,364 $0.26
William R. Cohen 100,000 $0.26
The total cash received by the Company from the exercise of
the above stock options and warrants was $1,202,656. Of the preceding amount,
approximately $400,000 is expected to be used to repurchase all 931,888 shares
of the Company's common stock held by the founder of the Company, at a price of
$0.43 per share. The excess funds received from these transactions will be used
as working capital. The option exercises discussed above, post year-end stock
repurchases listed below and repurchase of the 931,888 shares of common stock
will increase stockholders' equity by approximately $555,000.
Retirement of Stock Information. Subsequent to year-end the
Company made the following stock repurchases:
Series A Series 2 Total Purchase Price
-------- -------- --------------------
Date Common Shares Shares Shares including Commissions
---- ------------- ------ ------ ---------------------
June 15, 1998 46,500 $ 10,950
June 24, 1998 123,441 2,620 $ 45,000
July 22, 1998 60,000 $180,000
July 28, 1998 1,000 $ 3,000
August 20, 1998 2,800 $ 8,400
SELECTED FINANCIAL DATA
The following table sets forth selected financial information
regarding the Company. This information should be read in conjunction with the
Company's Financial Statements and related notes and Management's Discussion and
Analysis or Plan of Operation included elsewhere in this Form 10-KSB.
The selected financial data for each of the five years in the
period ended May 31, 1998 have been derived from the Company's audited financial
statements. The selected financial data is not required by Form 10-KSB and is
included herein as additional information.
11
<PAGE>
<TABLE>
<CAPTION>
Years Ended May 31,
---------------------------------------------------------------------
Selected Operating Data: 1998 1997 1996 1995 1994(1)
- ------------------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 8,336,631 $ 5,645,276 $ 6,019,896 $ 6,351,106 $ 4,418,512
Operating expenses 8,010,021 5,739,503 6,106,694 5,986,897 4,620,972
Net income (loss) 313,875 (190,265) (124,859) 505,411 (134,550)
Net income (loss) per
common share - Basic (2)(3) .06 (.13) (.12) .02 (.12)
As of May 31,
--------------------------------------------------------------------
Selected Balance Sheet Data: 1998 1997 1996 1995 1994(1)
- ---------------------------- ---------- ---------- ---------- ---------- ----------
Working capital $ 350,418 $ 293,595 $ 422,922 $ 747,566 $ 229,740
Current assets 1,588,969 1,271,505 864,566 1,242,534 647,522
Total assets 2,241,705 1,639,389 1,650,527 1,839,377 1,195,831
Current liabilities 1,238,551 977,910 441,644 494,968 417,782
Long term obligations 90,475 92,044 449,183 484,850 423,901
Total liabilities 1,329,026 1,069,954 890,827 979,818 841,683
Total stockholders' equity 912,679 569,435 759,700 859,559 354,148
</TABLE>
(1) Reflects a restatement of certain amounts for fiscal 1994 to conform to the
1995, 1996, 1997 and 1998 presentation.
(2) After provision for preferred stock dividends as follows: $63,270 in 1998
(70,300 Series 2 Shares outstanding as of May 31, 1998 times $0.90 per
share); $349,162 in 1997, 1996 and 1995; and $349,590 in 1994.
(3) The expected preferred stock dividend accrual for Series 2 and Series A
Shares for fiscal 1999, using share amounts currently outstanding as
disclosed previously, is $112,250.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Management's Discussion and Analysis and Results of Operations For the Fiscal
Years Ended May 31, 1998 and 1997:
The statements contained in this discussion and analysis
regarding management's anticipation of adequacy of cash reserves for
operations, adequacy of reserves for claims, anticipated level of operating
expenses related to new cardholders, adequacy of capital allocation for
dividends, viability of the Company, cash flows and marketability of the
Company constitute "forward-looking" statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements involve risks
and uncertainties, which could cause actual results to differ materially from
the forward-looking statements. Management's anticipation is based upon
assumptions regarding the market in which the Company operates, the level of
competition, the level of demand for services, the stability of costs, the
retention of Sponsors and cardholders enrolled in the Company's benefit
programs, the relevance
12
<PAGE>
of the Company's historical performance, and the 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.
The Company derives its administration fee revenue from Plan
Sponsors who customarily pay a set fee per Member per month. Administration fee
revenue is recognized on the accrual basis during the month that the Member is
entitled to use the benefit. 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 at the total amount billed to participating Providers and recognized
in the month the merchandise is shipped. 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 in fiscal 1998 increased
48% from the prior fiscal year from $5,645,276 to $8,336,631. The increase was
primarily due to the growth of the Company's managed care vision products. The
Company was able to decrease operating expenses as a percentage of total
service revenues in fiscal 1998 by 6% compared to fiscal 1997, from $5,739,503
(102%) to $8,010,021 (96%). The Company anticipates that the trend of decreased
operating expenses as a percentage of total service revenues will continue
during fiscal 1999, due to the operational efficiencies achieved during fiscal
1998 and the expected efficiencies to be achieved related to the new systems
currently under development.
The Company's vision and hearing programs accounted for
$5,258,750 (63%) of total service revenues during fiscal 1998 compared to
$2,607,152 (46%) in fiscal 1997. The increase in vision and hearing revenues
primarily resulted from the addition of a significant Sponsor, with
approximately 121,000 managed care vision cardholders, and the growth in
membership of two other significant Sponsors, with approximately 104,000 new
managed care vision cardholders. Revenues derived from the Company's managed
care programs have a significantly higher cost of service than the revenues
derived from the Company's discount programs. There were approximately 649,000
vision and 6,000 hearing cardholders as of May 31, 1998, compared to
approximately 385,000 vision and 9,000 hearing cardholders as of May 31, 1997.
Vision provider fee revenue declined by $11,735 (9%) during
fiscal 1998 compared to fiscal 1997 due in part to a modification of the
Company's standard agreements with its providers that for certain new Sponsors,
the providers are not required to pay a fee based on gross sales to that
Sponsor's Members. The Company expects this trend of decreased vision provider
fee revenue to continue.
13
<PAGE>
The Company's dental program accounted for $1,266,548 (15%) of
total service revenues during the current fiscal year compared to $1,253,014
(22%) in fiscal 1997. Subsequent to year-end, a review of the membership
information a Sponsor was communicating to the Company resulted in
approximately $78,000 of additional revenue being recognized related to the
entire fiscal year. The Sponsor's membership is expected to continue for the
foreseeable future. There were approximately 123,000 dental cardholders as of
May 31, 1998, compared to approximately 118,000 as of May 31, 1997.
The Company makes available to its vision providers a buying
group program that enables the provider to purchase 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 $1,655,298
(20%) during fiscal 1998 compared to $1,582,899 (28%) in fiscal 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. The Company's current cardholder base principally is derived from a
limited number of Sponsors.
The cost of services increased approximately 45% in dollar
amount but decreased as a percentage of total service revenues by 2%, from
$4,206,964 (75%) during fiscal 1997 to $6,120,416 (73%) in fiscal 1998. These
costs primarily relate to servicing cardholders, provider network development,
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 Company expects the cost
of services to remain relatively constant as a percentage of total service
revenues for the foreseeable future, based upon the current anticipation that
the current mix of managed care and discount programs will continue.
General and administrative expenses decreased as a percentage
of total service revenues by 5%, from $1,027,054 (18%) during fiscal 1997 to
$1,121,099 (13%) during fiscal 1998. Included in current year general and
administrative expense is $142,000 of legal and professional fees directly
related to the Company's Offer to Exchange Series 2 Preferred shares for Series
A Preferred shares.
Selling and marketing expenses held steady as a percentage of
total service revenues at $505,485 (9%) and $768,506 (9%) during fiscal 1997
and 1998, respectively. Selling and marketing expenses include marketing fees,
broker commissions, employee sales and marketing salaries and related expenses,
travel related to the Company's sales activities and an allocation of other
overhead expenses relating to the Company's sales and marketing functions. A
significant amount of the Company's marketing activities has been outsourced to
management consultants,
14
<PAGE>
National Health Enterprises. See Item 12 - "Certain Relationships and Related
Transactions."
Non-operating expense was $96,038 and $12,735 in fiscal 1997
and 1998, respectively. Prior year non-operating expense included a loss
related to the disposal of software and a gain resulting from a review of the
assumptions related to the discontinued activity of providing claims processing
services for a pharmaceutical benefit plan. The Company determined during
fiscal 1997 to integrate the three separate computer systems (Data General,
AS400 and PC) then being run onto a single platform. Due to the recent
increases in the capabilities of the PC platform and the flexibility for growth
that this platform affords, it was deemed the best choice. As a result of this
decision, the Company discontinued the AS400 development project (See Item 12 -
"Certain Relationships and Related Transactions - Software Development
Services"), and expensed the capitalized costs related to software not placed
in service. Also, an outstanding liability related to programming fees of
$67,971 was forgiven as of fiscal year end. Current year non-operating expense
includes $25,373 for the write-off of unamortized moving expenses of $25,835
related to the Company's previous relocation of the principal office.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $993,610 as of
May 31, 1998, compared to $817,535 as of May 31, 1997. The increase of $176,075
is primarily due to the timing of vendor and claim 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 and cash
provided from operations is expected to allow the Company to sustain operations
for the foreseeable future.
During July 1997 the Company contracted with a third party
vendor to develop new systems to support the Company's claims payment, customer
and provider service, quality assurance and network development functions. As of
August 20, 1998, the new system was in the beta-testing phase and is expected to
be fully functional in early autumn 1998. As of May 31, 1998, the Company had
paid approximately $258,000 for software development and related hardware. The
Company expects to incur approximately $50,000 of additional software
development and related hardware expenses during the first six months of fiscal
1999.
15
<PAGE>
The Company has reviewed all internally used software and
believes that the new system and all other critical applications will be Year
2000 compliant. Based upon its current computer operations and systems
development, the Company believes that its risks related to Year 2000 compliance
issues is low. The Company is in the process of contacting all vendors and
clients who forward data electronically to determine the extent of their
compliance and to plan accordingly.
As of May 31, 1998, the Company had $1,106,165 of Accounts
Payable, compared to $464,377 in the prior fiscal year. The increase is
predominately due to claims reserves of $786,052 in the current year compared
with $291,533 in the prior year, included in Accounts Payable. The reserves are
for incurred but not reported claim reimbursements to Providers who participate
in certain managed care programs. As previously discussed, the Company has seen
significant growth during the current year of managed vision care revenues and
the associated claims. The Company believes this reserve is adequate.
During fiscal 1998 the Company retired the final $189,000 of
Convertible Subordinated Debentures, due December 1, 1997, and all $160,000 of
subordinated notes payable to certain affiliates due March 18, 1998, with funds
provided by operations.
The Company expects to pay dividends of approximately $53,200
on the Series A Preferred on December 1, 1998.
ITEM 7. FINANCIAL STATEMENTS
Financial Statements appear commencing at page F-1 immediately
hereafter.
16
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Financial Statements
May 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
<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, 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended May 31, 1998 and 1997. 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, 1998, and the results of their operations and their
cash flows for each of the years in the two-year period ended May 31, 1998, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Phoenix, Arizona
August 21, 1998
F-1
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Balance Sheet
May 31, 1998
ASSETS
Current assets:
Cash and cash equivalents $ 993,610
Receivables, net (note 2) 479,908
Prepaid expenses and other 115,451
-----------
Total current assets 1,588,969
Property and equipment, net (notes 3 and 4) 409,227
Deposits 243,509
-----------
$ 2,241,705
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,106,165
Current installments of obligations
under capital lease (note 4) 10,288
Accrued expenses:
Compensation 36,529
Other 68,621
Deferred income 16,948
-----------
Total current liabilities 1,238,551
Accrued rent (note 4) 59,340
Obligations under capital lease, excluding
current installments (note 4) 31,135
-----------
Total liabilities 1,329,026
-----------
Stockholders' equity (notes 7, 8, 9, 10 and 13):
Preferred stock, $.01 par value, authorized
12,000,000 shares: $3.75 Class A, senior nonvoting
cumulative convertible preferred stock, Series A,
$0.01 par value; authorized 1,000,000 shares;
317,880 issued and outstanding (liquidation preference
of $3.75 per share) 3,179
$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; 70,300 shares issued and outstanding (liquidation
preference of $10 per share) and $347,985 of dividends in
arrears at $4.95 per share; dividends accrue at
$.225 per share per calendar quarter 703
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; 4,271,126 shares issued and outstanding 42,711
Additional paid-in capital 9,976,821
Accumulated deficit (9,110,735)
-----------
Total stockholders' equity 912,679
Commitments and contingencies (notes 4, 10, 11, 12, 13, 14 and 16)
-----------
$ 2,241,705
===========
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Statements of Operations
Years ended May 31, 1998 and 1997
1998 1997
----------- ----------
Service revenues (note 11):
Administration fees $ 6,550,966 3,865,732
Buying group 1,655,298 1,582,899
Provider fees 124,397 136,132
Other 5,970 60,513
----------- ----------
Total service revenues 8,336,631 5,645,276
Cost of services 6,120,416 4,206,964
----------- ----------
Income from services 2,216,215 1,438,312
General and administrative expenses 1,121,099 1,027,054
Selling and marketing expenses (note 12) 768,506 505,485
----------- ----------
Net income/(loss) from operations 326,610 (94,227)
----------- ----------
Non-operating income (expense):
Interest income 30,982 25,337
Interest expense (notes 4 and 13) (19,305) (29,461)
Other expense (note 13) (24,412) (91,914)
----------- ----------
Total non-operating expense (12,735) (96,038)
----------- ----------
Net income/(loss) 313,875 (190,265)
Preferred stock dividends (63,270) (349,162)
----------- ----------
Net income/(loss) available to common
stockholders $ 250,605 (539,427)
=========== ==========
Earnings per share - basic $ 0.06 (.13)
=========== ==========
Earnings per share - diluted $ 0.06 (.13)
=========== ==========
Weighted average common and equivalent
shares outstanding - basic 4,073,918 4,100,420
=========== ==========
Weighted average common and equivalent
shares outstanding - diluted 5,089,657 4,100,420
=========== ==========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended May 31, 1998 and 1997
1998 1997
--------- --------
Cash flows from operating activities:
Net income/(loss) $ 313,875 (190,265)
Adjustments to reconcile net income/(loss) to
net cash provided by operating activities:
Depreciation and amortization 112,071 178,647
Write-off of software costs -- 354,040
Provision for losses/(write-off) of accounts
receivable 9,898 (149)
Loss on sale of fixed assets 2,124 --
Common stock issued for professional services 50,000 --
Changes in assets and liabilities:
Increase in receivables (149,450) (24,800)
Increase in prepaid expenses and other (1,837) (538)
Increase in deposits (60,626) (1,225)
Increase in accounts payable 641,788 240,463
Decrease in deferred income (6,284) (8,133)
(Decrease)/increase in accrued rent (16,842) 6,468
Decrease in other accrued expenses (53,125) (61,577)
--------- --------
Net cash provided by operating activities 841,592 492,931
--------- --------
Cash flows from investing activities:
Purchases of property and equipment (294,307) (111,479)
Proceeds from dispositions of property and equipment 5,000 --
--------- --------
Net cash used in investing activities (289,307) (111,479)
--------- --------
Cash flows from financing activities:
Repayment of convertible subordinated debentures (189,000) --
Payments for repurchase of common stock (20,631) --
Repayment of shareholder notes payable (160,000) --
Principal payments under capital lease obligations (6,579) --
--------- --------
Net cash used in financing activities (376,210) --
--------- --------
Net increase in cash and cash equivalents 176,075 381,452
Cash and cash equivalents, beginning of year 817,535 436,083
--------- --------
Cash and cash equivalents, end of year $ 993,610 817,535
========= ========
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 20,118 28,344
========= ========
Equipment acquired under capital lease $ 48,002 --
========= ========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended May 31, 1998 and 1997
<TABLE>
<CAPTION>
Preferred Stock Additional Total
--------------------------------------- Common paid-in Accumulated stockholders'
Series A Series 1 Series 2 Series 3 stock capital deficit equity
-------- -------- -------- -------- ----- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1996 $ -- -- 3,882 -- 41,004 9,949,159 (9,234,345) 759,700
Net loss -- -- -- -- -- -- (190,265) (190,265)
-------- ------- -------- ----- -------- ---------- ---------- --------
Balance, May 31, 1997 -- -- 3,882 -- 41,004 9,949,159 (9,424,610) 569,435
Repurchase of 79,294 shares
of common stock (note 7) -- -- -- -- (793) (19,838) -- (20,631)
Exchange offer (Series 2
for Series A preferred)
(note 10) 3,179 (3,179) -- -- -- -- --
Issuance of 250,000 shares
of common stock in
connection with the
Supplemental
Investment Banking
Agreement (note 13) -- -- -- -- 2,500 47,500 -- 50,000
Net income -- -- -- -- -- -- 313,875 313,875
-------- ------- -------- ----- -------- ---------- ---------- --------
Balance, May 31, 1998 $ 3,179 -- 703 -- 42,711 9,976,821 (9,110,735) 912,679
======== ======= ======== ===== ======== ========== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
May 31, 1998 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND CONSOLIDATION POLICY
Avesis Incorporated, a Delaware Corporation, and its wholly-owned
subsidiary, Avesis of Washington, D.C., a District of Columbia
Corporation (collectively, the Company), markets and administers vision,
hearing, dental and chiropractic 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, dentists and chiropractors
(providers). The Company also makes available to its vision 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. 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 five years.
REVENUE RECOGNITION
Administrative fee revenue is recognized on the 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.
Buying group revenue is recognized in the month the merchandise is
shipped to the provider. Provider fee revenue, based on member
utilization, is recognized when the service is performed.
STOCK OPTIONS AND WARRANTS
All stock options and warrants are granted at fair market value or
greater on the date of grant.
F-6
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
EARNINGS PER SHARE
The Company adopted Statement of Accounting Standards No. 128 "Earnings
per Share" (SFAS 128) during 1997. The Company's Earnings per Common
Share (EPS) figures for the prior period were not affected by adoption of
SFAS 128. In accordance with SFAS 128, basic EPS is computed by dividing
net income, after deducting preferred stock dividends requirement, by
weighted average number of shares of common stock outstanding.
Diluted EPS reflects the maximum dilution that would result after giving
effect to dilutive stock options and warrants and to the assumed
conversion of all dilutive convertible securities and stock.
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.
STOCK OPTION PLAN
Prior to June 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense was recorded on the date
of grant only if the current market price of the underlying stock
exceeded the exercise price. On June 1, 1996, the Company implemented
SFAS No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1996 and
subsequent years as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123 (see Note 9, "Stock Option Plans and
Warrants").
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount
of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less
costs to sell.
USE OF ESTIMATES
Management of the Company has made certain estimates and assumptions
relating to the reporting of assets, liabilities, revenues, and expenses
to prepare the financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
F-7
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(2) RECEIVABLES
As of May 31, 1998 receivables consists of:
Trade accounts receivable $ 509,657
Less allowance for doubtful accounts 29,749
----------
$ 479,908
==========
(3) PROPERTY AND EQUIPMENT
As of May 31, 1998 property and equipment consists of:
Furniture and fixtures $ 243,591
Equipment 752,664
Automobile 14,780
Leasehold improvements 73,729
Software 255,746
----------
1,340,510
Less accumulated depreciation and amortization 931,283
----------
$ 409,227
==========
(4) LEASES
The Company leases office space under agreements which expire September
30, 2000 and September 30, 2002. In May 1997, the Company entered into a
sublease for the office space lease agreement which expires on 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, 1998 and 1997, rent expense for all operating leases
was $159,224 and $196,406, respectively. For the years ended May 31, 1998
and 1997, sublease rent expense was $159,623 and $25,688, respectively,
and sublease rental income was $161,720 and $27,692, respectively.
The Company is obligated under one capital lease for telephone equipment
that expires in October 2001. As of May 31, 1998 the gross amount of
equipment and accumulated depreciation recorded under this capital lease
was $48,002 and $6,400, respectively.
The Company records rent expense using the straight-line method.
Accordingly, the difference between rent expense and actual rent paid,
for the lease expiring September 30, 2000, has been recorded as accrued
rent for financial reporting purposes. These balances are included in
other accrued expenses and accrued rent in the accompanying balance
sheet. For the lease that expires September 30, 2002, there is no
difference between rent expense and actual rent paid.
F-8
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Future minimum lease payments for capital lease payments and operating
leases are as follows:
Capital Operating
Years Ending May 31, Lease Leases
------- ---------
1999 $14,731 $325,718
2000 14,731 232,625
2001 14,731 105,498
2002 4,911 101,174
2003 -- 38,903
Thereafter -- --
------- --------
Total future minimum lease payments 49,104 $803,918
========
Less amount representing interest (at 10.4%) 7,681
-------
Present value of net minimum lease payments 41,423
Less current installments of obligations under
capital lease 10,288
-------
Obligations under capital lease, excluding current
installments $31,135
=======
Total future minimum lease payments for operating leases have not been
reduced by minimum sublease rentals of $231,533 to be received in the
future under the noncancelable sublease.
(5) 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 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.
(6) INCOME TAXES
No income tax benefit was recorded in 1998 due to the establishment of a
100% valuation allowance against the Company's deferred tax assets
because of the uncertainty surrounding the Company's ability to realize
its net operating loss carryforwards.
F-9
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to income before taxes.
The sources and tax effects of the differences for the years ended May
31, 1998 and 1997 are as follows:
1998 1997
--------- -------
Computed "expected" federal income tax expense $ 80,325 --
Change in valuation allowance (129,660) 22,134
Other 49,335 (22,134)
--------- -------
$ -- --
========= =======
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) $ 2,340,671
Accrued expenses and other 23,155
Property and equipment 26,329
Valuation allowance (2,390,155)
-----------
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, 1998 was a decrease of $361,945. The net change for the year
ended May 31, 1997 was an increase of $65,100.
The Company's federal NOLs of approximately $7,000,000 expire between
1999 and 2011.
(7) COMMON STOCK
During the year ended May 31, 1998, the Company repurchased 79,294 shares
of common stock for prices ranging from $0.25 to $0.27 per share.
Subsequent to the repurchase, the Company retired these shares.
F-10
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(8) EARNINGS (LOSS) PER SHARE
A summary of the reconciliation from basic earnings (loss) per share to
diluted earnings (loss) per share for the years ended May 31, 1998 and
1997 follows:
1998 1997
----------- ----------
Net earnings (loss) $ 313,875 (190,265)
Less: preferred stock dividends (63,270) (349,162)
----------- ----------
Income (loss) available to common stock-holders
$ 250,605 (539,427)
=========== ==========
Basic EPS - weighted average shares outstanding
4,073,918 4,100,420
=========== ==========
Basic earnings (loss) per share 0.06 (0.13)
=========== ==========
Basic EPS - weighted average shares outstanding
4,073,918 4,100,420
Effect of diluted securities:
Convertible debentures 19,162 --
Convertible preferred stock 996,577 --
----------- ----------
Dilutive EPS - weighted average shares out-standing
5,089,657 4,100,420
Net earnings (loss) 313,875 (539,427)
Interest expense on non-CSE debt 8,978 17,955
----------- ----------
322,853 (521,472)
Diluted earnings (loss) per share 0.06 (0.13)
=========== ==========
Convertible debentures not included in diluted EPS
since antidilutive -- 37,800
=========== ==========
Stock options not included in diluted EPS since
antidilutive -- 970,450
=========== ==========
F-11
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9) STOCK OPTION PLANS AND WARRANTS
In 1993 the Company adopted a stock option plan (the "Plan"). The stock
option plan sets aside 600,000 shares of common stock (includes incentive
qualified and non-qualified stock options) to be granted to employees at
a price not less than the fair market value of the stock at the date of
grant. The vesting provisions are determined by the Board of Directors at
the dates of grant. At May 31, 1998, there were 180,000 incentive options
outstanding under this plan and 310,000 nonqualified options exercisable
at prices ranging from $.40 -$1.00 per share.
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.
A summary of stock option activity for the years ended May 31, 1998 and
1997 follows:
Price Per
Options Option
--------- ---------
Balance outstanding, May 31, 1996 4,881,325 $.40-1.00
Options granted 10,000 $1.00
Options exercised --
Options canceled 181,325
---------
Balance outstanding, May 31, 1997 4,710,000
Options granted 180,000 $.48
Options exercised --
Options canceled --
---------
Balance outstanding, May 31, 1998 4,890,000
=========
As of May 31, 1998 and 1997, options to purchase 4,770,000 and 4,710,000
shares, respectively, at prices ranging from $.40 to $1.00 were
exercisable.
F-12
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
A summary of stock options granted at May 31, 1998 follows:
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at May 31, Contractual Exercise at May 31, Exercise
Price 1998 Life Price 1998 Price
---------- ----------- ----------- -------- ----------- --------
$.40-$1.00 4,700,000 5.0 years $ .45 4,700,000 $ .45
1.00 10,000 9.0 years 1.00 10,000 1.00
.48 180,000 10.0 years .48 60,000 .48
--------- ----- --------- -----
4,890,000 .45 4,770,000 .45
========= ===== ========= =====
The per share weighted-average fair value of stock options granted during
1998 and 1997 was $0.30 and $0.46, respectively, on the date of the grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions: 1998 expected dividend yield rate of 0.0%,
risk-free interest rate of 8.0%, volatility of 57.98%, and an expected
life of six years; 1997 expected dividend yield rate of 0.0%, risk-free
interest rate of 8.0%, volatility of 57.98% and an expected life of six
years.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plan. Accordingly, no compensation cost has been
recognized for the Plan. Had compensation cost for the Company's
stock-based compensation plan been determined consistent with FASB
Statement No. 123, the Company's net income would have been reduced to
the pro forma amounts indicated below:
1998 1997
-------- --------
Net income/(loss):
As reported $250,605 (539,427)
Pro forma 242,363 (545,791)
Earnings per share:
Basic:
As reported .06 (.13)
Pro forma .06 (.13)
Diluted:
As reported .06 (.13)
Pro forma .06 (.13)
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 expired on February 1, 1998.
F-13
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The management agreement discussed above and related transactions with
NHE and certain other substantial transactions 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. RCI received cash consideration of
$50,000 and ten-year warrants to purchase 400,000 shares of common stock.
As of May 31, 1998, 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. As of May 31, 1998, 160,000 of these
warrants had been assigned to William L. Richter.
(10) 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 $10.00 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.
During fiscal 1998 the Company completed an Exchange Offer which offered
one share of its Class A, Senior Nonvoting Cumulative Convertible
Preferred Stock, Series A, par value $.01 ("Series A Shares"), for each
outstanding share of the Class A, Nonvoting Cumulative Convertible
Preferred Stock, Series 2, par value $.01 ("Series 2 Shares"), of the
Company. The purpose of this offer was to eliminate or significantly
reduce the number of Series 2 Shares outstanding including the related
dividend arrearage and to adjust the Company's capital structure.
The Exchange Offer expired on May 27, 1998, and resulted in the tendering
of 317,880 (approximately 82%) of the 388,180 outstanding Series 2 Shares
for the Series A Shares.
(11) CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company's programs and services are offered throughout the United
States. Most of the Company's customers are located in the midwest,
Texas, the southwestern states and the D.C. metropolitan area. Three
major customers provided 28%, 15% and 10% of total service revenues in
1998 and three major customers provided 17%, 15% and 14% in 1997.
F-14
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(12) 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 was five years and was
renewable. NHE also received options to purchase up to 4,400,000 shares
of the Company's common stock (note 7). In December 1997, the Company
renewed this agreement for a term of five years with payments of $250,000
per year due to NHE.
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 $211,000 and $65,000 to NHE under the terms of this
agreement in fiscal 1998 and 1997, respectively.
(13) RELATED PARTY TRANSACTIONS
During fiscal 1998 and 1997, the Company purchased approximately $0 and
$76,000, respectively, in software and related programming services from
National Computer Services, Inc. (NCS), a company owned by the President
and two stockholders of the Company who are also affiliates of NHE. These
costs have been capitalized as property and equipment. Additionally, the
Company has contracted with the same Company to lease its computer system
for approximately $1,000 per month. During 1997, the Company decided to
discontinue the software development project in favor of a new system on
a PC platform. Accordingly, a portion of the software development costs
previously capitalized on the Company's balance sheet were expensed. The
charge of $286,069, included in other expense in the consolidated
statement of operations, is net of an outstanding amount due to the
software vendor of $67,971, originally recorded as other accrued expense
on the Company's balance sheet, which is no longer a liability to the
Company due to the discontinuance of the project. During fiscal 1998, the
Company contracted with a third-party software vendor to develop new
technology to integrate all of the Company's systems.
The Company entered into a Registration Rights Agreement (the
"Registration Rights Agreement") effective March 18, 1993 with NHE, and
two shareholders. 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 9
("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 market prices.
F-15
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
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.
On April 23, 1998, the Company entered into a Supplemental Investment
Banking Agreement with RCI for investment banking services related to the
Exchange Offer for the Company's Series 2 Preferred shares. RCI received
cash consideration of $50,000 and 250,000 shares of the Company's common
stock valued at $0.20 per share.
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.
(14) 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 1% 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.
(15) EMPLOYEE BENEFIT PLAN
The Company has a qualified 401(k) Plan (defined contribution plan). The
plan covers substantially all employees who have completed three months
of service and attained age twenty-one. Subject to limits imposed by
Internal Revenue Service regulations and other options retained by the
Company affecting participant contribution, participants may voluntarily
contribute a percentage of their annual wages not to exceed limits
established by the Tax Reform Act of 1986. Participants are immediately
vested in the amount of their direct contribution. For the years ended
May 31, 1998 and 1997, the Company did not contribute to the plan.
(16) YEAR 2000
The Company has reviewed all internally used software and believes the
new system will be Year 2000 compliant. Based upon its current computer
operations and systems development, the Company believes that its risk
related to Year 2000 compliance issues is low. The Company is in the
process of contacting all vendors and clients who forward data
electronically to determine the extent of their compliance and to plan
accordingly.
F-16
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(17) SUBSEQUENT EVENT
Subsequent to year-end, on July 30, 1998 the Company's Board of Directors
approved a modification providing all outstanding stock option and
warrant holders the opportunity to exercise any or all of their vested
options and warrants at a discounted exercise price from their original
grant, during the period from August 1, 1998 to August 31, 1998. The
discounted price was calculated by discounting the stated exercise price
of each stock option or warrant at 10% per annum from the expiration date
back to August 1998, and rounding the calculated price to the nearest
whole cent. The discounted price in no case was allowed to be less than
the prevailing market price of the Company's common stock at the time of
exercise of the options, defined as the high bid price, and rounded to
the nearest whole cent. After August 31, 1998, the modification will
expire and all terms will return to the original exercise terms.
The total cash received by the Company from the exercise of 3,742,000
stock options and 400,000 warrants was $1,202,656. Of the preceding
amount, approximately $400,000 was used to repurchase all 931,888 shares
of the Company's common stock held by the founder of the Company. The
excess funds received from these transactions will be used as working
capital.
F-17
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth the names of the directors and
executive officers of the Company and certain biographical information relating
to them.
Name Age Position(s) with Company
---- --- ------------------------
William R. Cohen 67 Co-Chairman and Director
William L. Richter 55 Co-Chairman and Director
Kenneth L. Blum, Sr. 71 Director, Former Acting President and CEO as
of May 31, 1998
Gerald L. Cohen 54 Director
Sam Oolie 62 Director
Alan S. Cohn 43 President, CEO and Director
Kenneth L. Blum, Jr. 34 Director
Neal A. Kempler 30 Corporate Secretary,
Vice President of Operations
Shannon R. Barnett 30 Controller
Joel H. Alperstein 29 Treasurer, Director of Finance
Subsequent to year-end, on July 30, 1998, the Company's Board
of Directors expanded the Board of Directors from 5 members to 7 members.
Consequently, Alan S. Cohn and Kenneth L. Blum, Jr. were named to the Board of
Directors to fill the two vacant seats until the next stockholder meeting. The
election to the Board of Messrs. Cohn and Blum, Jr. was conditioned upon the
early exercise of their stock options.
17
<PAGE>
William R. Cohen, 67, Co-Chairman of the Board, has served as
a Director of the Company since April 1986. Mr. Cohen is the Chairman of Go
Lightly Candy Company. Mr. Cohen has served as Chairman of American Mobile
Communications, a cellular communications company, and has also held various
positions with CFC Associates, a venture capital partnership, and its
predecessor organizations. Mr. Cohen serves as a lifetime trustee of the
Hospital Center, Orange, New Jersey. Mr. Cohen is not related to Gerald L.
Cohen.
William L. Richter, 55, Co-Chairman of the Board, has been a
director of the Company since August 1993. Mr. Richter has been President of
Richter Investment Corp. and its wholly-owned subsidiary, Richter & Co., Inc., a
registered broker-dealer and investment banking firm (or its predecessor
organization) for the past nine years and has been a Senior Managing Director of
Cerberus Capital Management, L.P. (or its predecessor organizations) since their
founding in late 1992. Mr. Richter was Co-Chairman of Rent-A-Wreck of America,
Inc., a franchiser of automobile rental agencies, from November 1989 to June
1993 and has been Vice Chairman of that Company since June 1993.
Kenneth L. Blum, Sr., 71, has served as a Director of the
Company since August 1993. Mr. Blum was acting President and Chief Executive
Officer of the Company from September 1996 to May 1998. Mr. Blum has been
Chairman of the Board of Rent-A-Wreck of America, Inc., an automobile rental
franchiser, since June 1993, President from June 1993 to October 1994, and Chief
Executive Officer since January 1994. Mr. Blum has been the President of KAB,
Inc., a management company, since 1990. Mr. Blum co-founded United HealthCare,
Inc., a Baltimore, Maryland-based healthcare company, in 1974 and served as its
President and Chief Executive Officer until 1990. Since 1990, Mr. Blum has been
a management consultant to a variety of companies, including National Computer
Services, Inc., a computer service bureau; American Business Information
Systems, Inc., a high-volume laser printing company; and Mail-Rx, a mail-order
prescription drug company. Mr. Blum is the father of Kenneth L. Blum, Jr. and
the father-in-law of Alan S. Cohn. See "Management Services Agreement."
Gerald L. Cohen, 54, has served as a Director of the Company
since March 1985. Mr. Cohen is a managing director of Greenley Capital Company,
a limited partnership which is a New York-based investment banking firm. Mr.
Cohen is the sole shareholder of the general partner (Greenley Corp.) of
Greenley Capital Company. From August 1982 through April 1989, Mr. Cohen was a
managing director of Richter, Cohen & Co., a New York-based investment banking
firm. Mr. Cohen also serves as a Director of Marketing Systems of America. Mr.
Cohen is not related to William R. Cohen.
Sam Oolie, 62, has served as a Director of the Company since
March 1985. Mr. Oolie has been Chairman of NoFire Technologies, Inc., a
manufacturer of fire retardant coatings and textiles, since August 1995 and has
been Chairman of Oolie Enterprises, an investment company, since July 1985. Mr.
Oolie has held various positions with CFC Associates, a venture capital
partnership, and its predecessor
18
<PAGE>
companies since January 1984. He was Vice Chairman of American Mobile
Communications, Inc. a cellular telephone company, from February 1986 until July
1989 and Chairman of the Nostalgia Network, a 24-hour cable television program
service, from April 1987 until January 1990. Mr. Oolie also serves as a Director
of Noise Cancellation Technologies, Inc. and Comverse Technology, Inc.
Alan S. Cohn, 43, became the President and CEO of the Company
as of June 1998 and a Director of the Company as of August 1998. Mr. Cohn is
providing management services on behalf of the Company through an arrangement
with NHE. Mr. Cohn has been a management consultant for NHE and KAB, Inc. since
1993 and 1990, respectively. Since 1990, Mr. Cohn has been a principal or
management consultant to a variety of companies, including National Computer
Services, Inc., a computer service bureau; American Business Information
Systems, Inc., a high-volume laser printing company; Rent-A-Wreck of America,
Inc., an automobile franchiser; Allscripts, Inc., formerly Physician Dispensing
Systems, Inc., a pharmaceutical dispensing company, Lawphone, Inc., a prepaid
legal fee company; Medi-mail, Inc., a mail service pharmacy; and Mail-Rx, a
mail-order prescription drug company. Mr. Cohn is the son-in-law of Kenneth L.
Blum, Sr., the Company's former acting President and CEO, and a member of the
Board of Directors.
Kenneth L. Blum, Jr., 34, became a Director of the Company as
of August 1998. Mr. Blum is the President, Chief Executive Officer and the sole
stockholder of NHE. Mr. Blum is also President and Secretary of Rent-A-Wreck of
America, Inc., an automobile rental franchiser, President of National Computer
Services, Inc., a computer service bureau, and President of American Business
Information Systems, Inc., a high-volume laser printing company. Kenneth L.
Blum, Sr., the Company's former acting President and CEO, and a member of the
Board of Directors, is the father of Kenneth L. Blum, Jr. See - "Management
Services Agreement."
Neal Kempler, 30, has been the Corporate Secretary of the
Company since June 1996, the Vice President of Marketing & Operations of the
Company since August 1996 and the Assistant to the President/Director of
Marketing from January 1993 until August 1996. Mr. Kempler served as Account
Executive of National Health Enterprises, Inc., a management company, from June
1990 until January 1993.
Shannon R. Barnett, 30, has been the Controller of the Company
(Principal Accounting Officer) since August 1996 and was a Senior Accountant of
the Company from November 1995 until August 1996. Ms. Barnett was Assistant
Controller of Quality Hotel and Marlyn Nutraceuticals, a vitamin manufacturer,
from September 1994 until November 1995 and Staff Accountant of General Atlantic
Resources, Inc. an oil and gas company, from November 1992 until June 1994.
Joel H. Alperstein, 29, has been the Treasurer of the Company
since December 1997 and the Director of Finance of the Company (Principal
Financial Officer) since January 1997. Mr. Alperstein was a self-employed
financial consultant from September 1996 until December 1996. Mr. Alperstein was
a Manager at Stout, Causey
19
<PAGE>
& Horning, P.A., a full service public accounting firm, from September 1992
until August 1996, and a Senior Accountant at Arthur Andersen, LLP, from July
1990 until September 1992. Mr. Alperstein has a Masters of Business
Administration from Loyola College of Maryland and is a Certified Public
Accountant.
All directors will hold office until the next annual meeting
of stockholders and the election and qualification of their successors. Officers
are appointed annually and serve at the pleasure of the Board of Directors.
MANAGEMENT SERVICES AGREEMENT
Effective March 18, 1993, the Company entered into a
Management Agreement (the "Management Agreement") with National Health
Enterprises, Inc., a Maryland corporation ("NHE") pursuant to which NHE agreed
to manage substantially all aspects of the Company's business, subject to
certain limitations and the direction of the Company's Board of Directors. See
Item 12 - "Certain Relationships and Related Transactions."
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Company's
directors, its executive officers, and any persons holding more than ten percent
of the Company's Common and Preferred Stock are required to report their initial
ownership of the Company's Common and Preferred Stock and any subsequent changes
in that ownership to the Securities and Exchange Commission. Specific due dates
for these reports have been established and the Company is required to disclose
any failure to file by these dates. The Company believes that all of these
filing requirements were satisfied during the year ended May 31, 1998, except
that Messrs. Blum, Sr., W. Cohen, G. Cohen, Oolie and Richter each reported
transactions from May 1998 on Forms 4 dated June 22, 1998, and that Mr. William
Cohen reported a transaction from December 1997 on a Form 4 dated March 4, 1998.
In making these disclosures, the Company has relied solely on representations
obtained from certain of its former and current directors, executive officers
and ten percent holders and/or copies of the reports that they have filed with
the Commission.
20
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table and related notes set forth information
regarding the compensation awarded to, earned by or paid to the
Company's Chief Executive Officer during the year ended May 31,
1998. No executive officer who was serving as an executive
officer during fiscal 1998 received salary and bonus which
aggregated at least $100,000 for services rendered to the Company
during the year ended May 31, 1998.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
--------------------------------------------------------------
Awards
- -------------------------------------------------------------------------------------------------
Name and Principal Position Year Salary ($) Securities Underlying Options/SARs (#)
- --------------------------- ---- ---------- --------------------------------------
<S> <C> <C> <C>
Kenneth L. Blum, Sr., 1998 $0 --
Acting CEO (1) 1997 $0 --
1996 $0 --
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Blum became CEO of the Company during September 1996.
See also Item 12 -- "Certain Relationships and Related Transactions -
Agreements with National Health Enterprises, Inc. -- Stock Option Grant."
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUE TABLE
The following table sets forth information with respect to the one
executive officer named in the Summary Compensation Table concerning the number
and value of options outstanding at the end of the last fiscal year. The
executive officer named in the Summary Compensation Table did not exercise any
options during the last fiscal year.
- -------------------------------------------------------------------------------
Number of Unexercised Value of Unexercised
Options at FY-End (#) in-the-Money Options
at FY-End ($)
- -------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Kenneth L. Blum, Sr. -- -- -- --
- -------------------------------------------------------------------------------
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
ARRANGEMENTS
In the event of termination of the Management Agreement with
NHE without cause, all options granted to NHE in connection with the Management
Agreement remain outstanding for the balance of their 10-year term. See Item 12
- -- "Certain Relationships and Related Transactions -- Agreements with National
Health Enterprises, Inc. -- Stock Option Grant."
21
<PAGE>
DIRECTOR COMPENSATION
Directors are reimbursed for out-of-pocket expenses incurred
in connection with each Board of Directors or committee meeting attended.
Directors who also are employees of the Company are eligible to participate in
the Company's Incentive Stock Option Plan and the Company's 401(k) Plan, and all
directors are eligible to participate in the Company's 1993 Stock Option Plan
(the "1993 Plan"). Pursuant to the 1993 Plan, options for 100,000 shares of the
Company's Common Stock were granted on April 8, 1993 to each of directors
William R. Cohen, Gerald L. Cohen, and Sam Oolie. The exercise price of such
options is $.40 per share, which was at least the fair market value of the
Company's Common Stock on the date of grant. (See Item 5 - "Market for Common
Stock and Related Stockholder Matters - Recent Sales of Unregistered
Securities") Options for 25,000 shares of Common Stock were exercisable by each
of the optionees as of the date of grant, with the balance vesting in equal
parts at the end of each of the 10 three-month periods following the date of
grant. As of May 31, 1998 options for 100,000 shares of Common Stock were
exercisable by each of the optionees.
Subsequent to year-end, William R. Cohen exercised his 100,000
stock options pursuant to the reduced pricing as approved by the Board of
Directors. See Item 5 - "Market for Common Stock and Related Stockholder Matters
- - Recent Sales of Unregistered Securities."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of August 24, 1998 there were 8,243,185 shares of Common
Stock, 6,500 shares of Series 2 Preferred and 315,260 shares of Series A
Preferred outstanding. The table below sets forth as of August 24, 1998, certain
information regarding the shares of Common Stock beneficially owned by each
director of the Company and each named executive officer in the Summary
Compensation table set forth in Item 10, by all of the Company's executive
officers and directors as a group, and by those persons known by the Company to
have owned beneficially 5% or more of the outstanding shares of Common Stock,
which information as to beneficial ownership is based upon statements furnished
to the Company by such persons.
22
<PAGE>
<TABLE>
<CAPTION>
Common issuable upon conversion or
----------------------------------
exercise of: (1)
----------------
Total
-----
Common
------
Common % of Series A % of Options Beneficially Percent of
------ ---- -------- ---- ------- ------------ ----------
Name and Address Stock Common Preferred Stock Pref. or Warrants Owned (1) Common (2)
- ---------------- ----- ------ --------------- ----- ----------- --------- ----------
(actual shares)
<S> <C> <C> <C> <C> <C> <C> <C>
Gerald L. Cohen* 153,359 1.9 22,274(7) 7.1 100,000 476,099 5.6
William R. Cohen* 161,117(4) 2.0 10,552 3.3 -- 266,637 3.2
William L. Richter 1,194,620(3) 14.5 50,099 15.9 -- 1,695,610(3) 19.4
c/o Richter & Co., Inc.
450 Park Ave., 28th
Floor
New York, NY 10022
Sam Oolie* 220,021(5) 2.7 24,023 7.6 100,000 560,251 6.5
Kenneth L. Blum, Sr 140,000(6) 1.7 2,000 0.6 -- 160,000 1.9
17133 Ericarose Street
W. Boca Raton, FL 33496
Kenneth L. Blum, Jr 1,814,750 22.0 -- -- -- 1,814,750 22.0
11460 Cronridge Drive
Suite 120
Owings Mills, MD 21117
Alan S. Cohn 1,804,750 21.9 -- -- -- 1,804,750 21.9
11460 Cronridge Drive
Suite 120
Owings Mills, MD 21117
Neal A. Kempler* -- -- -- -- 255,000 255,000 3.0
Benjamin D. Ward Sr 931,888 11.3 -- -- -- 931,888 11.3
4712 North 41st Place
Phoenix, AZ 85018
All directors and 5,488,617(4)(5) 66.6 108,948 34.6 605,000 7,183,097 72.3
Executive officers as
a group (9 persons)
</TABLE>
* Address: 3724 North Third Street, Suite 300, Phoenix, Arizona 85012.
23
<PAGE>
(1) Includes shares of Common Stock with respect to which the identified person
had the right to acquire beneficial ownership on or within 60 days of the
date of the above table pursuant to the Series A Preferred or options or
warrants, as indicated. Each share of Series A Preferred Stock indicated in
the table is convertible into 10 shares of Common Stock and such shares of
Common Stock are included in the total Common beneficially owned.
(2) The percentages shown include Common Stock actually owned as of the date of
the above table and Common Stock as to which the person had the right to
acquire beneficial ownership within 60 days of such date pursuant to the
Series A Preferred, options or warrants, as indicated. In calculating the
percentage of ownership, all shares of Common Stock which the identified
person had the right to acquire within 60 days of the date of the above
table are deemed to be outstanding when computing the percentage of Common
Stock owned by such person but are not deemed to be outstanding when
computing the percentage of Common Stock owned by any other person.
(3) Includes 462,500 shares of Common Stock and shares of Common Stock issuable
upon conversion of 22,300 shares of Series A indirectly owned via an
affiliated corporation, Richter & Co., Inc. ("RCI"), which thereby
beneficially owns in its own name 685,500 shares or 8.1% of the Company's
Common Stock. Also includes shares of Common Stock issuable upon conversion
of 3,883 and 4,530 shares of Series A Preferred held via two other
corporations. Also includes shares of Common Stock issuable upon conversion
of 2,500 shares of Series A Preferred and 15,169 shares of Common Stock
held by family members, as to which Mr. Richter disclaims beneficial
ownership.
(4) Includes 6.67% of the 6,337 shares of common stock and 19,412 shares of
Series A Preferred stock held by an affiliated corporation, with respect to
which William R. Cohen owns 6.67% of the outstanding stock.
(5) Includes 20% of the 6,337 shares of common stock and 19,412 shares of
Series A Preferred stock held by an affiliated corporation, with respect to
which Mr. Oolie owns 20% of the outstanding stock. Also includes 8,679
shares owned by Mr. Oolie's wife, as to which Mr. Oolie disclaims
beneficial ownership.
(6) The indicated shares are held by Mr. Blum's spouse.
(7) Includes 43.75% of the 4,530 shares of Series A Preferred held by an
affiliated corporation.
24
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AGREEMENTS WITH NATIONAL HEALTH ENTERPRISES, INC.
Management Agreement. On December 12, 1997 the Company's Board
of Directors agreed to extend the term of the Company's Management Agreement
with NHE to March 18, 2003. Also, effective March 18, 1998, the Company's Board
of Directors agreed to increase the cash compensation paid to NHE under the
Management Agreement by $50,000 per year to $250,000 per year.
Stock Option Grant. Pursuant to the Management Agreement, on
March 18, 1993, the Company issued options (the "Options") to NHE for the
purchase of up to 4,400,000 shares of the Company's Common Stock. Also pursuant
to the Management Agreement, the Company entered into a Registration Rights
Agreement effective March 18, 1993 with NHE, Mr. Blum, Jr. and Mr. Cohn.
The Options are transferable only to employees or affiliates
of NHE performing substantial services for or on behalf of the Company or to
employees of the Company, subject to compliance with applicable law. Effective
January 27, 1997, NHE transferred 200,000 options, which had automatically
reverted to NHE from a former officer, to Neal A. Kempler. Effective April 6,
1998, NHE transferred 100,000 options to Joel H. Alperstein.
During August 1998, Messrs. Blum, Jr., Cohn and Richter
exercised all of their outstanding options from the March 18, 1993 Stock Option
Grant. See Item 5 - "Market for Common Stock and Related Stockholder Matters -
Recent Sales of Unregistered Securities."
Subordinated Promissory Notes. On March 18, 1993, the Company
obtained loans in the amount of $80,000 from each of Mr. Blum, Jr. and Mr. Cohn.
The notes were due March 18, 1998 and accrued interest at the rate of 6% per
annum, provided that the holders could accelerate the notes if the Company
terminated the Management Agreement without cause. Interest was payable
semiannually in arrears, commencing September 18, 1993. The notes were unsecured
and subordinated to the Company's outstanding 9 1/2% Debentures and future
indebtedness of the Company for borrowed money. The Company paid $8,416 and
$10,442 in interest under the terms of these notes in fiscal 1998 and 1997,
respectively. On March 18, 1998 the Company paid Mr. Blum, Jr. and Mr. Cohn the
outstanding principal and accrued interest amounts on the subordinated
promissory notes.
Marketing Agreement. Effective March 18, 1993, the Company and
NHE entered into a Marketing Representation Agreement (the "Marketing
Agreement") pursuant to which NHE is entitled to receive a commission equal to 7
1/2% of the enrollment fees (as defined) from Sponsor contracts generated by
NHE. The Company also agreed to pay NHE commissions equal to 2 1/2% of the
enrollment fees from Sponsor contracts with respect to which NHE provides
marketing assistance in procuring
25
<PAGE>
the contract, but does not itself generate the initial Sponsor contact. The term
of the Marketing Agreement is coextensive with that of the Management Agreement.
In fiscal 1998 and 1997, the Company paid approximately $211,000 and $65,000,
respectively, to NHE under the Marketing Agreement. In fiscal 1998 and 1997, the
Company paid approximately $8,000 and $14,000, respectively, in reimbursable
marketing expenses to NHE under the Marketing Agreement.
Investment Banking Services. On April 23, 1998, the Company
entered into a Supplemental Agreement with Richter & Co., Inc. ("RCI") for
Investment Banking services related to the Exchange Offer for the Company's
Series 2 Preferred shares. RCI received cash consideration of $50,000 and
250,000 shares of the Company's Common Stock. RCI assigned 100,000 shares of the
Company's Common Stock received under this agreement to William L. Richter.
SOFTWARE DEVELOPMENT SERVICES
During fiscal 1995, the Company contracted with National
Computer Services, Inc. ("NCS") to develop software related to the Company's
vision, dental and hearing programs. The Company paid approximately $0 and
$76,000 to NCS for such services during fiscal 1998 and 1997, respectively.
Additionally, the Company has contracted with NCS to lease its computer system
for approximately $1,000 per month. The Company paid $12,000 and $15,502 of
computer lease charges in fiscal 1998 and 1997, respectively. Kenneth L. Blum,
Jr., a Director, is President and a stockholder of NCS and the son of Kenneth L.
Blum, Sr., the former Acting President and CEO, and a Director of the Company.
During fiscal 1997, the Company decided to discontinue the
programming services being performed related to portions of the computer system
not yet placed in service. It was further determined that all of the Company's
current systems, which to date have been running on three separate platforms,
should be integrated through the use of the PC platform. The Company has
continued to use the completed modules developed by NCS while the new system is
under development. The capitalized costs related to modules not yet placed in
service, $286,069, were expensed in fiscal 1997. See Item 6 -- "Management's
Discussion and Analysis or Plan of Operation - Liquidity and Capital Resources."
26
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index following the Signatures page which Index is
incorporated herein by reference.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
27
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AVESIS INCORPORATED
Date August 24, 1998 By: /s/ Alan S. Cohn
----------------- -----------------------------------
Alan S. Cohn
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Alan S. Cohn President, Chief August 24, 1998
- ------------------------ Executive Officer and Director
Alan S. Cohn
/s/ Neal A. Kempler Corporate Secretary and August 24, 1998
- ------------------------ Vice President of Operations
Neal A. Kempler
/s/ Joel H. Alperstein Treasurer and August 24, 1998
- ------------------------ Director of Finance
Joel H. Alperstein (Principal Financial Officer)
/s/ Shannon R. Barnett Controller August 24, 1998
- ------------------------ (Principal Accounting Officer)
Shannon R. Barnett
/s/ William R. Cohen Co-Chairman of the August 24, 1998
- ------------------------ Board of Directors
William R. Cohen
/s/ William L. Richter Co-Chairman of the August 24, 1998
- ------------------------ Board of Directors
William L. Richter
/s/ Kenneth L. Blum, Sr. Director August 24, 1998
- ------------------------
Kenneth L. Blum, Sr.
/s/ Kenneth L. Blum, Jr. Director August 24, 1998
- ------------------------
Kenneth L. Blum, Jr.
/s/ Gerald L. Cohen Director August 24, 1998
- ------------------------
Gerald L. Cohen
/s/ Sam Oolie Director August 24, 1998
- ------------------------
Sam Oolie
28
<PAGE>
AVESIS INCORPORATED
EXHIBIT INDEX
FORM 10-KSB
FOR THE FISCAL YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Incorporated by Reference from the:
- ------- ------- -----------------------------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Company's Registration Statement on Form S-1
Incorporation of the Company, as amended (File No. 33-17217) filed January 12, 1988,
and declared effective January 12, 1988.
3.2 Bylaws of the Company Company's Registration Statement on Form S-18
(File No. 33-6366-LA) filed July 11, 1986 and
declared effective July 14, 1986.
3.3 Amendments to Bylaws adopted December 6, 1991 Company's Annual Report on Form 10-K for the
year ended May 31, 1992 (File No. 1-9758).
4.1 Indenture between the Company and Continental Company's Registration Statement on Form S-1
Stock Transfer & Trust Company, as Trustee, (File No. 33-17217) filed January 12, 1988,
including form of Convertible Subordinated and declared effective January 12, 1988.
Debenture
4.2 Statement of Designations, Preferences, Company's report on Form 8-K filed July 9,
Privileges, Voting Powers, Restrictions, 1988 (File No. l-9758).
Qualifications and Rights of the Series l
Preferred
4.3 Statement of Designations, Preferences, Company's Registration Statement on Form S-l
Privileges, Voting Powers, Restrictions, filed May 17, 1989 (File No. 33-28756).
Qualifications and Rights of the Series 2
Preferred
4.4 Specimen Certificate representing $.0l par value Company's Registration Statement on Form S-18
Common Stock (File No. 33-6366-LA) filed July 11, 1986 and
declared effective July 14, 1986.
4.5 Specimen Certificate representing $10 Class A Amendment No. l to the Company's Registration
Nonvoting Cumulative Convertible Preferred Statement on Form S-l filed June 29, 1989 (File No. 33-28756).
Stock, Series 2
4.6 Statement of Designations, Preferences, Company's Schedule 13E-4 filed April 27, 1998
Privileges, Voting Powers, Restrictions and (Annex A).
Qualifications of the Series A Preferred
10.1* Incentive Stock Option Plan of the Company, as Company's Registration Statement on Form S-1
amended (File No. 33-17217) filed January 12, 1988,
and declared effective January 12, 1988.
10.2* 401(k) Plan of the Company Company's annual report on Form 10-K for the
year ended May 31, 1989 (File No. 1-9758).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.3* Management Agreement dated March 18, 1993 Company's report on Form 8-K dated March 18,
between the Company and NHE 1993 (File No. 1-9758).
10.4* Stock Option Grant to NHE dated March 18, 1993 Company's report on Form 8-K dated March 18,
relating to options for the purchase of 1993 (File No. 1-9758).
4,400,000 shares of the Company's Common Stock
10.5 Subordinated Promissory Note dated March 18, Company's report on Form 8-K dated March 18,
1993 in the amount of $80,000 payable by the 1993 (File No. 1-9758).
Company to Mr. and Ms. Blum
10.6 Subordinated Promissory Note dated March 18, Company's report on Form 8-K dated March 18,
1993 in the amount of $80,000 payable by the 1993 (File No. 1-9758).
Company to Mr. and Mrs. Cohn
10.7 Registration Rights Agreement dated March 18, Company's report on Form 8-K dated March 18,
1993 among NHE, Mr. Blum, and Alan S. Cohn 1993 (File No. 1-9758).
10.8* Marketing Agreement dated March 18, 1993 between Company's report on Form 8-K dated March 18,
the Company and NHE 1993 (File No. 1-9758).
10.9 Option Transfer Documents dated March 31, 1993 Company's report on Form 8-K dated March 18,
1993 (File No. 1-9758).
10.10* Stock Purchase Warrant issued to Richter & Co., Company's report on Form 8-K dated March 18,
Inc. dated March 18, 1993 for the purchase of 1993 (File No. 1-9758).
240,000 shares of the Issuer's Common Stock
10.11* Stock Purchase Warrant issued to William L. Company's report on Form 8-K dated March 18,
Richter dated March 18, 1993 for the purchase of 1993 (File No. 1-9758).
160,000 shares of the Issuer's Common Stock
10.12* 1993 Stock Option Plan Company's annual report on Form 10-KSB for the
year ended May 31, 1993 (File No. 1-9758).
10.13 Lease Agreement between the Company and Phoenix Company's Report on Form 10-QSB for the three
City Square months ended February 28, 1995 (File No. 1-9758).
10.14 Fee Agreement between the Company and Richter & Company's Report on Form 10-QSB for the three
Co., Inc. months ended February 28, 1995 (File No. 1-9758).
10.15 Software Development Agreement between the Company's Report on Form 10-QSB for the three
Company and National Computer Services, Inc. months ended August 31, 1995 (File No. 1-9758).
10.16 Litigation Agreement between the Company and Ken Company's Report on Form 10-KSB for the year
Blum, Sr., Ken Blum, Jr., and Alan Cohn ended May 31, 1997 (File No. 0-15304).
10.17 Sublease Agreement between the Company and Company's Report on Form 10-KSB for the year
InfoImage, Inc. ended May 31, 1997 (File No. 0-15304).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.18 Lease Agreement between the Company and Company's Report on Form 10-KSB for the year
Principal Mutual Life Insurance Company ended May 31, 1997 (File No. 0-15304).
10.19 Supplemental Agreement to the December 5, 1994 filed herewith
Investment Banking Agreement
11 Statement recomputation of per-share earnings Earnings (Loss) per Share Computation, see
Note 8 to the Notes to Consolidated Financial
Statements.
21 Subsidiary of Registrant filed herewith
27 Financial Data Schedule filed herewith
</TABLE>
* Identified as a compensatory arrangement as required by Item 13(a) of Form
10-KSB.
SUPPLEMENTAL AGREEMENT TO THE DECEMBER 5, 1994
INVESTMENT BANKING AGREEMENT
THIS AGREEMENT is entered into this 23rd day of April, 1998, by and
between Richter & Co., Inc. ("Richter") and Avesis Incorporated, a Delaware
corporation (the "Company"), and supplements the December 5, 1994 Agreement
between the parties, which remains in effect.
1. The Company acknowledges that Richter has provided the conceptual idea for
the Section 3(a)(9) exchange offer as a means of addressing management's
concerns about the significant market effects arising from the outstanding
Class A, Cumulative Convertible Preferred Stock, Series 2, and its
accumulated dividend arrearages. Richter has also devised the terms of the
exchange offer and submitted such to the Company's board of directors,
which has approved such terms and conditions.
2. For such services, Richter shall be entitled to a fee of $50,000 in cash
and 250,000 shares of Company's Common Stock, par value $.01, for its
services under this Supplemental Agreement and any unpaid fees under the
December 5, 1994 Agreement. Such fee will be payable upon the mailing to
shareholders of the exchange offer of the Class A, Cumulative Convertible
Preferred Stock, Series 2 and the 250,000 shares will be issued as the
Company is instructed in a letter from Richter to the Company.
3. The parties agree that Richter shall limit its services so that they will
not constitute "solicitation" as the term is understood for purposes of
Section 3(a)(9) of the Securities Act of 1933, as amended.
AVESIS INCORPORATED
By: /s/ Joel H. Alperstein
-----------------------------
Its: Treasurer
---------------------------
RICHTER & CO., INC.
By: /s/ William L. Richter
-----------------------------
Its: President
---------------------------
Subsidiary of Registrant
Avesis of Washington, D.C., Inc.
State of Incorporation: District of Columbia
Name under which business is done: Avesis of Washington, D.C., Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-KSB FOR THE YEAR ENDED MAY 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<EXCHANGE-RATE> 1
<CASH> 993,610
<SECURITIES> 0
<RECEIVABLES> 509,657
<ALLOWANCES> (29,749)
<INVENTORY> 0
<CURRENT-ASSETS> 1,588,969
<PP&E> 1,340,510
<DEPRECIATION> (931,283)
<TOTAL-ASSETS> 2,241,705
<CURRENT-LIABILITIES> 1,238,551
<BONDS> 0
0
3,882
<COMMON> 42,711
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,241,705
<SALES> 0
<TOTAL-REVENUES> 8,336,631
<CGS> 6,120,416
<TOTAL-COSTS> 1,889,605
<OTHER-EXPENSES> (6,570)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (19,305)
<INCOME-PRETAX> 313,875
<INCOME-TAX> 0
<INCOME-CONTINUING> 313,875
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 313,875
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
