Securities and Exchange Commission
Washington D.C. 20549
FORM 10-QSB/A
Amendment No. 1
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended March 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
---------------------- ----------------------
Commission File Number 0-15304
AVESIS INCORPORATED
---------------------------------------
(Exact name of small business issuer as
specified 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)
(602) 241 - 3400
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
The number of outstanding shares of the registrant's Common Stock on May 3,
2000 was 7,619,297.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
(Check One) Yes [ ] No [X]
1 of 11
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
AVESIS INCORPORATED
BALANCE SHEET
AS OF MARCH 31, 2000
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,380,199
Receivables, net 345,447
Prepaid expenses and other 203,913
------------
Total current assets 2,929,559
Property and equipment, net 509,929
Intangibles, net of amortization 548,050
Deposits and other assets 556,686
------------
$ 4,544,224
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 737,144
Current installments of obligations
under capital lease 10,288
Accrued expenses-
Compensation 32,987
Other 118,776
Deferred income 30,570
------------
Total current liabilities 929,765
Obligations under capital lease, excluding
current installments 10,541
------------
Total liabilities 940,306
------------
Stockholders' equity:
Preferred stock $.01 par value, authorized
12,000,000 shares:
$3.75 Class A, senior nonvoting cumulative
convertible preferred stock, Series A,
$.01 par value; authorized 1,000,000 shares;
271,760 issued and outstanding (liquidation
preference of $3.75 per share) 2,718
$10 Class A, nonvoting cumulative convertible
preferred stock, Series 2, $.01 par value;
authorized 1,000,000 shares; 5,000 shares
issued and outstanding (liquidation
preference of $10 per share) and $33,750 of
dividends in arrears at $6.75 per share;
dividends accrue at $.225 per share per
calendar quarter 50
Common stock of $.01 par value, authorized
20,000,000 shares; 7,604,297 shares issued
and outstanding 76,043
Additional paid-in capital 10,524,323
Accumulated deficit (6,999,216)
------------
Total stockholders' equity 3,603,918
------------
$ 4,544,224
============
The accompanying notes are an integral part of these statements.
2
<PAGE>
AVESIS INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
Quarters Ended
-------------------------------
2000 1999
------------ ------------
Service revenues:
Administration fees $ 1,507,020 $ 2,145,579
Buying group 434,449 442,941
Provider fees 25,357 32,330
Other 2,488 3,663
------------ ------------
Total service revenues 1,969,314 2,624,513
Cost of services 1,201,654 1,756,197
------------ ------------
Income from services 767,660 868,316
General and administrative expenses 343,586 277,234
Selling and marketing expenses 222,427 286,773
------------ ------------
Income from operations 201,647 304,309
------------ ------------
Non-operating income:
Other income 1,331 47,033
Interest income 34,045 23,684
Interest expense (610) (927)
------------ ------------
Net non-operating income 34,766 69,790
------------ ------------
Income before income taxes 236,413 374,099
Income taxes 23,641 -0-
------------ ------------
Net income $ 212,772 $ 374,099
============ ============
Preferred stock dividends (24,055) (26,760)
Net income available to common
stockholders $ 188,717 $ 347,339
============ ============
Earnings per share - Basic $ 0.03 $ 0.05
============ ============
Earnings per share - Diluted $ 0.02 $ 0.04
============ ============
Weighted average common and
equivalent shares
outstanding - Basic 7,279,066 7,356,297
============ ============
Weighted average common and
equivalent shares
outstanding - Diluted 10,685,868 10,392,008
============ ============
The accompanying notes are an integral part of these statements.
3
<PAGE>
AVESIS INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 212,772 $ 374,099
----------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 41,528 32,812
Provision for losses on accounts receivable -0- 12,800
Increase (decrease) in cash resulting
from changes in:
Receivables (44,399) (70,618)
Prepaid expenses and other (26,813) (3,633)
Other assets (124,177) 14,835
Accounts payable 57,495 231,589
Accrued expenses 92,025 (31,172)
Deferred income 16,506 2,819
Accrued rent -0- (33,344)
----------- -----------
Total adjustments 12,165 156,088
----------- -----------
Net cash provided by operating activities 224,937 530,187
----------- -----------
Cash flows from investment activities:
Purchases of property and equipment (38,562) (78,079)
Asset acquisition (286,842) -0-
----------- -----------
Net cash used in investing activities (325,404) (78,079)
----------- -----------
Cash flows from financing activities:
Principal payments under capital lease obligation (3,073) (2,757)
Payments for repurchase of common and preferred stock -0- (13,005)
----------- -----------
Net cash used in financing activities (3,073) (15,762)
----------- -----------
Net (decrease) increase in cash and cash equivalents (103,540) 436,346
Cash and cash equivalents, beginning of period 2,483,739 2,181,385
----------- -----------
Cash and cash equivalents, end of period $ 2,380,199 $ 2,617,731
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
AVESIS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Avesis Incorporated, and its wholly-owned subsidiaries, Avesis of Washington,
D.C., Avesis Third Party Administrators, Inc., Avesis Reinsurance Incorporated
and Avesis of New York, Inc. (collectively, the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for a complete
financial statement presentation. In the opinion of Management, such unaudited
interim information reflects all adjustments, consisting only of a normal
recurring nature, necessary to present the Company's financial position and the
results of operations and cash flows for the periods presented. The results of
operations for interim periods are not necessarily indicative of the results to
be expected for a full fiscal year. These condensed consolidated financial
statements should be read in conjunction with the Company's audited consolidated
financial statements included in the Company's Annual Report on Form 10-KSB, for
the seven month transition period ended December 31, 1999.
Note 2. Earnings per Share
A summary of the reconciliation from basic earnings per share to diluted
earnings per share for the quarters ended March 31, 2000 and 1999 follows:
Quarter ended Quarter ended
March 31, 2000 March 31, 1999
-------------- --------------
Net earnings $ 212,772 $ 374,099
Less: preferred stock dividends 24,055 26,760
----------- -----------
Income available to common
stockholders 188,717 347,339
=========== ===========
Basic EPS - weighted average
shares outstanding 7,279,066 7,356,297
=========== ===========
Basic earnings per share $ 0.03 $ 0.05
=========== ===========
Basic EPS - weighted average
shares outstanding 7,279,066 7,356,297
Effect of dilutive securities:
Stock Purchase Options - common stock 674,547 --
Convertible preferred stock 2,732,254 3,035,711
----------- -----------
Dilutive EPS - weighted average
shares outstanding 10,685,868 10,392,008
Net earnings $ 212,772 $ 374,099
----------- -----------
Diluted earnings per share $ 0.02 $ 0.04
=========== ===========
5
<PAGE>
Note 3. Use of Estimates
Management of the Company has made certain estimates and assumptions
relating to the reporting of assets, liabilities, revenues and expenses to
prepare the financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
Note 4. Accounting for Southern States Eye Care, LLC Asset Acquisition
On March 24, 2000, the Company purchased substantially all of the assets of
Southern States Eye Care, LLC for an aggregate purchase price of $549,342,
including transaction related costs of $36,842. The total purchase price for the
acquisition comprised $250,000 cash and the issuance of 350,000 shares of common
stock valued at $0.75 per share. The acquisition was accounted for under the
purchase method. Results of operations are being recorded from the date of
acquisition. The Company recorded preliminary purchase accounting adjustments
based on the relative fair value of the assets acquired. Goodwill is being
amortized over eight years on a straight-line basis.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999
The statements contained in this discussion and analysis regarding
management's anticipation of adequacy of cash reserves for operations, adequacy
of reserves for claims, anticipated level of operating expenses related to new
Members, viability of the Company, cash flows and marketability of the Company
constitute "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements involve risks and
uncertainties, which could cause actual results to differ materially from the
forward-looking statements. Management's anticipation is based upon assumptions
regarding the market in which the Company operates, the level of competition,
the level of demand for services, the stability of costs, the retention of
Sponsors and Members enrolled in the Company's benefit programs, the relevance
of the Company's historical performance, and the stability of the regulatory
environment. Any of these assumptions could prove inaccurate, and therefore
there can be no assurance that the forward-looking information will prove to be
accurate.
Avesis Incorporated, a Delaware corporation (together with its subsidiary,
the "Company"), incorporated in June 1978, markets and administers vision,
dental, chiropractic and hearing managed care and discount programs ("Programs")
nationally. The Programs are designed to enable participants ("Members"), who
are enrolled through various sponsoring organizations such as insurance
carriers, HMOs, Blue Cross and Blue Shield organizations, corporations, unions
and various associations ("Sponsors"), to realize savings on purchases of
services and products through networks of providers such as ophthalmologists,
optometrists, opticians, dentists, chiropractors and hearing specialists
("Providers").
The Company derives its administration fee revenue from plan Sponsors who
customarily pay a set fee per Member per month. Administration fee revenue is
recognized on the accrual basis during the month that the Member is entitled to
use the benefit. Certain Sponsors pay for services rendered by the Company on a
fee for service basis. Based upon the type of program (e.g., managed care,
discount, third party administration) the Provider's claim for service provided
6
<PAGE>
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.
As previously reported on a Form 8-K filed on April 7, 2000, on March 24,
2000 the Company purchased substantially all of the assets of Southern States
Eye Care, LLC ("SSEC"), including but not limited to the name "Southern States
Eye Care", service marks, trade marks, trade names, current client contracts,
provider contracts and managed care contracts. The acquisition was made pursuant
to the Agreement by and between Southern States Eye Care, LLC, Philip E.
Johnson, R. Whitman Lord, Larry Forth, Brent Layton, Michael McQuaig and Avesis
Incorporated. The aggregate purchase price for the acquisition, determined
through arms-length negotiations between the parties, was $250,000 and 350,000
shares of the Company's Common Stock. The Company used its existing cash to
finance the purchase. The acquisition of SSEC will broaden the Company's client
base and increase the Company's vision provider network in Georgia, Alabama and
North Carolina. The Company intends to use the acquired assets to continue
SSEC's current lines of business, which the Company will operate out of its
corporate headquarters in Phoenix, Arizona.
RESULTS OF OPERATIONS:
The following tables detail the Company's major revenue and expense
categories for the quarters ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
March 31, 2000 March 31, 1999 Increase/(Decrease)
---------------------------- ---------------------------- -------------------
% of Total % of Total
Revenue: Service Revenue Service Revenue % Change
- -------- --------------- --------------- --------
<S> <C> <C> <C> <C> <C> <C>
Total Service Revenue $1,969,314 100% $2,624,513 100% ($655,199) (25%)
Vision & Hearing Program 1,338,031 68% 1,910,204 73% (572,173) (30%)
Vision Provider Fee 25,357 1% 32,330 1% (6,973) (22%)
Dental Program 168,988 9% 235,363 9% (66,375) (28%)
Buying Group Program 434,449 22% 442,941 17% (8,492) (2%)
Expenses:
Cost of Services 1,201,654 61% 1,756,197 67% (554,543) (32%)
General & Administrative 343,586 17% 277,234 11% 66,352 24%
Selling & Marketing 222,427 11% 286,773 11% (64,346) (22%)
Income from Operations 201,647 10% 304,309 12% (102,662) (34%)
Net Income 212,772 11% 374,099 14% (161,327) (43%)
</TABLE>
Past and future revenues in all lines of business are directly related to
the number of Members enrolled in the Company's benefit programs. However, there
may be significant pricing differences to Sponsors depending on whether the
benefit offered is funded in part or whole by the plan Sponsor. Two major
Sponsors accounted for 33% and 15% of total service revenues in the quarter
ended March 31, 2000, and two major Sponsors accounted for 48% and 14% of total
7
<PAGE>
service revenues in the quarter ended March 31, 1999. The Company is
substantially dependent on a limited number of Sponsors and may be materially
adversely affected by termination of its agreements with those Sponsors.
The decrease in total service revenues in the first quarter of 2000 is
principally due to a vision plan Sponsor who is not renewing the benefit for
their Members on their annual renewal, but providing a lesser benefit
internally. As of March 31, 2000, the Company had approximately 102,000 Members
from this Sponsor, as compared to approximately 192,000 Members as of December
31, 1999 and approximately 240,000 Members as of March 31, 1999. The Company
expects to lose a significant portion of the remaining 102,000 Members from this
Sponsor as they renew their benefits during the upcoming year.
The Company had approximately 1,592,000 vision and 12,000 hearing Members
as of March 31, 2000, compared to approximately 802,000 vision and 7,000 hearing
Members as of March 31, 1999. The vision Member count for March 31, 2000
includes approximately 977,000 Members received through the transaction with
Southern States Eye Care, LLC. The SSEC transaction had a minimal impact on
vision revenue and related expenses during the quarter ended March 31, 2000 as
the new Members were in effect for only the final seven days of the quarter.
Additionally, the revenue and profit expected to be derived per Member under
SSEC's vision benefit program, in general, is less than the revenue and profit
derived from the Sponsor who decreased its Membership, as described above, due
to the provision of a different level of benefit. The decrease in vision and
hearing revenue during the first quarter of calendar year 2000 as compared to
the same period in the previous year was largely the result of the vision plan
Sponsor mentioned above. Other changes in the number of vision and hearing
Members occurred due to Sponsors' employee or Member fluctuations in the normal
course of business. Vision provider fee revenue remained constant as a
percentage of total service revenues from the quarter ended March 31, 1999 to
the quarter ended March 31, 2000.
The Company had approximately 77,000 dental Members as of March 31, 2000,
compared to approximately 153,000 dental Members as of March 31, 1999. The
decline of the Company's dental program revenue and membership resulted from two
Sponsors' discontinuation of a benefit program that resulted in a loss of
approximately 55,000 Members who participated in the Company's dental program.
There also have been reductions in Members from various Sponsors in the normal
course of business.
The Company makes available to its vision Providers a buying group program
that enables the Provider to order eyeglass frames from the manufacturers at
discounts from wholesale costs. These discounted prices are generally lower than
a Provider could negotiate individually, due to the large volume of purchases of
the buying group.
Costs of Services primarily relate to servicing Members, Providers, and
Sponsors under the Company's vision, hearing, dental and chiropractic benefit
programs as well as the cost of frames that are sold through the Company's
buying group program as discussed above. Cost of Services decreased as a
percentage of total service revenues during the quarter ended March 31, 2000, as
compared to the quarter ended March 31, 1999. The decrease primarily resulted
from positive claims experience, reduction of the volume of frames purchases and
efficiencies in operations that the Company is experiencing related to the
maturation of the benefits for its largest Sponsors.
General and Administrative expenses increased as a percentage of total
service revenue during the quarter ended March 31, 2000, as compared to the
quarter ended March 31, 1999 due to increases in depreciation and amortization
8
<PAGE>
related to the Company's new computer systems, increases in payroll related to
administrative functions and, as previously announced, increases in the payments
under the Company's Management Agreement and Investment Advisor Agreement, both
with affiliated entities.
Selling and marketing expenses include marketing fees, broker commissions,
inside sales and marketing salaries and related expenses, travel related to the
Company's sales activities and an allocation of related overhead expenses.
Selling and marketing expenses were consistent as a percentage of total service
revenues during the quarter ended March 31, 2000, as compared to the quarter
ended March 31, 1999. A significant amount of the Company's marketing activities
has been outsourced to management consultants, National Health Enterprises (an
affiliate).
Liquidity and Capital Resources
The Company had cash and cash equivalents of $2,380,199 as of March 31,
2000, compared to $2,483,739 as of December 31, 1999. The decrease of $103,540
is primarily due to the Company's cash payment of $250,000 for the acquisition
of the assets of Southern States Eye Care, LLC, partially offset by the net
income earned during the quarter. Current cash on hand and cash provided from
operations is expected to allow the Company to sustain operations for the
foreseeable future.
The Company is party to a revolving credit facility for an amount not to
exceed $100,000. The credit facility allows the Company flexibility to better
manage its cash liquidity. To date, the Company has never drawn funds on the
credit facility.
As of March 31, 2000, the Company had $737,144 of Accounts Payable,
compared to $679,649 as of December 31, 1999. Included in Accounts Payable are
reserves for claims of $323,524 as of March 31, 2000, and $489,814 as of
December 31, 1999. The reserves are for incurred but not reported claim
reimbursements to Providers who participate in certain managed care programs.
The Company believes this reserve is adequate based upon historical results.
The Company expects to pay dividends of approximately $46,000 on the Series
A Preferred Stock on June 1, 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
issues 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.
9
<PAGE>
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) On March 24, 2000, in connection with the acquisition of substantially all
of the assets of Southern States Eye Care, LLC, the Company issued 350,000
shares of its Common Stock under Regulation D Rule 504.
See also Item 5 below for other Changes in Securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(b) The Certificate of Designation for the Company's Class A, Senior Nonvoting
Cumulative Convertible Preferred Stock, Series A, restricts the payment of
dividends on the Company's Series 2 Preferred Stock and Common Stock.
Accordingly, the Company may not pay the quarterly dividend otherwise
scheduled for payment during April 2000, on shares of its Series 2
Preferred Stock. Such dividend is cumulative, and the total dividend
arrearage is $33,750, or $6.75 per share, as of March 31, 2000 for all
5,000 shares outstanding.
ITEM 5. OTHER INFORMATION
Conversion of Series A Preferred Stock to Common Stock
Each share of the Company's Series A Preferred Stock is currently
convertible at any time at the option of the holders of the Series A
Preferred Stock into 10 shares of Common Stock of the Company. The
conversion ratio is subject to adjustment for stock splits and
combinations, stock dividends, reclassifications, exchanges or
substitutions relating to the Company's Common Stock, and any
reorganization, merger, consolidation or sale of assets of the Company. The
following table provides information concerning the conversion of Series A
Preferred Stock during the quarter ended March 31, 2000 and subsequent to
quarter end.
Number of Shares of
Series A Preferred Number of Shares
Date Received of Common Stock
---- -------- ---------------
February 18, 2000 400 4,000
April 11, 2000 1,500 15,000
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index following the Signatures page, which is incorporated
herein by reference.
(b) A report on Form 8-K was filed on April 7, 2000 to report the
acquisition of substantially all of the assets of Southern States Eye
Care, LLC.
10
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AVESIS INCORPORATED
-------------------
(Registrant)
Date: 5/15/2000 /s/ Neal A. Kempler
--------- ----------------------------------------
Neal A. Kempler, Vice President
and Secretary
Date: 5/15/2000 /s/ Joel H. Alperstein
---------- ----------------------------------------
Joel H. Alperstein, Chief Financial
Officer and Treasurer
11
<PAGE>
Avesis Incorporated
Exhibit Index
Form 10-QSB for the Quarter Ended March 31, 2000
Exhibit
No. Description Incorporated by Reference from the:
- ------- ----------- -----------------------------------
11 Statement re: Computation Earnings (Loss) per Share Computation,
of per Share Earnings see Note 2 to the Notes to Condensed
Consolidated Financial Statements
27 Financial Data Schedule Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE COMPANY'S FORM 10-QSB FOR THE QUARTER ENDED MARCH
31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 2,380,199
<SECURITIES> 0
<RECEIVABLES> 373,708
<ALLOWANCES> (28,261)
<INVENTORY> 0
<CURRENT-ASSETS> 2,929,559
<PP&E> 1,279,838
<DEPRECIATION> (769,909)
<TOTAL-ASSETS> 4,544,224
<CURRENT-LIABILITIES> 929,765
<BONDS> 0
0
2,768
<COMMON> 76,043
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,544,224
<SALES> 0
<TOTAL-REVENUES> 1,969,314
<CGS> 1,201,654
<TOTAL-COSTS> 566,013
<OTHER-EXPENSES> 35,376
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (610)
<INCOME-PRETAX> 236,413
<INCOME-TAX> 23,641
<INCOME-CONTINUING> 212,772
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 212,772
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.02
</TABLE>
