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 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 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 AVESIS INCORPORATED STATEMENTS OF CASH FLOWS FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999 (Unaudited) 2000 1999 ----------- ----------- Cash flows from operating activities: 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 =========== =========== The accompanying notes are an integral part of these statements. 4 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 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 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: Quarter Ended Quarter Ended March 31, 2000 March 31, 1999 Increase/(Decrease) ---------------------------- ---------------------------- ------------------- % of Total % of Total Revenue: Service Revenue Service Revenue % Change - -------- --------------- --------------- -------- 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%) 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 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 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 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 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 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