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, 1999 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 No.)
incorporation or organization)
3724 North Third Street, Suite 300
Phoenix, Arizona 85012
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (602) 241-3400
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value &
$l0 Class A Nonvoting Cumulative Convertible Preferred Stock,
Series 2, $.01 par value
-------------------------------------------------------------
(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 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: $10,206,467.
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 2, 1999 was $966,700. 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
2, 1999 was 7,356,297.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
AVESIS INCORPORATED
FORM l0-KSB ANNUAL REPORT
YEAR ENDED MAY 31, 1999
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...... 13
ITEM 7. Financial Statements .......................................... 17
ITEM 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure .................................... 18
PART III
ITEM 9. Directors, Executive Officers, Promoters, and Control Persons;
Compliance with Section 16(a) of the Exchange Act............ 18
ITEM 10. Executive Compensation ........................................ 22
ITEM 11. Security Ownership of Certain Beneficial Owners and
Management .................................................. 24
ITEM 12. Certain Relationships and Related Transactions................. 26
ITEM 13. Exhibits and Reports on Form 8-K .............................. 28
SIGNATURES ................................................................ 29
<PAGE>
PART I
ITEM I. DESCRIPTION OF BUSINESS
GENERAL
Avesis Incorporated, a Delaware corporation (together with its subsidiary,
Avesis of Washington, D.C., Inc., collectively 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,
--------------------------
1999 1998
---- ----
Vision and Hearing Program 87% 80%
Dental Program 13% 20%
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 may be 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 the Providers 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 a
periodic 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 regulation, 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 Providers Number of States Number of Members
------------ ------------------- ---------------- -----------------
May 31, 1999 5,151 45 817,000
May 31, 1998 4,550 48 649,000
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, from 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 Providers Number of States Number of Members
------------ ------------------- ---------------- -----------------
May 31, 1999 8,397 42 144,000
May 31, 1998 10,683 43 148,000
Included in the number of providers in the table above as of May 31, 1998 are
5,553 providers who participate in a third party's Provider network. The Company
had a network rental agreement that allowed Members to utilize the services of
the third party's Provider network that ended during fiscal 1999. As of August
13, 1999 the Company had 8,940 providers participating in its Dental Program.
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 (the "Chiropractic Program"). 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, Management believes 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,
Member patients can be an important source of incremental revenue to Providers.
There can be no assurance that Providers will continue to participate in the
Programs even if their participation results in an increase in revenues since
the portion of their practices derived from the Programs may be 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 or other wrongdoing 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"), an affiliate. 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.
Two major Sponsors accounted for 48% and 14% of total service revenues in
fiscal 1999 and three major Sponsors accounted for 28%, 15% and 10% in fiscal
1998. Two of the three major Sponsors accounted for separately during fiscal
1998 were combined during fiscal 1999 to be one major Sponsor. The Company is
substantially dependent on a limited number of Sponsors and may be materially
adversely affected by termination of its agreements with Sponsors.
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 aspects 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 applicable laws and regulations as they are currently
interpreted. 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 that event, the Company could be required to register in various
additional states and/or post substantial fidelity or surety bonds.
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 2, 1999, the Company had 47 full-time and 2 part-time
employees, compared to 42 full-time and 2 part-time employees as of August 10,
1998. 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.
On December 16, 1998, the Company entered into a lease agreement to expand its
current principal office location by approximately 3,200 square feet to 9,900
square feet. The term of the lease will run concurrently with the current lease
on the principal office location and will expire 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 covered
approximately 13,300 usable square feet of space and was scheduled to expire 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. On February 24, 1999, the Company was released by the
landlord from the lease agreement and by the lessee from the sub-lease agreement
covering the Company's former principal office. The write-off of unamortized
broker's commissions and accrued rent that related to the lease for the
Company's former principal office resulted in approximately $47,000 of
miscellaneous income. For the years ended May 31, 1999 and 1998, rent expense
related to the subleased premises was $169,426 and $159,623, respectively, and
sublease rental income was $168,071 and $161,720, 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 Class A Nonvoting Cumulative Convertible
Preferred Stock, Series 2 ("Series 2 Shares") Shares are quoted in the
over-the-counter market. 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 1999. Such market quotations reflect inter-dealer
prices, without retail markup, markdown or commission and may not represent
actual transactions. The Company's Class A Senior Nonvoting Cumulative
Convertible Preferred Stock, Series A ("Series A Shares") Shares were not quoted
during fiscal 1998 or fiscal 1999 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.
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 1999
- ----------------
First Quarter ended Aug. 31, 1998 $1.25 $1.00 $0.21875 $0.21875
Second Quarter ended Nov. 30, 1998 2.75 1.25 0.29 0.21875
Third Quarter ended Feb. 28, 1999 2.75 2.75 0.30 0.29
Fourth Quarter ended May 31, 1999 2.75 2.75 0.46875 0.30
8
<PAGE>
1998 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 ("Series A Shares"), for each outstanding share of the Class A
Nonvoting Cumulative Convertible Preferred Stock, Series 2 ("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 then outstanding Series 2 Shares
for the Series A Shares.
Series 2 Shares are entitled to receive a cumulative dividend at an annual
rate of 9% of the face value of $10.00 ($0.90 per share). Each share is
currently convertible into 2.5 shares of the Company's Common Stock. Series A
Shares are entitled to receive a cumulative dividend at an annual rate of
$0.3375 per share paid semi-annually and each share is currently convertible
into 10 shares of the Company's Common Stock.
The exchange of the Series 2 Shares pursuant to the Exchange Offer and the
Company's repurchase program, under which it repurchased and retired 64,300
Series 2 Shares at $3.00 per share during fiscal 1999, significantly reduced the
number of the Series 2 Shares that trade publicly and the number of holders of
the shares. These reductions may adversely affect the liquidity and the "pink
sheet" market value of remaining Series 2 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.
As of August 2, 1999, there were 7,356,297 shares of the Common Stock
outstanding held by approximately 165 stockholders of record. Trading activity
with respect to the Common Stock has been limited and the volume of transactions
may 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.
9
<PAGE>
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 the 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 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 exchanged 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 currently 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.
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
10
<PAGE>
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. The modification expired on August 31, 1998, and all terms
returned to the original exercise terms for all unexercised stock options and
warrants.
Pursuant to the revised terms, the following individuals exercised their
stock options or warrants during August 1998, in the following amounts at the
following exercise prices per option or warrant:
Number of Number of
Common Stock Common Stock Modified
Option/Warrant Holder Options Warrants Exercise Price
- --------------------- ------- -------- --------------
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
Gerald L. Cohen 100,000 $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 $1,228,657. Of the preceding amount, approximately
$400,712 was 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 was used as working capital.
RETIREMENT OF STOCK INFORMATION
Subsequent to year-end the Company made the following stock repurchase:
Total Purchase Price
Date Series 2 Shares including Commissions
---- --------------- ---------------------
June 29, 1999 1,000 $3,276
11
<PAGE>
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 fiscal years ending May
31, 1995 through 1999, have been derived from the Company's audited financial
statements. The selected financial data are included herein as additional
information.
<TABLE>
<CAPTION>
Years Ended May 31,
-------------------------------------------------------------------
Selected Operating Data: 1999 1998 1997 1996 1995
----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenues $10,206,467 $8,336,631 $ 5,645,276 $ 6,019,896 $6,351,106
Operating expenses 9,300,195 8,010,021 5,739,503 6,106,694 5,986,897
Net income (loss) 1,006,265 313,875 (190,265) (124,859) 505,411
Net income (loss) per share of
Common Stock - Basic (1) .13 .06 (.13) (.12) .02
As of May 31,
-------------------------------------------------------------------
Selected Balance Sheet Data: 1999 1998 1997 1996 1995
----------- ---------- ----------- ----------- ----------
Working capital $ 1,651,410 $ 350,418 $ 293,595 $ 422,922 $ 747,566
Current assets 3,197,248 1,588,969 1,271,505 864,566 1,242,534
Total assets 3,897,255 2,241,705 1,639,389 1,650,527 1,839,377
Current liabilities 1,545,838 1,238,551 977,910 441,644 494,968
Long term obligations 20,368 90,475 92,044 449,183 484,850
Total liabilities 1,566,206 1,329,026 1,069,954 890,827 979,818
Total stockholders' equity 2,331,049 912,679 569,435 759,700 859,559
</TABLE>
(1) After provision for preferred stock dividends as follows: $107,936 in 1999;
$63,270 in 1998 (70,300 Series 2 Shares outstanding as of May 31, 1998
times $0.90 per share); and $349,162 in 1997, 1996 and 1995.
12
<PAGE>
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, 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
cardholders, 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.
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.
13
<PAGE>
RESULTS OF OPERATIONS
The following table details the Company's major revenue and expense
categories for the years ended May 31, 1999 and 1998:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1999 May 31, 1998 Increase/(Decrease)
-------------------------- ------------------------ ---------------------
% of % of
Total Service Total Service
Revenue: Revenue Revenue % Change
- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Total Service Revenue $10,206,467 100% $8,336,631 100% $1,869,836 22%
Vision & Hearing Program 7,386,670 72% 5,258,750 63% 2,127,920 40%
Vision Provider Fee 142,863 1% 124,397 1% 18,466 15%
Dental Program 1,054,660 10% 1,266,548 15% (211,888) (17%)
Buying Group Program 1,607,000 16% 1,655,298 20% (48,298) (3%)
Expenses:
Cost of Services 7,131,269 70% 6,120,416 73% 1,010,853 17%
General & Administrative 1,066,390 10% 1,121,099 14% (54,709) (5%)
Selling & Marketing 1,102,536 11% 768,506 9% 334,030 43%
Income from Operations 906,272 9% 326,610 4% 579,662 177%
Net Income 1,006,265 10% 313,875 4% 692,390 221%
</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. A substantial
portion of the Company's Member base is derived from a limited number of
Sponsors.
The increase in the Company's total service revenues was principally 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 1999 by 5% compared to fiscal 1998 results. The Company anticipates that
the trend of decreased operating expenses as a percentage of total service
revenues will continue during fiscal 2000, due to the operational efficiencies
achieved during fiscal 1999 and the expected efficiencies to be achieved related
to the new systems currently under development.
The increase in vision and hearing revenues primarily resulted from the
addition of a significant Sponsor, with approximately 86,000 managed care vision
Members, and the increase in the level of benefits provided to a portion of the
membership of a significant Sponsor, with approximately 100,000 affected 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 817,000 vision and 6,000
hearing Members as of May 31, 1999, compared to approximately 649,000 vision and
6,000 hearing Members as of May 31, 1998.
14
<PAGE>
Vision provider fee revenue remained constant as a percentage of total
service revenues from fiscal 1998 to fiscal 1999.
The decrease in Dental Program revenues resulted from a Sponsor's loss of
approximately 18,000 Members. This loss of Members was partially offset by
increases of Members from various other current Sponsors. The revenue derived
from the new Members was less than the lost revenue due to the differences in
the level of benefits provided. There were approximately 144,000 dental Members
as of May 31, 1999, compared to approximately 148,000 as of May 31, 1998.
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.
Cost of Services primarily relates 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 and General and
Administrative Expenses continued to decrease as a percentage of total service
revenues in the current fiscal year as compared to the two prior fiscal years.
This is due to the efficiencies of scale that the Company is experiencing as its
Total Service Revenues and Member base continue to grow. Included in 1998
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 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. The increase in
expenses in the current fiscal year resulted from the increase of commissions
directly related to the increase in administration fee revenue, the addition of
an experienced salesperson during September 1998 and the increase of travel and
related expenses to expand the Company's markets. A significant amount of the
Company's marketing activities has been outsourced to management consultants,
National Health Enterprises. See Item 12 - "Certain Relationships and Related
Transactions - Agreements with National Health Enterprises, Inc.."
Non-operating income/(expense) was $112,993 and ($12,735) in fiscal 1999
and 1998, respectively. Included in non-operating income was $85,875 and $30,982
of interest income for the years ended May 31, 1999 and 1998, respectively. Also
included in current year non-operating income was approximately $47,000 related
to the write-off of unamortized broker's commissions and accrued rent that
related to the lease for the Company's former principal office. Prior year
15
<PAGE>
non-operating expense includes $25,373 for the write-off of virtually all of the
unamortized moving expenses related to the Company's previous relocation of the
principal office.
LIQUIDITY AND CAPITAL RESOURCES
On May 31, 1999, the Company's cash and cash equivalents were $2,599,342,
compared to $993,610 as of May 31, 1998. The increase of $1,605,732 was
primarily due to the Company's profitability, coupled with the timely
collections of accounts receivable and the favorable timing of vendor and claim
payments. The Company also received cash of $1,228,657 from the exercise of
stock options by members of the Board of Directors, which was offset by $714,016
for repurchases of capital stock throughout the year. Current cash on hand and
cash provided from operations are expected to allow the Company to sustain
operations for the foreseeable future.
The Company is party to a revolving credit facility for an amount not to
exceed $100,000. The credit facility allows the Company flexibility to better
manage its cash liquidity. To date, the Company has never drawn funds on the
credit facility.
As of May 31, 1999, the Company had $1,364,586 of Accounts Payable,
compared to $1,106,165 in the prior fiscal year. The increase is predominately
due to claims reserves of $1,082,072 in the current year compared with $786,052
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. The Company has continued to realize 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 $50,821 on the Series
A Shares to holders of record on November 30, 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.
16
<PAGE>
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 1999, the new system was in the implementation phase and is expected to
be fully implemented as of September 1, 1999. As of May 31, 1999, the Company
had paid approximately $384,000 for software development and related hardware,
which was properly capitalized. The Company expects to incur approximately
$100,000 of additional software development and related hardware expenses during
fiscal 2000.
The Company has reviewed all 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.
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 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 vendors and clients
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 successfully address Year 2000 issues.
ITEM 7. FINANCIAL STATEMENTS
Financial Statements appear commencing at page F-1 immediately hereafter.
17
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Financial Statements
May 31, 1999 and 1998
(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, 1999, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for the years ended
May 31, 1999 and 1998. 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, 1999, and the results of their operations and their
cash flows for each of the years in the two-year period ended May 31, 1999, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Phoenix, Arizona
July 16, 1999
F-1
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Balance Sheet
May 31, 1999
ASSETS
Current assets:
Cash and cash equivalents $ 2,599,342
Receivables, net 341,005
Prepaid expenses and other 256,901
-----------
Total current assets 3,197,248
Property and equipment, net 466,088
Deposits 233,919
-----------
$ 3,897,255
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,364,586
Current installments of obligations under capital lease 10,288
Accrued expenses:
Compensation 75,232
Other 32,709
Dividends payable 50,821
Deferred income 12,202
-----------
Total current liabilities 1,545,838
Obligations under capital lease, excluding current installments 20,368
-----------
Total liabilities 1,566,206
-----------
Stockholders' equity:
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; 301,160 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;
6,000 shares issued and outstanding (liquidation preference
of $10 per share) and $35,100 of dividends in arrears at
$5.85 per share; dividends accrue at $.225 per share each
calendar quarter 60
Common stock of $.01 par value, authorized 20,000,000 shares;
7,356,297 shares issued and outstanding 73,563
Additional paid-in capital 10,461,420
Accumulated deficit (8,207,006)
-----------
Total stockholders' equity 2,331,049
Commitments and contingencies (notes 4, 10, 11, 12 and 13)
-----------
$ 3,897,255
===========
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Statements of Earnings
Years ended May 31, 1999 and 1998
1999 1998
------------ ------------
Service revenues:
Administration fees $ 8,447,735 6,550,966
Buying group 1,607,000 1,655,298
Provider fees 142,863 124,397
Other 8,869 5,970
------------ ------------
Total service revenues 10,206,467 8,336,631
Cost of services 7,131,269 6,120,416
------------ ------------
Income from services 3,075,198 2,216,215
General and administrative expenses 1,066,390 1,121,099
Selling and marketing expenses 1,102,536 768,506
------------ ------------
Income from operations 906,272 326,610
------------ ------------
Non-operating income (expense):
Interest income 85,875 30,982
Interest expense (3,960) (19,305)
Other 31,078 (24,412)
------------ ------------
Total non-operating expense 112,993 (12,735)
------------ ------------
Income before income taxes 1,019,265 313,875
Income taxes (13,000) --
------------ ------------
Net income 1,006,265 313,875
Preferred stock dividends (107,936) (63,270)
------------ ------------
Net income available to common stockholders $ 898,329 250,605
============ ============
Earnings per share - basic $ 0.13 0.06
============ ============
Earnings per share - diluted $ 0.10 0.06
============ ============
Weighted average common and equivalent
shares outstanding - basic 6,788,944 4,073,918
============ ============
Weighted average common and equivalent
shares outstanding - diluted 9,902,713 5,089,657
============ ============
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended May 31, 1999 and 1998
<TABLE>
<CAPTION>
PREFERRED STOCK TOTAL
-------------------------- COMMON ADDITIONAL ACCUMULATED STOCKHOLDERS'
SERIES A SERIES 2 STOCK PAID-IN CAPITAL DEFICIT EQUITY
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1997 $ -- 3,882 41,004 9,949,159 (9,424,610) 569,435
Repurchase of 79,294 shares
of common stock -- -- (793) (19,838) -- (20,631)
Exchange offer (Series 2 for
Series A preferred) 3,179 (3,179) -- -- -- --
Issuance of 250,000 shares of
common stock in connection
with the Supplemental
Investment Banking Agreement -- -- 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
Repurchase of shares (167) (643) (11,568) (701,638) -- (714,016)
Exercise of stock options -- -- 38,420 1,072,601 -- 1,111,021
Exercise of warrants -- -- 4,000 113,636 -- 117,636
Dividends declared, $.3375
per Class A, senior
nonvoting cumulative
convertible preferred
stock, Series A -- -- -- -- (102,536) (102,536)
Net income -- -- -- -- 1,006,265 1,006,265
----------- ----------- ----------- ----------- ----------- -----------
Balance, May 31, 1999 $ 3,012 60 73,563 10,461,420 (8,207,006) 2,331,049
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended May 31, 1999 and 1998
1999 1998
----------- -----------
Cash flows from operating activities:
Net income $ 1,006,265 313,875
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 124,538 112,071
Provision for losses of accounts receivable 11,283 9,898
Loss on disposal of fixed assets 18,245 2,124
Common stock issued for professional services -- 50,000
Increase (decrease) in cash resulting from
changes in:
Receivables 127,620 (149,450)
Prepaid expenses and other (141,450) (1,837)
Deposits 9,590 (60,626)
Accounts payable 258,421 641,788
Deferred income (4,746) (6,284)
Accrued rent (92,827) (16,842)
Accrued expenses 36,278 (53,125)
Dividend payable 50,821 --
----------- -----------
Net cash provided by operating activities 1,404,038 841,592
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (209,389) (294,307)
Proceeds from dispositions of property
and equipment 9,745 5,000
----------- -----------
Net cash used in investing activities (199,644) (289,307)
----------- -----------
Cash flows from financing activities:
Payment of dividend on preferred stock (102,536) --
Repayment of convertible subordinated debentures -- (189,000)
Payments for repurchase of common stock (714,016) (20,631)
Proceeds from exercise of stock options
and warrants 1,228,657 --
Repayment of shareholder notes payable -- (160,000)
Principal payments under capital lease obligations (10,767) (6,579)
----------- -----------
Net cash provided by/(used in) financing
activities 401,338 (376,210)
----------- -----------
Net increase in cash and cash equivalents 1,605,732 176,075
Cash and cash equivalents, beginning of year 993,610 817,535
----------- -----------
Cash and cash equivalents, end of year $ 2,599,342 993,610
=========== ===========
Supplemental information:
Cash paid for interest $ 3,960 20,118
=========== ===========
Equipment acquired under capital lease $ -- 48,002
=========== ===========
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Financial Statements
May 31, 1999 and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) 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.
(b) CASH AND 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.
(c) 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. Software is amortized over the estimated useful
life of five years.
(d) 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.
(e) EARNINGS PER SHARE
In accordance with SFAS 128, basic EPS is computed by dividing net
income, after deducting the preferred stock dividends requirement, by
the 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.
F-6 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Financial Statements
May 31, 1999 and 1998
(f) 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.
(g) STOCK OPTION PLAN AND WARRANTS
All stock options and warrants are granted at the fair market value or
greater of the underlying securities on the date of grant.
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.
(h) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF
The Company reviews 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.
(i) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of
the financial statement date and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
F-7 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Financial Statements
May 31, 1999 and 1998
(j) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents approximated fair
value because their maturity is generally less than three months. The
fair value of accounts receivable, accounts payable, and accrued
expenses approximates the carrying value due to the short-term nature
of these instruments.
(k) COMPREHENSIVE INCOME
On June 1, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. SFAS 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set
of financial statements. Comprehensive income consists of net income
and net unrealized gains (losses) on securities and does not affect
the Company's consolidated financial statements for the year ended May
31, 1999.
(l) SEGMENT REPORTING
The Company has one operating business segment which markets and
administers vision, hearing, dental and chiropractic programs.
(2) RECEIVABLES
As of May 31, 1999 receivables consists of:
Trade accounts receivable $ 382,038
Less allowance for doubtful accounts (41,033)
----------
$ 341,005
==========
(3) PROPERTY AND EQUIPMENT
As of May 31, 1999 property and equipment consists of:
Furniture and fixtures $ 267,946
Equipment 805,197
Software 370,486
----------
1,443,629
Less accumulated depreciation and amortization 977,541
----------
$ 466,088
==========
(4) LEASES
The Company leases office space under an agreement which expires September
30, 2002. Until October 1997, the Company maintained its executive offices
at a different location. The lease agreement was set to expire on September
30, 2000. On October 29, 1996, the Company entered into an agreement to
sublease the space until the expiration of the Company's lease agreement.
On February 24, 1999, the Company was released by the landlord from the
lease agreement and by the lessee from the sub-lease agreement covering the
Company's former principal office. The Company also leases equipment under
long-term operating lease agreements. For the years ended May 31, 1999 and
1998, rent expense for all operating leases was $185,785 and $159,224,
F-8 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Financial Statements
May 31, 1999 and 1998
respectively. For the years ended May 31, 1999 and 1998, sublease rent
expense was $169,426 and $159,623, respectively, and sublease rental income
was $168,071 and $161,720, respectively.
The Company is obligated under one capital lease for telephone equipment
that expires in October 2001. As of May 31, 1999 the gross amount of
equipment and accumulated depreciation recorded under this capital lease
was $48,002 and $16,000, respectively.
The Company records rent expense using the straight-line method. For the
lease that expires September 30, 2002, there is no difference between rent
expense and actual rent paid.
Future minimum lease payments for capital lease payments and operating
leases are as follows:
CAPITAL OPERATING
LEASE LEASES
---------- ----------
Years ending May 31:
2000 $ 14,731 $ 208,625
2001 14,731 178,128
2002 4,911 179,899
2003 -- 86,007
2004 -- 26,569
Thereafter -- 12,394
---------- ----------
Total future minimum lease payments 34,373 $ 691,622
==========
Less amount representing interest (at 10.4%) 3,717
----------
Present value of net minimum lease payments 30,656
Less current installments of obligations
under capital lease 10,288
----------
Obligations under capital lease, excluding
current installments $ 20,368
==========
(5) INCOME TAXES
For the year ended May 31, 1999, income tax expense amounted to $13,000. No
income tax benefit was recorded for the year ended May 31, 1998. This was
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 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Financial Statements
May 31, 1999 and 1998
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, 1999 and
1998 are as follows:
1999 1998
----------- -----------
Computed "expected" federal income tax expense $ 346,550 80,325
Change in valuation allowance (350,117) (129,660)
Other 16,567 49,335
----------- -----------
$ 13,000 --
=========== ===========
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) $ 2,075,667
Accrued expenses and other 37,819
Property and equipment (14,199)
Valuation allowance (2,099,287)
-----------
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, 1999 and 1998 was a decrease of $290,868 and $361,945,
respectively.
The Company's federal NOLs of approximately $6,100,000 expire between 2004
and 2013.
(6) COMMON STOCK
During the year ended May 31, 1999, the Company repurchased 1,156,829
shares of common stock for prices ranging from $0.23 to $0.43 per share,
64,300 shares of Class A, nonvoting cumulative convertible preferred stock,
Series 2, for a price of $3 per share and 16,720 shares of Class A, senior
nonvoting cumulative convertible preferred stock, Series A, for prices
ranging from $2.63 to $3.81 per share. Subsequent to the repurchase, the
Company retired these shares.
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 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Financial Statements
May 31, 1999 and 1998
(7) EARNINGS PER SHARE
A summary of the reconciliation from basic earnings per share to diluted
earnings per share for the years ended May 31, 1999 and 1998 follows:
1999 1998
----------- -----------
Net earnings $ 1,006,265 313,875
Less: preferred stock dividends (107,936) (63,270)
----------- -----------
Income available to common stockholders $ 898,329 250,605
=========== ===========
Basic EPS - weighted average
shares outstanding 6,788,944 4,073,918
=========== ===========
Basic earnings per share $ 0.13 0.06
=========== ===========
Basic EPS - weighted average
shares outstanding 6,788,944 4,073,918
Effect of diluted securities:
Convertible debentures -- 19,162
Convertible preferred stock 3,113,769 996,577
----------- -----------
Dilutive EPS - weighted average
shares outstanding 9,902,713 5,089,657
Net earnings 1,006,265 313,875
Interest expense on non-CSE debt -- 8,978
----------- -----------
1,006,265 322,853
Diluted earnings per share $ 0.10 0.06
=========== ===========
(8) 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 (including 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, 1999, there were 170,000 incentive options
outstanding under this plan (of which 113,333 were exercisable at $0.48)
and 310,000 nonqualified options exercisable at prices ranging from $.40
-$1.00 per share.
In connection with the Long-Term Management Agreement, National Health
Enterprises, Inc. of Owing Mills, Maryland (NHE) received ten-year options
to purchase up to 4,400,000 shares of the Company's common stock. Options
to purchase 1,400,000 shares at an exercise price of $.40 per share were
vested at inception, and the remaining options to purchase shares at an
exercise price of $.48 per share vested on December 5, 1994, in connection
with a Board of Directors resolution. NHE transferred all of the options in
March 1993 to certain individuals affiliated with NHE. Effective December
5, 1994, these individuals collectively transferred an aggregate of 125,000
of the options exercisable at $.48 per share to Richter & Co., Inc.
F-11 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Financial Statements
May 31, 1999 and 1998
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. During August 1998, 3,842,000
options were exercised at prices ranging between $0.26 and $0.31. The
modification expired on August 31, 1998 and all terms returned to the
original exercise terms for all unexercised stock options and warrants.
A summary of stock option activity for the years ended May 31, 1999 and
1998 follows:
PRICE PER
OPTIONS OPTION
----------- -----------
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
Options granted --
Options exercised 3,842,000 $ .26 - .31
Options canceled 10,000 $ .48
-----------
Balance outstanding, May 31, 1999 1,038,000
===========
As of May 31, 1999 and 1998, options to purchase 981,333 and 4,770,000
shares, respectively, at prices ranging from $.40 to $1.00 were
exercisable.
A summary of stock options for common stock granted at May 31, 1999
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 1999 LIFE PRICE 1999 PRICE
--------- ----------- ----------- --------- ----------- ---------
.40-$1.00 858,000 4 years $ .47 858,000 $ .47
1.00 10,000 8 years 1.00 10,000 1.00
.48 170,000 9 years .48 113,333 .48
----------- --------- ----------- ---------
1,038,000 .48 981,333 .48
=========== ========= =========== =========
F-12 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Financial Statements
May 31, 1999 and 1998
No stock options were granted in 1999. The per share weighted-average fair
value of stock options granted during 1998 was $0.30 on the date of the
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: 1999 expected dividend yield rate of 0.0%,
risk-free interest rate of 8.0%, volatility of 54.92%, and an expected life
of six years; 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.
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:
1999 1998
----------- -----------
Net income/(loss):
As reported $ 1,006,265 313,875
Pro forma 1,003,622 305,633
Earnings per share:
Basic:
As reported .13 .06
Pro forma .13 .06
Diluted:
As reported .10 .06
Pro forma .10 .06
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. 160,000 of these
warrants had been assigned to William L. Richter. In August 1998, RCI and
William L. Richter exercised their warrants at exercise prices of $.26 and
$.31.
(9) PREFERRED STOCK
The Company has authorized 1,000,000 shares of $10 Class A, Nonvoting
Cumulative Convertible Preferred Stock, Series 2 (the "Series 2 Shares")
with a par value of $.01 per share and quarterly dividends at the fixed
annual rate of $.90 per share. The Series 2 Shares are 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.
F-13 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Financial Statements
May 31, 1999 and 1998
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, 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.
As of May 31, 1999, there were 6,000 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). As of May 31, 1999, there were
301,160 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.
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 Series A Share 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.
(10) 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 Southwest and the D.C. metropolitan area. Two major customers provided
48% and 14% of total service revenues in 1999 and three major customers
provided 28%, 15% and 10% of total service revenues in 1998.
(11) LONG-TERM MANAGEMENT AND MARKETING AGREEMENT
In March 1993, the Company entered into a Long-Term Management Agreement
with NHE, which provides for NHE to manage all aspects of the Company's
business. The initial term of the agreement was five years and was
renewable. NHE also received options to purchase up to 4,400,000 shares of
the Company's common stock. In December 1997, the Company renewed this
agreement for a term of five years with payments of $250,000 per year due
to NHE. In May 1999, the Company increased the payments, effective June
1999, to $300,000 per year.
F-14 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Financial Statements
May 31, 1999 and 1998
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 $310,000 and $211,000 to NHE under the terms of this
agreement in fiscal 1999 and 1998, respectively.
(12) RELATED PARTY TRANSACTIONS
During fiscal 1995, the Company contracted with National Computer Services,
Inc. ("NCS"), a company owned by a member of the Company's board of
directors, to develop software related to the Company's vision, dental and
hearing programs. The Company did not pay any development fees related to
the software during fiscal 1999 and 1998. Additionally, the Company has
contracted with NCS to lease its computer system for approximately $1,000
per month. The Company paid $12,000 of computer lease charges in fiscal
1999 and 1998.
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.
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 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 provided substantial ongoing financial management and other services to
the Company at no charge through May 1999. In May 1999, the Company's Board
of Directors approved a cash payment to RCI at an annual rate of $30,000 to
commence in June 1999. In the opinion of management, the terms of the
Company's arrangements with RCI, NHE and NCS taken as a whole are at least
as favorable to the Company as could be obtained from third parties.
F-15 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Financial Statements
May 31, 1999 and 1998
(13) 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, 1999 and 1998,
the Company did not contribute to the plan.
F-16
<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 68 Co-Chairman and Director
William L. Richter 56 Co-Chairman and Director
Kenneth L. Blum, Sr. 72 Director, Former Acting President and
CEO as of May 31, 1998
Gerald L. Cohen 55 Director
Sam Oolie 63 Director
Alan S. Cohn 43 President, CEO and Director
Kenneth L. Blum, Jr. 36 Director
Neal A. Kempler 31 Corporate Secretary,
Vice President of Operations
Shannon R. Barnett 31 Controller
Joel H. Alperstein 31 Treasurer, Director of Finance
18
<PAGE>
On July 30, 1998, the Company's Board of Directors expanded the Board of
Directors from 5 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 at which time they were re-elected as directors. The
election to the Board of Messrs. Cohn and Blum, Jr. was conditioned upon the
early exercise of their stock options.
William R. Cohen, 68, 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, 56, 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 ten 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., 72, 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 Leasing, Inc., an
automobile wholesaler, since its inception during 1998. 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."
19
<PAGE>
Gerald L. Cohen, 55, 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, 63, 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 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 NCT Group, Inc. (formerly 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;
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., 36, 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."
20
<PAGE>
Neal Kempler, 31, 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, 31, 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, 31, has been the Treasurer of the Company since
December 1997 and the Director of Finance of the Company (Principal Financial
Officer) since January 1997. Since March 1999, Mr. Alperstein has been a
management consultant to American Business Information Systems, Inc., a
high-volume laser printing company. Mr. Alperstein was a self-employed financial
consultant from September 1996 until December 1996. Mr. Alperstein was a Manager
at Stout, Causey & 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."
21
<PAGE>
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, 1999, except
that no Form 4 was received from a more than 10% shareholder in connection with
the Company's August 1998 repurchase of his shares. 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.
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, 1999. No executive officer who was
serving as an executive officer during fiscal 1999 received salary and
bonus which aggregated at least $100,000 for services rendered to the
Company during the year ended May 31, 1999.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- --------------------------------------
Awards
--------------------------------------
Name and Principal Position Year Salary ($) Securities Underlying Options/SARs (#)
- --------------------------- ---- ---------- --------------------------------------
<S> <C> <C> <C>
Alan S. Cohn, CEO (1) 1999 $0 --
Kenneth L. Blum, Sr., Acting CEO 1998 $0 --
1997 $0 --
</TABLE>
- ----------
(1) Mr. Cohn became CEO of the Company as of June 1, 1998. Mr. Cohn is
compensated through the Management Agreement with National Health
Enterprises, Inc.
See also Item 12 -- "Certain Relationships and Related Transactions -
Agreements with National Health Enterprises, Inc. -- Stock Option Grant."
22
<PAGE>
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
ARRANGEMENTS
No employment contracts, termination of employment, or change-in-control
arrangements currently exist except for the National Health Enterprises, Inc.
arrangement described below.
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.
During August 1998, William R. Cohen and Gerald L. Cohen each exercised
their 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."
23
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of August 13, 1999 there were 7,356,297 shares of Common Stock, 5,000
Series 2 Shares and 301,160 Series A Shares outstanding. The table below sets
forth as of August 13, 1999, certain information regarding the shares of Common
Stock and Series A Preferred 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. None of the directors or executive officers owns any Series 2 Shares.
<TABLE>
<CAPTION>
Common issuable upon conversion or
exercise of: (1)
-----------------------------------
Series A Total Common
Common % of Preferred Stock % of Options Beneficially Percent of
Name and Address Stock Common (actual shares) Pref. or Warrants Owned (1) Common (2)
- ---------------- ----- ------ ---------------- ----- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Gerald L. Cohen* 253,359 3.4 22,274(7) 7.4 -- 476,099 6.3
William R. Cohen* 161,117(4) 2.2 10,552 3.5 -- 266,637 3.6
William L. Richter 1,194,620(3) 16.2 50,099(3) 16.6 -- 1,695,610(3) 21.6
C/o Richter & Co., Inc.
450 Park Ave., 28th Floor
New York, NY 10022
Sam Oolie* 220,021(5) 3.0 24,023 8.0 100,000 560,251 7.3
Kenneth L. Blum, Sr. 140,000(6) 1.9 2,000 0.7 -- 160,000 2.2
17133 Ericarose Street
W. Boca Raton, FL 33496
Kenneth L. Blum, Jr. 1,814,750 24.7 -- -- -- 1,814,750 24.7
11460 Cronridge Drive
Suite 120
Owings Mills, MD 21117
Alan S. Cohn 1,804,750 24.5 -- -- -- 1,804,750 24.5
11460 Cronridge Drive
Suite 120
Owings Mills, MD 21117
All directors and 5,588,617(4)(5) 76.0 108,948 36.2 505,000 7,183,097 80.3
Executive officers as
A group (9 persons)
</TABLE>
- ----------
* Business Address: 3724 North Third Street, Suite 300, Phoenix, Arizona
85012.
24
<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 Stock 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 9.0% 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.
25
<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. On May 3, 1999, the
Company's Board of Directors agreed to increase the cash compensation paid to
NHE under the Management Agreement by an additional $50,000 per year to $300,000
per year. Messrs. Blum Sr., Blum Jr. and Cohn abstained from voting due to their
relationship to National Health Enterprises. The increase became effective as of
June 1, 1999.
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.
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 in
interest under the terms of these notes in fiscal 1998. 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 the contract, but does not itself generate the initial
Sponsor contact. The term of the Marketing Agreement is coextensive with that of
26
<PAGE>
the Management Agreement. In fiscal 1999 and 1998, the Company paid
approximately $310,000 and $211,000, respectively, to NHE under the Marketing
Agreement. In fiscal 1999 and 1998, the Company paid approximately $13,446 and
$8,000, 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.
On May 3, 1999, the Company's Board of Directors approved a cash payment to
Richter & Co., Inc. at an annual rate of $30,000 under the Investment Advisor
Agreement. Mr. Richter abstained from voting due to his relationship to Richter
& Co., Inc. The payment commenced as of June 1, 1999.
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 did not pay any development fees related to the
software during fiscal 1999 and 1998. Additionally, the Company has contracted
with NCS to lease its computer system for approximately $1,000 per month. The
Company paid $12,000 of computer lease charges in fiscal 1999 and 1998. 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.
27
<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.
28
<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, 1999 By: /s/ Alan S. Cohn
------------------------ -------------------------------------
Alan S. Cohn
President and Principal 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, Principal August 24, 1999
- ------------------------ Executive Officer and Director
Alan S. Cohn
/s/ Neal A. Kempler Corporate Secretary and August 24, 1999
- ------------------------ Vice President of Operations
Neal A. Kempler
/s/ Joel H. Alperstein Treasurer and Director August 24, 1999
- ------------------------ of Finance
Joel H. Alperstein (Principal Financial Officer)
/s/ Shannon R. Barnett Controller August 24, 1999
- ----------------------- (Principal Accounting Officer)
Shannon R. Barnett
/s/ William R. Cohen Co-Chairman of the August 24, 1999
- ---------------------- Board of Directors
William R. Cohen
/s/ William L. Richter Co-Chairman of the August 24, 1999
- ------------------------ Board of Directors
William L. Richter
/s/ Kenneth L. Blum, Sr. Director August 24, 1999
- ------------------------
Kenneth L. Blum, Sr.
/s/ Kenneth L. Blum, Jr. Director August 24, 1999
- ------------------------
Kenneth L. Blum, Jr.
/s/ Gerald L. Cohen Director August 24, 1999
- ------------------------
Gerald L. Cohen
/s/ Sam Oolie Director August 24, 1999
- ------------------------
Sam Oolie
29
<PAGE>
AVESIS INCORPORATED
EXHIBIT INDEX
FORM 10-KSB
FOR THE FISCAL YEAR ENDED MAY 31, 1999
<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 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
4.2 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.
4.3 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
Stock, Series 2 (File No. 33-28756).
4.4 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>
EXHIBIT NO. EXHIBIT INCORPORATED BY REFERENCE FROM THE:
- ----------- ------- -----------------------------------
<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, Company's report on Form 8-K dated
1993 relating to options for the purchase of March 18, 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
1993 in the amount of $80,000 payable by the March 18, 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
1993 in the amount of $80,000 payable by the March 18, 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
1993 among NHE, Mr. Blum, and Alan S. Cohn March 18, 1993 (File No. 1-9758).
10.8 Marketing Agreement dated March 18, 1993 between Company's report on Form 8-K dated
the Company and NHE March 18, 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
Inc. dated March 18, 1993 for the purchase of March 18, 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
Richter dated March 18, 1993 for the purchase of March 18, 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 Company's Report on Form 10-QSB for the three
Phoenix 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 Company's Report on Form 10-KSB for the year
Ken Blum, Sr., Ken Blum, Jr., and Alan Cohn ended May 31, 1997 (File No. 0-15304).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT INCORPORATED BY REFERENCE FROM THE:
- ----------- ------- -----------------------------------
<S> <C> <C>
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).
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 Company's Report on Form 10-KSB for the year
Investment Banking Agreement ended May 31, 1998 (File No. 0-15304).
11 Statement recomputation of per-share earnings Earnings (Loss) per Share Computation, see
Note 7 to the Notes to Consolidated Financial
Statements.
21 Subsidiary of Registrant filed herewith
27 Financial Data Schedule filed herewith
</TABLE>
Exhibit 21
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, 1999 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-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,599,342
<SECURITIES> 0
<RECEIVABLES> 382,038
<ALLOWANCES> (41,033)
<INVENTORY> 0
<CURRENT-ASSETS> 3,197,248
<PP&E> 1,443,629
<DEPRECIATION> (977,541)
<TOTAL-ASSETS> 3,897,255
<CURRENT-LIABILITIES> 1,545,838
<BONDS> 0
0
3,072
<COMMON> 73,563
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,897,255
<SALES> 0
<TOTAL-REVENUES> 10,206,467
<CGS> 7,131,269
<TOTAL-COSTS> 2,168,926
<OTHER-EXPENSES> (116,953)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,960)
<INCOME-PRETAX> 1,019,265
<INCOME-TAX> 13,000
<INCOME-CONTINUING> 1,006,265
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,006,265
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.10
</TABLE>
