-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TP52XLI5ws0yHfJh161Q/E02GNOni4xjX/sBzcQvyoHZOFeLKxqD7P1VHUjmaoVp HIQ9lNuhYnnnv6x35+XhDQ== 0000950147-01-501980.txt : 20020412 0000950147-01-501980.hdr.sgml : 20020412 ACCESSION NUMBER: 0000950147-01-501980 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVESIS INC CENTRAL INDEX KEY: 0000795574 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 860349350 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-15304 FILM NUMBER: 1802617 BUSINESS ADDRESS: STREET 1: 3724 NORTH THIRD ST STREET 2: STE 300 CITY: PHOENIX STATE: AZ ZIP: 85012 BUSINESS PHONE: 6029567287 MAIL ADDRESS: STREET 1: 3724 NORTH THIRD STREET STREET 2: SUITE 300 CITY: PHOENIX STATE: AZ ZIP: 85012 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL VISION SERVICES INC DATE OF NAME CHANGE: 19900117 FORMER COMPANY: FORMER CONFORMED NAME: NBS NATIONAL BENEFIT SERVICES INC DATE OF NAME CHANGE: 19910114 10QSB/A 1 e-7559.txt AMENDMENT NO. 1 TO QTRLY REPORT DATED 9-30-01 United States 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 September 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 Identification No.) incorporation or organization) 3724 North Third Street, Suite 300 Phoenix, Arizona 85012 (Address of principal executive offices) (602) 241-3400 The number of outstanding shares of the registrant's Common Stock on November 6, 2001 was 7,618,425. TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (Check One) [ ] Yes [X] No 1 of 15 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AVESIS INCORPORATED BALANCE SHEET AS OF SEPTEMBER 30, 2001 (Unaudited)
ASSETS Current assets: Cash and cash equivalents $ 685,081 Receivables, net 493,387 Inventory 136,397 Income taxes receivable 27,141 Prepaid expenses and other 192,429 ------------ Total current assets 1,534,435 Property and equipment, net 639,571 Intangibles, net of amortization 445,048 Deposits and other assets 365,840 ------------ $ 2,984,894 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 710,737 Accrued expenses- Compensation 20,821 Other 13,227 Deferred income 16,232 ------------ Total current liabilities 761,017 Long-term liabilities -- ------------ Total liabilities 761,017 ------------ 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 $38,070 of dividends in arrears at $8.10 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 (8,327,682) ------------ Total stockholders' equity 2,223,877 ------------ $ 2,984,894 ============
The accompanying notes are an integral part of these statements. 2 AVESIS INCORPORATED STATEMENTS OF OPERATIONS FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (Unaudited)
Quarters Ended Nine Months Ended ---------------------------- ---------------------------- September 30, September 30, September 30, September 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Service revenues: Administration fees $ 1,503,059 $ 1,510,515 $ 4,438,600 $ 4,807,655 AbsoluteCare revenues 734,483 -- 1,459,454 -- Provider fees 9,214 22,197 32,912 72,243 Buying group 266,116 332,952 906,995 1,145,575 Other 2,779 1,932 7,163 6,381 ------------ ------------ ------------ ------------ Total service revenues 2,515,651 1,867,596 6,845,124 6,031,854 Cost of services 2,153,890 1,321,290 5,942,857 4,048,342 ------------ ------------ ------------ ------------ Income from services 361,761 546,306 902,267 1,983,512 General and administrative expenses 438,964 381,487 1,368,097 1,079,860 Selling and marketing expenses 317,709 188,390 744,128 620,483 ------------ ------------ ------------ ------------ (Loss)/income from operations (394,912) (23,571) (1,209,959) 283,169 ------------ ------------ ------------ ------------ Non-operating income: Other income 39 620 1,351 2,436 Interest income 10,509 35,498 45,731 103,273 Interest expense (66) (438) (472) (1,574) ------------ ------------ ------------ ------------ Net non-operating income 10,482 35,680 46,610 104,135 ------------ ------------ ------------ ------------ (Loss)/income before income taxes $ (384,430) $ 12,109 $ (1,163,349) $ 387,304 Income taxes -- 10,500 -- 34,141 ------------ ------------ ------------ ------------ Net (loss)/income $ (384,430) $ 1,609 $ (1,163,349) $ 353,163 ============ ============ ============ ============ Preferred stock dividends (22,718) (23,928) (68,155) (71,785) Net (loss)/income available to common stockholders $ (407,148) $ (22,319) $ (1,231,504) $ 281,378 ============ ============ ============ ============ (Loss)/earnings per share - Basic $ (0.05) $ 0.00 $ (0.16) $ 0.04 ============ ============ ============ ============ (Loss)/earnings per share - Diluted $ (0.05) $ 0.00 $ (0.16) $ 0.03 ============ ============ ============ ============ Weighted average common and equivalent shares outstanding - Basic 7,618,425 7,619,297 7,619,933 7,505,698 ============ ============ ============ ============ Weighted average common and equivalent shares outstanding - Diluted 7,618,425 10,487,259 7,619,933 10,668,726 ============ ============ ============ ============
The accompanying notes are an integral part of these statements. 3 AVESIS INCORPORATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (Unaudited)
2001 2000 ----------- ----------- Cash flows from operating activities: Net (loss)/income $(1,163,349) $ 353,163 ----------- ----------- Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 236,846 155,234 Provision for losses on receivables (12,405) (3,901) Increase (decrease) in cash resulting from changes in: Accounts receivable (2,465) (182,718) Inventory (21,424) -- Prepaid expenses and other 82,344 (13,840) Other assets 552 (106,127) Accounts payable (59,076) (202,776) Accrued expenses (10,982) (21,184) Deferred income 2,436 12,213 ----------- ----------- Total adjustments 215,826 (363,099) ----------- ----------- Net cash used in operating activities (947,523) (9,936) ----------- ----------- Cash flows from investment activities: Purchases of property and equipment (158,202) (162,913) Asset acquisition -- (286,842) ----------- ----------- Net cash used in investing activities (158,202) (449,755) ----------- ----------- Cash flows from financing activities: Principal payments under capital lease obligation (10,562) (9,474) 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 (107,728) (55,080) ----------- ----------- Net decrease in cash and cash equivalents (1,213,453) (514,771) Cash and cash equivalents, beginning of period 1,898,534 2,483,739 ----------- ----------- Cash and cash equivalents, end of period $ 685,081 $ 1,968,968 =========== ===========
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. 4 AVESIS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 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 accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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 quarters and nine months ended September 30, 2001 and 2000 follows:
Quarter ended Quarter ended September 30, 2001 September 30, 2000 ------------------ ------------------ Net (loss)/earnings $ (384,430) $ 1,609 Less: preferred stock dividends 22,718 23,928 ------------ ------------ Loss available to common stockholders (407,148) (22,319) ============ ============ Basic EPS - weighted average shares outstanding 7,618,425 7,619,297 ============ ============ Basic (loss)/earnings per share $ (0.05) $ 0.00 ============ ============ Basic EPS - weighted average shares outstanding 7,618,425 7,619,297 Effect of dilutive securities: Stock Purchase Options - common stock -- 152,862 Convertible preferred stock -- 2,715,100 ------------ ------------ Dilutive EPS - weighted average shares outstanding 7,618,425 10,487,259 Net (loss)/earnings $ (407,148) $ 1,609 ------------ ------------ Diluted (loss)/earnings per share $ (0.05) $ 0.00 ============ ============
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Nine Months ended Nine Months ended September 30, 2001 September 30, 2000 ------------------ ------------------ Net (loss)/earnings $(1,163,349) $ 353,163 Less: preferred stock dividends 68,155 71,785 ----------- ----------- Income available to common stockholders (1,231,504) 281,378 =========== =========== Basic EPS - weighted average shares outstanding 7,619,933 7,505,698 =========== =========== Basic (loss)/earnings per share $ (0.16) $ 0.04 =========== =========== Basic EPS - weighted average shares outstanding 7,619,933 7,505,698 Effect of dilutive securities: Stock Purchase Options - common stock -- 441,629 Convertible preferred stock -- 2,721,399 ----------- ----------- Dilutive EPS - weighted average shares outstanding 7,619,933 10,668,726 Net (loss)/earnings $(1,231,504) $ 353,163 ----------- ----------- Diluted (loss)/earnings per share $ (0.16) $ 0.03 =========== ===========
The diluted share base for the quarter ended September 30, 2001 excludes incremental shares of 222,123 related to employee stock options and 2,578,960 shares related to convertible preferred stock. The diluted share base for the nine months ended September 30, 2001 excludes incremental shares of 251,952 related to employee stock options and 2,614,415 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 September 30, 2001 and nine months ended September 30, 2001. 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 accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 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 6 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 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 and laboratory 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 nine months ended September 30, 2001 and 2000 (unaudited):
Quarter Ended Quarter Ended September 30, 2001 September 30, 2000 Increase/(Decrease) ---------------------------- ---------------------------- ---------------------- % of Total % of Total Service Revenue Service Revenue % Change --------------- --------------- -------- Revenue: Total Service Revenue $2,515,651 100% $1,867,596 100% $648,055 35% Vision & Hearing Program 1,469,535 58% 1,367,429 73% 102,106 7% Vision Provider Fee 9,214 0% 22,197 1% (12,983) (58%) Dental Program 33,524 1% 142,967 8% (109,443) (77%) Buying Group Program 266,116 11% 332,952 18% (66,836) (20%) AbsoluteCare, Inc. 734,483 29% -0- 0% 734,483 100% Expenses: Cost of Services - Avesis Incorporated & Subsidiaries excluding AbsoluteCare, Inc. 1,469,028 58% 1,321,290 71% 147,738 11% Cost of Services - AbsoluteCare, Inc. 684,862 27% -0- 0% 684,862 100% General & Administrative 438,964 17% 343,950 18% 95,014 28% Selling & Marketing 317,709 13% 188,390 10% 129,319 69% (Loss) from Operations - AbsoluteCare, Inc. (66,654) (3%) -0- 0% (66,654) 100% (Loss) from Operations - Avesis Incorporated & Subsidiaries excluding AbsoluteCare, Inc. (328,258) (13%) (23,571) (1%) (304,687) 1,293% Net (Loss)/Income (384,430) (15%) 1,609 0% (386,039) (23,992%)
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Nine Months Ended Nine Months Ended September 30, 2001 September 30, 2000 Increase/(Decrease) ---------------------------- ---------------------------- ---------------------- % of Total % of Total Revenue: Service Revenue Service Revenue % Change --------------- --------------- -------- Total Service Revenue $6,845,124 100% $6,031,854 100% $813,270 13% Vision & Hearing Program 4,339,554 63% 4,316,408 72% 23,146 1% Vision Provider Fee 32,912 0% 72,243 1% (39,331) (54%) Dental Program 99,046 1% 491,020 8% (391,974) (80%) Buying Group Program 906,995 13% 1,145,575 19% (238,580) (21%) AbsoluteCare, Inc. 1,459,454 21% -0- 0% 1,459,454 100% Expenses: Cost of Services - Avesis Incorporated & Subsidiaries excluding AbsoluteCare, Inc. 4,470,026 65% 4,048,342 67% 421,684 10% Cost of Services - AbsoluteCare, Inc. 1,472,831 22% -0- 0% 1,472,831 100% General & Administrative 1,368,097 20% 1,042,323 17% 325,774 31% Selling & Marketing 744,128 11% 620,483 10% 123,645 20% (Loss) from Operations - AbsoluteCare, Inc. (397,040) (6%) -0- 0% (397,040) 100% (Loss)/Income from Operations - - Avesis Incorporated & Subsidiaries excluding AbsoluteCare, Inc. (812,919) (12%) 283,169 5% (1,096,088) (387%) Net (Loss)/Income (1,163,349) (17%) 353,163 6% (1,516,512) (429%)
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. Three major Sponsors accounted for 14%, 11% and 11% of total service revenues in the nine months ended September 30, 2001, and two major Sponsors accounted for 25% and 14% of total service revenues in the nine months ended September 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 8 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 headquarters in Phoenix, Arizona. The Company had approximately 1,410,000 vision and 20,000 hearing Members as of September 30, 2001, compared to approximately 1,429,000 vision and 13,000 hearing Members as of September 30, 2000. The decrease in the Company's vision member counts as of September 30, 2001 as compared to September 30, 2000 is principally due to two vision plan Sponsors that did not renew the benefit for their Members upon their annual renewal, but instead are providing a lesser benefit internally. As of September 30, 2000, the Company had approximately 184,000 Members from these Sponsors. During September 2000, the Company entered into a contract with one of the previously mentioned Sponsors to provide benefits to approximately 28,000 Members, which are all from one employer group. The contract for the 28,000 Members ended on September 30, 2001, as the remaining Members left their Sponsor and were 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 was projected that approximately 17% of the 130,000 individuals would enroll in our benefit plan, for an expected decrease in membership from 28,000 Members to 22,000 Members. The actual enrollment for the employer group is currently approximately 58,000 Members. The new Members are not included in the Member count above as the new contract has an effective date of October 1, 2001. The loss in membership has also been partially offset by a new Sponsor, currently with approximately 99,000 Members, added during the last quarter of the year ended December 31, 2000. The revenue and profit derived from this new Sponsor is less than the revenue and profit derived from the two Sponsors who did not renew their Members' benefits. Vision provider fee revenue decreased in the nine months ended September 30, 2001 as compared to the nine months ended September 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 49,000 dental Members as of September 30, 2001, compared to approximately 67,000 dental Members as of September 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, partially offset by the growth in membership of two existing Sponsors. 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 January 1, 2001 and approximately 74,000 as of October 1, 2001, including the approximately 58,000 Members from the employee group previously mentioned. Although the 58,000 Members are obviously a large group, these members are from a single employer. In most instances the sizes of the groups participating in the Avesis Advantage Vision Program are significantly smaller. As with the Company's traditional vision business, the Company may be materially adversely affected by the loss of a large group participating in the Avesis Advantage Vision Program. During July 2001, the Company hired three salespeople, located in Georgia, Pennsylvania and Massachusetts, to market the Company's products, concentrating 9 on sales of the Avesis Advantage Vision Program. Additionally, the Company increased its marketing support staff and network development personnel to further the sales efforts. The Company expects to derive its first revenues from the Avesis Advantage Dental Program during the first half of calendar year 2002. The Company originally anticipated deriving its first revenues from the Avesis Advantage Dental Program during the second half of calendar year 2001, but it has delayed the rollout of the product as its resources have been concentrated in the geographic expansion of sales of the Avesis Advantage Vision Program. 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 has seen a 21% decrease in sales. Cost of Services for Avesis Incorporated and its subsidiaries, excluding AbsoluteCare, 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 also includes AbsoluteCare's employee salaries, medical supplies, laboratory consumables and pharmaceuticals dispensed. Cost of Services increased as a percentage of total service revenues, excluding AbsoluteCare revenue, during the quarter and nine months ended September 30, 2001, as compared to the quarter and nine months ended September 30, 2000. The increase primarily resulted from higher service costs related to the previously mentioned new Sponsor who began offering the Company's vision program to its Members during the fourth quarter of fiscal 2000, and higher service costs from a second Sponsor whose Members participated in the Company's vision program from October 1, 2000 through August 31, 2001. The Company has discussed the variances in projected utilization of benefits with the two Sponsors. The Company successfully modified the participating provider network and reduced the fee schedule reimbursement for the Sponsor whose program ended on August 31, 2001, as of July 1, 2001, in an effort to make this account profitable over its final two months. The Company is planning to take similar steps to reduce service costs for the other Sponsor during the fourth quarter of 2001. General and Administrative expenses decreased as a percentage of total service revenue during the quarter ended September 30, 2001, as compared to the quarter ended September 30, 2000, and increased as a percentage of total service revenue during the nine months ended September 30, 2001, as compared to the nine months ended September 30, 2000. The amount of General and Administrative expenses increased in both the quarter and nine months ended September 30, 2001, as compared to the corresponding periods in the prior year. The increase in 10 expenses primarily 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 partially offset by an increase in amortization of goodwill created by the SSEC transaction. 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 marketing expenses increased as a percentage of total service revenue during the quarter and nine months ended September 30, 2001, as compared to the corresponding periods in the prior year. The increase primarily resulted from the payroll and associated expenses related to the new salespeople and support staff hired during July 2001, as previously mentioned, and the marketing expenses related to AbsoluteCare, which did not exist in the prior year. AbsoluteCare's total service revenue has increased by $279,462, from $455,021 for the quarter ended June 30, 2001, to $734,483 for the quarter ended September 30, 2001. Operating expenses, which includes the cost of pharmaceuticals dispensed, increased by $202,668, from $598,469 for the quarter ended June 30, 2001, to $801,137 for the quarter ended September 30, 2001. The Company began billing for internal laboratory services during June 2001, which generates revenues for laboratory services from approximately 90% of its patient base, compared to 30% of the patient base previously. The Company increased its marketing and public relations efforts during the second quarter of calendar year 2001 in an effort to educate potential patients about the services AbsoluteCare offers. Based upon the Company's business plan, the Company anticipates that the growth of its patient base and the revenue from its laboratory services will enable AbsoluteCare to break even and possibly generate positive cash flow by the end of the fourth quarter of 2001. Because the ultimate result will depend on factors outside the Company's control, there can be no assurances of this result. 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. 11 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 may account for using the pooling-of-interests method, and Statement 142 effective January 1, 2002. The Company did not initiate any business combinations prior to July 1, 2001 that were pending as of that date. Furthermore, any goodwill and any intangible assets 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 the Company's adoption of Statement 142 that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination and make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart 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. 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 for the year ended December 12 31, 2000 and $51,501 for the nine months ended September 30, 2001. 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. On October 3, 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement No. 144 supersedes Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, it retains many of the fundamental provisions of that Statement. Statement No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. By broadening the presentation of discontinued operations to include more disposal transactions, the FASB has enhanced managements' ability to provide information that helps financial statement users to assess the effects of a disposal transaction on the ongoing operations of an entity. Statement No. 144 is effective for fiscal years beginning after December 15, 2001. At the current time, management does not believe that the adoption of this statement on January 1, 2002 will have a material impact on the Company's financial position. LIQUIDITY AND CAPITAL RESOURCES The Company had cash and cash equivalents of $685,081 as of September 30, 2001, compared to $1,898,534 as of December 31, 2000. The decrease of $1,213,453 is primarily due to the Company's loss from operations caused by the increase in cost of services, the hiring of new employees to accelerate the development of the Avesis Advantage Vision Program, the loss from operations during the start-up of AbsoluteCare, the repurchase of the Company's 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's achieving cash flow break even, which is projected for the fourth quarter of 2001, and a diminution of the losses related to Avesis' vision and hearing programs, which is also projected. 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 September 30, 2001, the Company had $710,737 of Accounts Payable, compared to $769,813 as of December 31, 2000. The decrease in Accounts Payable primarily relates to the payment of the initial expenses of AbsoluteCare's pharmacy and medical office. Claims reserves of $350,419 as of September 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. The Company expects to pay dividends of approximately $43,000 on the Series A Preferred Stock on December 1, 2001. 13 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, restricts 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 October 2001, on shares of its Series 2 Preferred Stock. Such dividend is cumulative, and the total dividend arrearage is $38,070, or $8.10 per share, as of September 30, 2001 for all 4,700 shares outstanding. 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 September 30, 2001. 14 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: 11/29/01 /s/ Alan S. Cohn ---------------------------------------- Alan S. Cohn, Chief Executive Officer and President Date: 11/29/01 /s/ Joel H. Alperstein ---------------------------------------- Joel H. Alperstein, Chief Financial Officer and Treasurer 15 Avesis Incorporated Exhibit Index Form 10-QSB for the Quarter Ended September 30, 2001
Exhibit No. Description Incorporated by Reference from the: - ----------- ----------- ----------------------------------- 11 Statement re: Computation of per Share Earnings per Share Computation, see Note 2 to Earnings the Notes to Condensed Consolidated Financial Statements
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