10QSB 1 e-7275.txt QUARTERLY REPORT FOR QTR. ENDED 06/30/2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ______ to ______ Commission File Number 0-15304 AVESIS INCORPORATED (Exact name of small business issuer as specified in its charter) Delaware 86-0349350 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 3724 North Third Street, Suite 300 Phoenix, Arizona 85012 (Address of principal executive offices) (602) 241 - 3400 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of outstanding shares of the registrant's Common Stock on August 3, 2001 was 7,618,425. TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (Check One) Yes [ ] No [X] PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AVESIS INCORPORATED BALANCE SHEET JUNE 30, 2001 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,015,844 Receivables, net 478,048 Inventory 112,048 Income taxes receivable 27,141 Prepaid expenses and other 167,815 ------------ Total current assets 1,800,896 Property and equipment, net 698,113 Intangibles, net of amortization 462,215 Deposits and other assets 364,780 ------------ $ 3,326,004 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 664,698 Current installments of obligations under capital lease 3,617 Accrued expenses- Compensation 21,084 Other 12,063 Deferred income 16,235 ------------ Total current liabilities 717,697 Obligations under capital lease, excluding current installments -- ------------ Total liabilities 717,697 ------------ 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; 256,721 issued and outstanding (liquidation preference of $3.75 per share) 2,568 $10 Class A, nonvoting cumulative convertible preferred stock, Series 2, $.01 par value; authorized 1,000,000 shares; 4,700 shares issued and outstanding (liquidation preference of $10 per share) and $37,012 of dividends in arrears at $7.88 per share; dividends accrue at $.225 per share per calendar quarter 47 Common stock of $.01 par value, authorized 30,000,000 shares; 7,618,425 shares issued and outstanding 76,184 Additional paid-in capital 10,472,760 Accumulated deficit (7,943,252) ------------ Total stockholders' equity 2,608,307 ------------ $ 3,326,004 ============
The accompanying notes are an integral part of these statements. 1 AVESIS INCORPORATED STATEMENTS OF OPERATIONS FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (Unaudited)
Quarters Ended Six Months Ended ----------------------------- ----------------------------- June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 ------------- ------------- ------------- ------------- Service revenues: Administration fees $ 1,491,424 $ 1,790,120 $ 2,935,541 $ 3,297,140 AbsoluteCare revenues 455,021 -- 724,971 -- Provider fees 10,410 24,689 23,698 50,046 Buying group 310,484 378,174 640,879 812,623 Other 1,563 1,961 4,384 4,449 ------------ ------------ ------------ ------------ Total service revenues 2,268,902 2,194,944 4,329,473 4,164,258 Cost of services 1,946,400 1,525,398 3,788,967 2,727,052 ------------ ------------ ------------ ------------ Income from services 322,502 669,546 540,506 1,437,206 General and administrative expenses 460,435 354,787 929,134 698,373 Selling and marketing expenses 234,954 209,666 426,419 432,093 ------------ ------------ ------------ ------------ (Loss)/income from operations (372,887) 105,093 (815,047) 306,740 ------------ ------------ ------------ ------------ Non-operating income: Other income 403 485 1,312 1,816 Interest income 12,508 33,730 35,222 67,775 Interest expense (163) (526) (406) (1,136) ------------ ------------ ------------ ------------ Net non-operating income 12,748 33,689 36,128 68,455 ------------ ------------ ------------ ------------ (Loss)/income before income taxes (360,139) 138,782 (778,919) 375,195 Income taxes -- -- -- 23,641 ------------ ------------ ------------ ------------ Net (loss)/income $ (360,139) $ 138,782 $ (778,919) $ 351,554 ============ ============ ============ ============ Preferred stock dividends 22,718 23,928 45,437 47,856 Net (loss)/income available to common stockholders $ (382,857) $ 114,854 $ (824,356) $ 303,698 ============ ============ ============ ============ Earnings per share - Basic $ (0.05) $ 0.02 $ (0.11) $ 0.04 ============ ============ ============ ============ Earnings per share - Diluted $ (0.05) $ 0.01 $ (0.11) $ 0.03 ============ ============ ============ ============ Weighted average common and equivalent shares outstanding - Basic 7,620,355 7,617,484 7,620,699 7,448,275 ============ ============ ============ ============ Weighted average common and equivalent shares outstanding - Diluted 7,620,355 10,603,661 7,620,699 10,693,182 ============ ============ ============ ============
The accompanying notes are an integral part of these statements. 2 AVESIS INCORPORATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (Unaudited)
2001 2000 ----------- ----------- Cash flows from operating activities: Net (loss)/income $ (778,919) $ 351,554 Adjustments to reconcile net income to net cash provided by in operating activities: Depreciation and amortization 155,235 98,729 Provision for losses of accounts receivable -0- (3,901) Increase (decrease) in cash resulting from changes in: Accounts receivable 469 (131,694) Inventory 2,925 -0- Prepaid expenses and other 106,958 (1,436) Deposits and other assets 1,613 (123,371) Accounts payable (105,115) (98,479) Accrued expenses (11,883) 27,086 Deferred income 2,439 12,361 Accrued rent -- -- ----------- ----------- Total adjustments 152,641 (220,705) ----------- ----------- Net cash (used in)/provided by operating activities (626,278) 130,849 ----------- ----------- Cash flows from investment activities: Purchases of property and equipment (152,301) (46,684) Asset acquisition -0- (286,842) ----------- ----------- Net cash used in investing activities (152,301) (333,526) ----------- ----------- Cash flows from financing activities: Principal payments under capital lease obligation (6,945) (6,230) Payment of dividend on preferred stock (45,590) (45,606) Payments for repurchase of common and preferred stock (51,576) -- ----------- ----------- Net cash used in financing activities (104,111) (51,836) ----------- ----------- Net (decrease) increase in cash and cash equivalents (882,690) (254,513) Cash and cash equivalents, beginning of period 1,898,534 2,483,739 ----------- ----------- Cash and cash equivalents, end of period 1,015,844 2,229,226 =========== =========== Supplemental disclosure of noncash investing and financing activities: During the six months ended June 30, 2000, 350,000 shares of common stock valued at $262,500 were issued in connection with an acquisition.
The accompanying notes are an integral part of these statements. 3 AVESIS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 AND 2000 (Unaudited) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Avesis Incorporated, and its wholly-owned subsidiaries, AbsoluteCare, Inc., 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 year ended December 31, 2000. NOTE 2. EARNINGS PER SHARE A summary of the reconciliation from basic earnings per share to diluted earnings per share for the quarter and six month periods ended June 30, 2001 and 2000 follows:
Quarter ended Quarter ended June 30, 2001 June 30, 2000 ------------- ------------- Net (loss)/earnings $ (360,139) $ 138,782 Less: preferred stock dividends 22,718 23,928 ----------- ----------- (Loss)/income available to common stockholders $ (382,857) $ 114,854 =========== =========== Basic EPS - weighted average shares outstanding 7,620,355 7,617,484 =========== =========== Basic (loss)/earnings per share $ (0.05) $ 0.02 =========== =========== Basic EPS - weighted average shares outstanding 7,620,355 7,617,484 Effect of dilutive securities: Stock Purchase Options - common stock -- 269,264 Convertible preferred stock -- 2,716,913 ----------- ----------- Dilutive EPS - weighted average shares outstanding 7,620,355 10,603,661 Net (loss)/earnings $ (382,857) $ 138,782 ----------- ----------- Diluted (loss)/earnings per share $ (0.05) $ 0.01 =========== =========== Six months ended Six months ended June 30, 2001 June 30, 2000 ------------- ------------- Net (loss)/earnings $ (778,919) $ 351,554 Less: preferred stock dividends 45,437 47,856 ----------- ----------- Income (loss)/available to common stockholders $ (824,356) $ 303,698 =========== =========== Basic EPS - weighted average shares outstanding 7,620,699 7,448,275 =========== =========== Basic (loss)/earnings per share $ (0.11) $ 0.04 =========== =========== Basic EPS - weighted average shares outstanding 7,620,699 7,448,275 Effect of dilutive securities: Stock Purchase Options - common stock -- 520,323 Convertible preferred stock -- 2,724,584 ----------- ----------- Dilutive EPS - weighted average shares outstanding 7,620,699 10,693,182 Net (loss)/earnings $ (824,356) $ 351,554 ----------- ----------- Diluted (loss)/earnings per share $ (0.11) $ 0.03 =========== ===========
The diluted share base for the quarter ended June 30, 2001 excludes incremental shares of 237,469 related to employee stock options and 2,582,192 shares related to convertible preferred stock. The diluted share base for the six months ended June 30, 2001 excludes incremental shares of 258,530 related to employee stock options and 2,632,436 shares related to convertible preferred stock. These shares are excluded due to their antidilutive effect as a result of the Company's net loss for the quarter ended June 30, 2001 and six months ended June 30, 2001. 4 NOTE 3. USE OF ESTIMATES Management of the Company has made certain estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses to prepare the financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000 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 may constitute "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties that 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, the expansion of the AbsoluteCare concept 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 subsidiaries, the "Company"), is an ancillary healthcare management firm. The Company markets and administers vision, dental and hearing insured programs and discount programs ("Programs") nationally and operates AbsoluteCare, Inc., an infectious disease medical center. The Programs are designed to enable participants who are enrolled through various sponsoring organizations, such as HMOs, insurance carriers, corporations and various other sponsors, to realize savings on purchases of products and services through the Company's independent network of providers. AbsoluteCare was established to create infectious disease centers, with a current concentration on HIV/AIDS treatment, potentially on a national basis. AbsoluteCare provides professional care, in-house pharmacy and laboratory services. AbsoluteCare's first medical center opened in Atlanta, Georgia during November 2000. 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 5 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. AbsoluteCare recognizes revenue during the month the medical services are provided and the pharmaceuticals are dispensed to the patient. RESULTS OF OPERATIONS The following tables detail the Company's major revenue and expense categories for the quarters and six months ended June 30, 2001 and 2000:
Quarter Ended Quarter Ended June 30, 2001 June 30, 2000 Increase/(Decrease) ----------------------------- ----------------------------- -------------------------- % of Total % of Total Revenue: Service Revenue Service Revenue % Change --------------- --------------- -------- Total Service Revenue $ 2,268,902 100% $ 2,194,944 100% $ 73,958 3% Vision & Hearing Program 1,459,505 64% 1,610,948 73% (151,443) (9%) Vision Provider Fee 10,410 1% 24,689 1% (14,279) (58%) Dental Program 31,919 1% 179,065 8% (147,146) (82%) Buying Group Program 310,484 14% 378,174 17% (67,690) (18%) AbsoluteCare, Inc. 455,021 20% 0 455,021 Expenses: Cost of Services - Avesis Incorporated & Subsidiaries excluding AbsoluteCare, Inc. 1,480,323 65% 1,525,398 69% (45,075) (3%) Cost of Services - AbsoluteCare, Inc. 466,077 21% 0 466,077 General & Administrative 460,435 20% 354,787 16% 105,648 30% Selling & Marketing 234,954 10% 209,666 10% 25,288 12% (Loss)/Income from Operations - AbsoluteCare, Inc. (143,448) (6%) 0 (143,448) (Loss)/Income from Operations - Avesis Incorporated & Subsidiaries excluding AbsoluteCare, Inc. (229,439) (10%) 105,093 5% (334,532) (318%) Net (Loss)/Income (360,139) (16%) 138,782 6% (498,921) (359%)
6
Six Months Ended Six Months Ended June 30, 2001 June 30, 2000 Increase/(Decrease) ----------------------------- ----------------------------- -------------------------- % of Total % of Total Revenue: Service Revenue Service Revenue % Change --------------- --------------- -------- Total Service Revenue $ 4,329,473 100% $ 4,164,258 100% $ 165,215 4% Vision & Hearing Program 2,870,019 66% 2,948,979 71% (78,960) (3%) Vision Provider Fee 23,698 1% 50,046 1% (26,348) (53%) Dental Program 65,522 1% 348,053 8% (282,531) (81%) Buying Group Program 640,879 15% 812,623 20% (171,744) (21%) AbsoluteCare, Inc. 724,971 17% 0 724,971 Expenses: Cost of Services - Avesis Incorporated & Subsidiaries excluding AbsoluteCare, Inc. 3,000,998 69% 2,727,052 65% 273,946 10% Cost of Services - AbsoluteCare, Inc. 787,969 18% 0 787,969 General & Administrative 929,134 22% 698,373 17% 230,761 33% Selling & Marketing 426,419 10% 432,093 10% (5,674) (1%) (Loss)/Income from Operations - AbsoluteCare, Inc. (330,386) (8%) 0 (330,386) (Loss)/Income from Operations - Avesis Incorporated & Subsidiaries excluding AbsoluteCare, Inc. (484,661) (11%) 306,740 7% (791,401) (258%) Net (Loss)/Income (778,919) (18%) 351,554 8% (1,130,473) (322%)
Past and future revenues for Avesis Incorporated and its subsidiaries, excluding AbsoluteCare, are directly related to the number of Cardholders 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. Additionally, pricing will differ depending on whether a benefit is designed to be provided to all members of a group, employer/Sponsor paid, or offered to all members on a voluntary enrollment basis. Four major Sponsors accounted for 15%, 12%, 11% and 8% of total service revenues in the six months ended June 30, 2001, and two major Sponsors accounted for 28% and 14% of total service revenues in the six months ended June 30, 2000. The Company is substantially dependent on a limited number of Sponsors and may be materially adversely affected by termination of any of its agreements with Sponsors. 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 aggregate purchase price for the acquisition was $549,342, consisting of $250,000, 350,000 shares of the Company's Common Stock, valued at $262,500 and $36,842 of transaction related expenses. The Company used its existing cash to finance the purchase. The acquisition of SSEC broadens the Company's client base and increases the Company's vision provider network in Georgia, Alabama and North Carolina. The Company is using the acquired assets to continue SSEC's current lines of business, which the Company is operating out of its corporate headquarters in Phoenix, Arizona. The Company had approximately 1,389,000 vision and 12,400 hearing Members as of June 30, 2001, compared to approximately 1,770,000 vision and 12,300 hearing Members as of June 30, 2000. The decrease in the Company's vision member 7 counts as of June 30, 2001 as compared to June 30, 2000 is principally due to two vision plan Sponsors that are not renewing the benefit for their Members upon their annual renewal, but instead are providing a lesser benefit internally. As of June 30, 2000, the Company had approximately 213,000 Members from these Sponsors, as compared to approximately 28,000 Members as of June 30, 2001. During September 2000, the Company entered into a contract with one of the previously mentioned Sponsors to provide benefits to the remaining approximately 28,000 Members, which are all from one employer group. The contract for the 28,000 Members is set to end on September 30, 2001, as the current Members are leaving their current Sponsor and are being consolidated with approximately another 102,000 lives from their employer to one vision vendor. During July 2001, the Company was awarded the contract to provide the voluntary vision benefit to the employer group with the previously mentioned approximately 130,000 individuals. Based upon preliminary expectations, it is expected that approximately 17% of the 130,000 individuals will enroll in the benefit, for an expected decrease in membership from 28,000 members to approximately 22,000 members. The new contract has an effective date of October 1, 2001. The loss in membership has also been partially offset by two new Sponsors, currently with approximately 20,000 and 87,000 Members, added during the last quarter of the year ended December 31, 2000. The revenue and profit derived from these two new Sponsors are less than the revenue and profit derived from the two Sponsors who did not renew their Members' benefits. The program for the Sponsor with the 20,000 members is currently due to end on August 31, 2001. This program has not generated a positive contribution to income. The decrease in vision and hearing program revenue for the quarter and six months ended June 30, 2001, as compared to the quarter and six months ended June 30, 2000 was primarily caused by the loss of the two Sponsors mentioned above, partially offset by the inclusion of SSEC's accounts for the entire six months ended June 30, 2001, as opposed to only three months and one week of the six months ended June 30, 2000. Vision provider fee revenue decreased in the six months ended June 30, 2001 as compared to the six months ended June 30, 2000, due to the removal of the fee, as of December 31, 2000, charged to participating providers associated with one of the Company's ongoing plans. The Company had approximately 44,000 dental Members as of June 30, 2001, compared to approximately 73,000 dental Members as of June 30, 2000. The decline of the Company's dental program revenue and membership resulted from the loss of approximately 45,000 Members from three Sponsors who did not renew their contracts with the Company. The majority of the Company's current dental membership is enrolled in programs that provide a lower level of benefit, and therefore the Sponsors pay a lower per member per month fee, compared to the three Sponsors, mentioned above, who did not renew their contracts. In an effort to minimize the Company's risk related to its dependence on a limited number of Sponsors, the Company has developed the Avesis Advantage Vision Program and the Avesis Advantage Dental Program. These insured products allow the Company to market and contract directly with employers, unions and other groups either through the Company's internal sales staff or the broker community. The Company derived its first revenues from its Avesis Advantage Vision Program in December 1999, and had approximately 9,500 Members as of 8 January 1, 2001 and approximately 12,500 as of August 1, 2001. During July 2001, the Company hired three salespeople, located in Georgia, Pennsylvania and Massachusetts, to market the Company's products, concentrating on sales of the Avesis Advantage Vision Program. Prior to being employed by the Company, the three salespeople were employed by one of the Company's competitors. Additionally, the Company hired marketing support and network development personnel from formerly employed by the competitor to further the sales efforts. The Company expects to derive its first revenues from the Avesis Advantage Dental Program during the second half of calendar year 2001. 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. Historically, the Company has not actively marketed the buying group program. The Company began promoting its buying group program to its vision Providers during the first quarter of 2001. Although the Company has seen an increase in Providers applying to become members of the buying group, it is uncertain whether this activity will translate into an increase in sales. Costs of Services primarily relate to servicing Members, Providers, and Sponsors under the Company's vision, hearing and dental 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 increased as a percentage of total service revenues, excluding AbsoluteCare revenue, during the quarter and six months ended June 30, 2001, as compared to the quarter and six months ended June 30, 2000. The increase primarily resulted from higher service costs related to the previously mentioned two new Sponsors who began offering the Company's vision program to their Members during the fourth quarter of fiscal 2000. The Company had discussions with these two Sponsors related to variances in projected utilization of benefits. The utilization of benefits by members of one of the Sponsors is now more consistent with the original estimates. The other Sponsor, as previously mentioned, is set to terminate its participation with the Company as of August 31, 2001. The Company has modified the participating provider network and reduced the fee schedule reimbursement for this Sponsor as of July 1, 2001, in an effort to make this account profitable over its final two months. General and Administrative expenses increased as a percentage of total service revenue during the quarter and six months ended June 30, 2001, as compared to the quarter and six months ended June 30, 2000. The increase largely relates to the development of AbsoluteCare. The Company experienced a decrease in payroll related to administrative functions for Avesis Incorporated and subsidiaries, excluding AbsoluteCare, which was offset by increases in amortization of goodwill created by the SSEC transaction and legal and professional fees related to increased licensing requirements due to the Company's geographic expansion. 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. A significant amount of the Company's marketing activities has been outsourced to management consultants, National Health Enterprises (an affiliate). Selling and 9 marketing expenses were consistent as a percentage of total service revenue during the quarter and six months ended June 30, 2001, as compared to the corresponding periods in the prior year due to the absence of sales commissions on the SSEC accounts, offset by the marketing expenses related to AbsoluteCare. AbsoluteCare's total service revenue has increased by $185,071, from $269,950 for the quarter ended March 31, 2001, to $455,021 for the quarter ended June 30, 2001. Operating expenses, which includes the cost of pharmaceuticals dispensed, increased by $141,581, from $456,888 for the quarter ended March 31, 2001, to $598,469 for the quarter ended June 30, 2001. The Company began billing for internal laboratory services during June 2001, which will enable it to derive revenues for laboratory services from approximately 90% of its patient base, compared to 30% of the patient base previously. The Company has increased its marketing and public relations efforts, during the second quarter of calendar year 2001, to educate potential patients of the services AbsoluteCare offers. Based upon the Company's business plan, the Company anticipates that the anticipated growth of its patient base and the revenue from its laboratory services will enable AbsoluteCare to be at a breakeven cashflow position by the end of the third quarter of 2001. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In July 2001, the FASB issued Statement No. 141, BUSINESS COMBINATIONS, and Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. The Company is required to adopt the provisions of Statement 141 immediately, except with regard to business combinations initiated prior to July 1, 2001, which it expects to account for using the pooling-of-interests method, and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142. Statement 141 will require upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart 10 from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill and equity-method goodwill is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of earnings. And finally, any unamortized negative goodwill and negative equity-method goodwill existing at the date Statement 142 is adopted must be written off as the cumulative effect of a change in accounting principle. As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $427,881, unamortized identifiable intangible assets in the amount of $0, and unamortized negative goodwill in the amount of $0, all of which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $52,793 and $34,334 for the year ended December 31, 2000 and the six months ended June 30, 2001, respectively. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company's financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. 11 LIQUIDITY AND CAPITAL RESOURCES The Company had cash and cash equivalents of $1,015,844 as of June 30, 2001, compared to $1,898,534 as of December 31, 2000. The decrease of $882,690 is primarily due to the Company's loss from operations caused by the decrease in administration fee revenue, the increase in cost of services, the repurchase of capital stock, the payment of the semi-annual dividend on the Company's Series A Preferred Stock and the capital expenditures related to the development of AbsoluteCare's laboratory. Current cash on hand and cash provided from operations is expected to allow the Company to sustain operations for the foreseeable future, subject to AbsoluteCare achieving cash flow breakeven, which is projected for the fourth quarter of 2001, and a diminution of the losses related to Avesis' vision and hearing programs. The Company is party to a revolving credit facility for an amount not to exceed $100,000. The credit facility allows the Company to better manage its cash liquidity. To date, the Company has never drawn funds on the credit facility. As of June 30, 2001, the Company had $664,698 of Accounts Payable, compared to $769,813 as of December 31, 2000. The decrease in Accounts Payable primarily relates to the payment of the opening expenses of AbsoluteCare's pharmacy and medical office. Claims reserves of $335,518 as of June 30, 2001 and $273,364 as of December 31, 2000 are included in Accounts Payable. The reserves are for incurred but not reported claim reimbursements to Providers who participate in certain managed care programs. The Company believes this reserve is adequate based upon historical trends and its experience. 12 PART II. OTHER INFORMATION ITEM 3. DEFAULTS UPON SENIOR SECURITIES (b) The Certificate of Designation for the Company's Class A, Senior Nonvoting Cumulative Convertible Preferred Stock, Series A, places restrictions upon the payment of dividends on the Company's Series 2 Preferred Stock and Common Stock. Accordingly, the Company did not pay the quarterly dividend otherwise scheduled for payment during July 2001, on shares of its Series 2 Preferred Stock. Such dividend is cumulative and the total dividend arrearage is $37,012 or $7.88 per share, as of June 30, 2001 for all 4,700 shares outstanding. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) An annual meeting of stockholders of the Company was held on June 8, 2001. (b) The following nominees were elected for one-year terms as directors of the Company: William R. Cohen William L. Richter Gerald L. Cohen Brent D. Layton Kenneth L. Blum, Sr. Kenneth L. Blum, Jr. Alan S. Cohn (c) On the record date of April 20, 2001, 7,621,047 common shares were outstanding. The results of voting for the nominees were as follows: 1. Election of directors For Withheld Non-Votes --------------------- --- -------- --------- William R. Cohen 4,947,633 16,965 2,656,449 Kenneth L. Blum Sr. 4,947,633 16,965 2,656,449 Gerald L. Cohen 4,947,633 16,965 2,656,449 Brent D. Layton 4,947,633 16,965 2,656,449 William L. Richter 4,947,633 16,965 2,656,449 Alan S. Cohn 4,947,633 16,965 2,656,449 Kenneth L. Blum, Jr. 4,947,633 16,965 2,656,449 ITEM 5. OTHER INFORMATION Subsequent to the preparation of the Company's Form 10-QSB for the quarter ended March 31, 2001, the Company made the following stock repurchases and retirements: Series A Total Purchase Price Date Common Shares Shares including Commissions ---- ------------- ------ --------------------- June 6, 2001 2,622 $1,337 June 6, 2001 439 $2,239 13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) See Exhibit Index following the Signatures page, which is incorporated herein by reference. (b) No reports on Form 8-K were filed during the quarter ended June 30, 2001. 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: 8/14/2001 /s/ Alan S. Cohn ------------------------------------------- Alan S. Cohn, Chief Executive Officer and President Date: 8/14/2001 /s/ Joel H. Alperstein ------------------------------------------- Joel H. Alperstein, Chief Financial Officer and Treasurer 14 Avesis Incorporated Exhibit Index Form 10-QSB for the Six Months Ended June 30, 2001
Exhibit No. Description Incorporated by Reference from the: ----------- ----------- ----------------------------------- 11 Statement re: Computation of per Earnings per Share Computation, see Note 2 to Share Earnings the Notes to Condensed Consolidated Financial Statements