UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the fiscal year August 1, 1995 to July 31,
1996.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from N/A to N/A .
--- ---
Commission File Number: 0-15207
FIRST AMERICAN HEALTH CONCEPTS, Inc.
(Name of small business issuer in its charter)
ARIZONA 86-0418406
(State of Incorporation) (IRS Employer Identification Number)
7776 South Pointe Parkway West, Suite 150, Phoenix, Arizona 85044-5424
(Address of principal executive offices) (Zip Code)
(602) 414-0300
(Issuer's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock without par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No .
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenue for the fiscal year ended July 31, 1996 was $5,678,016.
Registrant's Common Stock outstanding at October 21, 1996 was 2,577,026 shares
after deducting 418,302 shares of treasury stock. At such date, the aggregate
market value of Registrant's Common stock held by non-affiliates, based upon the
closing price at which such stock was sold on NASDAQ on such date was
approximately $5,073,000.
Documents Incorporated by Reference
Portions of Registrant's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on January 9, 1997 are incorporated in Part III as set
forth herein.
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TABLE OF CONTENTS
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PART I PAGE
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Item 1. Description of Business 3
Item 2. Description of Property 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 6
Item 6. Management's Discussion and Analysis 6
Item 7. Financial Statements 8
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 8
PART III
Item 9. Directors and Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act 8
Item 10. Executive Compensation 9
Item 11. Security Ownership of Certain Beneficial
Owners and Management 9
Item 12. Certain Relationships and Related
Transactions 9
Item 13. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
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PART I
First American Health Concepts, Inc.
Item 1. DESCRIPTION OF BUSINESS
Business Development
First American Health Concepts, Inc. ("FAHC" or the "Company") was
incorporated in Arizona in 1981 and made its initial public offering of common
stock in October, 1985. For the past eleven years, the Company has been involved
in the business of providing managed vision care plans and programs to the
employee benefit industry and direct access to preferred pricing through a
network of preferred providers (PPO). The Company markets and administers its
vision care programs under the registered trade name Eye Care Plan of America
("ECPA").
The containment of runaway costs within the health care industry has
been a major focus of attention for several years. The increasing cost of
medical care and an increasing need for vision care, has triggered a growing
awareness of, and need for, new products, services and ideas designed to curtail
health care costs.
In 1995, U.S. retail sales of optical products were $13.8 billion, a 12
percent increase from the $12.3 billion in 1993. Managed vision care programs,
(private and government) accounted for 30 percent of all these eyewear sales,
according to the Ophthalmic Manufacturers Association (OMA).
According to a special report published by the Jobson Optical Group in
1995, 60 percent of the American population, or approximately 157 million people
require some form of vision correction, with 61 percent of them purchasing
eyewear in 1995. The report also tracks the effect that the graying of America
is having on the vision care market, with 40 percent of purchasers in 1995 being
over 40 years of age. It is estimated that segment of the population will
increase to 60 percent by the year 2000. The Group Health Association of America
(GHAA) estimates that 91 percent of the best selling plans offered by HMO's
included coverage for routine eye exams and 15 percent offer eyewear benefits.
Approximately one in five Americans are currently receiving their health care
through an HMO. It is this rapidly growing market where the Company focuses its
sales and product development efforts.
Consumers are naturally cost conscious when purchasing health care
products, and a large number of optometrists, opticians and ophthalmologists are
concerned over losing their patients to managed care plans. The ECPA concept is
intended to assist these professionals in maintaining or increasing the volume
of their business, while enabling consumers to reduce their eye care costs by
providing substantial savings to members purchasing eye care from participating
ECPA providers.
Eye Care Plan of America
Eye Care Plan of America is a managed vision care plan with a
verifiable cost containment pricing structure as its foundation. Pricing is
based on industry published wholesale prices for the ophthalmic materials plus
nominal professional service fees. ECPA provides fully-insured and self- funded
service emphasizing this pricing structure.
The Company's original program, ECPA Non-Insured, is not an insurance
program but, rather, affords consumers the opportunity to purchase eyewear
products from providers at substantial savings through participation in the
Company's programs.
During 1993, the Company introduced its first insured vision care
products which utilize the same price structure as the Company's original
program, while adding a schedule of indemnity allowances for eye examinations,
lenses, frames and contact lenses. The Company's programs can assist providers
in increasing or maintaining their markets, while enabling members to reduce
their health care costs.
Currently, 10.1 million members are enrolled in the Company's vision
care cost-containment programs, and there are over 13,800 participating eye care
providers in the United States, Puerto Rico and the US Virgin Islands.
Upon enrollment in any of the ECPA programs, members receive
identification or authorization verifying their membership. This identification
is usually either on a Company- issued ECPA card or the sponsor's own
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identification card on which the ECPA logo is imprinted. Included in the
information on either card is the toll-free telephone number to the Company's
national customer service center. Members are instructed to call the telephone
number to locate nearby participating ECPA providers. Members and their families
may visit any provider during normal business hours and are encouraged, but not
required, to have their eyes examined by the provider in connection with their
purchases. Members may select eyewear from each provider's inventory without
restriction as to style, color, size, tint or lens type. The Company guarantees
that any complaints associated with ECPA programs will be resolved to the
members' satisfaction, either by the provider or by the Company.
[ ] ECPA Non-Insured
Upon presentation of an authorized membership card at an approved
provider, a member may purchase eyewear at a price 20% to 60% below usual
retail. The preferred pricing is based on published wholesale price lists such
as FRAMES, an industry publication which reflects manufacturers' wholesale frame
prices, and wholesale optical laboratory published price lists.
Unlike traditional insured vision plans, ECPA Non-Insured does not
require either the member or the provider to complete or submit claim forms. All
payments are made directly to the participating providers by the ECPA
Non-Insured members.
[ ] ECPA Insured and ECPA Self-Funded
The Company's insured vision care programs are designed to combine the
preferred pricing structure with a traditional insurance schedule for eye exams,
lenses, frames and contact lenses creating a managed indemnity product with
increased flexibility in plan design.
Under ECPA Insured and ECPA Self-Funded, members receive a "Schedule
of Allowances" for vision care needs. Applying the Schedule of Allowances to the
ECPA preferred pricing greatly increases the members' buying power and reduces
their out-of-pocket expenses for quality managed eye care.
ECPA Insured and ECPA Self-Funded members also have the option of
seeking services from eye care professionals outside of the ECPA provider
network. In such cases, the member pays the eye care provider's usual and
customary fees directly, and the member is then reimbursed according to a
reduced Schedule of Allowances.
After the Schedule of Allowances has been exhausted, ECPA Insured and
ECPA Self-Funded members may purchase additional eyewear and contact lenses from
participating ECPA providers at ECPA preferred pricing levels.
Insured scheduled allowances are underwritten by Security Life
Insurance Company of America ("SLICA," founded in Minnesota in 1956) and
Congress Life Insurance Company (in Alabama), a wholly-owned subsidiary of
SLICA. ECPA Self-Funded provides the same benefits to members as ECPA Insured,
however the scheduled allowances are self-funded by the plan sponsor.
ECPA Sponsors
The Company does not market participation in ECPA programs directly to
the public. Instead, members are enrolled through sponsors having access to
large numbers of their own employees, clients or customers. Existing and
potential sponsors include employer groups, insurance carriers, third party
administrators, health maintenance organizations, multiple employer trusts,
financial institutions, associations, labor unions, governmental bodies, and
political sub-divisions. Generally, a sponsor pays either an annual/monthly fee
or a monthly premium for each member enrolled. Under the Company's standard
agreement each sponsor agrees to offer membership in ECPA to its clients, and
typically will enroll all of its clients.
Presently there are more than 1,000 sponsors of ECPA plans, the largest
of which accounts for approximately 9 percent of the Company's total operating
revenue.
ECPA Eye Care Providers
Each participating ECPA provider is an established provider prior to
becoming associated with the Company, is owned independent of the Company, and
is operated by professionals regulated under applicable state law. A large
portion of the provider network is comprised of independent optometrists,
opticians, and ophthalmologists, and the balance is comprised of chain-operated
providers. Each provider agrees to pay a periodic or transaction-based fee for
the Company's administration of the network.
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The Company recruits potential providers using in-house telemarketing
efforts. Each potential provider is screened through interviews with
credentialing representatives and discussions with their references. The Company
requires, among other things, that providers maintain normal business hours,
offer a full selection of eyewear, possess all licenses required to practice in
the state in which their operations take place, maintain sufficient professional
liability insurance, and adhere to standards set forth in the Company's Quality
of Care Assurance Program. A nominal credentialing fee is required. Each
approved provider agrees to provide eye care to plan members according to the
Company's standards and at predetermined, published, wholesale-based prices, and
to guarantee the services, care and related materials to the members'
satisfaction.
Since ECPA is based on a cost containment fee structure, it is
necessary to maintain an appropriate ratio of members to providers within a
given geographic area. ECPA has set the desired ratio at 2000-to-1, bearing in
mind that utilization will be only a fraction of that, and that eye care visits
are normally an annual or semi-annual event. ECPA verifies that the prospective
provider's office is capable of efficiently serving an increased patient load.
Competition
The Company's primary competition in marketing ECPA programs comes from
other insured vision plans, some of which are long-established entities with
significantly greater financial and other resources than the Company.
Due to the high percentage of the population requiring eyewear and
because access to eye care services is largely a planned occurrence, it is
necessary to spread the cost of insured benefits over large groups and
therefore, vision care insurance premiums and fees are set at levels which may
not produce significant cost savings in the total cost of individual vision
care. The Company believes, therefore, that the ECPA membership cost-containment
concept offers advantages in the cost and ease of administration over
traditional insured and prepaid coverage programs.
Although several companies offer membership programs for the purchase
of discount eyewear from participating providers, to the Company's knowledge, no
other Company is comparable in size, product diversity or geographic scope to
ECPA. Other entities could establish cost-containment benefit programs similar
in concept to the Company's programs. However, management believes the Company's
service mark recognition obtained during the past fifteen years provides a
competitive edge for the Company and will continue to do so. In addition,
because the Company's newer insured vision care products utilize the same price
schedule as ECPA Non-Insured, associated claims costs are lower than competing
traditional insured vision care plans and therefore, material cost savings are
passed on to the insured members and sponsors.
Regulation
Health care providers, insurers, and third party administrators are
subject to federal, state and occasionally, local regulation. Regulations
applicable to the products or operations of the Company are complied with
directly by the Company or through the compliance departments of the Company's
alliance partners, where applicable.
Since the Company is in the employee benefit industry, any proposed or
enacted legislation which would adversely affect the preferential tax treatment
or flexibility of choice afforded employee health benefits could adversely
affect the business of the Company.
Employees
At October 21, 1996 the Company had 67 full-time employees including 6
officers, 5 outside sales representatives and 56 customer service, clerical and
administrative employees. The Company anticipates hiring additional staff as
increased business demands dictate.
Item 2. DESCRIPTION OF PROPERTY
The Company leases an aggregate of 15,000 square feet of Class B office
space for its sales and administrative offices. The Company's headquarters
office in Phoenix, Arizona is leased at an effective rate of $12,300 per month
with an expiration date of September, 1999. Sales offices are located in
Phoenix, Atlanta, Chicago, Washington, D.C. and Hartford with effective rates
ranging from $450 to $1,400 per month and lease expiration dates through
September, 1997.
The Company maintains cash reserves for use in corporate expansion,
financing growth of its business and general corporate purposes. FAHC
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invests excess cash in interest-bearing securities including U.S. Treasuries and
municipal obligations, generally with maturities of less than one year.
Investments are governed by guidelines established by a committee of the Board
of Directors and are generally not limited by type.
Item 3. LEGAL PROCEEDINGS
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common Trading Range During the Years Ended July 31,
Stock Prices 1996 1995
- ------------ --------------------------------------------------------
High Low High Low
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Quarter Ended:
October 31 $6-3/4 $5 $8-1/8 $5-1/8
January 31 6-3/8 4-5/8 8-7/8 6-1/8
April 30 5-3/4 4-3/8 6-5/8 4-3/4
July 31 5-1/4 3-1/4 7-5/8 6-1/8
Since February 27, 1995 the Company's common stock has traded on the
Nasdaq National Market System (symbol: FAHC). Prior to that date, common shares
were traded on the Nasdaq Over-the-Counter Market. On October 21, 1996 there
were approximately 135 shareholders of record, not including those shares held
in street name. The Company has neither declared nor paid any cash dividends to
date and does not plan to do so in the immediate future.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
First American Health Concepts, Inc. ("FAHC" or the "Company") reported
operating revenues of $5,678,000 for 1996 compared to $4,657,000 for 1995, an
overall increase of 22 percent. ECPA Non-Insured revenues increased 20 percent
due to an increase in eligible members from 9.6 million members in 1995 to 10.0
million members at July 31, 1996. Revenues generated from the Company's managed
care plans, ECPA Insured and ECPA Self-Funded increased 86 percent from the
prior year and, while still the smaller part of the business, represent the
fastest growing product lines.
During 1996, the Company reported $871,000 of combined revenue from
ECPA Insured and ECPA Self-Funded, compared to $468,000 in 1995. This increase
was due to enrollment of new groups during fiscal 1996 and full-year revenues
from groups added in 1995. The insured vision employee benefits market has
continued to have a progressively positive effect on revenues since the Company
introduced the managed care products in 1993. The Company anticipates that
revenues from ECPA Insured and ECPA Self-Funded will continue to grow at a
faster rate than Non-Insured revenues and will continue to represent an
increasing portion of new business.
The Company does not expect inflation to have a material impact on
future revenues and/or profits.
Total operating expenses were $5,297,000 in 1996 compared to $3,822,000
in 1995, a 39 percent increase. The overall increase in operating expenses
generally reflects investment in the Company's internal infrastructure designed
to support marketing and sales activities, service current and new business, and
support future growth.
Sales and marketing expenses were $2,015,000 in 1996 and $1,403,000 in
1995. The 44 percent increase resulted from the full-year effect of a dedicated
marketing, account services and sales support department established during the
fourth quarter of fiscal 1995 combined with increased development and production
expenses
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for marketing materials focused on new business growth. New field sales staff
were also added to increase market coverage. Further contributing to increased
sales and marketing costs were the addition of provider relations personnel and
comprehensive quality assurance programs aimed at strengthening the Company's
competitive position. During fiscal 1996, management continued to direct sales
and marketing efforts toward new ECPA Non-Insured business while increasing
focus on ECPA Insured and ECPA Self-Funded products.
Direct membership expenses, the costs of providing members with
membership materials, maintaining a national customer service center, and
administering the claims processing function, were $1,345,000 in fiscal 1996
compared to $798,000 for 1995, a 69 percent increase. The increase resulted from
the addition of customer service and claims administration personnel, and higher
materials and outside claims administration costs associated with increased
membership, especially for the ECPA-Insured and ECPA Self-Funded products.
Expenses within this category will continue to increase as operating revenues in
these business lines increase.
For fiscal 1996, general and administrative expenses were $1,608,000,
compared to $1,379,000 in 1995. Factors contributing to this 17 percent increase
were additional finance and information systems support personnel, professional
fees related to employee additions, and systems and infrastructure expenditures
to accommodate future growth. The Company expects general and administrative
expenses to increase only slightly during fiscal 1997.
Depreciation was $244,000 for 1996 and $156,000 in 1995. Depreciation
increased in 1996 due to purchases of computer systems, furniture and office
equipment and leasehold improvements to accommodate new personnel. In addition,
a full year's depreciation is included for mailing and processing equipment
purchased in 1995 with the expectation of overall cost savings through internal
processing versus outside contracting. Depreciation and amortization will
increase in 1997 when a significant new integrated managed care information
system presently being developed is put into service along with related
telephone system enhancements.
Interest income was $243,000 in 1996 compared to $204,000 in 1995. The
increase in interest income was due to higher average invested balances during
the year ended July 31, 1996. The increased investment balances also earned a
higher average yield compared to 1995 due to a lesser focus on lower yielding
tax-preferred investments. Disregarding rate fluctuations, interest income
should decrease during fiscal 1997 as the Company plans to use internal funds to
finance capital expenditures and system development.
Liquidity and Capital Resources
Working capital was $2,666,000 and the current ratio was 2.5 to 1 at
July 31, 1996. Cash and cash equivalents and marketable investment securities
totaled $4,192,000.
The Company's cash and cash equivalents decreased $470,000 from the
1995 balance to $1,600,000 at July 31, 1996. The Company's principal source of
funds for the year ended July 31, 1996 was cash flow from operations. In
addition, $2,474,000 was generated from the redemption of marketable investment
securities, though substantially all of these funds were reinvested in similar
financial instruments.
Major uses of funds for the year were the purchase of computer and
office equipment and an integrated managed care information system comprising
$998,000 and the purchase of 40,500 treasury shares for an aggregate price of
$204,000. The Company's Board of Directors has authorized up to $1 million for
such acquisitions.
Management anticipates continuing, though slower, expansion in 1997
through additional management and staff support personnel, capital additions and
infrastructure expenditures to accommodate future growth. The Company believes
its ongoing cash flow will support all anticipated capital expenditures and
operating expenses.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets," will require that long-lived assets of
the Company be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. Management believes the adoption of SFAS 121 for the year ending
July 31, 1997, will not have a material effect on the Company's financial
position.
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes
financial and reporting standards for stock-based compensation
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plans including all arrangements by which employees receive shares of stock,
options, or other equity instruments. These transactions must be accounted for,
or at least disclosed in the case of stock options, based on the fair value of
the equity instruments issued. The company will adopt the disclosure
requirements of SFAS No. 123 for its fiscal year ending July 31, 1997.
Item 7. FINANCIAL STATEMENTS
The Company's financial statements and notes thereto are included in
this annual report beginning at page 11.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information called for by this Item, with respect to directors, and
with respect to officers regarding compliance with Section 16(a) is incorporated
by reference from the "Notice of Meeting and Proxy Statement" filed herewith as
Exhibit 28.
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Current Title and Positions
Executive Officer Age at 7/31/96 Held During the Last Five Years
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John A. Raycraft 49 Chief Executive Officer since May 1993; President since
1992; Executive Vice President from 1991 to 1992; President
and Chief Executive Officer of AVP Vision Plan and
Executive Vice President of Optics East, Inc. prior to joining
the Company.
Laura J. Arnold 35 Vice President of Provider Relations since August 1994;
Manager since August 1993; Director of Vision and Hearing
Plan Services / Southwestern Benefit Plans and Network
Development with AVESIS, Incorporated prior to joining
the Company.
Bruce T. Davidson 64 Vice President of Marketing and Sales since November
1995; an independent marketing and sales consultant prior
to joining the Company.
Carolyn Hall 56 Secretary and Treasurer since 1988; Secretary since 1987.
Craig L. Santilli 48 Vice President of Information Systems since September
1995; Director, Applications Development for Samaritan
Health System and Director, Information Management for
Hartford Insurance Group prior to joining the Company.
Charles P. Stanford, Jr. 45 Vice President of Finance and Chief Financial Officer since
October 1994; General Manager, Director, Vice President
and Chief Financial Officer of Capitol Castings, Inc., and an
independent financial and business consultant prior to
joining the Company.
</TABLE>
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Item 10. EXECUTIVE COMPENSATION
The information called for by this Item is incorporated by reference
from the "Notice of Meeting and Proxy Statement" filed herewith as Exhibit 28.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item is incorporated by reference
from the "Notice of Meeting and Proxy Statement" filed herewith as Exhibit 28.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1993, the Company made a $101,395 loan to John A. Raycraft,
President and Chief Executive Officer of the Company, in exchange for an
interest-bearing note receivable. The agreement provided for quarterly loan
payments amounting to 50% of the profit sharing payment due to the officer, with
payments applied first to accumulated interest due and then to principal, until
paid in full. The note was secured by an insurance policy on the life of the
officer. The balance of the note on August 1, 1994 was $65,525.
During fiscal 1995, the Company loaned the officer an additional
$28,000 and agreed to repayment of principal and interest in five annual
installments through August 1, 1999. Other terms of the note receivable remain
unchanged. On August 1, 1996 a repayment of $18,621 was received from the
officer.
Additional information called for by this Item is incorporated by
reference from the "Notice of Meeting and Proxy Statement" filed herewith as
Exhibit 28.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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Exhibit Number Description Method of Filing
- -------------- ----------- ----------------
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3-A Articles of Incorporation Incorporated by reference to
of the Company as amended Exhibit 3-A of 1990 10-K. Current
amendment filed herewith
3-B Bylaws of the Company Incorporated by reference to
Exhibit 3-B of 1992 10-K
4-A Specimen Stock Certificate Incorporated by reference to
Exhibit 4-A of S-18 33-00118-LA
24 Consent of KPMG Peat Marwick LLP Exhibit filed herewith
28 Notice of Meeting and Proxy Exhibit filed herewith
Statement
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the last quarter of the period
covered by this report.
9
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
.
FIRST AMERICAN HEALTH CONCEPTS, Inc.
(Registrant)
Date: October 28, 1996 By /s/ John A. Raycraft
-----------------------------------
John A. Raycraft
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
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<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ John A. Raycraft President and 10/28/96
- ------------------------------------- Chief Executive Officer --------
(John A. Raycraft)
/s/ Charles P. Stanford, Jr. Vice President of Finance and 10/28/96
- ------------------------------------- Chief Financial Officer --------
(Charles P. Stanford, Jr.)
/s/ John W. Heidt Chairman of the Board 10/28/96
- ------------------------------------- --------
(John W. Heidt)
/s/ Robert M. Topol Director 10/28/96
- ------------------------------------- --------
(Robert M. Topol)
/s/ Robert J. Delsol Director 10/28/96
- ------------------------------------- --------
(Robert J. Delsol)
/s/ Thomas B. Morgan Director 10/28/96
- ------------------------------------- --------
(Thomas B. Morgan)
/s/ John R. Behrmann Director 10/28/96
- ------------------------------------- --------
(John R. Behrmann)
</TABLE>
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KPMG Peat Marwick LLP
One Arizona Center
400 E. Van Buren Street
Suite 1100
Phoenix, AZ 85004
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
First American Health Concepts, Inc.:
We have audited the accompanying balance sheet of First American Health
Concepts, Inc. as of July 31, 1996, and the related statements of income,
shareholders' equity, and cash flows for each of the years in the two-year
period ended July 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First American Health Concepts,
Inc. as of July 31, 1996 and the results of its operations and its cash flows
for each of the years in the two-year period ended July 31, 1996 in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
October 4, 1996
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First American Health Concepts, Inc.
BALANCE SHEET
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ASSETS July 31, 1996
- -------------------------------------------------------------------------------------------------------
<S> <C>
Current Assets:
Cash and cash equivalents $ 1,599,566
Marketable investment securities (Note B) 1,699,691
Member fees receivable, net of allowance for
doubtful accounts of $26,000 649,285
Note receivable-officer, current (Note C) 18,621
Deferred expenses 223,973
Prepaid expenses 84,975
Income taxes receivable (Note G) 32,807
Other current assets 110,216
------------------
Total Current Assets 4,419,134
------------------
Property and Equipment:
Office furniture and fixtures 287,083
Computers and office equipment 1,309,027
Leasehold improvements 102,818
Systems under development 551,132
------------------
2,250,060
Less accumulated depreciation and amortization (884,845)
------------------
Net Property and Equipment 1,365,215
Marketable investment securities, long term (Note B) 893,002
Note receivable-officer, long term (Note C) 60,120
------------------
Total Assets $ 6,737,471
==================
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 216,350
Capital lease obligation, current (Note D) 17,090
Bank loan, current (Note F) 84,400
Accrued expenses 252,017
Deferred tax liability (Note G) 20,000
Deferred revenue 1,162,948
------------------
Total Current Liabilities 1,752,805
Capital lease obligation, long term (Note D) 30,034
Bank loan, long term (Note F) 189,900
------------------
Total Liabilities 1,972,739
------------------
Shareholders' Equity (Notes B, E, and F):
Common stock, no par value; Authorized, 8,000,000
shares; Issued, 2,995,104 shares 630,306
Additional paid-in capital 2,560,544
Retained earnings 2,976,741
Unearned ESOP shares (Note F) (259,804)
Net unrealized gain on marketable investment securities (Note B) (1,613)
------------------
5,906,174
Treasury stock, at cost, 383,102 shares (1,141,442)
------------------
Total Shareholders' Equity 4,764,732
------------------
Commitments and Contingencies (Notes D and F)
Total Liabilities and Shareholders' Equity $ 6,737,471
==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
First American Health Concepts, Inc.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Years ended July 31, 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Revenues $5,678,016 $4,656,871
Operating Expenses:
Sales and marketing expenses 2,014,504 1,403,014
Direct membership expenses 1,345,497 797,764
General and administrative expenses 1,608,338 1,378,520
Depreciation 244,499 156,178
ESOP charges (Note F) 84,102 86,046
-------------- -------------
Total Operating Expenses 5,296,940 3,821,522
-------------- -------------
Operating Income 381,076 835,349
Non-operating Income (Expense):
Interest income 243,103 204,268
Interest expense (35,086) (35,137)
-------------- -------------
Total Non-operating Income 208,017 169,131
Income Before Income Taxes 589,093 1,004,480
Income Taxes (Note G) 230,000 336,700
-------------- -------------
Net Income $359,093 $667,780
============== =============
Net Income Per Share $0.14 $0.25
============== =============
Weighted Average Common and Equivalent
Shares Outstanding 2,655,432 2,718,799
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
First American Health Concepts, Inc.
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net Unrealized
Outstanding Additional Gain (Loss) on
Common Common Paid-in Retained Unearned Marketable
Shares Stock Capital Earnings ESOP Shares Investment Securities
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at August 1, 1994 2,551,220 $518,429 $2,112,507 $1,949,868 - ($19,726)
Stock options exercised 66,330 97,356 - - - -
Net unrealized gain (loss) on
marketable investment securities - - - - - 23,011
Income tax benefit arising from
employee stock option plan - - 130,579 - - -
Transfer of treasury stock to
ESOP Trust 91,978 - 301,751 - (422,000) -
Purchase of treasury stock (64,500) - - - - -
Cost of ESOP shares released - - 14,331 - 71,715 -
Net income - - - 667,780 - -
-----------------------------------------------------------------------------------------
Balances at July 31, 1995 2,645,028 615,785 2,559,168 2,617,648 (350,285) 3,285
Stock options exercised 7,474 14,521 - - - -
Net unrealized gain (loss) on
marketable investment securities - - - - - (4,898)
Income tax benefit arising from
employee stock option plan - - 7,755 - - -
Purchase of treasury stock 40,500 - - -
Cost of ESOP shares released - - (6,379) - 90,481 -
Net income - - - 359,093 - -
-----------------------------------------------------------------------------------------
Balances at July 31, 1996 2,693,002 $630,306 $2,560,544 $2,976,741 ($259,804) ($1,613)
=========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Total
Treasury Shareholders'
Stock Equity
---------------------------------------
<S> <C> <C>
Balances at August 1, 1994 ($798,210) $3,762,868
Stock options exercised - 97,356
Net unrealized gain (loss) on
marketable investment securities - 23,011
Income tax benefit arising from
employee stock option plan - 130,579
Transfer of treasury stock to
ESOP Trust 198,378 78,129
Purchase of treasury stock (338,075) (338,075)
Cost of ESOP shares released - 86,046
Net income - 667,780
---------------------------------------
Balances at July 31, 1995 (937,907) 4,507,694
Stock options exercised - 14,521
Net unrealized gain (loss) on
marketable investment securities - (4,898)
Income tax benefit arising from
employee stock option plan - 7,755
Purchase of treasury stock (203,535) (203,535)
Cost of ESOP shares released - 84,102
Net income - 359,093
---------------------------------------
Balances at July 31, 1996 ($1,141,442) $4,764,732
=======================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
First American Health Concepts, Inc.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended July 31, 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $359,093 $667,780
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 244,499 156,178
Amortization of deferred system costs 24,660 ----
Income tax benefit arising from stock option plan 7,755 130,579
ESOP shares committed to be released 84,102 86,046
Provision for losses on accounts receivable 12,000 10,750
Increase (decrease) in deferred taxes 7,000 (19,000)
Changes In Assets and Liabilities:
Increase in member fees receivable (65,244) (97,903)
Increase in deferred expenses (31,065) (25,698)
Decrease (increase) in prepaid expenses and other current assets (151,305) 67,561
Increase in income taxes receivable (22,078) (10,729)
Increase in accounts payable 99,007 74,328
Decrease in income taxes payable ---- (21,517)
Increase (decrease) in accrued expenses and other current liabilities 72,308 (50,479)
Decrease in accrued ESOP contributions ---- (78,129)
Increase in deferred revenue 83,132 18,000
----------------------------------
Net Cash Provided By Operating Activities 723,864 907,767
----------------------------------
Cash Flows from Investing Activities:
Decrease in certificates of deposit ---- 90,000
Purchases of property and equipment (998,106) (433,010)
Purchases of marketable investment securities (2,396,483) (1,041,510)
Redemptions/sales of marketable investment securities 2,473,981 1,474,825
Decrease (increase) in note receivable-officer 15,600 (28,811)
----------------------------------
Net Cash Provided By (Used In) Investing Activities (905,008) 61,494
----------------------------------
Cash Flows from Financing Activities:
Proceeds from sale of treasury stock ---- 500,129
Repayments of bank loan (84,400) (63,300)
Repayments of capital lease obligation (15,005) (11,143)
Proceeds from exercised stock options 14,521 97,356
Purchases of treasury stock (203,535) (338,075)
----------------------------------
Net Cash Provided (Used) By Financing Activities (288,419) 184,967
----------------------------------
Net Increase (Decrease) In Cash and Cash Equivalents (469,563) 1,154,228
Cash and Cash Equivalents, Beginning of Year 2,069,129 914,901
----------------------------------
Cash and Cash Equivalents, End of Year $1,599,566 $2,069,129
==================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for income taxes $239,117 $257,367
==================================
Cash paid during the year for interest $34,991 $35,137
==================================
Supplemental Disclosures of Non-cash Investing Activities:
Unrealized gain (loss) on marketable investment securities ($4,898) $23,011
==================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
First American Health Concepts, Inc.
A. Summary of Significant Accounting Policies
[ ] Revenue Recognition
First American Health Concepts, Inc. ("FAHC" or the "Company") receives
membership fees through its various Eye Care Plan of America ("ECPA") programs.
ECPA Non-Insured membership generally is renewed annually and fees are remitted
to the Company monthly by sponsors, based on the number of members represented
by the sponsor. Revenues are recognized monthly based on the aggregate number of
members reported to the Company. Membership fees may also be remitted on an
annual basis and, in such cases, are amortized ratably to income over a
twelve-month period. Premiums and fees related to ECPA Insured and ECPA
Self-Funded plans are calculated and billed on a monthly basis and recognized
accordingly.
[ ] Cash and Cash Equivalents
The Company considers all highly liquid financial instruments purchased
with an original maturity of three months or less to be cash equivalents.
[ ] Development Costs
The Company expenses its costs of developing the eye care provider
network and sponsor network as they are incurred. Costs of the integrated
managed care information system are being deferred until development is
completed and the system is operational at which time costs will be amortized
over a five-year period.
[ ] Marketable Investment Securities
Marketable investment securities at July 31, 1996 consist of U.S.
Treasury securities. Under the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company classifies its debt securities as available for sale
and such securities are recorded at fair value. Unrealized holding gains and
losses on available-for-sale securities, net of related tax effects, are
excluded from earnings and are reported as a separate component of shareholders'
equity until realized. Realized gains and losses on securities are included in
earnings and are derived using the specific identification method for
determining the cost of securities sold.
[ ] Deferred Expenses
The Company defers the direct costs of initiating vision plan
memberships. Such costs, which include commissions, printing and other
materials, are amortized over a twelve-month period, which corresponds to the
period utilized for measurement of membership fees. Direct advertising costs are
expensed as incurred.
[ ] Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided
using the straight-line method over estimated useful lives of three-to-five
years. Equipment under capital leases and leasehold improvements are amortized
using the straight-line method over the shorter of the lease term or the
estimated useful life of the asset.
[ ] Net Income Per Share
Net income per share is calculated using the weighted average number of
common shares and dilutive common equivalent shares outstanding during the
period. Dilutive common equivalent shares consist of stock options computed
using the treasury stock method. Average outstanding common and equivalent
shares do not include 46,851 shares held by the Employee Stock Ownership Plan at
July 31, 1996. Shares held by the ESOP are not considered outstanding for net
income per share calculations until the shares are released from the Trust.
[ ] Income Taxes Payable
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled.
[ ] Use of Estimates and Reclassifications
Management has made a number of estimates and assumptions relating to
the reporting of assets, liabilities, revenue and expenses to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates. Certain 1995
balances have been reclassified to conform with the 1996 presentation.
16
<PAGE>
B. Marketable Investment Securities
At July 31, 1996, the amortized cost, gross unrealized holding losses
and fair value of available-for-sale securities by major security type were as
follows. There were no realized losses included in income in 1996.
Gross
Unrealized
Amortized Holding
Cost Loss Fair Value
--------- ---------- ----------
U.S. Treasury Securities $2,594,306 ($ 1,613) $2,592,693
Maturities of investment securities classified as available-for-sale were as
follows at July 31, 1996:
Amortized
Cost Fair Value
--------- ----------
Due within one year $1,700,685 $1,699,691
Due after one year through two years 893,621 893,002
---------- ----------
$2,594,306 $2,592,693
========== ==========
C. Note Receivable-Officer
During 1993, the Company made a $101,395 loan to the President and
Chief Executive Officer of the Company, in exchange for an interest-bearing note
receivable. The agreement provided for quarterly loan payments amounting to 50%
of the profit sharing payment due to the officer, with payments applied first to
accumulated interest due and then to principal, until paid in full. The note was
secured by an insurance policy on the life of the officer. The balance of the
note on August 1, 1994 was $65,525.
During fiscal 1995, the Company loaned the officer an additional
$28,000 and agreed to repayment of principal and interest in five annual
installments through August 1, 1999. Other terms of the note receivable remain
unchanged.
D. Lease Obligations
The Company leases telephone equipment under the terms of a capital
lease. The terms provide for 60 monthly installments of $1,867, including
principal and interest through January, 1999. At July 31, 1996, office equipment
included $82,052 and accumulated amortization included $44,391 related to the
equipment covered by the lease.
Following is a schedule by year of future minimum lease payments:
Year Ending July 31,
- --------------------------------------------------------------------------------
1997 22,400
1998 22,400
1999 10,980
--------
Total payments 55,780
Interest portion (8,656)
--------
Principal balance 47,124
Less current portion (17,090)
--------
Long-term portion $ 30,034
========
The Company also operates from leased premises under operating leases.
Rental expense related to these leases was $210,073 in 1996 and $203,307 in
1995.
Future minimum lease payments under noncancellable operating leases as
of July 31, 1996 are as follows:
Year Ending July 31,
- --------------------------------------------------------------------------------
1997 $178,209
1998 164,912
1999 177,436
2000 30,181
--------
$550,738
========
17
<PAGE>
E. Stock Options
The Company maintains a stock option plan which covers all employees,
officers and directors of the Company and provides for the granting of incentive
and non-qualified stock options. Outside directors and officers who are not
employees of the Company are only eligible for non-qualified options.
The Company has reserved 1,000,000 shares of common stock for issuance
upon exercise of stock options granted under the plan. Of these, 500,000 are
restricted for issuance to employees other than directors and officers of the
Company.
Options are granted at not less than fair market value on the date of
grant and become exercisable based on conditions set by the Board of Directors.
Options generally expire if unexercised at the end of ten years for incentive
stock options and eleven years for non-qualified stock options.
At July 31, 1996, 480,759 stock options were available for grant under
this plan and 209,144 stock options were exercisable. Activity related to stock
options is summarized, as follows:
<TABLE>
<CAPTION>
Incentive Stock Options Nonqualified Stock Options
------------------------------------- -------------------------------------
Number of Option Price Number of Option Price
Date Activity Shares Per Share Shares Per Share
---- -------- ------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C>
August 1, 1994 Outstanding 90,964 $ 1.1250 - 6.3750 184,000 $ 1.3125 - 8.0000
Granted 25,500 4.8750 - 8.2500 65,000 6.0600
Exercised (47,330) 1.1250 - 5.9375 (19,000) 1.3125 - 1.4375
Expired (7,964) 1.9375 - 6.3750 - -
------------------------------------- -------------------------------------
July 31, 1995 Outstanding 61,170 1.3125 - 8.2500 230,000 1.3125 - 8.0000
Granted 11,000 6.0000 - 7.0000 45,000 6.0600
Exercised (7,474) 1.3125 - 2.3125 - -
Expired (2,594) 5.4275 - 5.9375 - -
------------------------------------- -------------------------------------
July 31, 1996 Outstanding 62,102 $ 1.3125 - 8.2500 275,000 $ 1.3125 - 8.0000
===================================== =====================================
Exercisable 34,144 $ 1.3125 - 8.2500 175,000 $ 1.3125 - 8.0000
===================================== =====================================
</TABLE>
The sale of common stock received through the exercise of incentive
stock options, or the exercise of non-qualified options, results in a tax
deduction for the Company equivalent to the taxable gain recognized by the
optionee. For financial reporting purposes, the tax effect of this deduction is
accounted for as a credit to additional paid-in capital rather than as a
reduction of income tax expense. A tax benefit of $7,800 was recognized for the
year ended July 31, 1996.
F. Employee Stock Ownership Plan
The Company maintains an employee stock ownership plan (First American
Health Concepts, Inc. Employee Stock Ownership Plan and related Trust),
qualified as a stock bonus plan under Section 401(a) of the Internal Revenue
Code. The Plan is designed to invest primarily in Company stock exclusively for
the benefit of eligible employees of the Company. Eligible employees become
participants in the Plan upon completion of one year of service as defined by
the Plan. Company contributions are determined each year by the Company's Board
of Directors (subject to certain limitations) and are allocated among the
accounts of participants in proportion to their total compensation.
During fiscal 1995, the Trust borrowed $422,000 from a bank for a term
of five years at an annual interest rate of 8.42%. The proceeds, along with the
Company's 1994 ESOP contribution, were used to purchase 91,978 treasury shares
from the Company. Because the Company has guaranteed the bank loan, it is
reported as long term debt of the Company. The shares sold by the Company to the
Trust are reflected in shareholders' equity, and an amount corresponding to the
borrowing (the guaranteed ESOP obligation) is reported as a reduction of
shareholders' equity. At July 31, 1996 the fair market value of the 46,851
unearned ESOP shares was $217,000.
18
<PAGE>
The loan agreement requires quarterly payments of principal and
interest which will be paid from the Company's contributions to the ESOP. As the
principal amount of the borrowing is repaid, the liability and the guaranteed
ESOP obligation are reduced. The Company recognizes compensation expense equal
to the average fair market value of the shares committed to be released for
allocation to participants in the ESOP, which is based on total debt service
requirements. Such expense amounted to $84,102 for 1996 and $86,046 for 1995.
Minimum remaining principal payments required to be made during fiscal
years ending July 31 are $84,400 in 1997 to 1999 and $21,100 in 2000.
G. Income Taxes
Components of income tax expense for the years ended July 31, 1996 and
1995 include:
Current Deferred Total
------- -------- -----
1996:
Federal $180,000 $5,000 $185,000
State 43,000 2,000 45,000
-------- ------ --------
$223,000 $7,000 $230,000
======== ====== ========
1995:
Federal $290,700 ($16,000) $274,700
State 65,000 (3,000) 62,000
-------- -------- --------
$355,700 ($19,000) $336,700
======== ======== ========
Actual tax expense differs from the "expected" tax expense (computed
by applying the applicable U.S. Federal corporate tax rate of 34% to income
before income taxes) as follows:
1996 1995
---- ----
Computed "expected" tax expense $200,000 $342,000
Increase (reduction) in income taxes
resulting from:
State income taxes, net of Federal benefit 28,000 55,000
Reversal of prior years' overaccruals - (41,000)
Interest income on tax-exempt securities (8,000) (29,000)
Other items 10,000 9,700
-------- --------
$230,000 $336,700
======== ========
The temporary differences that give rise to deferred tax assets and
liabilities at July 31, 1996 include:
Deferred tax assets:
Capital loss carryforward $16,000
Accrued expenses 29,000
Reserves and allowances 6,000
-------
Total gross deferred tax assets 51,000
Less valuation allowance (8,000)
-------
Net deferred tax asset 43,000
-------
Deferred tax liabilities:
Deferred commissions 29,000
Deferred expenses 3,000
Accelerated depreciation 31,000
-------
Total gross deferred tax liabilities 63,000
-------
Net deferred tax liability $20,000
=======
There was no change in the valuation allowance during the year ended
July 31, 1996.
19
<PAGE>
J. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values for its financial instruments. Fair value estimates are
made at a specific point in time and are based on relevant market information
and information about the financial instrument; they are subjective in nature
and involve uncertainties and matters of judgement and, therefore, cannot be
determined with precision. Changes in assumptions could significantly affect
these estimates and, since the fair values are estimated as of July 31, 1996,
the amounts that will actually be realized or paid at settlement or maturity of
the instruments could be significantly different.
[ ] Cash and Cash Equivalents - The carrying amount is assumed to be the
fair value because of the liquidity of these instruments.
[ ] Marketable Investment Securities - As described in Note B, marketable
investment securities are carried at fair market value as determined by
quoted market prices.
[ ] Accounts and Notes Receivable - The carrying amount is assumed to be
the fair value because of the short maturity of these instruments.
[ ] Accounts Payable and Accrued Liabilities - The carrying amount
approximates fair value because of the short maturity of these
instruments.
K. Business Segments and Major Customers
The Company's operations are in one business segment - the development
and marketing of vision care cost-containment programs. During fiscal 1996 and
1995, no single customer represented 10% or more of revenues.
20
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC.
SCHEDULE OF EXHIBITS
FILED WITH 1996 10-KSB
3-A Fiscal 1996 Amendment to Articles of
Incorporation of the Company Page 22
24 Consent of KPMG Peat Marwick LLP Page 24
28 Notice of Meeting and Proxy Page 25
Statement
21
STATE OF ARIZONA
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATON
OF
FIRST AMERICAN HEALTH CONCEPTS, INC.
Pursuant to the provisions of A.R.S. ss. 10-1006, the undersigned
corporation adopts the following amendment to its Articles of Incorporation
FIRST: The name of the corporation is First American Health Concepts, Inc.
SECOND: The document attached hereto as Exhibit A sets forth the amendment to
the Articles of Incorporation which were adopted by the shareholders
of the corporation on February 15, 1996, in the manner prescribed by
A.R.S. ss. 10-1003
THIRD: The number of shares outstanding at the time of such adoption was
2,642,374, and the number of shares entitled to vote thereon was
2,514,945.
FOURTH: The corporation has outstanding only a single class of stock.
FIFTH: The number of shares voted for the amendment was 2,507,130, and the
number of shares voted against the amendment was 5,440.
SIXTH: The amendment does not effect any exchange, reclassification or
cancellations of issued shares.
SEVENTH: The amendment does not effect a change in the amount of stated
capital.
DATED: February 15, 1996
FIRST AMERICAN HEALTH CONCEPTS, INC.
By /s/ John A. Raycraft
-----------------------------
John A. Raycraft, President
By /s/ Carolyn Fricke
-----------------------------
Carolyn Fricke, Secretary
22
<PAGE>
RESOLUTION
Pursuant to the requirements of Arizona Revised Statutes ss. 10-803,
the Board proposes and recommends to the shareholders that the Articles of
Incorporation be amended to read:
Article X:
----------
"Subject to the requirements of the Arizona Revised
Statutes the Board of Directors shall be composed of a minimum of
five (5) and a maximum of seven (7) Directors. The Board as
provided in the Bylaws, shall from time-to-time determine the
number of Directors within the above minimum and maximum."
It is also resolved the Amendment, along with the Board's
recommendation for its adoption, be submitted to the shareholders for a vote at
the Annual Meeting and included in the Proxy Statement.
Adopted by the Board at its specially called meeting on January 8,
1996.
/s/ JOHN W. HEIDT
---------------------
JOHN W. HEIDT
Chairman of the Board
EXHIBIT "A"
23
[KPMG PEAT MARWICK LLP LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
First American Health Concepts, Inc.:
We consent to incorporation by reference in the Registration Statement No.
33-23711 on Form S-8 of First American Health Concepts, Inc. of our report dated
October 4, 1996, relating to the balance sheet of First American Health
Concepts, Inc. as of July 31, 1996 and the related statements of income,
shareholders' equity, and cash flows for each of the years in the two-year
period ended July 31, 1996, which report appears in the July 31, 1996 annual
report on Form 10-KSB of First American Health Concepts, Inc.
KPMG PEAT MARWICK LLP
Phoenix, Arizona
October 28, 1996
24
First American Health Concepts, Inc.
7776 S. Pointe Parkway West, Suite 150
Phoenix, Arizona 85044-5424
---------------------------------------------------------------------------
Notice of Meeting and Proxy Statement
For Annual Meeting of Shareholders
To Be Held on January 9, 1997
---------------------------------------------------------------------------
To Our Shareholders:
The Annual Meeting of Shareholders of FIRST AMERICAN HEALTH CONCEPTS,
INC. (the "Company") will be held at The Pointe Hilton Resort on South Mountain,
7777 S. Pointe Parkway, Phoenix, Arizona 85044 on Thursday, January 9, 1997 at
10:00 A.M., Arizona Time, for the following purposes:
1. To elect directors.
2. To ratify the Board of Directors' recommendation that KPMG
Peat Marwick be appointed the Company's independent public
accountants for fiscal year 1997.
3. To transact such other business as may properly come before
the meeting. Management is presently aware of no other
business to come before the meeting.
The Board of Directors recommends a vote FOR Proposal 2.
The Board of Directors has fixed the close of business on November 4,
1996 as the record date for the determination of shareholders entitled to
receive notice of and to vote at the meeting or any adjournment thereof and only
holders of record of issued and outstanding shares of the Company's Common Stock
at that time will be entitled to such notice or so to vote.
Management of the Company cordially invites you to attend the meeting.
Shareholders who do not expect to attend personally are requested to sign and
date the accompanying proxy and return it promptly in the enclosed postage
prepaid envelope.
Details of the matters to be acted on by the shareholders are set forth
in the following Proxy Statement, which is hereby incorporated as a part of this
Notice of Meeting.
By Order of the Board of Directors
John W. Heidt
Chairman of the Board
Mailed to Shareholders on or about December 12, 1996
25
<PAGE>
PROXY STATEMENT
---------------
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of FIRST AMERICAN HEALTH CONCEPTS, INC.
(the "Company") to be used at the Annual Meeting of Shareholders which will be
held on January 9, 1997, and at any adjournment thereof with respect to the
matters referred to in the preceding Notice of Meeting. The Company's 1996
Annual Report, containing financial statements reflecting the financial position
and results of operations of the Company for the fiscal year ended July 31,
1996, and this Proxy Statement and the preceding Notice of Meeting are being
mailed on or about December 12, 1996, to shareholders of record at the close of
business on November 4, 1996. As of the record date, there were 2,577,026 shares
of the Company's Common Stock outstanding. Shareholders of record are entitled
to one vote for each share held of record on each matter of business to be
considered at the meeting other than the election of directors. See "Cumulative
Voting Rights" under Proposal 1 for information on voting with respect to the
election of directors.
Voting; Proxies; Revocation of Proxies
- --------------------------------------
A shareholder desiring to vote at the Annual Meeting may do so by (i)
attending the meeting and voting in person; (ii) signing and dating the proxy
which accompanies this Notice of Meeting and Proxy Statement and returning it to
the Company; or (iii) duly executing and giving a proxy to a person of the
shareholder's choosing. Any proxy so given may be revoked by the person giving
it at any time before its use by delivering to the Company a written notice of
revocation or a duly executed proxy bearing a later date or by attending the
meeting and voting in person.
In determining whether a quorum exists at the meeting all shares
represented in person or proxy will be counted. Presence of holders of a
majority of the outstanding stock entitled to vote shall constitute a quorum.
Votes will be tabulated by inspectors. Abstentions and broker non-votes are each
included in the determination of the number of shares present and voting. Each
is tabulated separately. Abstentions are counted in tabulations of the votes
cast on proposals presented to shareholders, whereas broker non-votes are not
counted for purposes of determining whether a proposal has been approved.
Adoption of Proposal 2 will require the affirmative vote of a majority
of the shares of the Company's Common Stock present and entitled to vote at the
Annual Meeting, assuming a quorum is present. For information with respect to
election of directors, see "Proposal 1 - Cumulative Voting Rights."
1997 Proxy Statement Proposals
- ------------------------------
Each year the Board of Directors submits to the shareholders at the Annual
Meeting its nominations for election of directors. Other proposals may be
submitted by the Board of Directors or shareholders for inclusion in the Proxy
Statement for action at the Annual Meeting. Any proposal submitted by a
shareholder for inclusion in the 1997 Annual Meeting Proxy Statement must be
received by the Company not later than June 25, 1997.
PROPOSAL 1
ELECTION OF DIRECTORS
Cumulative Voting Rights
- ------------------------
Each shareholder present either in person or by proxy at the Annual
Meeting will have cumulative voting rights with respect to the election of
directors; that is the shareholder will have an aggregate number of votes in the
election of directors equal to the number of directors to be elected multiplied
by the number of shares of Common Stock of the Company held by such shareholder
on the record date. The resulting aggregate number of votes may be cast by the
shareholder for the election of any single nominee, or the shareholder may
distribute such votes among any number of all of the nominees. The five nominees
receiving the highest number of votes will be elected to the Board of Directors.
The cumulative voting rights may be exercised in person or by proxy and there
are no conditions precedent to the exercise of such rights. The form of proxy
which accompanies this Notice of Meeting and Proxy Statement confers
discretionary authority on the proxyholders to vote the shares represented
thereby cumulatively in certain cases described immediately below under
"Nominees."
26
<PAGE>
Nominees
- --------
A board of five directors is to be elected at the Annual Meeting.
Unless otherwise instructed in any proxy, the persons named in the form of proxy
which accompanies this Notice of Meeting and Proxy Statement (the
"proxyholders") will vote the proxies received by them for the Company's five
nominees whose names are set forth in the following table, all of whom are
presently directors of the Company. In the event that any such nominee is unable
or declines to serve as a director at the time of the Annual Meeting, the
proxies will be voted for any nominee who shall be designated by the present
Board of Directors to fill the vacancy. In the event that additional persons are
nominated for election as directors, the proxyholders intend, unless otherwise
instructed in any proxy, to vote all proxies received by them in such manner in
accordance with cumulative voting as will assure the election of as many of the
following nominees as possible, and, in such event, the specific nominees to be
voted for will be determined by the proxyholders. In the event that authority to
vote for any nominee whose name is set forth in the following table is withheld
in any proxy, the proxyholders intend, unless otherwise instructed in such
proxy, to vote the shares represented by such proxy, in their discretion,
cumulatively for one or more of the other nominees named in such table. The
Company is not aware of any nominee who will be unable or will decline to serve
as a director. The term of office of each person elected as a director will
expire upon the election and qualification of his or her successor, expected to
be at the next Annual Meeting of Shareholders.
The names of the nominees, their ages, position(s) with the Company,
and periods during which they have held such positions are as follows:
Name and Year
First Held Position Age Position(s)
------------------- --- -----------
John R. Behrmann 61 Director (1)
(1993)
Robert J. Delsol 47 Director (1)
(1993)
John W. Heidt 49 Director (1)
(1989)
Thomas B. Morgan 71 Director (1)
(1988)
Robert M. Topol 71 Director (1)
(1989)
(1) Member of the Executive Committee, which Committee has all powers
of the entire Board of Directors other than powers denied by law or by
resolution of the entire Board of Directors.
Information Concerning Nominees
- -------------------------------
Information furnished to the Company by such persons, with respect to
the business experience of the above nominees for election as directors of the
Company, is set forth below.
JOHN R. BEHRMANN has been a director since November, 1993. Mr. Behrmann
is a director of Medical Technology & Innovations, Inc., a public company in the
medical device business and owner and operator of Evergreen Industries, Inc., a
company with interests in commercial deer farming and real estate. Mr. Behrmann
is also a stockholder and chairman of the board of Preston Reynolds & Co., Inc.,
an investment banking firm with special emphasis on the oil and gas industry and
a stockholder and director of Redstone Resources, Inc., a company engaged in
natural gas exploration. Mr. Behrmann, a CPA, holds a BS degree in Commerce and
Finance from Bucknell University, Lewisburg, Pennsylvania.
27
<PAGE>
ROBERT J. DELSOL has been a director of the Company since June, 1993.
Mr. Delsol is a graduate of California State University, Hayward, with a BA
degree in accounting. He received his CPA certificate in 1972. He currently
serves as President and Chief Executive Officer of Pacific Steel Casting
Company; President, Tri-Pacific, Inc., a personal holding company; President,
Alpha Capital Company, which he co-founded in 1977; and Executive Vice
President, Caron Compactor Company.
JOHN W. HEIDT has been a director of the Company since November 1989.
Mr. Heidt, the General Partner of Pinnacle Capital Management, L.P., is Vice
President and a director of Alpha Capital Company, an investment advisory firm
located in Oakland, California, and is an employee of Pacific Steel Casting
Company, a steel foundry based in Berkeley, California. Prior to these positions
Mr. Heidt was a stockbroker in the San Francisco bay area. Mr. Heidt holds a BS
degree in financial management from California State University in Hayward,
California.
THOMAS B. MORGAN has been a director of the Company since October 1988.
Mr. Morgan is currently the President of Citizen Auto Stage Co. and Gray Line
Tours, Inc., bus and trucking companies operating in Phoenix and southern
Arizona. Mr. Morgan is also Past Chairman of Holy Cross Hospital, Nogales,
Arizona, and Gray Line Worldwide, Dallas, Texas.
ROBERT M. TOPOL has been a director of the Company since November 1989.
In June 1994, Mr. Topol retired from Smith Barney Shearson, Inc. after serving
as Executive Vice President since 1976, and Director of Unit Trusts since 1980.
Mr. Topol serves as Director of E-Z-EM, Inc., a medical products company in
Westbury, New York and is a member of the Board of Directors of the American
Health Foundation, City Meals and Wheels, Purchase College, and Redstone
Resources, Inc.
The Company maintains a standing Audit Committee currently comprised of
John R. Behrmann, Robert J. Delsol, John W. Heidt and Robert M. Topol. The Audit
Committee met one time during fiscal 1996. The basic function of the Audit
Committee is to review the financial statements of the Company and to consider
such other matters in relation to the internal and external audit of the
financial affairs of the Company as may be necessary or appropriate in order to
facilitate accurate financial reporting.
The Board of Directors maintains a Nominating Committee currently
comprised of all five members of the Board of Directors.
All members of the Board of Directors also serve on the Compensation
and Options Committee.
During the fiscal year ended July 31, 1996, the Board of Directors met
on five occasions. During the last fiscal year, no incumbent director, during
the period that he was a director, attended fewer than 75% of the aggregate of
(i) the total number of meetings of the Board of Directors and (ii) the total
number of meetings held by all committees of the Board on which he served.
Compliance With Section 16(a) of the Exchange Act
- -------------------------------------------------
During the fiscal year ended July 31, 1996, there were no reports filed
on an untimely basis.
Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------
(a) Security ownership of certain beneficial owners. As of November 4,
1996, the following persons were known by the Company to be the beneficial
owners of more than 5% of the Company's Common Stock:
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of
Title of Class Beneficial Owner Beneficial Ownership Class (1)
- -------------- ---------------- -------------------- ---------
<S> <C> <C> <C>
No par value Alpha Capital Company 306,104 11.2%
common 1425 Leimert Blvd., Ste. #400 (11)
Oakland, CA 94602
No par value Robert J. Delsol, Director 982,512 35.9%
common 1333 Second Street (2)(4)(7)
Berkeley, CA 94710
</TABLE>
28
<PAGE>
<TABLE>
<S> <C> <C> <C>
No par value John W. Heidt, Chairman of the Board 351,958 12.9%
common 1425 Leimert Blvd., Ste. #400 (2)(4)(8)
Oakland, CA 94602
</TABLE>
(b) Security ownership of management. The stock beneficially owned by
all directors, nominees, and executive officers of the Company as of November 4,
1996, is set forth below:
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of
Title of Class Beneficial Owner Beneficial Ownership Class (1)
- -------------- ---------------- -------------------- ---------
<S> <C> <C> <C>
No par value John R. Behrmann, Director 130,006 4.7%
common Highbourne Place (2)(4)
R.D. #3 Box 296
Dallastown, PA 17313
No par value Bruce T. Davidson, V.P. Marketing/Sales 5,000 .1%
common 6130 N. 31st Ct. (5)
Phoenix, AZ 85016
No par value Robert J. Delsol, Director 982,512 35.9%
common 1333 Second Street (2)(4)(7)
Berkeley, CA 94710
No par value John W. Heidt, Chairman of the Board 351,958 12.9%
common 1425 Leimert Blvd., Ste. #400 (2)(4)(8)
Oakland, CA 94602
No par value Thomas B. Morgan, Director 114,510 4.1%
common 67 East Baffert Drive (2)(4)(9)
Nogales, AZ 85621
No par value John A. Raycraft 39,643 1.4%
common President and Chief Executive Officer (5)
7776 S. Pointe Parkway West, #150
Phoenix, AZ 85044
No par value Robert M. Topol, Director 136,000 4.9%
common 825 Orienta Avenue (2)(4)(10)
Mamaroneck, NY 10543
Officers and directors as 1,465,266 53.6%
a group (11 persons) (3)(6)
</TABLE>
(1) Percentage is calculated on the basis that all director and officer shares
under stock options presently exercisable are deemed outstanding. The total
Common Stock outstanding under this basis was 2,733,410 shares.
(2) A Director.
(3) Includes shares held by officers, directors, and owners of 5% or more, as
community property, in joint tenancy with spouses or having other shared
voting rights.
(4) Includes 20,000 shares which may be acquired within 60 days of the record
date (01/04/97) upon exercise of stock options.
(5) Shares which may be acquired within 60 days of the record date (01/04/97)
upon exercise of stock options.
29
<PAGE>
(6) Includes an additional 11,741 exercisable options held by other officers
for a total of 156,384 shares which may be acquired within 60 days of the
record date (01/04/97) upon exercise of stock options.
(7) Includes 390,722 shares owned by Pacific Steel Casting, a corporation of
which Mr. Delsol is CEO and a major shareholder; with shared voting and
investment power; 137,286 shares owned by Pacific Steel Casting Pension
Plan and 93,143 by Pacific Steel Casting Profit Sharing Plan, of which Mr.
Delsol is a trustee with shared voting and investment power; 23,257 shares
owned by Piece of the Pebble, L.P., of which Mr. Delsol as the general
partner has sole voting and investment power; 12,000 shares owned by
Tri-Pacific, Inc., a personal holding company of which Mr. Delsol as
President has sole voting and investment power; 66,515 shares owned by
Alpha Capital Company, Inc., a corporation in which Mr. Delsol as an owner,
officer, and director, has shared voting and investment power; 239,589
shares held in a fiduciary capacity by Alpha Capital for investor-clients.
Alpha Capital has no voting power over these shares but it does have the
power to dispose of these shares on behalf of others.
(8) Includes 1,200 shares owned by children over which Mr. Heidt has sole
voting and investment power; 66,515 shares owned by Alpha Capital Company,
Inc., a corporation in which Mr. Heidt as a minority owner, officer, and
director, has shared voting and investment power; 239,589 shares held in a
fiduciary capacity by Alpha Capital for investor-clients (Alpha Capital has
no voting power over these shares but it does have the power to dispose of
these shares on behalf of others); and 24,654 shares owned by Pinnacle
Capital Management, L.P., a limited partnership for which Mr. Heidt as
general partner, has sole voting and investment power.
(9) Includes 15,000 shares owned by spouse. Mr. Morgan has no voting or
investment power with regard to these shares.
(10) Includes 28,000 shares owned by spouse and 60,000 owned by children. Mr.
Topol has no voting or investment power with regard to these shares.
(11) A beneficial owner of more than 5% of the Company's Common Stock. Address:
1425 Leimert Boulevard, Suite 400, Oakland, CA 94602. Alpha Capital
Company, Inc. ("Alpha") is a registered investment advisor. Of the 306,104
shares, 239,589 have been acquired by Alpha for the accounts of selected
individuals and institutional investors, who are clients of Alpha. These
shares are held in fiduciary capacity for its investor-clients and were not
acquired with the purpose or effect of changing or influencing control of
FAHC.
EXECUTIVE COMPENSATION
The following table sets forth compensation paid or accrued to each
person who was an executive officer of the Company at any time during the fiscal
year ended July 31, 1996 whose cash compensation from the Company for services
in all capacities during such fiscal year exceeded $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation
===================
<TABLE>
<CAPTION>
Name Other
and Annual
Principal Compen- Options/
Position Year Salary Bonus sation SARS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
John A. Raycraft 1996 $154,800 - 0 - $1,999(1) - 0 -
President/CEO 1995 143,451 32,717 1,999(1) 40,000
1994 129,800 48,367 1,999(1) 21,560
Bruce T. Davidson 1996 92,780 - 0 - 52,500(2) 50,000
V.P. of Marketing and Sales
</TABLE>
(1) Life insurance policy with spouse as beneficiary.
(2) Consulting fees prior to employment.
30
<PAGE>
Option/SAR Grants in Last Fiscal Year
=====================================
Individual Grants
<TABLE>
<CAPTION>
Percent of Total
Options/SARS
Options/ Granted to
SARS Employees in Exercise or Expiration
Name Granted Fiscal Year Base Price Date
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bruce T. Davidson 5,000 8.9% $7.00 11/22/2005
V.P. of Marketing and Sales 45,000 80.4% $6.06 11/22/2006
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
================================================================================
Value of
Number of Unexercised
Unexercised In-the-money
Options/SARS Options/SARS
at FY-End at FY-End
Shares Acquired Exercisable/ Exercisable/
Name on Exercise Value Realized Unexercisable Unexercisable
- --------------------------------------------------------------------------------
None
Directors' Compensation
- -----------------------
Directors who are not employees receive $500 per meeting of the Board of
Directors attended and an additional $200 per meeting for attending any
committee meeting of the Board of Directors of which they are a member.
Nonstatutory options for 20,000 shares each of the Company=s Common Stock
have been granted to directors as follows: One during fiscal year ended July 31,
1994, at $8.00 per share; one during the fiscal year ended July 31, 1993, at
$4.625 per share; two during the fiscal year ended July 31, 1990, at $2.1875 per
share, and one during the fiscal year ended July 31, 1989, at $1.6256 per share.
Certain Relationships and Related Transactions
- ----------------------------------------------
During 1993, the Company made a $101,395 loan to John A. Raycraft,
President and Chief Executive Officer of the Company, in exchange for an
interest bearing note receivable. The agreement provided for quarterly loan
payments amounting to 50% of the profit sharing payment due to the officer, with
payments applied first to accumulated interest due and then to principal, until
paid in full. The note was secured by an insurance policy on the life of the
officer. The balance of the note on August 1, 1994 was $65,525.
During fiscal 1995, the Company loaned the officer an additional $28,000
and agreed to repayment of principal and interest in five annual installments
through August 1, 1999. Other terms of the note receivable remain unchanged. The
balance of the note on July 31, 1996 was $78,741. On August 1, 1996 a repayment
of $18,621 was received from the officer.
31
<PAGE>
PROPOSAL 2
SELECTION OF AUDITORS
The Board of Directors will request that the shareholders ratify its
selection of KPMG Peat Marwick as the Company's independent public accountants
for fiscal year 1997. If the shareholders do not ratify the selection of KPMG
Peat Marwick, another firm of certified public accountants will be selected as
the Company's independent auditors by the Board of Directors.
Representatives of KPMG Peat Marwick will be present at the Annual
Meeting, will have an opportunity to make a statement, and will be available to
respond to appropriate questions.
The Board of Directors recommends a vote FOR Proposal 2.
GENERAL
As of the date of this Proxy Statement, the Board of Directors knows of
no other matter which will come before the meeting. In the event that any other
matter legally comes before the meeting, the persons named in the accompanying
form of Proxy intend to vote all proxies in accordance with their judgment on
such matters.
Shares represented at the Annual Meeting by properly executed and dated
proxies in the accompanying form will be voted and, where the shareholder
specifies by means of the ballot set forth in the form of Proxy a choice with
respect to any matter to be acted upon, the shares will be voted in accordance
with the specifications so made. In the absence of any specification with
respect to Proposal 2, proxies will be voted FOR such Proposal.
The cost of soliciting proxies relating to the Annual Meeting will be
borne by the Company. Directors, officers and regular employees of the Company
may solicit proxies from the larger shareholders, which solicitation may be made
by telephone, telegram or personal interview. In addition, the Company will,
upon the request of brokers, dealers, voting trustees and banks and other
entities that exercise fiduciary powers, and their nominees, who are holders of
record of shares of the Company's Common Stock on the record date referred to
above, pay their reasonable expenses for completing the mailing of copies of
this Notice of Meeting and Proxy Statement, of the enclosed form of Proxy and of
the Company's 1996 Annual Report to the beneficial owners of such shares of
Common Stock.
FIRST AMERICAN HEALTH CONCEPTS, INC.
John W. Heidt
Chairman of the Board
December 12, 1996
32
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 776997
<NAME> First American Health Concepts, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,599,566
<SECURITIES> 2,592,693
<RECEIVABLES> 675,285
<ALLOWANCES> 26,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,419,134
<PP&E> 2,250,060
<DEPRECIATION> 884,845
<TOTAL-ASSETS> 6,737,471
<CURRENT-LIABILITIES> 1,752,805
<BONDS> 0
0
0
<COMMON> 630,306
<OTHER-SE> 4,134,426
<TOTAL-LIABILITY-AND-EQUITY> 6,737,471
<SALES> 0
<TOTAL-REVENUES> 5,678,016
<CGS> 0
<TOTAL-COSTS> 5,296,940
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,086
<INCOME-PRETAX> 589,093
<INCOME-TAX> 230,000
<INCOME-CONTINUING> 359,093
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 359,093
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
