Securities and Exchange Commission
Washington D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended August 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______________ to ______________
Commission File Number 0-15304
AVESIS INCORPORATED
---------------------------------------
(Exact name of small business issuer as
specified in its charter)
Delaware 86-0349350
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3724 North Third Street, Suite 300 Phoenix, Arizona 85012
---------------------------------------------------------
(Address of principal executive offices)
(602) 241 - 3400
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
The number of outstanding shares of the registrant's Common Stock on
September 23, 1999 was 7,343,297.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (Check One)
[ ] Yes [X] No
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVESIS INCORPORATED
BALANCE SHEET
AS OF AUGUST 31, 1999
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,619,661
Receivables, net 285,135
Prepaid expenses and other 228,660
------------
Total current assets 3,133,456
Property and equipment, net 498,623
Deposits and other assets 245,681
------------
$ 3,877,760
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,308,688
Current installments of obligations under capital lease 10,288
Accrued expenses-
Compensation 43,961
Other 8,396
Deferred income 17,883
------------
Total current liabilities 1,389,216
Obligations under capital lease, excluding current installments 17,583
------------
Total liabilities 1,406,799
------------
Stockholders' equity:
Preferred stock $.01 par value, authorized 12,000,000 shares:
$3.75 Class A, senior nonvoting cumulative convertible
preferred stock, Series A, $.01 par value; authorized
1,000,000 shares; 301,160 issued and outstanding
(liquidation preference of $3.75 per share) 3,012
$10 Class A, nonvoting cumulative convertible preferred
stock, Series 2, $.01 par value; authorized 1,000,000
shares; 5,000 shares issued and outstanding (liquidation
preference of $10 per share) and $30,375 of dividends in
arrears at $6.075 per share; dividends accrue at $.225
per share per calendar quarter 50
Common stock of $.01 par value, authorized 20,000,000 shares;
7,356,297 shares issued and outstanding 73,563
Additional paid-in capital 10,458,180
Accumulated deficit (8,063,844)
------------
Total stockholders' equity 2,470,961
------------
$ 3,877,760
============
The accompanying notes are an integral part of these statements.
2
<PAGE>
AVESIS INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED AUGUST 31, 1999 AND 1998
(Unaudited)
Quarters Ended
----------------------------
1999 1998
------------ ------------
Service revenues:
Administration fees $ 2,074,723 $ 1,994,944
Buying group 356,883 405,713
Provider fees 37,438 37,053
Other 2,059 1,588
------------ ------------
Total service revenues 2,471,103 2,439,298
Cost of services 1,805,905 1,832,672
------------ ------------
Income from services 665,198 606,626
General and administrative expenses 283,972 237,884
Selling and marketing expenses 266,100 249,423
------------ ------------
Income from operations 115,126 119,319
------------ ------------
Non-operating income:
Other income 702 1,319
Interest income 28,231 10,128
Interest expense (897) (1,104)
------------ ------------
Net non-operating income 28,036 10,343
------------ ------------
Net income $ 143,162 $ 129,662
============ ============
Preferred stock dividends (26,535) (28,053)
Net income available to common stockholders $ 116,627 $ 101,599
============ ============
Earnings per share - Basic $ 0.02 $ 0.02
============ ============
Earnings per share - Diluted $ 0.01 $ 0.02
============ ============
Weighted average common and equivalent
shares outstanding - Basic 7,356,297 5,059,711
============ ============
Weighted average common and equivalent
0shares outstanding - Diluted 10,493,904 8,327,918
============ ============
The accompanying notes are an integral part of these statements.
3
<PAGE>
AVESIS INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED AUGUST 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 143,162 $ 129,662
----------- -----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 35,444 27,892
Provision for losses on accounts receivable (12,771) -0-
Increase (decrease) in cash resulting from changes in:
Receivables 68,641 139,162
Prepaid expenses and other 28,241 (13,401)
Other assets (11,762) 722
Accounts payable (55,898) 159,064
Accrued expenses (55,584) (31,165)
Deferred income 5,681 4,399
Accrued rent -0- (5,875)
----------- -----------
Total adjustments 1,992 280,798
----------- -----------
Net cash provided by operating activities 145,154 410,460
----------- -----------
Cash flows from investment activities:
Purchases of property and equipment (67,979) (52,702)
Proceeds from dispositions of property and equipment -0- 1,370
----------- -----------
Net cash used in investing activities (67,979) (51,332)
----------- -----------
Cash flows from financing activities:
Principal payments under capital lease obligation (2,785) (2,579)
Exercise of stock options and warrants -0- 1,228,656
Payment of dividend on preferred stock (50,821) -0-
Payments for repurchase of common and preferred stock (3,250) (647,568)
----------- -----------
Net cash (used in) provided by financing activities (56,856) 578,509
----------- -----------
Net increase in cash and cash equivalents 20,319 937,637
Cash and cash equivalents, beginning of period 2,599,342 993,610
----------- -----------
Cash and cash equivalents, end of period $ 2,619,661 $ 1,931,247
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
AVESIS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1999 AND 1998
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Avesis Incorporated, and its wholly-owned subsidiary, Avesis of Washington, D.C.
(collectively, the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for a complete financial statement
presentation. In the opinion of Management, such unaudited interim information
reflects all adjustments, consisting only of a normal recurring nature,
necessary to present the Company's financial position and the results of
operations and cash flows for the periods presented. The results of operations
for interim periods are not necessarily indicative of the results to be expected
for a full fiscal year. These condensed consolidated financial statements should
be read in conjunction with the Company's audited consolidated financial
statements included in the Company's Annual Report on Form 10-KSB, for the year
ended May 31, 1999.
Note 2. Earnings per Share
A summary of the reconciliation from basic earnings per share to diluted
earnings per share for the quarters ended August 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
Quarter ended Quarter ended
August 31, 1999 August 31, 1998
----------- -----------
<S> <C> <C>
Net earnings $ 143,162 $ 129,662
Less: preferred stock dividends 26,535 28,063
=========== ===========
Income available to common stockholders 116,627 101,599
=========== ===========
Basic EPS - weighted average shares outstanding 7,356,297 5,059,711
=========== ===========
Basic earnings per share $ 0.02 $ 0.02
=========== ===========
Basic EPS - weighted average shares outstanding 7,356,297 5,059,711
Effect of dilutive securities:
Stock Purchase Options - common stock 112,746 --
Convertible preferred stock 3,024,861 3,268,207
----------- -----------
Dilutive EPS - weighted average shares outstanding 10,493,904 8,327,918
Net earnings $ 143,162 $ 129,662
----------- -----------
Diluted earnings per share $ 0.01 $ 0.02
=========== ===========
</TABLE>
5
<PAGE>
NOTE 3. 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS FOR THE
QUARTERS ENDED AUGUST 31, 1999 AND 1998
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
Members, 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 Members enrolled in the Company's benefit programs, the relevance
of the Company's historical performance, Year 2000 issues 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.
Avesis Incorporated, a Delaware corporation (together with its subsidiary,
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
services and products through networks of providers such as ophthalmologists,
optometrists, opticians, dentists, chiropractors and hearing specialists
("Providers").
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. Certain Sponsors 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 product is shipped.
Vision Provider fee revenue is based upon a percentage of materials sold by
certain participating providers under certain plans.
6
<PAGE>
RESULTS OF OPERATIONS:
The following tables detail the Company's major revenue and expense
categories for the quarters ended August 31, 1999 and 1998:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
August 31, 1999 August 31, 1998 Increase/(Decrease)
--------------------------- --------------------------- -------------------
% of Total % of Total %
Revenue: Service Revenue Service Revenue Change
- -------- --------------- --------------- ------
<S> <C> <C> <C> <C> <C> <C>
Total Service Revenue $2,471,103 100% $2,439,298 100% $31,805 1%
Vision & Hearing Program 1,868,728 76% 1,691,887 69% 176,841 11%
Vision Provider Fee 37,438 2% 37,053 2% 385 1%
Dental Program 205,987 8% 296,785 12% (90,798) (31%)
Buying Group Program 356,883 14% 405,713 17% (48,830) (12%)
Expenses:
- ---------
Cost of Services 1,805,905 73% 1,832,672 75% (26,767) (1%)
General & Administrative 283,972 12% 237,884 10% 46,088 19%
Selling & Marketing 266,100 11% 249,423 10% 16,677 7%
Net Income 143,162 6% 129,662 5% 13,500 10%
</TABLE>
Past and future revenues in all lines of business are directly related to
the number of Members enrolled in the Company's benefit programs. However, there
may be significant pricing differences to Sponsors depending on whether the
benefit offered is funded in part or whole by the plan Sponsor. Two major
Sponsors accounted for 48% and 14% of total service revenues in the first
quarter of fiscal 2000, and three major Sponsors accounted for 28%, 16% and 14%
of total service revenues in the first quarter of fiscal 1999. Two of the
Company's three major Sponsors accounted for separately during the first quarter
of fiscal 1999 were combined before the first quarter of fiscal 2000. The
Company is substantially dependent on a limited number of Sponsors and may be
materially adversely affected by termination of its agreements with those
Sponsors.
The increase in total service revenues is principally due to a vision plan
Sponsor who has increased the level of benefit of its Members, and the resulting
fees, over the prior year, and a second vision plan Sponsor which has added
approximately 93,000 Members since August 1998.
The Company had approximately 784,000 vision and 4,000 hearing Members as
of August 31, 1999, compared to approximately 794,000 vision and 6,000 hearing
Members as of August 31, 1998. The increase in vision and hearing revenue during
the first quarter of fiscal year 2000 as compared to the previous fiscal year
was largely the result of the two vision plan Sponsors mentioned above. Other
changes in the number of vision and hearing Members occurred due to Sponsors'
employee or Member fluctuations in the normal course of business. Vision
provider fee revenue remained constant as a percentage of total service revenues
from the first quarter of fiscal year 1999 to the first quarter of fiscal year
2000.
7
<PAGE>
The Company had approximately 126,000 dental Members as of August 31, 1999,
compared to approximately 162,000 dental Members as of August 31, 1998. The
decline of the Company's dental program revenue and membership resulted from a
Sponsor's loss of approximately 23,000 Members who participated in the Company's
dental program. There also have been reductions in Members from various Sponsors
in the normal course of business.
The Company makes available to its vision Providers a buying group program
that enables the Provider to order eyeglass frames from the manufacturers at
discounts from wholesale costs. These discounted prices are generally lower than
a Provider could negotiate individually, due to the large volume of purchases of
the buying group.
Costs of Services primarily relate to servicing Members, Providers, and
Sponsors under the Company's vision, hearing, dental and chiropractic benefit
programs as well as the cost of frames that are sold through the Company's
buying group program as discussed above. Cost of Services decreased slightly as
a percentage of total service revenues during the quarter ended August 31, 1999,
as compared to the same period in fiscal 1999. This is due to the efficiencies
of scale that the Company is starting to realize as its total service revenue
continues to grow. However, Cost of Services increased as a percentage of total
service revenue during the first quarter of fiscal 2000 (73%) as compared to the
average for the entire previous fiscal year (70%). This increase was largely due
to the Company's focus on Customer Service, Network Development and Provider
communication. During the first quarter of fiscal 2000, the Company's Vision &
Dental Provider Networks each grew by approximately 9%.
General and Administrative expenses increased as a percentage of total
service revenue during the quarter ended August 31, 1999, as compared to the
quarter ended August 31, 1998. The increase was largely due to increases in
rent, depreciation and equipment rentals related to the expansion of the
Company's principal offices beginning February 1999. The Company's payments
under its Management Agreement with National Health Enterprises, Inc. (an
affiliate) increased by $50,000 to $300,000 annually as of June 1, 1999. The
Company also began making monthly payments under its Investment Advisor
Agreement with Richter & Co., Inc. (an affiliate) at an annual rate of $30,000
as of June 1, 1999.
Selling and marketing expenses include marketing fees, broker commissions,
inside sales and marketing salaries and related expenses, travel related to the
Company's sales activities and an allocation of related overhead expenses. The
increase in expenses during the current period was primarily due to the payroll
and related expenses for a senior salesperson that joined the Company after the
first quarter of fiscal 1999. A significant amount of the Company's marketing
activities has been outsourced to management consultants, National Health
Enterprises (an affiliate).
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $2,619,661 as of August 31,
1999, compared to $2,599,342 as of May 31, 1999. The increase of $20,319 is
primarily due to the Company's net income earned during the quarter ended August
31, 1999, partially offset by fixed asset purchases and the payment of a
dividend on the Company's Series A preferred stock. Current cash on hand and
cash provided from operations is expected to allow the Company to sustain
operations for the foreseeable future.
As of August 31, 1999, the Company had $1,308,688 of Accounts Payable,
compared to $1,364,586 as of May 31, 1999. Included in Accounts Payable are
reserves for claims of $1,102,565 as of August 31, 1999, and $1,082,072 as of
May 31, 1999. The reserves are for incurred but not reported claim
reimbursements to Providers who participate in certain managed care programs.
The Company believes this reserve is adequate based upon historical results.
The Company expects to pay dividends of approximately $50,000 on the Series
A Preferred Stock on December 1, 1999.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer systems that were written
using two digits rather than four to define the applicable year. This
programming decision may prevent such systems from accurately processing dates
occurring in the Year 2000 and thereafter. This could result in system failures
or in miscalculations causing a disruption of operations, including, but not
limited to, a temporary inability to process Member eligibility information, to
process claims payments, or to engage in routine business activities and
operations.
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. The
Company missed its anticipated implementation date for the new system of
September 1, 1999, due to issues with data conversion from its current systems.
As of October 4, 1999, the issues have been addressed in a satisfactory manner
and the Company's expectation is that the new system will be fully implemented
as of November 1, 1999. As of August 31, 1999, the Company had paid
approximately $429,000 for software development and related hardware, which was
capitalized. The Company expects to incur approximately $55,000 of additional
software development and related hardware expenses during fiscal 2000.
The Company has reviewed all other internally used software and believes
that its systems that have recently been developed and are currently under
testing and all other critical applications are Year 2000 compliant. Based upon
its current computer operations and systems development, the Company believes
that its risks related to Year 2000 compliance are minimal. The Company does not
presently anticipate that any additional costs to address the Year 2000 issue
will have a material adverse effect on the Company's financial condition,
results of operations or liquidity.
9
<PAGE>
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. Based upon information recently received from third parties,
the Company believes that all significant vendors and clients have Year 2000
remediation efforts underway. The Company's five largest Sponsors that
collectively account for greater than 90% of the total administration fee
revenue either electronically transmit data using a four-digit year or forward
data in a hard copy format. To the extent that the Company's vendor and client
data are not Year 2000 compliant, the Company's new systems have been written
with the flexibility to translate the data accordingly into a Year 2000
compliant format. While the Company believes that its risks related to
disruption arising from Year 2000 compliance by vendors and its clients are
minimal, it does not have any control over these third parties and cannot
determine to what extent future operating results may be adversely affected by
the failure of third parties to address Year 2000 issues successfully.
10
<PAGE>
PART II OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(b) The Certificate of Designation for the Company's Class A, Senior
Nonvoting Cumulative Convertible Preferred Stock, Series A, restricts
the payment of dividends on the Company's Series 2 Preferred Stock and
Common Stock. Accordingly, the Company may not pay the quarterly
dividend otherwise scheduled for payment during October 1999, on
shares of its Series 2 Preferred Stock. Such dividend is cumulative,
and the total dividend arrearage is $31,500, or $6.30 per share, as of
September 30, 1999 for all 5,000 shares outstanding.
ITEM 5. OTHER INFORMATION
RETIREMENT OF STOCK INFORMATION
As previously disclosed in the Company's Form 10-KSB for the year ended May
31, 1999, filed on August 25, 1999, the Company made the following stock
repurchases and retirements:
Series 2 Total Purchase Price
Date Shares including Commissions
------------- -------- ---------------------
June 29, 1999 1,000 $3,276
Subsequent to the filing of the Company's Form 10-KSB for the year ended
May 31, 1999, the Company made the following stock repurchases and
retirements:
Series A Total Purchase Price
Date Common Shares Shares including Commissions
----------------- ------------- -------- ---------------------
September 3, 1999 13,000 $ 6,392
September 13,1999 3,500 $17,522
CHANGE IN FISCAL YEAR
On October 5, 1999, the Company's Board of Directors approved the change of
the Company's fiscal year end from May 31 to December 31. The Company will
file a transition report on Form 10-QSB for the quarter ended September 30,
1999 by November 15, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index following the Signatures page, which is incorporated
herein by reference.
(b) No reports on Form 8-K were filed during the quarter ended August 31,
1999.
11
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AVESIS INCORPORATED
(Registrant)
Date: 10/12/99 /s/ Neal A. Kempler
----------------------------------------
Neal A. Kempler, Vice President
and Secretary
Date: 10/12/99 /s/ Joel H. Alperstein
----------------------------------------
Joel H. Alperstein, Director of Finance
and Treasurer
(Principal Financial Officer)
12
<PAGE>
Avesis Incorporated
Exhibit Index
Form 10-QSB for the Quarter Ended August 31, 1999
Exhibit No. Description Incorporated by Reference from the:
- ----------- ----------- -----------------------------------
11 Statement re: Computation Earnings (Loss) per Share
of per Share Earnings Computation, see Note 2 to the
Notes to Condensed Consolidated
Financial Statements
27 Financial Data Schedule Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE COMPANY'S FORM 10-QSB FOR THE QUARTER ENDED AUGUST
31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> AUG-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,619,661
<SECURITIES> 0
<RECEIVABLES> 313,396
<ALLOWANCES> (28,261)
<INVENTORY> 0
<CURRENT-ASSETS> 3,133,456
<PP&E> 1,511,609
<DEPRECIATION> (1,012,986)
<TOTAL-ASSETS> 3,877,760
<CURRENT-LIABILITIES> 2,389,216
<BONDS> 0
0
3,062
<COMMON> 73,563
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,877,760
<SALES> 0
<TOTAL-REVENUES> 2,471,103
<CGS> 1,805,905
<TOTAL-COSTS> 550,072
<OTHER-EXPENSES> 28,933
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (897)
<INCOME-PRETAX> 143,162
<INCOME-TAX> 0
<INCOME-CONTINUING> 143,162
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 143,162
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.01
</TABLE>
