SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ ] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended ________________ or
[X] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from June 1, 1999 to December 31, 1999
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $5,614,154.
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 March 14, 2000 was $1,765,535. 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 March
13, 2000 was 7,250,297.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
AVESIS INCORPORATED
FORM l0-KSB ANNUAL REPORT
TRANSITION PERIOD ENDED DECEMBER 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 ................................................ 19
ITEM 8. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure ............................ 20
PART III
ITEM 9. Directors, Executive Officers, Promoters,
and Control Persons; Compliance with Section 16(a)
of the Exchange Act ............................................... 20
ITEM 10. Executive Compensation ............................................. 24
ITEM 11. Security Ownership of Certain Beneficial
Owners and Management ............................................ 26
ITEM 12. Certain Relationships and Related Transactions...................... 28
ITEM 13. Exhibits and Reports on Form 8-K ................................... 30
SIGNATURES .................................................................. 31
<PAGE>
PART I
ITEM L. DESCRIPTION OF BUSINESS
GENERAL
Avesis Incorporated, a Delaware corporation (together with its
subsidiaries, Avesis of Washington, D.C., Inc. and Avesis Reinsurance
Incorporated, collectively the "Company"), 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:
Transition Period Ended Fiscal Years Ended
----------------------- ----------------------------
December 31, 1999 May 31, 1999 May 31, 1998
----------------- ------------ ------------
Vision and Hearing Program 90% 87% 80%
Dental Program 10% 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.
<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
---- ------------------- ---------------- -----------------
December 31, 1999 6,700 46 687,000
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
---- ------------------- ---------------- -----------------
December 31, 1999 8,945 43 73,000
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 was terminated during the fiscal year
ended May 31, 1999.
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. 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 47% and 15% of total service revenues
during the transition period ended December 31, 1999, and 48% and 14% of total
service revenues in the fiscal year ended May 31, 1999. Three major Sponsors
accounted for 28%, 15% and 10% in the fiscal year ended May 31, 1998. Two of the
three major Sponsors accounted for separately during the fiscal year ended May
31, 1998 were combined during the fiscal year ended May 31, 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.
The Company has recently developed the Avesis "Advantage Vision Plan," and
the "Premier Dental Plan." These products were designed to offer fully insured
benefits to small and medium sized groups, through internal sales personnel and
the broker marketplace. The growth of these product lines will enable the
Company to minimize the inherent risk related to the concentration of its
Members over relatively few Sponsors. The Company derived its first revenues
from these plans during the last quarter of the Transition Period.
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 March 13, 2000 the Company had 39 full-time employees as compared to
47 full-time and 2 part-time employees as of August 2, 1999 and 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
6
<PAGE>
Company's former principal office resulted in approximately $47,000 of
miscellaneous income. For the fiscal 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. There were no sublease expenses or rental income during the
Transition Period.
The Company maintains sales and administrative offices at 3724 S. Dolfield
Road, Owings Mills, Maryland 21117 and at 5321 First Place NE, Washington, D.C.
20011. The DC office is used pursuant to a verbal agreement with the lessee that
is terminable at will and is at no cost to the Company. The Company entered into
a lease agreement on June 3, 1999 for approximately 1,500 usable square feet of
space in Owings Mills, Maryland for a term of five years, which began November
1, 1999. The lease agreement is with KA Real Estate Associates, LLC, a related
party owned by Messrs. Cohn and Blum, Jr., with the terms being no less
favorable than an arm's length transaction. Until November 1999, the Company
maintained a sales and administrative office at 11460 Cronridge Drive, Suite
118, Owings Mills, Maryland 21117. The former Maryland office was used pursuant
to a verbal agreement with the lessee that was terminable at will and was 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. See Item 12 - "Certain Relationships and
Related Transactions."
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, except that the Company's Series 2 Shares were not
quoted during the Transition Period. 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 the fiscal years ended May 31, 1998 and 1999. The
following table also sets forth the high and low bid price for the Company's
Common Stock as reported by the National Quotation Bureau, Inc. for two periods
during the Transition Period. 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 the periods presented 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 Ended May 31,1998 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 0.21 0.15625
Third Quarter ended Feb. 28, 1998 1.12 1.06 0.27 0.1875
Fourth Quarter ended May 31, 1998 1.12 1.12 0.27 0.1875
Fiscal Year Ended May 31, 1999
First Quarter ended Aug. 31, 1998 $1.25 $ 1.00 $ 0.21 $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 0.46 0.30
Transition Period Ended
December 31, 1999
Four Months ended Sept. 30, 1999 $ 0.50 $ 0.4375
Three Months ended Dec. 31, 1999 0.68 0.39
8
<PAGE>
1998 EXCHANGE OFFER
During the fiscal year ended May 31, 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 the fiscal year ended May 31,1999, and
1,000 Series 2 Shares at $3.25 per share during the Transition Period,
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 the 5,000 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.
COMMON STOCK
As of March 13, 2000, there were 7,250,297 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
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
10
<PAGE>
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 Common Number of Common Modified
Option/Warrant Holder Stock Options Stock 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 were used as working capital.
RETIREMENT OF STOCK INFORMATION
As previously disclosed in the Company's Form 10-QSB for the quarter ended
September 30, 1999, filed on November 15, 1999, the Company made the following
stock repurchases and retirements:
Series A Total Purchase Price including
Date Shares Commissions
---- ------ -----------
November 1, 1999 7,500 $37,522
Subsequent to the filing of the Company's Form 10-QSB for the quarter ended
September 30, 1999, the Company made the following stock repurchases and
retirements:
11
<PAGE>
Total Purchase Price
Date Common Stock Series A Shares including Commissions
---- ------------ --------------- ---------------------
November 19, 1999 35,000 $17,524
November 22, 1999 40,000 $17,222
November 24, 1999 3,000 $15,022
December 27, 1999 15,000 $75,022
December 28, 1999 11,300 $5,085
December 31, 1999 6,700 $3,037
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 the Transition Period and each of the four
fiscal years ending May 31, 1996 through 1999, have been derived from the
Company's audited financial statements. The selected financial data are included
herein as additional information.
<TABLE>
<CAPTION>
Transition Fiscal Years Ended May 31,
---------- -----------------------------------------------------
Selected Operating Data: Period 1999 1998 1997 1996
- ------------------------ ------ ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating revenues $5,614,154 $10,206,467 $8,336,631 $ 5,645,276 $ 6,019,896
Operating expenses 5,024,537 9,300,195 8,010,021 5,739,503 6,106,694
Net income (loss) (1) 1,045,838 1,006,265 313,875 (190,265) (124,859)
Net income (loss) per share of
Common Stock - Basic (2) .13 .13 .06 (.13) (.12)
As of
December 31, As of May 31,
------------ --------------------------------------------
Selected Balance Sheet Data: 1999 1999 1998 1997 1996
- ---------------------------- ---- ---- ---- ---- ----
Working capital $2,198,148 $1,651,410 $ 350,418 $ 293,595 $ 422,922
Current assets 2,961,887 3,197,248 1,588,969 1,271,505 864,566
Total assets 3,905,999 3,897,255 2,241,705 1,639,389 1,650,527
Current liabilities 763,739 1,545,838 1,238,551 977,910 441,644
Long term obligations 13,614 20,368 90,475 92,044 449,183
Total liabilities 777,353 1,566,206 1,329,026 1,069,954 890,827
Total stockholders' equity 3,128,646 2,331,049 912,679 569,435 759,700
</TABLE>
- ----------
(1) Transition Period Net income includes the cumulative effect of a change in
accounting method that resulted in an increase to income of $521,000
($470,000 after taxes).
(2) After provision for preferred stock dividends as follows: $61,049 in the
Transition Period; $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 1997and 1996.
12
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 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.
CHANGE IN FISCAL YEAR
On October 5, 1999, the Company changed its fiscal year-end from May 31 to
December 31 to conform to the year-end of Avesis Reinsurance Incorporated
("ARI"). Reinsurance corporations are required by the Arizona Department of
Insurance to have a December 31 fiscal year-end and to submit calendar year-end
audited financial statements. The transition period resulting from the change in
fiscal year-end is measured from the Company's former fiscal year-end of May 31.
Accordingly, the seven-month period resulting from this change, June 1, 1999
through December 31, 1999, is referred to herein as the "Transition Period."
13
<PAGE>
RESULTS OF OPERATIONS
The following table details the Company's major revenue and expense
categories for the transition period from June 1, 1999 to December 31, 1999 and
the corresponding period from June 1, 1998 to December 31, 1998 (unaudited):
<TABLE>
<CAPTION>
Seven Months Ended
Seven Months Ended December 31, 1998
December 31, 1999 (unaudited) Increase/(Decrease)
------------------------ ---------------------- ---------------------
% of % of
Total Service Total Service
Revenue: Revenue Revenue % Change
- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Total Service Revenue $5,614,154 100% $5,863,176 100% $(249,022) (4%)
Vision & Hearing Program 4,227,308 75% 4,213,037 72% 14,271 0%
Vision Provider Fee 73,653 1% 84,458 1% (10,805) (13%)
Dental Program 491,993 9% 680,312 12% (188,319) (28%)
Buying Group Program 816,420 15% 874,876 15% (58,456) (7%)
Expenses:
- ---------
Cost of Services 3,740,468 67% 4,326,920 74% (586,452) (14%)
General & Administrative 674,496 12% 595,378 10% 79,118 13%
Selling & Marketing 609,573 11% 618,034 11% (8,461) (1%)
Income from Operations 589,617 11% 322,844 6% 266,773 83%
Net Income 1,045,838 19% 364,364 6% 681,474 187%
The following table details the Company's major revenue and expense
categories for the years ended May 31, 1999 and 1998:
Year Ended Year Ended
May 31, 1999 May 31, 1998 Increase/(Decrease)
------------------------ ---------------------- ---------------------
% of % of
Total Service Total Service
Revenue: Revenue Revenue % Change
- -------- ------- ------- --------
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.
14
<PAGE>
The decrease in the Company's total service revenues during the Transition
Period ended December 31, 1999 as compared to the corresponding period ended
December 31, 1998 was largely due to decreases in the dental program and the
buying group program. The Company was able to decrease operating expenses as a
percentage of total service revenues in the Transition Period by 5% compared to
the corresponding period's results.
The increase in the Company's total service revenues from the year ended
May 31, 1998 to the year ended May 31, 1999, 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 by 5% compared to
the prior fiscal year's results.
Vision and hearing revenues remained constant in the Transition Period as
compared to the corresponding period ended December 31, 1999. There were
approximately 687,000 vision and 5,000 hearing Members as of December 31, 1999,
compared to approximately 817,000 vision and 6,000 hearing Members as of May 31,
1999. The decrease of approximately 130,000 vision Members during the transition
period was largely attributable to the termination of a Sponsor with
approximately 103,000 Members in the Company's discount vision program. Due to
the pricing of the benefit, the loss of Members did not significantly negatively
impact the Company's revenues.
The increase in vision and hearing revenues from the year ended May 31,
1998 to the year ended May 31, 1999, 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.
Vision provider fee revenue remained constant as a percentage of total
service revenues during the Transition Period to the corresponding period in the
prior year and from the fiscal year ended May 31, 1998 to the fiscal year ended
May 31, 1999.
Dental Program revenues decreased in the Transition Period from the
corresponding period ended December 31, 1998. The decrease primarily resulted
from four Sponsors who collectively lost approximately 74,000 Members. There
were approximately 73,000 dental Members as of December 31, 1999, compared to
approximately 144,000 as of May 31, 1999.
15
<PAGE>
The decrease in Dental Program revenues from the year ended May 31, 1998 to
the year ended May 31, 1999 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. The Company has not actively marketed its buying group program
in the past. Due to the recent development of systems to better handle the
transaction data from the eyeglass frame manufacturers, the Company is
researching the best approach in which to market 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 decreased in the
Transition Period as compared to the corresponding period ended December 31,
1998 due to positive claims experience, reduction of the volume of frames
purchases and efficiencies in operations that the Company is experiencing
relating to the maturation of the benefits for its largest Sponsors.
Cost of Services continued to decrease as a percentage of total service
revenues in the year ended May 31, 1999 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.
General and Administrative Expenses increased in the Transition Period as
compared to the corresponding period ending December 31, 1998 due to increases
in depreciation and amortization related to the Company's new systems and the
increases in the cash payments under the Company's Management Agreement and
Investment Advisor Agreement.
General and Administrative Expenses decreased as a percentage of total
service revenues in the year ended May 31, 1999 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 General and Administrative Expense for the year ended May 31, 1998,
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.
16
<PAGE>
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. Selling and marketing
expenses were consistent as a percentage of total service revenues during the
Transition Period as compared to the corresponding period ended December 31,
1998.
The increase in selling and marketing expenses in the year ended May 31,
1999 as compared to the prior 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 affiliated
management consultants, National Health Enterprises. See Item 12 - "Certain
Relationships and Related Transactions - Agreements with National Health
Enterprises, Inc."
Interest Income was $72,316 during the Transition Period as compared to
$42,049 in the corresponding period ended December 31, 1998, and is included in
non-operating income (expense) on the Company's Consolidated Statements of
Earnings. Income tax expense was $86,000 for the Transition Period. No income
tax expense was booked for the corresponding period ended December 31, 1998.
Non-operating income/(expense) was $112,993 in the year ended May 31, 1999
and ($12,735) in the year ended May 31,1998. 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 the year ended May 31, 1999's 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. The prior fiscal year's 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.
During the Transition Period the Company changed its methodology of
accounting for cost of services provided in connection with the Company's vision
program that resulted in a change in accounting. The change in method has been
reflected as a change in accounting principle on the Company's Consolidated
Statements of Earnings and has resulted in a net increase to earnings of
$470,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased by $115,603 during the
transition period from $2,599,342 as of May 31, 1999 to $2,483,739 as of
December 31, 1999. During the Transition Period the Company established two (2)
$100,000 letters of credit; one related to Avesis Reinsurance, Inc. and one
related to the Avesis Advantage Vision Plan. The $200,000 is included on the
Company's Balance Sheet in Deposits and other assets. Cash provided by the
Company's operations funded the repurchases of stock, payments of dividends and
purchases of property and equipment. Current cash on hand and cash provided from
17
<PAGE>
operations are expected to allow the Company to sustain operations for the
foreseeable future.
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.
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 December 31, 1999, the Company had $679,649 of Accounts Payable,
compared to $1,364,586 as of May 31, 1999 and $1,106,165 as of May 31, 1998. The
fluctuations are predominately due to claims reserves of $489,814 as of December
31, 1999, $1,082,072 as of May 31, 1999 and $786,052 as of May 31, 1998,
included in Accounts Payable. The reserves are for incurred but not reported
claim reimbursements to Providers who participate in certain managed care
programs. As mentioned above, the Company changed its methodology of accounting
for cost of services provided in connection with the Company's vision program
during the transition period. The change of accounting method resulted in a
decrease of claims reserves of $470,000. The Company believes this reserve is
adequate.
The Company expects to pay dividends of approximately $46,000 on the Series
A Shares to holders of record on May 31, 2000.
YEAR 2000 COMPLIANCE
The Company so far has experienced no disruptions in the operation of its
internal information systems during the transition to the year 2000. The Company
is not aware that any of its vendors or clients experienced any disruptions
during their transition to the year 2000 or that there has been any year 2000
problems with its services provided. The Company will continue to monitor the
transition to year 2000 and will act promptly to resolve any problems that
occur. If the Company or any third parties with which it has business
relationships experience problems related to the year 2000 transition that have
not yet been discovered, it could have a material adverse impact on the Company.
ITEM 7. FINANCIAL STATEMENTS
Financial Statements appear commencing at page F-1 immediately hereafter.
18
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1999 and May 31, 1999
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Avesis Incorporated:
We have audited the accompanying consolidated balance sheets of Avesis
Incorporated and subsidiaries as of December 31, 1999 and May 31, 1999, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for the Transition Period ended December 31, 1999 and each of the years in
the two-year period ended May 31, 1999. 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 subsidiaries at December 31, 1999 and May 31, 1999, and the results of their
operations and their cash flows for the Transition Period ended December 31,
1999 and each of the years in the two-year period ended May 31, 1999, in
conformity with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the Company
changed its method of accounting for the cost of services provided in connection
with the vision program that resulted in a change in accounting.
Phoenix, Arizona
March 24, 2000
F-1
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and May 31, 1999
<TABLE>
<CAPTION>
December 31, May 31,
ASSETS 1999 1999
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,483,739 2,599,342
Accounts receivable, net 301,048 341,005
Prepaid expenses and other 177,100 256,901
------------ -----------
Total current assets 2,961,887 3,197,248
Property and equipment, net 511,604 466,088
Deposits and other assets 432,508 233,919
------------ -----------
Total assets $ 3,905,999 3,897,255
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 679,649 1,364,586
Current installments of obligations
under capital lease 10,288 10,288
Accrued expenses:
Compensation 43,642 75,232
Other 16,096 32,709
Dividends payable -- 50,821
Deferred income 14,064 12,202
------------ -----------
Total current liabilities 763,739 1,545,838
Obligations under capital lease, excluding
current installments 13,614 20,368
------------ -----------
Total liabilities 777,353 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; 272,160 and 301,160 issued and outstanding at
December 31 and May 31, 1999, respectively (liquidation preference of $3.75 per share) 2,722 3,012
$10 Class A, nonvoting cumulative convertible preferred stock, Series 2, $.01 par value;
authorized 1,000,000 shares; 5,000 and 6,000 shares issued and outstanding at December 31
and and May 31, 1999, respectively (liquidation preference of $10 per share) and $32,625
and $35,100 of dividends in arrears at $6.53 and $5.85 per share at December 31, and
May 31, 1999, respectively; dividends accrue at $.225 per share each calendar quarter 50 60
Common stock of $.01 par value, authorized 20,000,000 shares; 7,250,297 and 7,356,297
shares issued and outstanding at December 31 and May 31, 1999, respectively 72,503 73,563
Additional paid-in capital 10,265,360 10,461,420
Accumulated deficit (7,211,989) (8,207,006)
------------ -----------
Total stockholders' equity 3,128,646 2,331,049
Commitments and contingencies
(notes 4, 10, 11, 12, 13 and 14)
------------ -----------
$ 3,905,999 3,897,255
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Earnings
Transition Period ended December 31, 1999 and years ended May 31, 1999 and 1998
<TABLE>
<CAPTION>
Transition
period ended Year ended May 31,
December 31, --------------------------
1999 1999 1998
------------ ----------- ----------
<S> <C> <C> <C>
Service revenues:
Administration fees $ 4,719,319 8,447,735 6,550,966
Buying group 816,420 1,607,000 1,655,298
Provider fees 73,653 142,863 124,397
Other 4,762 8,869 5,970
------------ ----------- ----------
Total service revenues 5,614,154 10,206,467 8,336,631
Cost of services 3,740,468 7,131,269 6,120,416
------------ ----------- ----------
Income from services 1,873,686 3,075,198 2,216,215
General and administrative expenses 674,496 1,066,390 1,121,099
Selling and marketing expenses 609,573 1,102,536 768,506
------------ ----------- ----------
Income from operations 589,617 906,272 326,610
------------ ----------- ----------
Non-operating income (expense):
Interest income 72,316 85,875 30,982
Interest expense (1,838) (3,960) (19,305)
Other 1,743 31,078 (24,412)
------------ ----------- ----------
Total non-operating expense 72,221 112,993 (12,735)
------------ ----------- ----------
Income before income taxes and cumulative effect of change in accounting principle 661,838 1,019,265 313,875
Income taxes (86,000) (13,000) --
------------ ----------- ----------
Income before cumulative effect of change in accounting principle 575,838 1,006,265 313,875
Cumulative effect of change in accounting principle, net of income taxes of $51,000 470,000 -- --
------------ ----------- ----------
Net income 1,045,838 1,006,265 313,875
Preferred stock dividends (61,049) (107,936) (63,270)
------------ ----------- ----------
Net income available to common stockholders $ 984,789 898,329 250,605
============ =========== ==========
Basic earnings per share:
Income before cumulative effect of change in accounting principle $ 0.07 0.13 0.06
Cumulative effect of change in accounting principle 0.06 -- --
------------ ----------- ----------
Net income $ 0.13 0.13 0.06
============ =========== ==========
Diluted earnings per share:
Income before cumulative effect of change in accounting principle $ 0.06 0.10 0.06
Cumulative effect of change in accounting principle 0.04 -- --
------------ ----------- ----------
Net income $ 0.10 0.10 0.06
============ =========== ==========
Weighted average common and equivalent shares outstanding - basic 7,334,719 6,788,944 4,073,918
============ =========== ==========
Weighted average common and equivalent shares outstanding - diluted 10,459,631 9,902,713 5,089,657
============ =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Transition period ended December 31, 1999 and 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 shares -- -- (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
Repurchase of shares (290) (10) (1,060) (196,060) -- (197,420)
Dividends declared, $.16875
per Class A, senior
nonvoting cumulative
convertible preferred
stock, Series A -- -- -- -- (50,821) (50,821)
Net income -- -- -- -- 1,045,838 1,045,838
------- ------ ------- ----------- ---------- ----------
Balance, December 31, 1999 $ 2,722 50 72,503 10,265,360 (7,211,989) 3,128,646
======= ====== ======= =========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Transition Period ended December 31, 1999 and years ended May 31, 1999 and 1998
<TABLE>
<CAPTION>
Transition
Period Ended Year Ended May 31,
December 31, -----------------------
1999 1999 1998
----------- ---------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,045,838 1,006,265 313,875
Adjustments to reconcile net
income to net cash provided by operating activities:
Depreciation and amortization 86,333 124,538 112,071
Cumulative effect of change in accounting principle (521,000) -- --
Provision for losses of accounts receivable -- 14,884 16,980
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:
Accounts receivable 39,957 124,019 (156,532)
Prepaid expenses and other 79,801 (141,450) (1,837)
Deposits (198,589) 9,590 (60,626)
Accounts payable (163,937) 258,421 641,788
Deferred income 1,862 (4,746) (6,284)
Accrued rent -- (92,827) (16,842)
Accrued expenses (48,203) 36,278 (53,125)
Dividend payable -- 50,821 --
----------- ---------- --------
Net cash provided by operating activities 322,062 1,404,038 841,592
----------- ---------- --------
Cash flows from investing activities:
Purchases of property and equipment (131,849) (209,389) (294,307)
Proceeds from dispositions of property and equipment -- 9,745 5,000
----------- ---------- --------
Net cash used in investing activities (131,849) (199,644) (289,307)
----------- ---------- --------
Cash flows from financing activities:
Payment of dividend on preferred stock (101,642) (102,536) --
Repayment of convertible subordinated debentures -- -- (189,000)
Payments for repurchase of capital stock (197,420) (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 (6,754) (10,767) (6,579)
----------- ---------- --------
Net cash provided by (used in) financing activities (305,816) 401,338 (376,210)
----------- ---------- --------
Net increase (decrease) in cash and cash equivalents (115,603) 1,605,732 176,075
Cash and cash equivalents, beginning of period 2,599,342 993,610 817,535
----------- ---------- --------
Cash and cash equivalents, end of period $ 2,483,739 2,599,342 993,610
=========== ========== ========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,740 3,960 20,118
=========== ========== ========
Equipment acquired under capital lease $ -- -- 48,002
=========== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
Transition Period ended December 31, 1999
and years ended 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
subsidiaries, Avesis of Washington, D.C., a District of Columbia
Corporation and Avesis Reinsurance Incorporated, an Arizona
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 Company
incorporated Avesis Reinsurance Incorporated in October 1999, to
enable the Company to insure risks as a life and disability reinsurer,
thereby maximizing the potential revenues and earnings related to its
Programs. The consolidated financial statements include the accounts
of Avesis Incorporated and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation.
(b) CHANGE IN FISCAL YEAR END
The Company has changed its year-end from May 31 to December 31.
Accordingly, the Company began a new 12-month fiscal year on January
1, 2000. The seven-month period resulting from this change, June 1,
1999 through December 31, 1999, is referred herein as the "Transition
Period".
(c) 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.
(d) CHANGE IN ACCOUNTING PRINCIPLE
During the Transition Period, the Company changed its methodology of
accounting for cost of services provided in connection with the
Company's vision program that resulted in a change in accounting. The
cumulative effect of the change in the accounting method as of June 1,
1999, is separately reported in the accompanying statement of earnings
as the cumulative effect of a change in accounting principle in the
amount of $470,000, after taxes. There was no effect on Transition
Period pre-tax income as a result of adopting the change in accounting
method.
(e) 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.
F-6 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
Transition Period ended December 31, 1999
and years ended May 31, 1999 and 1998
(f) 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.
(g) 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.
(h) DEFERRED REVENUE
Deferred revenue represents cash received on membership fees received
from sponsors, as allowed under fee agreements.
(i) 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.
(j) 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.
(k) 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.
F-7 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
Transition Period ended December 31, 1999
and years ended May 31, 1999 and 1998
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.
(l) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF
The Company reviews long-lived assets and certain identifiable
intangibles 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 undiscounted
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 exceeds 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.
(m) 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.
(n) 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 Transition
Period and the years ended May 31, 1999 and 1998.
(o) SEGMENT REPORTING
The Company has one operating business segment which markets and
administers vision, hearing, dental and chiropractic programs.
(p) RECLASSIFICATION
Certain reclassifications have been made in the May 31, 1999 and 1998
consolidated statement of cash flows to conform to the current
period's presentation.
F-8 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
Transition Period ended December 31, 1999
and years ended May 31, 1999 and 1998
(2) ACCOUNTS RECEIVABLE
Accounts receivable consists of:
December 31, May 31,
1999 1999
--------- --------
Trade accounts receivable $ 329,309 382,038
Less allowance for doubtful accounts (28,261) (41,033)
--------- --------
$ 301,048 341,005
========= ========
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of:
December 31, May 31,
1999 1999
--------- --------
Furniture and fixtures $ 267,946 267,946
Equipment 838,346 805,197
Software 469,186 370,486
---------- ---------
1,575,478 1,443,629
Less accumulated depreciation and amortization 1,063,874 977,541
---------- ---------
$ 511,604 466,088
========== =========
(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 for this location 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.
On June 3, 1999, the Company entered into a lease agreement with KA Real
Estate Associates, LLC, for office space in Owings Mills, Maryland. This
lease expires in November 2004. The Company paid $3,060 in rent during the
Transition Period.
The Company also leases equipment under long-term operating lease
agreements. For the Transition Period and the years ended May 31, 1999 and
1998, rent expense for all operating leases was $136,594, $185,785 and
$159,224, 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 December 31, 1999 the gross amount of
equipment and accumulated depreciation recorded under this capital lease
F-9 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
Transition Period ended December 31, 1999
and years ended May 31, 1999 and 1998
was $48,002 and $21,600, respectively. At 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 December 31:
2000 $14,731 $208,069
2001 11,049 198,919
2002 -- 164,281
2003 -- 54,708
2004 -- 32,778
Thereafter -- 12,394
------- --------
Total future minimum lease payments 25,780 $671,149
========
Less amount representing interest (at 10.4%) 1,878
-------
Present value of net minimum lease payments 23,902
Less current installments of obligations under
capital lease 10,288
-------
Obligations under capital lease, excluding current
installments $13,614
=======
(5) INCOME TAXES
For the Transition Period and year ended May 31, 1999, income tax expense
amounted to $86,000 and $13,000, respectively. 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.
Components of income tax expense for the Transition Period ended December
31, 1999 and the year ended May 31, 1999 include:
Current Deferred Total
------- -------- -----
December 31, 1999:
Federal $ 4,246 -- 4,246
State 81,754 -- 81,754
------- ------ ------
$86,000 -- 86,000
======= ====== ======
Current Deferred Total
------- -------- -----
May 31, 1999:
Federal $13,000 -- 13,000
State -- -- --
------- ------ ------
$13,000 -- 13,000
======= ====== ======
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 Transition Period and years
ended May 31, 1999 and 1998 are as follows:
May 31,
December 31, ----------------------
1999 1999 1998
--------- -------- --------
Computed "expected" federal
income tax expense $ 225,025 346,550 80,325
Change in valuation allowance (261,710) (350,117) (129,660)
State taxes 116,290 -- --
Other 6,395 16,567 49,335
--------- -------- --------
$ 86,000 13,000 --
========= ======== ========
F-10 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
Transition Period ended December 31, 1999
and years ended May 31, 1999 and 1998
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) $ 1,952,633
Accrued expenses and other 42,650
Property and equipment (30,308)
Valuation allowance (1,964,975)
-----------
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 Transition
Period and years ended May 31, 1999 and 1998 was a decrease of $134,312,
$290,868 and $361,945, respectively. The Transition Period change in
valuation allowance is the net effect of a $332,655 increase from a change
in tax rate, a current year benefit of $261,710 resulting from utilization
of federal NOLs and the effect of the cumulative change in accounting
principle of $205,257.
The Company's federal NOLs of approximately $5,553,000 expire between 2004
and 2013.
(6) COMMON STOCK
During the Transition Period, the Company repurchased 106,000 shares of
common stock for prices ranging from $0.43 to $0.50 per share, 1,000 shares
of Class A, nonvoting cumulative convertible preferred stock, Series 2, for
a price of $3.25 per share and 29,000 shares of Class A, senior nonvoting
cumulative convertible preferred stock, Series A, for a price of $5.00 per
share. Subsequent to the repurchases, the Company retired these shares.
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 repurchases, 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 repurchases, the Company retired these shares.
F-11 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
Transition Period ended December 31, 1999
and years ended 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 Transition Period and years ended May 31, 1999
and 1998 follows:
<TABLE>
<CAPTION>
May 31,
December 31, ---------------------------
1999 1999 1998
------------ ---------- ----------
<S> <C> <C> <C>
Income before cumulative effect of change in
accounting principle $ 575,838 1,006,265 313,875
Less: preferred stock dividends (61,049) (107,936) (63,270)
------------ ---------- ----------
Income before cumulative effect of change in
accounting principle available to common
stockholders $ 514,789 898,329 250,605
============ ========== ==========
Basic EPS - weighted average shares outstanding 7,334,719 6,788,944 4,073,918
============ ========== ==========
Basic earnings per share - before cumulative effect
of change in accounting principle $ 0.07 0.13 0.06
============ ========== ==========
Basic EPS - weighted average shares outstanding 7,334,719 6,788,944 4,073,918
Effect of diluted securities:
Convertible debentures -- -- 19,162
Convertible preferred stock 2,976,927 3,113,769 996,577
Employee stock options 147,985 -- --
------------ ---------- ----------
Dilutive EPS - weighted average shares outstanding 10,459,631 9,902,713 5,089,657
Net earnings 575,838 1,006,265 313,875
Interest expense on non-CSE debt -- -- 8,978
------------ ---------- ----------
575,838 1,006,265 322,853
Diluted earnings per share $ 0.06 0.10 0.06
============ ========== ==========
</TABLE>
F-12 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
Transition Period ended December 31, 1999
and years ended May 31, 1999 and 1998
(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 December 31, 1999, there were 220,000 incentive
options outstanding under this plan (of which 173,324 were exercisable at
$0.48) and 120,000 non-qualified options outstanding under this plan (of
which 110,000 were exercisable at prices ranging from $.40 to $1.00 per
share). At May 31, 1999, there were 170,000 incentive options outstanding
under this plan (of which 113,333 were exercisable at $0.48) and 110,000
nonqualified options outstanding under this plan exercisable at prices
ranging from $.40 -$1.00 per share.
In connection with the Long-Term Management Agreement, National Health
Enterprises, Inc. of Owings 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.
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.
F-13 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
Transition Period ended December 31, 1999
and years ended May 31, 1999 and 1998
A summary of stock option activity for the Transition Period and years ended May
31, 1999 and 1998 follows:
Options Price Per Option
------- ----------------
Balance outstanding, May 31, 1997 4,710,000
Options granted 180,000 $ 0.48
Options exercised --
Options canceled --
---------
Balance outstanding, May 31, 1998 4,890,000
Options granted --
Options exercised 3,842,000 $0.26 - 0.31
Options canceled 10,000 $ 0.48
---------
Balance outstanding, May 31, 1999 1,038,000
Options granted 60,000 $0.48 - 0.60
Options exercised --
Options canceled --
---------
Balance outstanding, December 31, 1999 1,098,000
=========
As of December 31, 1999 and May 31, 1999 and 1998, options to purchase
1,041,334, 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 December 31, 1999
follows:
Options Outstanding Options Exercisable
- ----------------------------------------------------- ------------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
Range of At Remaining Average At Average
Exercise December 31, Contractual Exercise December 31, Exercise
Price 1999 Life Price 1999 Price
----- ---- ---- ----- ---- -----
$ 0.40 100,000 3.3 $ 0.40 100,000 $ 0.40
$ 0.48 978,000 4.3 $ 0.48 931,334 $ 0.48
$0.6 - $1.00 20,000 8.4 $ 0.80 10,000 $ 1.00
--------- ------ --------- ------
$0.4 - $1.00 1,098,000 $ 0.48 1,041,334 $ 0.48
========= ====== ========= ======
F-14 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
Transition Period ended December 31, 1999
and years ended May 31, 1999 and 1998
The weighted average fair value at date of grant for options granted during the
Transition Period and the year ended May 31, 1998 was $0.18 and $0.06,
respectively. There were no options granted during the year ended May 31, 1999.
The fair value of each option was estimated on the date of grant using the
Black-Scholes pricing model with the following assumptions:
May 31,
December 31, -----------------
1999 1999 1998
---- ---- ----
Dividend yield $ 0% 0% 0%
Expected volatility 54.10% 54.92% 57.98%
Risk-free interest rate 6.28% 8.00% 8.00%
Forfeiture rate 0 0 0
Expected term in years 6 6 6
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:
May 31,
December 31, -----------------------
1999 1999 1998
---- ---- ----
Net income:
As reported $ 1,045,838 1,006,265 313,875
Pro forma 1,042,271 1,003,622 305,633
Earnings per share:
Basic:
As reported .13 .13 .06
Pro forma .13 .13 .06
Diluted:
As reported .10 .10 .06
Pro forma .10 .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.
F-15 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
Transition Period ended December 31, 1999
and years ended May 31, 1999 and 1998
(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.
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 December 31, 1999 and May 31, 1999, there were 5,000 and 6,000,
respectively, 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 December 31 and May 31, 1999, there were
272,160 and 301,160, respectively, 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.
F-16 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
Transition Period ended December 31, 1999
and years ended May 31, 1999 and 1998
(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 states and the D.C. metropolitan area. For the Transition
Period and year ended May 31, 1999, two major customers provided 47% and
15% and 48% and 14% of total service revenues, respectively. For the year
ended May 31, 1998, three major customers provided 28%, 15% and 10% of
total service revenues.
(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. For the Transition Period, payments of $175,000
were made under this agreement.
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. For the Transition
Period and years ended May 31, 1999 and 1998, the Company paid
approximately $155,167, $310,000 and $211,000, respectively, to NHE under
the terms of this agreement.
(12) RELATED PARTY TRANSACTIONS
The Company has contracted with NCS to lease its computer system for
approximately $1,000 per month. The Company paid $7,000 of computer lease
charges for the Transition Period and $12,000 of computer lease charges for
the years ended May 31, 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 8 ("Registrable
Securities"). The first demand registration is exercisable at the request
of holders of at least 900,000 Registrable Securities after the exercise by
NHE and/or its transferees of at least 900,000 options. The second demand
registration is exercisable at the request of holders of at least 1,000,000
options after completion of a fiscal year in which the Company has profits
of at least $1,000,000. The Registration Rights Agreement also provides
piggyback registration rights with respect to registrations in which other
selling stockholders are participating. The Company is obligated to pay the
offering expenses of each such registration, except for the selling
stockholders' pro rata portion of underwriting discounts and commissions.
No precise prediction can be made of the effect, if any, that the
availability of shares pursuant to registrations under the Registration
Rights Agreement will have on the market price prevailing from time to
time. Nevertheless, sales of substantial amounts of the common stock
pursuant to such registrations could adversely affect prevailing market
prices.
F-17 (Continued)
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARIES
Consolidated Financial Statements
Transition Period ended December 31, 1999
and years ended May 31, 1999 and 1998
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. For the Transition Period, payments of $17,500 were
made under this agreement. Effective November 6, 1999, the investment
banking agreement was assigned to RCI's parent company, Richter Investment
Corp., and modified so as to delete any functions, and any attendant
compensation, providable only by broker-dealers. 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.
During the Transition Period, the Company made payments of $3,060 to KA
Real Estate Associates for a lease of office space.
(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 Transition Period and years ended May
31, 1999 and 1998, the Company did not contribute to the plan.
(14) COMMITMENTS AND CONTINGENCIES
During the Transition Period, the Company established two letters of credit
totaling $200,000 at December 31, 1999. The letters of credit are included
in Deposits and other assets on the balance sheet and relate to Avesis
Reinsurance, Inc. and the Avesis Advantage Vision Plan.
The Company had available a revolving line of credit for an amount not to
exceed $100,000 which expires October 31, 2001. The line of credit bears
interest at the bank's National Association Base rate plus 1%. As of
December 31, 1999, the Company had not drawn on this line of credit.
F-18
<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 57 Co-Chairman and Director
Kenneth L. Blum, Sr. 73 Director, Former Acting President and CEO
from September 1996 to May 1998
Gerald L. Cohen 55 Director
Sam Oolie 63 Director
Alan S. Cohn 44 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, Chief Financial Officer
19
<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
appointment 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, 57, Co-Chairman of the Board, has been a Director of
the Company since August 1993. Mr. Richter has been President of Richter
Investment Corp., a merchant 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., an asset management organization (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., 73, 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."
20
<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, 44, 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."
21
<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, the Chief Financial Officer of the Company since December 1999
and the Director of Finance of the Company from January 1997 until December
1999. Mr. Alperstein has been a management consultant to American Business
Information Systems, Inc., a high-volume laser printing company, since March
1999 and Rent-A-Wreck of America, Inc., an automobile franchiser, since December
1999. 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."
22
<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 Transition Period. 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 transition period and the years ended May 31, 1999 and
1998. No executive officer that was serving as an executive officer during
the transition period received salary and bonus that aggregated at least
$100,000 for services rendered to the Company.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards
------
Name and Principal Position Year Salary ($) Securities Underlying Options/SARs (#)
- --------------------------- ---- ---------- --------------------------------------
<S> <C> <C> <C>
Transition $0
Alan S. Cohn, CEO (1) Period --
1999 $0 --
Kenneth L. Blum, Sr., Acting CEO 1998 $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."
23
<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."
24
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 13, 2000 there were 7,250,297 shares of Common Stock, 5,000
Series 2 Shares and 272,160 Series A Shares outstanding. The table below sets
forth as of March 13, 2000, 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)
------------------------------------------------
Total Common
Common % of Series A % of Beneficially Percent of
Name and Address Stock Common Preferred Stock Pref. Options Owned (1) Common (2)
- ---------------- ----- ------ ---------------- ----- ----------- --------- ----------
(actual shares)
<S> <C> <C> <C> <C> <C> <C> <C>
Gerald L. Cohen* 253,359 3.5 22,274(7) 8.2 -- 476,099 6.4
William R. Cohen* 161,117(4) 2.2 10,552 3.9 -- 266,637 3.6
William L. Richter 1,194,620(3) 16.5 50,099 18.4 -- 1,695,610(3) 21.9
C/o Richter Investment Corp.
450 Park Ave., 28th Floor
New York, NY 10022
Sam Oolie* 220,021(5) 3.0 24,023 8.8 100,000 560,251 7.4
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 25.0 -- -- -- 1,814,750 25.0
10324 S. Dolfield Rd.
Owings Mills, MD 21117
Alan S. Cohn 1,804,750 24.9 -- -- -- 1,804,750 24.9
10324 S. Dolfield Rd.
Owings Mills, MD 21117
All directors and 5,588,617(4)(5) 77.1 108,948 40.0 505,000 7,183,097 81.2
Executive officers as
A group (9 persons)
</TABLE>
- ----------
* Business Address: 3724 North Third Street, Suite 300, Phoenix, Arizona
85012.
25
<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, 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 or options, 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 26,183 shares of Series A indirectly owned via an
affiliated corporation, Richter Investment Corp. ("RIC"), which thereby
beneficially owns in its own name 724,330 shares or 9.6% of the Company's
Common Stock. Also includes shares of Common Stock issuable upon conversion
of 4,530 shares of Series A Preferred held via a related corporation. 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.
26
<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 later 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 (to whom NHE had
transferred a portion of their options) 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 during the year ended May 31, 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
the Management Agreement. During the Transition Period and years ended May 31,
27
<PAGE>
1999 and 1998, the Company paid approximately $155,167, $310,000 and $211,000,
respectively, to NHE under the Marketing Agreement. For the Transition Period
and years ended May 31, 1999 and 1998, the Company paid approximately $9,976,
$13,446 and $8,000, respectively, in reimbursable marketing expenses to NHE
under the Marketing Agreement.
REAL ESTATE LEASE
On June 3, 1999, the Company entered into a lease agreement with KA Real
Estate Associates, LLC, for office space in Owings Mills, Maryland. KA Real
Estate Associates, LLC is owned by Messrs. Cohn and Blum, Jr. The Company paid
$3,060 in rent during the Transition Period. See Item 2 - "Description of
Properties."
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 Banking
Agreement. Mr. Richter abstained from voting due to his relationship to Richter
& Co., Inc. The payment commenced as of June 1, 1999. Richter & Co., Inc. was
merged into its parent company, Richter Investment Corp., as of December 31,
1999. The Investment Banking Agreement was modified to reflect the fact that
Richter Investment Corp. is not a broker-dealer.
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 the transition period and the years ended May 31, 1999 and 1998.
Additionally, the Company has contracted with NCS to lease its computer system
for approximately $1,000 per month. The Company paid $7,000 of computer lease
charges for the Transition period and $12,000 of computer lease charges for the
years ended May 31, 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.
28
<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.
29
<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 March 29, 2000 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 March 29, 2000
- ------------------------ Executive Officer and Director
Alan S. Cohn
/s/ Neal A. Kempler Corporate Secretary and March 29, 2000
- ---------------------- Vice President of Operations
Neal A. Kempler
/s/ Joel H. Alperstein Treasurer and Chief Financial March 29, 2000
- ------------------------ Officer (Principal Financial
Joel H. Alperstein Officer)
/s/ Shannon R. Barnett Controller March 29, 2000
- ----------------------- (Principal Accounting Officer)
Shannon R. Barnett
/s/ William R. Cohen Co-Chairman of the March 29, 2000
- ---------------------- Board of Directors
William R. Cohen
/s/ William L. Richter Co-Chairman of the March 29, 2000
- ------------------------ Board of Directors
William L. Richter
/s/ Kenneth L. Blum, Sr. Director March 29, 2000
- ------------------------
Kenneth L. Blum, Sr.
/s/ Kenneth L. Blum, Jr. Director March 29, 2000
- ------------------------
Kenneth L. Blum, Jr.
/s/ Gerald L. Cohen Director March 29, 2000
- ----------------------
Gerald L. Cohen
/s/ Sam Oolie Director March 29, 2000
- ------------------------
Sam Oolie
30
<PAGE>
AVESIS INCORPORATED
EXHIBIT INDEX
FORM 10-KSB
FOR THE TRANSITION PERIOD ENDED DECEMBER 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).
3.4 Amendments to Bylaws adopted February 15, 2000 filed herewith
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>
31
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.3 Management Agreement dated March 18, 1993 Company's report on Form 8-K dated March 18,
between the Company and NHE 1993 (File No. 1-9758).
10.4 Stock Option Grant to NHE dated March 18, 1993 Company's report on Form 8-K dated March 18,
relating to options for the purchase of 1993 (File No. 1-9758).
4,400,000 shares of the Company's Common Stock
10.5 Subordinated Promissory Note dated March 18, Company's report on Form 8-K dated March 18,
1993 in the amount of $80,000 payable by the 1993 (File No. 1-9758).
10.5 Company to Mr. and Ms. Blum
10.6 Subordinated Promissory Note dated March 18, Company's report on Form 8-K dated March 18,
1993 in the amount of $80,000 payable by the 1993 (File No. 1-9758).
Company to Mr. and Mrs. Cohn
10.7 Registration Rights Agreement dated March 18, Company's report on Form 8-K dated March 18,
1993 among NHE, Mr. Blum, and Alan S. Cohn 1993 (File No. 1-9758).
10.8 Marketing Agreement dated March 18, 1993 between Company's report on Form 8-K dated March 18,
the Company and NHE 1993 (File No. 1-9758).
10.9 Option Transfer Documents dated March 31, 1993 Company's report on Form 8-K dated March 18,
1993 (File No. 1-9758).
10.10 Stock Purchase Warrant issued to Richter & Co., Company's report on Form 8-K dated March 18,
Inc. dated March 18, 1993 for the purchase of 1993 (File No. 1-9758).
240,000 shares of the Issuer's Common Stock
10.11 Stock Purchase Warrant issued to William L. Company's report on Form 8-K dated March 18,
Richter dated March 18, 1993 for the 1993 (File No. 1-9758).
purchase of 160,000 shares of the Issuer's
Common Stock
10.12 1993 Stock Option Plan Company's annual report on Form 10-KSB for the
year ended May 31, 1993 (File No. 1-9758).
10.13 Lease Agreement between the Company and Phoenix Company's Report on Form 10-QSB for the three
City Square months ended February 28, 1995 (File No.
1-9758).
10.14 Fee Agreement between the Company and Richter & Company's Report on Form 10-QSB for the three
Co., Inc. months ended February 28, 1995 (File No.
1-9758).
10.15 Software Development Agreement between the Company's Report on Form 10-QSB for the three
Company and National Computer Services, Inc. months ended August 31, 1995 (File No. 1-9758).
10.16 Litigation Agreement between the Company and Ken Company's Report on Form 10-KSB for the year
Blum, Sr., Ken Blum, Jr., and Alan Cohn ended May 31, 1997 (File No. 0-15304).
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
<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).
10.20 Lease Agreement between the Company and KA filed herewith
Leasing, LLC
10.21 Modified Investment Banking Agreement filed herewith
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>
33
EXHIBIT 3.4
AMENDMENT TO BYLAWS
The following sections are deleted effective February 15, 2000 and replaced
with the following:
Section 1.01. PRINCIPAL OFFICE. The principal office of the Corporation
shall be located at 3724 North Third Street, Suite 300, Phoenix, Arizona 85012
unless otherwise established by a vote of a majority of the board of directors
in office.
Section 2.01. ANNUAL MEETING. The board of directors may determine the
place, date and time of the annual meeting of the stockholders, but if no such
place, date and time is fixed, the meeting for any calendar year shall be held
at the principal office of the corporation at 10:00 a.m. on the second Wednesday
of May of such year. If that day is a legal holiday, the meeting shall be held
on the next succeeding day that is not a legal holiday. At that meeting, the
stockholders entitled to vote shall elect directors and transact such business
as may properly be brought before the meeting.
EXHIBIT 10.20
LEASE AGREEMENT
THIS LEASE AGREEMENT, made on the 3rd day of June, 1999, by and between KA
REAL ESTATE ASSOCIATES, LLC, a Maryland corporation, having an office address at
10324 South Dolfield Road, Owings Mills, Maryland 21117 (hereinafter called
Landlord) and AVESIS INCORPORATED having an office at 10324 South Dolfield Road,
Owings Mills, Maryland 21117 (hereinafter collectively called Tenant).
WITNESSETH: That in consideration of the rents, covenants and agreements
herein contained, on the part of Tenant to be performed, Landlord does hereby
lease unto the said Tenant the premises known as 10324 South Dolfield Road,
Baltimore County, Maryland 21117 (Office), as shown on Exhibit A, space plan,
containing approximately 1,500 square feet (Premises).
TERM The term of the lease shall be for five (5) years beginning on
November 1, 1999 and terminating on October 31, 2004.
RENT Tenant shall pay rent to Landlord at the rental rate of TWELVE DOLLARS
TWENTY-FIVE CENTS ($12.25) cents per square foot of floor space in the
Premises or EIGHTEEN THOUSAND THREE HUNDRED SEVENTY-FIVE DOLLARS
($18,375.00) for the first year of this lease. The rental rate shall
increase by THREE PERCENT (3%) per annum for each subsequent year of
the lease. Rent is to be paid in equal monthly installments, in
advance, on the first day of the month as follows: Rent shall be paid
to Landlord at its office at 10324 South Dolfield Road, Owings Mills,
Maryland 21117, or to such other appointee as Landlord may from time
to time designate in writing.
THE TENANT COVENANTS AND AGREES WITH THE LANDLORD AS FOLLOWS:
1. RENT PAYMENTS. Tenant shall pay rent when due, without deduction or set
off.
2. USE. Tenant shall use and occupy the Premises solely for the following
purposes: administrative offices and for no other purpose or purposes.
3. UTILITIES/TRASH/JANITORIAL. (a) Tenant shall pay for its proportionate
share of all gas, electricity, telephone and other utilities used in or about
the Premises for the aforesaid permitted purpose. Accounts must be opened in
Tenant's name with the company that supplies the utilities, except with respect
to water and sewer (if no separate meter is provided) Landlord will bill Tenant
monthly or quarterly on the basis of a meter reading and Tenant will pay
Landlord directly for said water and sewer charges within ten (10) days after
receipt of Landlord's billing. The parties acknowledge that the Premises are
served by a separate meter for water and sewer.
(b) Tenant hereby covenants, at its expense, to provide its
own janitorial service, and to keep the Premises, both inside and
out, clean at all times and agrees that it will at all times keep
such Premises in a clean, neat and orderly manner and that it
will remove all refuse, garbage and trash from the interior of
the Premises and the adjacent areas and will see that the same is
removed daily, at its expense. Tenant shall provide at its
expense, trash receptacles required by Landlord, including but
not limited to commercial trash dumpsters or similar receptacles.
All trash receptacles must be approved by Landlord and shall be
located in such places as Landlord shall designate. Tenant shall
maintain such receptacles and the designated location thereof in
a neat, clean and secure condition at all times. Tenant shall, at
its expense, provide for the pickup and removal of its trash. In
the event Tenant's trash is not removed in the manner aforesaid,
Landlord shall be entitled to remove or cause to be removed the
trash of tenant and Tenant shall pay to Landlord as additional
rent the cost incurred by Landlord for such removal, plus twenty
percent (20%) overhead and administrative expenses.
<PAGE>
4. COMPLIANCE WITH LAWS. Tenant shall observe, comply with and execute at
its expense, all laws and valid and lawful rules, requirements and regulations
of the United States, State, City and County in which the Premises are located,
and of any and all governmental authorities or agencies and of any board of fire
underwriters or other similar organization, respecting the Premises hereby
leased and the manner in which said Premises are or should be used by Tenant.
5. ASSIGNMENT/SUBLETTING. Tenant shall not assign this Lease, in whole or
in part, nor sublet the Premises, or any part or portion thereof, without
Landlord's prior written consent, which consent shall not be unreasonably
withheld. If such assignment or subletting is permitted, Tenant shall not be
relieved from any liability whatsoever under this Lease. Any transfer of a
majority of ownership in Tenant, if Tenant is a corporation or a partnership,
even by merger or consolidation, shall be deemed an assignment pursuant to this
Section.
6. FLOOR LOAD. Tenant shall not load the Premises hereby leased beyond its
present carrying capacity. Any damage resulting from overloading the floors or
walls of the Premises will be charged to Tenant.
THE PARTIES HERETO FURTHER COVENANT AND AGREE WITH EACH OTHER AS FOLLOWS:
7. TENANT'S INSURANCE; INDEMNITY. (a) Tenant shall indemnify and save
harmless Landlord, its successors or assigns, from all claims and demands of
every kind that may be brought against it, them, or any of them for or on
account of any damage, loss or injury to persons or property in or about the
Premises during the continuance of it tenancy, or during the time of any
alterations, repairs or improvements or restorations to said property by Tenant
and arising in connection therewith and from any and all costs and expenses and
other charges which may be imposed upon Landlord, its successors or assigns, or
which it or they may be obligated to incur in consequence thereof. Tenant shall
at all times carry and pay for a public liability insurance policy protecting
Landlord and specifically covering the above indemnity agreement on the part of
Tenant, with limits of $1,000,000.00 and $3000,000.00 for personal injury and
$100,000.00 for property damage, and will furnish Landlord with certificate of
such policy and any renewal thereof, naming Landlord as a certificate holder and
an Additional Insured. Such policy shall provide that Landlord will be given ten
(10) days' notice of any cancellation, modification or surrender. All personal
property and fixtures in the Premises shall remain at Tenant's sole risk. Tenant
shall insure such property and fixtures against loss or damage by fire and
casualties ordinarily included in the extended coverage endorsement in use in
Maryland in an amount equal to 100% of the replacement value thereof. Landlord
shall not be liable for any damage or loss arising from the bursting,
overflowing or leaking of the roof or of water, sprinkler, sewer or steam pipes,
or for malfunctioning heating, air conditioning or plumbing fixtures or from
electric wire or fixtures or arising from any other cause whatsoever, unless
caused by Landlord's negligent or willful misconduct.
(b)Tenant shall not do anything in or about said Premises that will
contravene or affect any policy of insurance against loss by fire or other
hazards, including but not limited to, public liability, now existing or
which Landlord may hereafter place thereon, or which will prevent Landlord
from procuring such policies in companies acceptable to Landlord; and
Tenant shall do everything reasonably possible and consistent with the
conduct of Tenant's business, as above limited, so as to obtain the
greatest possible reduction in the insurance rates for Landlord on the
Office of which the Premises hereby leased are a part, and Tenant
<PAGE>
further agrees to pay, as additional rental, any increase in the premium of
any insurance on the Premises hereby leased (or if the Premises hereby
leased are a part of a complex, then any increases in the premium of any
insurance on said entire complex) caused by the occupancy of Tenant, the
nature of the business carried on by Tenant in said Premises, or otherwise
resulting from any act of Tenant, its agents, servants, employees or
customers.
(c) Tenant hereby releases Landlord from all liability or
responsibility to Tenant or any person claiming by, through or under Tenant
by way of subrogation or otherwise, for any injury, loss or damage to the
Premises or any part thereof or any property of Tenant in or around the
Premises, or to Tenant's business irrespective of the cause of such injury,
loss or damage, and Tenant shall require its insurer(s) to include in all
Tenant's insurance policies which could give rise to a right of subrogation
against Landlord a clause or endorsement whereby the insurer(s) shall waive
any rights of subrogation against Landlord.
8. ALTERATIONS. Tenant shall not make any alterations (which term shall
include floor and wall coverings) to the Premises without the written consent of
Landlord. If Tenant desires to make any such alterations, the same shall first
be submitted to and approved by Landlord, which approval shall not be
unreasonably withheld, and shall be done by Tenant at it own expense, and Tenant
agrees that all such work shall be done in a good and workmanlike manner, that
the structural integrity of the Premises shall not be impaired, and that no
liens shall attach to the Premises by reason thereof.
9. END OF TERM. Unless Landlord shall elect that all or any part of the
alterations, referred to in or contemplated by the provisions of Section 8,
shall remain, the Premises shall be restored to their original condition (except
as to any part of said alterations which Landlord shall elect to remain) by
Tenant before the expiration of its tenancy, at its own expense, and Tenant
shall repair any damage resulting from the installation or removal of such
alterations.
Notwithstanding the right of Landlord to require the removal thereof, any
such alterations shall become the property of Landlord as soon as they are
affixed to the Premises and all right, title and interest therein of Tenant
shall immediately cease unless otherwise agreed to in writing. The Landlord
shall have the sole right to collect any insurance for damage of any kind to any
of such alterations upon the said Premises by Tenant. If the making of any such
alterations, or the obtaining permits or franchise therefor, shall directly or
indirectly result in a franchise, minor privilege, tangible personal property or
other similar tax or assessment, such tax or assessment shall be paid,
immediately upon its levy, by Tenant.
10. MAINTENANCE. Tenant shall, during the term of this Lease, keep said
Premises and appurtenances (including all appliances and facilities, doors and
doorways, windows, window frames, plate glass, and the heating and air
conditioning system) in good order and condition and will make or pay for its
proportionate share of all necessary repairs thereto, and further, with respect
to the heating and air conditioning system, while Landlord will make available
to Tenant any warranties with respect to said equipment which Landlord receives,
Tenant will be responsible at the expiration of the warranty period, if any, for
maintaining a maintenance contract on said equipment with a heating/air
conditioning contractor acceptable to Landlord. While Tenant is responsible for
keeping its Premises in good order and repair, Landlord specifically agrees that
it will make any necessary repairs to the exterior walls of the building of
which the Premises are a part and to the roof of said building, and further,
that Landlord will maintain the plumbing and electrical systems serving said
building to the point of entry into the Premises, after being notified of the
need for such repairs by Tenant, and provided that none of the required repairs
have been caused by the negligent act or omission of Tenant, its employees or
agents. Landlord may enter the Tenant's Premises at all reasonable times to make
repairs required hereunder, or to inspect the Premises in order to ascertain
that Tenant is carrying out its obligations with respect to maintenance/repair.
Tenant will also not obstruct any walkways made available to it. The Tenant
will, at the expiration of the term or at the sooner termination thereof by any
forfeiture or otherwise, deliver up the Premises in the same good order and
condition as they were at the beginning of the tenancy, reasonable wear and tear
excepted.
<PAGE>
11. TAX ESCALATOR. Tenant shall pay as additional rent Tenant's
proportionate share of the real estate taxes assessed against the land and/or
building(s) of the Office. In the event of any increases in real estate taxes
resulting from government assessments, improvements, alterations or additions as
made by Tenant, Tenant shall pay one hundred percent (100%) of the amount of
said increase. If Tenant pays its proportionate share of the taxes based on a
bill that is appealed by Landlord and later reduced, then Tenant shall be
entitled to a credit equal to its proportionate share of any refund, after all
costs or fees incurred by Landlord in contesting the real estate tax assessment
are deducted. For purposes of calculating Tenant's "proportionate share" the
real estate tax bill will be multiplied by a fraction, the numerator of which
shall be the square footage occupied by Tenant for the real estate tax year in
question and the denominator of which shall be the total leaseable square
footage of the Office, occupied or ready for occupancy. "Taxes" or "real estate
taxes" as used herein shall include, but not by way of limitation, all paving
taxes, special paving taxes, Metropolitan District Charges, and any and all
other benefits or assessments which may be levied on the Premises or the land
and/or building(s) in which the same are situate, as well as any and all costs
or fees incurred by Landlord in contesting any real estate tax assessment, but
shall not include any income tax on the income or rent payable hereunder. Any
payment due hereunder shall be deemed to be additional rental pursuant to this
Lease and shall be paid within ten (10) days of Landlord's billing.
12. INSURANCE ESCALATOR. Landlord may, in its reasonable business judgment,
maintain insurance on the property including but not limited to equipment and
systems in or pertaining to the building or property and including but not
limited to public liability insurance, property damage insurance, automobile
insurance, sign insurance, fire and extended coverage insurance, rent insurance,
boiler liability and casualty insurance, flood and earthquake insurance, and
plate glass insurance. For any insurance maintained by Landlord with respect to
the property and/or its equipment, Tenant agrees to pay as additional rent
Tenant's proportionate share of said premiums for any insurance carried on the
property or any portion thereof. If this Lease shall be in effect for less than
a full insurance year, Tenant shall pay as additional rent its proportionate
share of the insurance premium based upon the number of months that this Lease
is in effect. For purposes of calculating Tenant's "proportionate share", the
insurance premium bill will be multiplied by a fraction, the numerator of which
shall be the square footage occupied by Tenant for the insurance year in
question, and the denominator of which shall be the average of all the leasable
square footage in the building occupied by Tenant.
13. DEFAULT. If Tenant fails to pay fixed rental or any other sum required
by the terms of this Lease to be paid by Tenant when the same shall be due, or
if Tenant shall abandon the Premises, then Landlord shall have the immediate
right, without notice, to make distress therefor and, upon such distress, in the
Landlord's discretion, this tenancy shall terminate. If any fixed rental payment
required to be paid by Tenant shall be in arrears more than ten (10) days,
Tenant shall be liable for a late charge of fifteen percent (15%) of the amount
in arrears, which charge shall be collectible as rent. In case Tenant shall fail
to comply with any of the other provisions, covenants or conditions of this
Lease on its part to be kept and performed, and such default shall continue for
a period of ten (10) days after written notice thereof shall have been given to
Tenant by Landlord, or if Tenant fails to pay any sum of money due to Landlord
or others under the terms hereof, when and as such payment is due, then upon the
happening of any such events, the term of this Lease, at the option of Landlord,
shall cease and determine and, from thenceforth, it shall and may be lawful for
Landlord to re-enter into and upon the Premises, or any part thereof, and to
repossess and hold the same as if this Lease had never been executed. If
Landlord incurs any expenses in proceeding against Tenant for any default under
this Lease, then Tenant shall pay Landlord all reasonable expenses, including
counsel and court costs fees incurred with respect to such default.
<PAGE>
In addition to the preceding, if Tenant fails to comply with any of the
other provisions, covenants or conditions of this Lease, and Tenant has been
given notice by Landlord and reasonable opportunity to cure, then thereafter and
notwithstanding anything in this Lease to the contrary, Landlord may cure
Tenant's default and Tenant shall owe Landlord any monies which Landlord spends
as a result of Landlord curing Tenant's default, plus fifteen percent (15%)
administrative/overhead costs.
14. CASUALTY. In case of the total destruction of the Premises by fire, the
elements or other cause, or of such damage thereto as shall render the same
totally unfit for occupancy by Tenant, the payment of the rent due hereunder
shall be abated for the period of untenantability, or, at Landlord's option,
Landlord may declare that this Lease, together with the payment of rent then due
and a proportionate part thereof to the date of surrender, shall terminate and
be at an end. If any cause mentioned in the preceding sentence shall render the
Premises partly untenantable, then Landlord shall, at its own expense, restore
the Premises with all reasonable diligence, and the rent shall be abated
proportionately for the period of untenantability and the part of the Premises
untenantable until such improvements shall have been fully restored; provided
that, if neither the Premises nor any part thereof shall be rendered either
wholly or partly untenantable, Landlord shall, at its own expense, restore the
Premises with all reasonable diligence, but the rent shall not be abated to any
extent whatsoever; and provided further that if the cost of restoration of any
such damage to the Premises (based on the estimate of Landlord's insurance
adjuster) exceeds one-half (1/2) of the rent reserved hereunder from the date of
the occurrence of the damage to the expiration of the then current term of this
Lease, then Landlord may, at its option, cancel this Lease.
15. RECEIVERSHIP. In the event of the appointment of a receiver or trustee
for Tenant by any court, Federal or state, in any legal proceedings instituted
by or against it, including proceedings under any provisions of the Bankruptcy
Act, if the appointment of such receiver or such trustee is not vacated within
thirty (30) days, or if Tenant be adjudicated bankrupt or insolvent, or shall
make an assignment for the benefit of its creditors; then, and in any of said
events, Landlord may, at is option, terminate this Lease by ten (10) days'
written notice, and re-enter upon the Premises.
16. POSSESSION. In case possession of or the right to use the Premises, in
whole or in part, cannot be given to Tenant for any reason whatever (including
inability to obtain any occupancy or other necessary permit) on or before the
date specified for the beginning of the term, then Landlord agrees to abate the
rent proportionately until possession is given to Tenant, and Tenant agrees to
accept such pro rata abatement as liquidated damages for the failure to obtain
possession. If Landlord is unable to give Tenant possession of or the right to
use the Premises for more than one hundred eighty (180) days after the date
specified for the beginning of the term, then either party may cancel this Lease
by written notice to the other party, and there shall be no further liability of
either party with respect to this Lease.
17. SIGNS, ETC. Tenant shall not place or permit any signs, lights, awnings
or poles on or about the exterior of the Premises without the written consent of
Landlord, and, if such consent is given, then Tenant agrees to pay any permit
fees and minor privilege or other tax therefor. At its own cost and expense,
Tenant shall install exterior signage over its front and rear entrances to the
Premises. Such signage shall be of Landlord/building standard color, material
and size and the placement of such signage shall be subject to Landlord's
approval. Tenant further covenants and agrees that it will not paint or make any
change in or on the outside of the Premises without the permission of Landlord
in writing. Tenant agrees that it will do nothing on the outside of Premises to
change the uniform architecture, paint or appearance of said Premises, without
the consent of Landlord in writing. In the event of any violation of this
Section 17 by Tenant, then Landlord may take such action as it sees fit to abate
such violation, and Tenant shall pay to Landlord all expenses incurred by
Landlord in taking such action.
<PAGE>
18. RULES AND REGULATIONS. Tenant covenants and agrees to abide by the
rules and regulations set forth below in this lease, and any reasonable changes
and additions thereto; and the same shall be deemed to be covenants of this
Lease.
19. LANDLORD ACCESS. Landlord shall have the right to place a "For Sale" or
"For Rent" sign on any portion of the Premises for one hundred eighty (180) days
prior to the final termination of this Lease, and may show the Premises at all
reasonable times to prospective tenants and purchasers.
20. LANDLORD LIABILITY. Tenant shall carry standard fire and extended
coverage insurance on those parts of the Premises and the facilities therein
which were originally constructed and/or installed by Tenant or at Tenant's
expense and on all other leasehold improvements made by it, and on its trade
fixtures, merchandise and other personal property in the Premises for their full
replacement value. Landlord shall not be liable to Tenant for any damage to any
such property from any cause, unless (i) such damage is due to Landlord's
negligence, and (ii) such damage is caused by an occurrence which is not an
insured hazard under the standard fire and extended coverage insurance which is
available for insuring such property of Tenant at the time of the loss; it being
understood that it is not the intention of the parties that Landlord be relieved
from liability to Tenant for negligence contrary to any statute or public policy
of the State of Maryland, but rather that Tenant avail itself of available
insurance coverage without subjecting Landlord to liability for losses that
could have been insured, and without subjecting Landlord to subrogation claims
of any insurer. The Landlord shall not be liable to Tenant for damage to
Tenant's property due to the negligent or intentional acts of any other tenant
in the complex of which the Premises is a part, or to any condition existing on
or emanating from the Premises of any other tenant which is not caused by
Landlord or its agents or contractors, nor shall Tenant be entitled to any
abatement of rent or to claim an actual or constructive eviction, whole or
partial, permanent or temporary, by reason of any such condition or emanating
from such other tenant's Premises.
21. ACCESS. Subject to Landlord not unreasonably interfering with Tenant's
business, Landlord, and its agents, servants and employees, including any
builder or contractor employed by Landlord, shall have, and Tenant hereby gives
them and each of them, the absolute and unconditional right, license and
permission, at any and all reasonable times, and for any reasonable purpose
whatsoever, to enter through, across or upon the Premises hereby leased or any
part thereof and, at the option of Landlord, to make such reasonable repairs to
or changes in the Premises as Landlord may deem necessary or proper.
22. EXPIRATION. The term of this Lease shall expire on October 31, 2004,
without the necessity of any notice by or to any of the parties hereto. If
Tenant shall occupy the Premises after such expiration, in the absence of any
written agreement to the contrary, Tenant shall hold the Premises as a tenant
from month to month, subject to all the other terms and conditions of this
Lease, except that the fixed rent shall be one and one-half (1-1/2)) times the
highest monthly rental reserved in this Lease, provided that Landlord shall,
upon such expiration, be entitled to the benefit of all public general or public
local laws relating to the speedy recovery of the possession of lands and
tenements held over by tenants that may be now in force or may hereafter be
enacted, tenant hereby waiving the necessity of any written notice as a
condition precedent to the institution of any action for speedy recovery of the
Premises by Landlord.
23. CONDEMNATION. If condemnation proceedings are instituted against the
Premises and title taken by any federal, state or municipal body, then this
Lease shall terminate as of the date possession vests in the condemning
authority. Tenant shall not be entitled to share in any part of the award, which
may be received by Landlord for the taking of the fee and Tenant's leasehold
estate. This Section 23 shall apply also in case of any sale of the Premises by
Landlord to a condemning authority under threat of the exercise of the power of
eminent domain.
<PAGE>
24. SUBORDINATION. Landlord shall have the right to place a mortgage or
mortgages on the Premises and the property of which the Premises is a part, and
this Lease shall be subordinate to any such mortgage or mortgages or superior
thereto, as the mortgagee(s) may elect from time to time. Notice of such
election shall be given to tenant in connection with any mortgage foreclosure.
25. COMMON AREAS. (a) Tenant, its agents, servants, employees, customers
and invitees, shall have the non-exclusive right to use, in common with others,
the automobile parking areas, driveways, and pedestrian walkways, and for all
other areas, space, facilities, equipment and signs, to the extent made
available by Landlord for the common and joint non-exclusive use and benefit of
landlord, Tenant and other tenants and occupants of the Office and their
respective employees, agents, subtenants, customers and other invitees
(hereinafter collective called "common areas") from time to time made available
by Landlord in the complex of which the Premises are a part, subject to such
rules and regulations as Landlord may prescribe. All employees of Tenant shall
park only in spaces designated by Landlord for employee parking, if Landlord so
requires; and Tenant shall furnish to Landlord, promptly upon request, license
numbers, makes and colors of vehicles used by Tenant's employees. If any
employee of Tenant parks a vehicle in any area other than that designated for
employee parking, Tenant shall pay Landlord $10.00 per day (or part) for each
vehicle so parked if Landlord shall have given written notice or oral notice of
such parking violation to a responsible official of Tenant on the premises, and
such violation is not immediately corrected. Landlord reserves the right to
limit the number of parking spaces and the location of said spaces, in
Landlord's sole discretion.
(b) Landlord shall have the exclusive management and control over the
common areas; shall keep the parking areas and driveways substantially free
of ice, snow and debris; shall keep the common areas in reasonable repair
and shall care for all landscaping; and may change the arrangement and
location of parking areas and driveways as it sees fit.
(c) Landlord (subject to reimbursement as hereinafter set forth in
this section) will, at its expense, operate and maintain, or cause to be
operated and maintained, the common areas (hereinabove defined) and the
Office in a manner deemed reasonable and appropriate by Landlord. For
purposes of this Lease, "common area costs" shall be those costs of
operating and maintaining or of causing the operation and maintenance of
the common areas and the Office of which the Premises form a part in a
manner deemed by Landlord to be reasonable and appropriate, including, but
not limited to, all costs and expenses, whether expended or incurred, of
repairing, lighting, cleaning, landscaping, painting and maintaining
(including, but not limited to, preventive maintenance); removing snow,
ice, rubbish and debris, including dumpster rental and/or pick-up charges,
inspecting, policing, providing security and regulating traffic; rental and
depreciation of machinery and equipment and other non-real estate assets
used in the operation and maintenance of the property; repairing and/or
replacing of paving, curbs, walkways, landscaping, drainage, on-site water
lines, sanitary sewer lines, storm water lines, electrical lines and other
equipment serving the Office from which the Premises or any part thereof is
constructed or is to be constructed; electricity, steam, water and/or other
fuel used in the common areas; heating, ventilating and air conditioning in
enclosed common areas, if any; cleaning and janitorial supplies including
equipment, uniforms, supplies and sundries used in connection therewith, if
such services are provided, sales or use taxes on supplies or services; any
parking surcharges that may result from any environmental or other laws,
rules, regulations, guidelines or orders; the gross compensation (including
fringe benefit expenses and related payroll taxes) of all personnel
required to supervise and accomplish the foregoing, together with an
administrative charge equal to 15% of the total of all common area costs
specifically referred to above. In the event of any dispute as to whether
an item represents an expense or a capital item, Landlord's accounting
practices shall be determinative and binding on the parties.
<PAGE>
(d) Tenant shall pay as additional rent, Tenant's
proportionate share of the common area costs incurred by
Landlord. For purposes of calculating Tenant's "proportionate
share", the common area costs incurred by Landlord will be
multiplied by a fraction, the numerator of which shall be the
square footage occupied by Tenant for the common area cost year
in question and the denominator of which shall be the total
leaseable square footage of the Office, occupied or ready for
occupancy. Any payment due hereunder shall be deemed to be
additional rent payable by Tenant pursuant to this section within
fifteen (15) days of Landlord's billing. Additional rent payable
by Tenant pursuant to this section shall be pro-rated for any
fractional part of the year during the last year of the Lease.
Unless Tenant shall have given Landlord written notice of
exception to any billing by Landlord within thirty (30) days
after delivery thereof, the same shall be deemed conclusive and
binding on Tenant. Landlord shall supply Tenant with a statement
showing the amount and computation of such additional rent upon
written request therefore by Tenant delivered within fifteen (15)
days of receipt of the Landlord's billing provided for in this
subsection.
26. SECURITY DEPOSIT. Tenant shall deposit with Landlord the sum of ONE
THOUSAND FIVE HUNDRED THIRTY-ONE DOLLARS AND TWENTY-FIVE CENTS ($1,531.25) to be
held by Landlord a security for the payment of rent and the performance of
Tenant's other obligations under this Lease. Landlord may (but need not) invest
the deposit in interest bearing securities or accounts and interest earned
thereon, if any, shall belong to Landlord. The deposit shall be returned to
Tenant within sixty (60) days after the termination of this Lease if all of
Tenant's obligations hereunder are performed to the date of termination. If
tenant defaults in the performance or observance of any obligation on its part
under this Lease, Landlord may apply the deposit to payment of the rent in
default or other money arrearage, and/or to the damages and costs incurred by
Landlord as a result of any default, and/or to costs incurred by Landlord in
rectifying any default, and/or to the prepayment of rent for any subsequent
period of the term, and Tenant shall promptly thereafter restore the security
deposit to the original amount above specified. The right of Landlord to apply
the security deposit as above specified shall not be construed as a limitation
upon Landlord's right to invoke any other remedy available under this Lease or
at law or equity for breach of this Lease, or to collect the full amount of
damages owing by Tenant on account of such breach. If, by reason of Tenant's
default under this Lease, Landlord terminates this Lease either before or after
the commencement of the term or re-enters the Premises or if Tenant holds over
at the end of the term, Landlord may retain the security deposit as liquidated
damages (applying it against the damages which it suffers but without waiving
its right to recovery of additional damages to which it may be entitled) or
apply it to the monthly installments of rent hereunder in inverse order of
accrual.
27. NOTICES. Any notice, demand, consent, approval, request or other
communication or document to be provided hereunder to a party hereto shall be
(a) in writing, and (b) deemed to have been provided (i) (1) 48 hours after
being sent as certified or registered first class mail in the United States
mails, postage prepaid, return receipt requested, or (2) the next business day
after having been deposited (in time for delivery by such service on such
business day) with Federal Express or other national courier service, in each
case to the address of such parties set forth herein or to such address in the
United States of America as such party may designate from time to time by notice
to the other party hereto, (ii) (if such party's receipt thereof is acknowledged
in writing) upon being given by hand or other actual delivery to such party, or
(iii) upon being sent by telecopier to such telecopier number as such party may
designate from time to time by notice to the other party hereto.
28. TENANT BUILD-OUT. Upon the commencement of this Lease, Tenant will
accept deliver of the Premises from Landlord "As Is".
29. RELOCATION. Landlord reserves the right to relocate Tenant at
Landlord's cost to comparably sized Premises within the Office. Landlord will
provide Tenant with no less than 120 days written
<PAGE>
notice of its intention to relocate Tenant to new Premises. Any notice to
relocate Tenant shall be subject to the following terms and conditions:
(a) This Lease will be amended effective as of the date of such
relocation by deleting the description of the original Premises and
substituting for it a description of the new Premises.
(b) Tenant will pay rent and additional rent/charges for the new
Premises at the same rate per square foot that is then payable for such
charges hereunder.
(c) Landlord shall bear the reasonable costs of moving Tenant to the
new Premises, and shall also bear the cost of constructing the new Premises
in a manner identical or substantially identical to Landlord's construction
obligations with respect to the original Premises, and Landlord shall
complete its construction obligations and deliver the new Premises to
Tenant as of the date specified in Landlord's notice.
30. HAZARDOUS SUBSTANCES. (a) The term "Hazardous Substances" as used in
this Lease is defined to mean any substance defined as a "hazardous substance"
or "hazardous material" under either the Comprehensive Environmental Response,
Compensation and Liability Act of 1989, as amended (42 USC9601, et seq.), or
substances declared to be hazardous or toxic under any other federal, state or
municipal law or regulation now or hereafter enacted or promulgated by any
governmental authority having jurisdiction, and including asbestos and
underground and above ground storage tanks.
(b) Tenant shall have no responsibility or liability whatsoever to
Landlord or any third person for any Hazardous Substances or any other
environmental hazards which were created and/or existed on or in the
Premises prior to the date of this Lease. Landlord shall indemnify and save
harmless tenant, its successors and assigns, from all claims and demands of
every kind, that may be brought against Tenant, before or on account of any
damage, loss or injury to persons or property arising from connection with
any such Hazardous Substance or any other environmental hazard created or
existing on or before this Lease, and from any and all costs and expenses
and other charges which may be imposed upon Tenant, its successors and
assigns, or which Tenant may be obligated to incur in consequence thereof.
(c) Tenant shall not cause or permit to occur:
(i) Any violation of any federal, state or local law, ordinance
or regulation now or hereafter enacted, related to environmental
conditions on, under or about the Premises and arising from Tenant's
use or occupancy of the Premises, including, but not limited to soil
and ground water conditions; or
(ii) The use, generation, release, manufacture, refining,
production, processing, storage or disposal of any Hazardous Substance
on, under or about the Premises or the transportation to or from the
Premises of any Hazardous Substance.
Further, it is agreed that:
(iii) Tenant shall, at Tenant's own expense, make all submissions
to, provide all information required by, and comply with all
requirements of all governmental authorities (the "Authorities) under
the Laws.
(iv) Tenant shall, at Tenant's own expense, comply with all laws
regulating the use generation, storage, transportation or disposal of
Hazardous Substances ("Laws").
<PAGE>
(v) Should any Authority or any third party demand that a cleanup
plan be prepared and that a clean-up be undertaken because of any
deposit, spill, discharge or other release of Hazardous Substances
that occurs during the term of this Lease, at or from the Premises and
Tenant's use thereof, and for compliance therewith, and Tenant shall
execute all documents promptly upon Landlord's request. No such action
by Landlord and no attempt made by Landlord to mitigate damages under
any Law shall constitute a waiver of any of Tenant's obligations under
this Section.
(vi) Tenant shall promptly provide all information regarding the
use, generation, storage, transportation or disposal of Hazardous
Substances that is requested by Landlord. If Tenant fails to fulfill
any duty imposed under this Section within a reasonable time, Landlord
may do so; and in such case, Tenant shall cooperate with Landlord in
order to prepare all documents Landlord deems necessary or appropriate
to determine the applicability of the Laws to the Premises and
Tenant's use thereof, and for compliance therewith, and Tenant shall
execute all documents promptly upon Landlord's request. No such action
by Landlord and no attempt made by Landlord to mitigate damages under
any Law shall constitute a waiver of any of Tenant's obligations under
this Section.
(vii) Tenant's obligations and liabilities under this Section
shall survive the expiration of this Lease.
(d) Tenant shall indemnify, defend and hold harmless Landlord, the
manager of Landlord's buildings and their respective officers, directors,
beneficiaries, shareholders, partners, agents and employees from all fines,
suits, procedures, claims and actions of every kind, and all costs
associated therewith (including attorneys' and consultants' fees) arising
out of or in any way connected with any deposit, spill, discharge or other
release of Hazardous Substances that occurs during the term of this Lease,
at or from Tenant's failure provide all information, make all submissions
and take all steps required by all Authorities under the Laws and all other
environmental laws. Tenant's obligations and liabilities under this Section
shall survive the expiration of the Lease.
31. BROKERAGE COMMISSIONS. Each of the parties represents and warrants that
there are no claims for brokerage commissions or finder's fees in connection
with the execution of this Lease, and each of the parties agrees to indemnify
and save harmless the other party from and against all liabilities arising from
any such claim including, without limitation, the cost of attorney's fees in
connection therewith.
32. RECORDING. Tenant shall not record this Lease. The parties agree that
at or prior to the commencement of the Lease term, or at a later date, if
requested by either party, they will, upon the written request of either party,
execute, acknowledge and deliver a short form of lease setting forth the date, a
description of the Premises, term, renewal option and restrictive covenants, of
any, contained and found to exist in this Lease. If the short form of lease
herein referred to is recorded, all costs incident thereto shall be paid by the
party requesting such recordation. The cost of recording any financing statement
required by Landlord as security for the rent or other payments due hereunder
shall be at Tenant's expense. Such short form lease shall not change the rights
and obligations of the respective parties.
33. WAIVER OF JURY TRIAL. Landlord and Tenant shall and they hereby do
waive trial by jury in any action, proceeding or counterclaim brought by either
of the parties hereto against the other. Said waiver is effective as to all
matters, including, but not limited to, any matters arising out of or in any way
connected with this Lease, the relationship of Landlord and Tenant, Tenant's use
or occupancy of the Premises, and any emergency or other statutory remedy.
Tenant further agrees that it shall not interpose any counterclaim(s) in a
summary proceeding or in any action based on holdover or non-payment of Rent
and/or Additional Charges.
<PAGE>
34. MISCELLANEOUS. (a) For the purpose of any suit brought or based on this
Lease, this Lease shall be constructed to be a divisible contract, to the end
that successive actions may be maintained as successive periodic sums shall
mature under this Lease, and failure to include in any suit or action any sum or
sums then matured shall not be a bar to the maintenance of any suit or action
for the recovery of said sum or sums so omitted. Tenant shall not in any suit or
suits brought on this Lease for a matured sum, for which judgment has not
previously been received, plead, rely on or urge as a bar to said suit or suits,
the defenses of res adjudicata, former recovery, extinguishment, merger,
election of remedies or other similar defenses.
(b) Nothing shall be construed to be a waiver of any of the terms,
covenants and Conditions herein contained unless the same be in writing
signed by the party to be charged with such waiver and no waiver of the
breach of any covenant shall be construed as a waiver of the covenant or
any subsequent breach thereof.
(c) The failure of Landlord to insist in any one or more instances
upon a strict performance of any covenant of this Lease or to exercise any
right herein contained shall not be construed as a waiver or relinquishment
for the future of such covenant or right, but the same shall remain in full
force and effect, unless the contrary is expressed in writing by Landlord.
(d) If this Lease is executed by two or more individuals, as Tenant,
the liability for all obligations on Tenant's part to be performed
hereunder, specifically including but not limited to the obligation to pay
all rent and additional rent provided for herein, shall be deemed to be
joint and several.
(e) Landlord covenants that Tenant, on paying the Rent and Additional
Rent due hereunder and performing Tenant's obligations under this Lease,
shall peacefully and quietly have, hold and enjoy the Premises throughout
the term without hindrance, ejection or molestation by any person lawfully
claiming under Landlord, subject to the terms and provisions of this Lease
and to all mortgages and underlying leases of record to which this Lease
may be or becomes subject and subordinate, unless a non-disturbance
agreement has been granted by mortgagee or ground lessor.
(f) Any and all sums of money required to be paid by Tenant under this
Lease, Whether or not designated as "additional rent" shall nevertheless be
deemed as "additional rent" and shall be collectible as rent.
(g) Nothing contained in this Lease shall be deemed, construed or
interpreted to imply any consent or agreement on the part of Landlord to
subject Landlord's interest or estate to any liability under any mechanic's
or other lien law. If landlord receives any notice to file a mechanic's or
other lien against the Office, or any part thereof, or the Premises, or any
part thereof, for any work, labor, services or materials claimed to have
been performed or furnished for or on behalf of Tenant or anyone holding
any part of the premises through our under Tenant, then Tenant shall act
promptly to have such notice withdrawn and to settle any dispute that is
the subject of such notice. If any petition to establish a mechanic's or
other lien is filed or if any mechanic's or other lien is actually
established, against the Office or any part thereof, or the Premises, or
any part thereof, or if any mechanic's or other lien is actually
established, for any work, labor, services or materials claimed to have
been performed or furnished for or on behalf of Tenant or anyone holding
any part of the Premises through or under Tenant, then Tenant shall cause
the same to be canceled and discharged of record by payment, bond or order
of court within 20 days after notice by Landlord to Tenant. Tenant shall,
at Landlord's request, give written notice to all of Tenant's laborers and
materialmen that Landlord shall not be responsible for labor on the
Premises not at the time of said notice performed, or for materials which
have been furnished. Tenant shall be responsible for paying, as additional
rent, any attorneys fees that Landlord actually incurs as a result of
<PAGE>
Landlord receiving any notice of intent to file a mechanic's or other, lien
described herein; as a result of any such petition to file a mechanic's or
other lien or as a result of any such mechanics, or other lien being
established against the Office, or any part thereof, or against the
Premises, or any part thereof.
35. CONTINGENCIES. The Tenant's lease at 10324 South Dolfield Road will
commence on the earlier of the day after the Tenant's current lease Agreement
with Continental Realty Corporation expires or the day after the Lease Agreement
is terminated, if earlier than the expiration date. In no event will the
Tenant's commencement date be later than November 1, 1999.
IN WITNESS WHEREOF, the parties hereto have executed this Lease under their
respective hands and seals as of the day and year first above written: WITNESS:
LANDLORD: KA REAL ESTATE ASSOCIATES, LLC
/s/ Phyllis Oppenheim /s/ Kenneth L. Blum, Jr.
- ---------------------- ----------------------------------------
WITNESS: TENANT:
AVESIS INCORPORATED
/s/ Phyllis Oppenheim /s/ Alan S. Cohn
- ---------------------- ----------------------------------------
STATE OF MARYLAND, COUNTY OF Baltimore , to wit:
On this 3rd day of June, 1999, before me, the subscriber, a Notary Public of the
State of Maryland, personally appeared Kenneth L. Blum, Jr. ,and he acknowledged
the above Lease to be the act of said Landlord.
IN WITNESS WHEREOF, I hereunto set my hand and Notarial Seal.
/s/ Kathy Incaprera
----------------------------------------
My Commission Expires: 8/1/2001
STATE OF MARYLAND, COUNTY OF Baltimore , to wit:
On this 3rd day of June, 1999, before me, the subscriber, a Notary Public of the
State of Maryland, personally appeared Kenneth L. Blum, Jr. ,and he acknowledged
the above Lease to be the act of said Landlord.
IN WITNESS WHEREOF, I hereunto set my hand and Notarial Seal.
/s/ Kathy Incaprera
----------------------------------------
My Commission Expires: 8/1/2001
EXHIBIT 10.21
Richter Investment Corp.
November 6, 1999
Mr. Alan Cohn
President
Avesis Incorporated
10324 S. Dolfield Road
Owings Mills, MD 21117
Dear Alan:
Richter Investment Corp. ("Richter") is pleased to submit this proposal to
serve as exclusive financial advisor for Avesis Incorporated ("Avesis" or the
"Company"). In this capacity, Richter will assist the Company in: (i) exploring
potential financing sources including, but not limited to, private placements of
equity and/or debt securities; (ii) identifying, reviewing and evaluating
prospective merger & acquisition opportunities; (iii) interfacing with other
financial consultants and advisors which the Company may retain from time to
time; and (iv) performing all other investment banking services that the company
may request; provided, however, that neither Richter nor any of its personnel
will engage in business as a broker or a dealer to effect any securities
transactions with or for the Company or any other person.
FINANCING SERVICES
For its role as financial advisor in seeking financing for the company,
Avesis agrees to pay Richter an advisory fee equal to one percent (1%) of any
amounts being sought regardless of whether or not such sums are ever received by
the Company. All fees will be payable upon engagement.
MERGER & ACQUISITION SERVICES
As the Company's advisor in potential merger & acquisition transactions,
Richter will assist Avesis in identifying and gathering information on potential
opportunities, in reviewing all potential acquisitions, joint ventures, new
ventures, strategic investments, etc. developed or considered by management, and
in analyzing, structuring, negotiating and effecting selected business
combinations. In such transactions, Avesis may function as seller, buyer or
participant and Richter's fee structure will depend on the role of the Company
in the transaction.
SELL SIDE TRANSACTIONS - if all or a controlling interest in the Company is
acquired, Avesis agrees to pay Richter a cash fee upon the closing of the
transaction in an amount equal to two percent (2%) of the value of the
transaction.
BUY SIDE TRANSACTIONS - if the Company is the acquirer in a business
combination, Avesis agrees to pay Richter a cash fee upon the closing of
the transaction in an amount equal to three percent (3%) of the transaction
value up to $10 million plus two percent (2%) of the amount by which the
transaction value exceeds $10 million. Notwithstanding the above-stated
percentages, Richter's minimum fee for completing a buy-side transaction
for the Company will be $100,000.
<PAGE>
Mr. Alan Cohn
November 6, 1999
Page 2 of 4
Richter's role in sell-side or buy-side transactions will be purely
advisory. Richter will assist in structuring and negotiating transactions,
but it will not solicit participation or otherwise act in any manner which
might require it to be a securities broker or dealer.
PARTICIPANT TRANSACTIONS - if the Company enters into a joint venture or
similar arrangement with another entity, Avesis agrees to pay Richter a fee
equal to five percent (5%) of the value of all consideration net of
expenses received or earned by Avesis from such venture during the first
five years of its existence. Payments to Richter will be due upon receipt
of consideration by Avesis and may be made in the same form as such
consideration is received by Avesis or in cash at equivalent value as
determined in good faith by Avesis and Richter. If Avesis receives its
consideration in the form of participation in revenues or profits, such
consideration shall be deemed received by Avesis upon receipt by it of
audited results on an annual basis. Notwithstanding the above-stated
percentage, Richter's minimum fee per participant transaction will be
$25,000 payable over five years, and its maximum fee per participant
transaction will be $600,000 payable as outlined above until the maximum
has been paid.
Richter's role in participant transactions will be purely advisory. Richter
will assist in structuring and negotiating transactions, but it will not
act as a broker in any transaction involving the purchase or sale of
securities.
For purposes of this letter, the term "transaction value" means an amount
equal to cash consideration paid, the aggregate fair market value of any
securities (including Notes or other forms of indebtedness) issued in connection
with the business combination plus the stated value of any liabilities or
indebtedness assumed by the acquirer. The fair market value of any such
securities will be the value determined by Avesis and Richter upon the closing
of the transaction. If publicly traded shares of an acquiring company are part
of the consideration, they shall be valued at their market price on the date of
closing without regard to restrictions as to immediate salability. Debt
securities issued shall be valued at face unless the buyer and seller mutually
agree that an original issue discount is applicable, in which case they shall be
valued as stipulated in the definitive purchase agreement. To the extent that
any portion of the transaction value is not known at the time of closing (for
example, because it is contingent upon future performance of Avesis or another
entity), the portion of the transaction fee, if any, payable for such portion of
the transaction value will be payable in cash only when such payments are made.
Avesis may enter into more than one type of transaction at a time with a
single entity, in which case each such transaction shall result in an
appropriate fee as indicated above.
OTHER INVESTMENT BANKING SERVICES
To the extent that Avesis should wish to use Richter for other investment
banking activities, Richter and Avesis will negotiate mutually acceptable fees
for such services.
EXPENSES
Avesis will promptly reimburse Richter for its out-of-pocket expenses
incurred in connection with this engagement upon invoicing from Richter together
with appropriate documentation and receipts.
<PAGE>
Mr. Alan Cohn
November 6, 1999
Page 3 of 4
INDEMNIFICATION
Subject to the procedures set forth in the next paragraph, Avesis
agrees to indemnify Richter, its affiliates and their respective directors,
officers, employees, agents and controlling persons ("Indemnified Parties") from
and against any and all losses, claims, damages or liabilities, joint or
several, to which such Indemnified Party may become subject under any applicable
federal or state law, or otherwise, related to or arising out of this
Engagement, and will reimburse any Indemnified Party periodically for all
reasonable expenses (including reasonable counsel fees and expenses) as they are
incurred in connection with the investigation of, preparation for or defense of
any pending or threatened claim or any action or proceeding arising therefrom.
The indemnification agreement contained in this paragraph, however, shall not
extend to any loss, claim, damage, expense, liability, or action or right to
reimbursement if and to the extent that a court shall ultimately determine that
any such loss, claim, damage, expense, liability or action or right to
reimbursement arose by reason of an act or omission to act on Richter's part (a)
by reason of gross negligence on Richter's part or (b) as the result of willful
misconduct by Richter. In the event of a failure or defect in the ability of
Avesis to provide indemnification to Richter, it is agreed that Avesis and
Richter will contribute to the cost of discharging any obligation arising out of
this engagement in proportion to their relative benefit from this engagement.
If an indemnified Party receives a complaint, claim or other notice
from any third party of any loss, claim or damage, liability or action giving
rise to a claim for indemnification hereunder, the party claiming
indemnification hereunder shall promptly notify Avesis of such complaint,
notice, claim or action, and Avesis shall have the right to investigate and
defend any such loss, claim, damage, liability or action. The indemnified Party
shall cooperate in any defense upon the request and at the expense of Avesis,
and shall have the right to employ separate counsel subject to the approval of
Avesis (which approval shall not be unreasonably withheld) in any such action
and to participate in the defense thereof, but the fees and expenses of such
counsel shall not be at the expense of Avesis if Avesis has then undertaken
defense of such action with competent counsel reasonably acceptable to the
Indemnified Party; provided that separate counsel may be retained by the
Indemnified Party at the expense of Avesis if a conflict of interest would exist
for counsel simultaneously representing Avesis and the Indemnified Party. Except
as provided in the last sentence of this paragraph, Avesis shall not be
obligated to indemnify any person for any settlement of any claim or action
effected without Avesis's consent. If Avesis fails to defend within a reasonable
time after notice, the Indemnified Party shall have the right but not the
obligation to undertake the defense of and to compromise or settle (exercising
reasonable business judgment) the claim or other matter on behalf, for the
account and at the risk of Avesis.
TERMINATION
Avesis may terminate its obligations under this engagement at any time
upon ninety (90) days written notice of the Company's desire to terminate and
the payment of any fees payable to Richter together with payment for Richter's
out-of-pocket expenses up to that date. However, if during the period Richter is
retained by Avesis or within two years thereafter, (a) a financing, joint
venture or business combination is consummated with an entity (i) as to which
Richter advised Avesis or (ii) with which Avesis or Richter, with the Company's
approval, had substantive discussions regarding a financing, joint venture or
business combination, or (b) Avesis enters into a definitive agreement with any
such entity which subsequently results in a financing, joint venture or business
combination, Avesis agrees to pay Richter an advisory fee in an amount equal to
the fees outlined above, payable in cash upon the closing of such transaction.
GOVERNING LAW
In the event of any legal dispute between Avesis and Richter under the
terms of this agreement, the governing law shall be the laws of the State of New
York.
<PAGE>
Mr. Alan Cohn
November 6, 1999
Page 4 of 4
If the foregoing correctly sets forth the understanding between Avesis and
Richter, please so indicate by an authorized signature below, whereupon this
letter shall constitute a binding agreement between us.
Sincerely,
/s/ William L. Richter
William L. Richter
Accepted and agreed to this 10th day of March, 2000
---- -----
By: /s/ Alan S. Cohn
----------------------------
Alan Cohn
President
Avesis Incorporated
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.
Avesis Reinsurance, Inc.
State of Incorporation: Arizona
Name under which business is done: Avesis Reinsurance, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-KSB FOR THE TRANSITION PERIOD ENDED DECEMBER 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> 7-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,483,739
<SECURITIES> 0
<RECEIVABLES> 329,309
<ALLOWANCES> (28,261)
<INVENTORY> 0
<CURRENT-ASSETS> 2,961,887
<PP&E> 1,575,478
<DEPRECIATION> (1,063,874)
<TOTAL-ASSETS> 3,905,999
<CURRENT-LIABILITIES> 763,739
<BONDS> 0
0
2,772
<COMMON> 72,503
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,905,999
<SALES> 0
<TOTAL-REVENUES> 5,614,154
<CGS> 3,740,468
<TOTAL-COSTS> 1,284,069
<OTHER-EXPENSES> (74,059)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,838)
<INCOME-PRETAX> 661,838
<INCOME-TAX> 86,000
<INCOME-CONTINUING> 575,838
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 470,000
<NET-INCOME> 1,045,838
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.10
</TABLE>
