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, 1997 to July 31,
1998.
[ ] 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, 1998 was $7,809,122.
Registrant's Common Stock outstanding at October 22, 1998 was 2,604,736 shares
after deducting 468,102 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 $5,336,476.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on December 11, 1998 are incorporated in Part III as set
forth herein.
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TABLE OF CONTENTS
PART I PAGE
Item 1. Description of Business 3
Item 2. Desciption of Property 6
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 7
Item 6. Management's Discussion and Analysis 7
Item 7. Financial Statements 11
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 11
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act 12
Item 10. Executive Compensation 13
Item 11. Security Ownership of Certain Beneficial Owners and Management 13
Item 12. Certain Relationships and Related Transactions 13
Item 13. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
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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 first offered common stock publicly in
October 1985. FAHC markets and administers vision care programs under the
registered trade names of Eye Care Plan of America(R) and ECPA(R).
In seventeen (17) years, ECPA has grown steadily, developing and
marketing directed and managed vision care programs for businesses and
organizations nationwide. Initially, ECPA's growth came from the development of
a direct access preferred pricing program (ECPA Access) that today is the
nation's largest membership-based vision care savings program. This program is
delivered through a national preferred provider (PPO) network of independent and
retail optometrists, opticians and ophthalmologists. Through this same national
network, ECPA has offered insured and self-funded managed vision care products
(ECPA Select) since 1993.
The expansion from directed vision savings programs to full-benefit
managed vision care required a multi-year investment in infrastructure to
support the delivery of comprehensive benefits and claims administration. With
this infrastructure in place, ECPA now provides paperless vision care with
automated, 24-hour access to benefits and provider information. This past year,
First American Health Concepts, Inc. created a captive reinsurance company,
First American Reinsurance Company, (FARC), that will provide greater
flexibility and profit potential for ECPA's product offerings.
ECPA'S COMPETITIVE ADVANTAGE
ECPA delivers a better value in vision care through a "right-sized,"
accessible provider network that offers a diverse choice of independent and
retail providers as well as an unlimited selection of eyewear materials. ECPA
directs members to a select group of providers in every market, and, with the
prospect of increased patient volume, providers agree to a uniform preferred
pricing schedule that is significantly below retail prices. Three in five
Americans prefer an independent vision care provider. ECPA's network of all
three Os - optometrists, ophthalmologists and opticians is comprised of 61%
independent providers and 39% providers in retail chains.
ECPA's competitive advantage - diverse choice and real value with easy
access to benefits through paperless, automated administration - positions ECPA
as a leader in a growing market for group vision care benefits.
ECPA PRODUCTS
* ECPA ACCESS
ECPA Access is a direct access vision care savings program.
Members are provided a membership card and a list of the 10 closest
providers. In addition, they also may locate a nearby ECPA provider by
calling the toll-free provider locator number on the card. Members
access providers directly and receive significant savings whenever they
or their dependents present their card, regardless of the amount or
frequency of purchases.
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* ECPA SELECT
ECPA Select includes full-benefit insured and self-funded
group vision care. Members receive an ECPA membership card, materials
and a schedule of benefits, including out-of-network benefits, that
varies by the plan design selected. Members call ECPA's toll-free
provider locator line to locate a nearby ECPA provider, and they are
also able to call this same toll-free line at any time to check on
their benefits. Members schedule and access ECPA providers directly.
Members pay only a copayment, if applicable, for scheduled vision care
benefits. After these scheduled benefits are exhausted, members still
have access to ECPA preferred pricing for direct purchases any time
they present their card to any ECPA Provider.
Insured benefits are underwritten by Security Life Insurance
Company of America (founded in 1956, Minnetonka, Minnesota) and The
MEGA Life and Health Insurance Company (founded in 1982, Oklahoma City,
Oklahoma).
A CHANGING MARKET AND GROWING DEMAND
ECPA is able to deliver attractive, flexible and profitable vision care
to businesses large and small at a time when more and more Americans need vision
care and more companies are adding vision care benefits. Sixty (60) percent of
the American population, approximately 160.8 million people, require a vision
correction, according to an optical industry report published by the Jobson
Optical Group in 1998. An aging population means that the percent of Americans
who require a vision correction, for many years a constant proportion of the
U.S. population, is increasing and will continue to increase.
Vision care is becoming more of a mainstream employee benefit. Today
more than 50 percent of large employers (500 + employees) offer a vision benefit
to their employees. While continued growth is expected in the large market
segment, the strongest growth is expected among smaller companies, the largest
and fastest growing segment of the economy. For smaller companies to effectively
compete for talent, they must strive to match the kinds of benefits offered by
larger employers, including ancillary benefits such as vision care.
One of the least expensive employee benefits, vision care was among the
most highly valued by employees in a recent national survey. Many employees are
more likely to visit their vision care provider than their primary care
physician. And, because a low-cost, routine eye exam can detect more than 50
serious medical conditions such as diabetes, many employers are beginning to see
vision care not only as a potential boost to productivity, but also as a
cost-saving wellness benefit.
Healthy vision is everyone's business.
MEETING MARKET DEMAND
ECPA recognizes significant growth potential for vision care among
smaller businesses and has prepared to meet this market challenge. Marketing and
delivering vision care to small businesses presents two primary challenges.
First, a greater number of unit sales are essential to increasing total
membership growth, and as importantly, growth in total membership and unit sales
means a greater number of groups to be set up and administered. While one
solution might be to add staff to handle the increased number of sales and
administrative transactions, this approach would not meet ECPA's commitment to
continual improvement in performance and productivity.
ECPA will manage an increase in sales transactions by utilizing a
broker distribution strategy for ECPA Select sales and outbound telemarketing
for ECPA Access sales. Smaller
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businesses often rely on brokers and agents who know their needs best and can
find the right package of benefits for them. ECPA has installed the appropriate
sales incentives and has established communications and sales support for
successful product distribution. In addition, ECPA has established an outbound
telemarketing function to sell ECPA Access to groups with fewer than 1,000
employees.
An increase in sales transactions also has required fundamental change
in ECPA operations. With an increase in the number of groups to be set up and
administered, ECPA has focused on work process flow analysis in order to
streamline and standardize operational processes and procedures.
EFFECTIVE AND EFFICIENT MANAGED VISION CARE INFORMATION
EPCA is able to manage an increase in sales and administration
transactions because of an efficient infrastructure. A key part of this
infrastructure is ECPA's managed vision care information system, developed and
installed over the past few years. ECPA was the first company nationally with a
vision care application of the Health Systems Design (HSD) Integrated Managed
Care System. This new system, one of the most comprehensive managed care
information systems available, allows ECPA to provide paperless vision care
benefits administration and manage a significant increase in the number of
administrative transactions for group installation without a significant
increase in staffing or other operational costs.
In addition, ECPA's HSD system continues to produce significant
improvements in productivity. This past year, the first full year in which the
HSD system has managed the claims processing function for ECPA, the average
turnaround time for adjudicated claims was reduced by more than half. While this
system allows ECPA to provide automated, paperless vision care benefits, it also
provides the capacity for tracking and manipulating benefits data and providing
enhanced decision support.
ECPA'S PREFERRED PROVIDER NETWORK
Today, ECPA's Preferred Provider Network includes more than 14,000
providers in more than 7,000 locations throughout the United States and Puerto
Rico.
In response to the preferences of current and potential ECPA members,
ECPA made two significant changes to its Provider Network and Provider Fee
Schedule this past year. First, ECPA brought one of the most popular retail
vision chains, LensCrafters, into the ECPA Provider Network. Although most
Americans still prefer an independent vision care provider, LensCrafters adds
another attractive dimension to ECPA's Provider Network. In addition, ECPA
modified its Preferred Pricing Schedule to make it easier for members to
understand. While the amount of savings provided has not changed, the schedule
now is based on retail rather than wholesale prices, making it easier for
members to understand their savings and shop more effectively.
ECPA PROVIDERS AND QUALITY MANAGEMENT
Each ECPA provider is credentialed through independent primary source
verification by an NCQA-certified agency. ECPA providers must agree to 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 ECPA's Provider Manual and Quality Assurance Manual. A nominal credentialing
fee is also required, and each provider agrees to pay a periodic or
transaction-based fee for ECPA's administration of the network.
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Each approved provider agrees to provide vision care according to
ECPA's standards, to charge ECPA members no more than ECPA's preferred pricing
for eyewear and to guarantee the services, care and related materials to the
members' satisfaction.
ECPA maintains a comprehensive provider quality assurance program that
includes recredentialing every two years and provider profiling that tracks
member complaints and grievances, member and provider surveys and random
`mystery patient' responses.
GROUP ADMINISTRATION
ECPA markets its programs only to employers and other sponsors having
access to ten or more 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 subdivisions. Sponsors generally either pay an annual/monthly fee or a
monthly premium for each member enrolled.
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
Atlanta, Boston, Columbus (Ohio), and Mesa (Arizona) with effective rates
ranging from $456 to $895 per month and lease expiration dates through April,
1999.
The Company maintains cash reserves for use in corporate expansion,
financing growth of its business and general corporate purposes. FACH 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
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PART II
FIRST AMERICAN HEALTH CONCEPTS, INC.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Common Trading Range During the
Stock Prices Years Ended July 31,
1998 1997
---------------------------------------------------------------
High Low High Low
--------------- ----------------
Quarter Ended:
October 31 $5 $2 7/8 $5 1/4 $3 7/8
January 31 $5 1/2 $2 7/8 $4 3/4 $2 3/4
April 30 $5 $3 1/4 $5 $1 3/4
July 31 $5 1/4 $3 1/2 $4 $2 1/2
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 5, 1998 there were
approximately 108 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
a 9 percent increase in operating revenues, with a growth from $7,172,000 for
1997 to $7,809,000 for 1998. Products comprising total operating revenues
include non-insured product revenues (ECPA Access) of $4,792,000, insured and
self-funded product revenues (ECPA Select) of $2,064,000 and other incidental
income of $953,000. The 9 percent increase in operating income was achieved
despite a $38,000 decrease in non-insured product revenues, a reflection of
changing market demand for vision care "discount" or savings programs that the
Company has been anticipating for several years. Market research continues to
show an increasing demand for full-benefit, managed vision care programs,
especially among smaller businesses, and the Company's growth in managed vision
care sales supports this trend. Although the Company's insured and self-funded
products (ECPA Select) still represent a smaller portion of the Company's
business, they are the fastest growing business segment. The Company has
steadily added to its capacity to support the delivery of managed vision care,
and is well positioned for continued growth. Since the introduction of its
managed vision care programs in 1993, the Company has become an industry-leading
provider of managed vision care. The Company anticipates that revenues from its
managed vision care programs (insured and self-funded) will continue to be the
source of growth in the future. The Company does not experience significant
seasonal fluctuations. While the non-insured product membership is renewed
annually, most fees are remitted and recognized
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as revenue monthly. The insured product and self-funded products are calculated
and billed monthly and recognized accordingly.
Inflation is not expected to have a material effect on revenues or
profits.
Total operating expenses increased 7 percent, from $6,860,000 in 1997
to $7,366,000 in 1998. However, total operating expenses decreased as a
percentage of total operating revenue from 96% in 1997 to 94% in 1998. While
increases in operating expenses in recent years have reflected an investment in
the infrastructure necessary to support managed vision care, this year's
increase is in line with the increase in operating revenues and indicates that
much of the infrastructure investment is complete.
Sales and marketing expenses were $2,005,000 in 1997 compared to
$1,843,000 in 1998. This 8 percent decrease was the result of a more focused
sales and marketing strategy as well as the productivity enhancements from the
standardization of processes and program offerings. Although sales and marketing
expenses were down this past year, the Company added sales staff and will
continue to add sales staff as it grows through a more focused distribution
strategy.
Direct membership expenses decreased 3 percent, from $2,841,000 for
1997 compared to $2,756,000 for 1998, with the completion of a multi-year
investment in an advanced vision care information system. This comprehensive,
multi-year transition has facilitated paperless, automated benefits
administration and has been a significant investment in the Company's future as
a leading managed vision care provider. Among the many benefits of this new
system, lower membership unit costs this past year reflect the result of
bringing the claims processing function in-house for the first full year. With
the HSD managed vision care information system in place, the costs of providing
members with membership materials, maintaining a national service center and
administering claims processing are expected to increase more slowly than
increases in operating revenues in the future.
General and administrative expenses were $1,647,000 in 1997 compared to
$2,189,000 in 1998. Recent growth required a renovation and expansion of office
space this past year. The 33 percent increase in general and administrative
expenses were the result of these one-time costs as well as some administrative
costs of ECPA of California, FAHC's California subsidiary, that has applied for
licensure as an HMO in California.
Depreciation increased from $306,000 for 1997 to $519,000 for 1998. A
significant portion of this increase was due to the HSD managed vision care
information system being in operation for its first full year.
Interest income was $194,000 in 1997 compared to $163,000 in 1998. The
decrease in interest income was due to lower average invested balances during
the year ended July 31, 1998. The Company used internal funds to finance capital
expenditures and information systems development.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $2,608,000 and the current ratio was 2.2 to 1 at
July 31, 1998. Cash and cash equivalents and marketable investment securities
totaled $2,345,000.
The Company's cash and cash equivalents increased $795,000 from the
1997 balance to $1,343,000 at July 31, 1998. The Company's principal source of
funds for the year ended July 31, 1998 was cash flow from investing activities.
Management anticipates moderate expansion in 1999 through capital
additions and infrastructure expenditures to accommodate growth as it occurs.
The Company believes its ongoing cash flow will support all anticipated capital
expenditures and operating expenses.
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YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits (rather than four) to define the applicable year. Computer
programs that have time-sensitive software may not recognize dates beginning in
the year 2000, which could result in miscalculations or system failures.
The Company formed a Year 2000 Task Force over two years ago to perform
a comprehensive review of its core business applications (i.e. those systems
that the Company is dependent upon for the conduct of daily business
operations). The review was performed in conjunction with planning efforts to
enhance the Company's existing infrastructure and to support the Company's
addition of full-benefit insured and self-funded group vision care products.
From this effort, a managed vision care software system was purchased to support
the new products and to replace the software system utilized for the vision care
savings product. In addition, other information systems were identified for
upgrade. In no case was a system replaced or purchased solely because of Year
2000 issues. Thus, the Company does not believe the costs of these software
replacements are specifically Year 2000 related.
The Company is currently waiting for improvements, related to Year 2000
issues, from its software vendors. These improvements are scheduled to arrive,
be tested and implemented by the first half of 1999. The Company believes that
it will not incur additional material costs in the implementation of the
improvements. All personal computers and related equipment have already been
reviewed and upgraded (if necessary) for any imbedded software that was not Year
2000 capable.
The Year 2000 Task Force also assessed additional Year 2000 issues such
as non-information technology systems (i.e. telephone systems). Some
improvements and/or upgrades were identified as a result of the review. As with
the information technology systems, the review was made in conjunction with a
formal planning process to enhance infrastructure. All upgrades will be
completed by November 1998. The Task Force is also reviewing the Company's
relationships with vendors, financial institutions and other third parties to
identify possible Year 2000 issues.
The Company is aware that it could be adversely affected by Year 2000
issues in that purchasing patterns of customers or potential customers may be
affected by Year 2000 issues as companies expense significant resources to
correct their current systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase services such as those offered by
the Company, which could have an adverse effect on the Company's business,
operating results and financial condition. Given the information available at
this time, management believes that this issue should not have a material
adverse effect on the Company's liquidity, its results of operations or its
customers.
The Company has not at this time established a formal Year 2000
contingency plan but will consider and, if necessary, address doing so as part
of its Year 2000 Task Force activities. The Company does maintain contingency
plans designed to address other potential business interruptions that may be
usable in this situation.
CONTRACTUAL ARRANGEMENTS
The Company's insured line of business is underwritten by Security Life
Insurance Company of America (SLICA) and The MEGA Life and Health Insurance
Company (MEGA). According to the management agreement with SLICA (dated April
15, 1992), SLICA is responsible to "process, investigate, settle and pay all
claims arising," including claims underwritten by the MEGA Life and Health
Insurance Company. The Company assumes both premium and risk of loss on the
policies under the terms of a Reinsurance Agreement between First American
Reinsurance Company (FARC) and SLICA (dated January 1, 1998). The risk of loss
is based upon the schedule of benefits attached to each policy. The revenue and
expenses associated with this agreement were not material for the year ending
July 31, 1998, and were therefore not shown as a separate income statement and
balance sheet component.
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LICENSURE ISSUES
The Company markets and administers insured vision care under its own
licenses or the license of its insurance carrier in each state where insured
vision care is provided. To meet legal and regulatory requirements, a new
subsidiary, First American Administrators, Inc. (FAA) was created to provide
these services. During this past year, both FAHC and FAA obtained various
third-party administrator licenses in markets where they do business. However,
due to rigorous regulatory requirements in some markets and competing
operational priorities, this process was not completed in all markets. It is
anticipated that this licensing process will be complete in 1999.
The primary licensing activity involving FAHC's subsidiary, ECPA of
California, resulted in the filing of an application for licensure as a
Specialized Knox-Keene Health Care Services Organization in the State of
California. Upon review and approval of this application by the California
Department of Corporations, ECPA of California, together with FAHC, will provide
a complete complement of vision care services in the State of California.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 129, DISCLOSURE OF
INFORMATION ABOUT CAPITAL STRUCTURE, to consolidate existing disclosure
requirements. This new standard contains no change in disclosure requirements
for the Company. It was effective for the Company for the quarter ending January
31, 1998.
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE
INCOME, to establish standards for reporting and display of comprehensive income
(all changes in equity during a period except those resulting from investments
by and distributions to owners) and its components in financial statements. This
new standard, which will be effective for the Company for the fiscal year ending
July 31, 1999, is not currently anticipated to have a significant impact on the
Company's financial statements based on the current financial structure and
operations of the Company.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION, to establish standards for reporting
information about operating segments in annual financial statements, selected
information about operating segments in interim financial reports and
disclosures about products and services, geographic areas and major customers.
This new standard, which will be effective for the Company for the fiscal year
ending July 31, 1999, will require the Company to report financial information
on the basis that is used internally for evaluating segment performance and
deciding how to allocate resources to segments, which is currently anticipated
to result in more detailed information in the notes to the Company's financial
statements than is currently required and provided.
In February 1998, the FASB issued SFAS No. 132, EMPLOYERS' DISCLOSURES
ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS, which revises requirements
concerning employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans. This
new standard, which will be effective for the Company for the fiscal year ending
July 31, 1999, is not currently anticipated to have a significant impact of the
Company's financial statements based on the current financial structure and
operations of the Company.
In April 1998, the AICPA Accounting Standards Executive Committee
issued SOP 98-5, REPORTING THE COSTS OF START-UP ACTIVITIES, which requires that
costs incurred during start-up activities, including organization costs, be
expensed as incurred. Application of the SOP should be as of the beginning of
the fiscal year in which the SOP is first adopted, and it should be reported as
a cumulative effect of a change in accounting principle. This new standard,
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which will be effective for the Company for the fiscal year ending July 31, 2000
is being evaluated by management to determine its applicability, and effect, on
future periods.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which establishes accounting and reporting
standards for derivative instruments and for and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and that these instruments be measured at fair
value. This new standard, which will be effective for the Company for the fiscal
year ending July 31, 2000, is not currently anticipated to have a significant
impact on the Company's financial statements based on the current financial
structure and operations of the Company.
There are certain matters affecting accounting and disclosure, which
have been pronounced by authoritative accounting bodies other than the FASB.
Management has evaluated and implemented those currently required, and is
evaluating the applicability and impact of those pronouncements that are not yet
effective.
ITEM 7. FINANCIAL STATEMENTS
The Company's financial statements and notes thereto are included in
this report beginning at page 15.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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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.
Current Title and Positions
Executive Officer Age at 7/31/98 Held During the Last Five Years
- ----------------- -------------- -------------------------------
John A. Raycraft 51 Chief Executive Officer since May 1993; President
since 1992; Executive Vice President from 1991 to
1992.
Laura J. Arnold 37 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, Inc. prior to
joining the Company.
Deborah L. Brady 41 Vice President of Administration since June 1997;
Membership Accounting Manager for FHP Health Care
from 1996 to 1997, Operations Manager for CIGNA
HealthCare from 1995 to 1996, Director & Manager of
Enrollment Processing for PCS Health Systems, Inc.
from 1993 to 1995.
James D. Hyman 53 Vice President of Marketing and Sales since August
1998; a Principal & Vice President of Managed Care
for Physicians Eyecare Network, Inc. from 1993 to
1996, Vice President of Marketing for Davis Vision,
Inc. from 1987 to 1993.
Bruce T. Davidson 66 Vice President of Corporate Development since August
1998; Vice President of Marketing and Sales since
November 1995; an independent marketing and sales
consultant prior to joining the Company.
Carolyn Hall 58 Secretary and Treasurer since 1988; Secretary since
1987.
Margaret Eardley 29 Vice President of Finance and Chief Financial Officer
since October 1998; Vice President of Finance for
Cedar Hill Assurance Company from 1997 to 1998, Vice
President & Treasurer, Assistant Vice President of
Finance and Finance Manager for Republic Western
Insurance Company from 1991 to 1997.
Craig Santilli 50 Vice President of Information Systems since September
1995; Director, Applications Development for
Samaritan Health System from 1993 to 1995 and
Director, Information Management for Hartford
Insurance Group from 1983 to 1993.
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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
The Company has an outstanding note receivable due from the President
and Chief Executive Officer. The note is secured by an insurance policy on the
life of the officer. The terms of the note require annual installments through
August 1, 1999. The balance of the note on July 31, 1998 was $45,525.
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
Exhibit Number Description Method of Filing
- -------------- ----------- ----------------
3-A Articles of Incorporation of the Incorporated by reference to
Company as amended Exhibit 3-A of 1990 10-K.
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
27 Financial Data Schedule Exhibit Filed herewith
28 Notice of Meeting and Proxy Incorporated by reference to
Statement the Company's 1998 Definitive
Notice and Proxy Statement.
(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.
13
<PAGE>
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 23, 1998
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.
Signature Title Date
--------- ----- ----
/s/ John A. Raycraft President and 10/23/98
- ----------------------- Chief Executive Officer
(John A. Raycraft)
/s/ Brian Kay Controller 10/23/98
- -----------------------
(Brian Kay
/s/ John R. Behrmann Chairman of the Board 10/23/98
- -----------------------
(John R. Behrmann)
/s/ Robert J. Delsol Director 10/23/98
- -----------------------
Robert J. Delsol
/s/ John W. Heidt Vice Chairman of the Board 10/23/98
- -----------------------
(John W. Heidt)
/s/ Thomas B. Morgan Director 10/23/98
- -----------------------
(Thomas B. Morgan)
/s/ James J. Meenaghan Director 10/23/98
- -----------------------
(James J. Meenaghan)
/s/ Robert M. Topol Director 10/23/98
- -----------------------
(Robert M. Topol)
14
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
July 31, 1998
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
First American Health Concepts, Inc.:
We have audited the accompanying consolidated balance sheet of First American
Health Concepts, Inc. and subsidiaries as of July 31, 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the two-year period ended July 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First American
Health Concepts, Inc. and subsidiaries as of July 31, 1998 and the results of
their operations and their cash flows for each of the years in the two-year
period ended July 31, 1998 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Phoenix, Arizona
October 9, 1998
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
July 31, 1998
ASSETS
Current assets:
Cash and cash equivalents $ 1,342,759
Marketable investment securities (note 2) 1,002,158
Member fees receivable, net of allowance of $37,870 1,386,446
Note receivable-- officer (note 3) 45,525
Deferred costs 246,318
Prepaid expenses 126,270
Income taxes receivable 249,902
Other current assets 443,848
-----------
Total current assets 4,843,226
-----------
Property and equipment:
Office furniture and fixtures 316,553
Computers and office equipment 3,245,154
Leasehold improvements 197,750
-----------
3,759,457
Less accumulated depreciation and amortization (1,759,087)
-----------
Net property and equipment 2,000,370
-----------
Deferred costs 692,814
-----------
Total assets $ 7,536,410
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 207,659
Capital lease obligation, current (note 4) 9,631
Bank loan, current (note 7) 84,400
Accrued expenses 154,953
Deferred tax liability 504,155
Deferred revenue 1,274,427
-----------
Total current liabilities 2,235,225
Bank loan, long-term (note 7) 21,100
-----------
Total liabilities 2,256,325
-----------
Shareholders' equity (notes 6 and 7):
Common stock, no par value; authorized, 8,000,000
shares; issued 3,032,838 shares 681,546
Additional paid-in capital 2,554,348
Retained earnings 3,623,820
Unearned ESOP shares (note 7) (95,945)
Net unrealized gain on marketable investment
securities (note 2) 2,048
-----------
6,765,817
Treasury stock, at cost, 468,102 shares (1,485,732)
-----------
Total shareholders' equity 5,280,085
-----------
Commitments and contingencies (notes 4, 7, 9 and 10)
Total liabilities and shareholders' equity $ 7,536,410
===========
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended July 31, 1998 and 1997
1998 1997
----------- -----------
Operating revenues $ 7,809,122 7,171,909
Operating expenses:
Sales and marketing expenses 1,842,518 2,005,360
Direct membership expenses 2,755,751 2,840,645
General and administrative expenses 2,188,694 1,646,825
Depreciation 519,319 305,602
ESOP charges (note 7) 59,951 61,388
----------- -----------
Total operating expenses 7,366,233 6,859,820
----------- -----------
Operating income 442,889 312,089
----------- -----------
Non-operating income (expense):
Interest income 163,164 194,157
Interest expense (16,286) (25,885)
----------- -----------
Total non-operating income 146,878 168,272
----------- -----------
Income before income taxes 589,767 480,361
Income taxes (note 8) 239,049 184,000
----------- -----------
Net income $ 350,718 296,361
=========== ===========
Net income per share - basic $ 0.14 0.12
=========== ===========
Net income per share - diluted $ 0.14 0.11
=========== ===========
Weighted average common and equivalent
shares outstanding - basic 2,559,750 2,513,492
=========== ===========
Weighted average common and equivalent
shares outstanding - diluted 2,559,750 2,577,868
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
July 31, 1998 and 1997
Outstanding Additional
Common Common Paid-in Retained
Shares Stock Capital Earnings
------ ----- ------- --------
Balances at July 31, 1996 2,612,002 $630,306 2,560,544 2,976,741
Stock options exercised 17,734 24,990 -- --
Net unrealized gain (loss)
on marketable invest-
ment securities -- -- -- --
Income tax benefit arising
from employee stock
option plan -- -- 14,931 --
Purchase of treasury stock (85,000) -- -- --
Cost of ESOP shares
released -- -- (23,252) --
Net income -- -- -- 296,361
---------- -------- ---------- ---------
Balances at July 31, 1997 2,544,736 655,296 2,552,223 3,273,102
Stock options exercised 20,000 26,250 -- --
Net unrealized gain (loss)
on marketable invest-
ment securities -- -- -- --
Income tax benefit arising
from employee stock
option plan -- -- 21,393 --
Purchase of treasury stock -- -- -- --
Cost of ESOP shares
released -- -- (19,268) --
Net income -- -- -- 350,718
---------- -------- ---------- ---------
Balances at July 31, 1998 2,564,736 $681,546 2,554,348 3,623,820
========== ======== ========== =========
<PAGE>
Net Unrealized
Gain (Loss) on
Unearned Marketable Total
ESOP Investment Treasury Shareholders'
Shares Securities Stock Equity
------ ---------- ----- ------
Balances at July 31, 1996 (259,804) (1,613) (1,141,442) 4,764,732
Stock options exercised -- -- -- 24,990
Net unrealized gain (loss)
on marketable invest-
ment securities -- 6,536 -- 6,536
Income tax benefit arising
from employee stock
option plan -- -- -- 14,931
Purchase of treasury stock -- -- (344,290) (344,290)
Cost of ESOP shares
released 84,640 -- -- 61,388
Net income -- -- -- 296,361
-------- ------ ---------- ----------
Balances at July 31, 1997 (175,164) 4,923 (1,485,732) 4,824,648
Stock options exercised -- -- -- 26,250
Net unrealized gain (loss)
on marketable invest-
ment securities -- (2,875) -- (2,875)
Income tax benefit arising
from employee stock
option plan -- -- -- 21,393
Purchase of treasury stock -- -- -- --
Cost of ESOP shares
released 79,219 -- -- 59,951
Net income -- -- -- 350,718
-------- ------ ---------- ----------
Balances at July 31, 1998 (95,945) 2,048 (1,485,732) 5,280,085
======== ====== ========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended July 31, 1998 and 1997
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 350,718 296,361
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 519,319 305,602
Amortization of deferred system costs -- 49,321
Income tax benefit arising from stock option plan 21,393 14,931
ESOP shares committed to be released 59,951 61,388
Provision for losses on accounts receivable 37,870 --
Increase in deferred taxes 406,155 78,000
Changes in assets and liabilities:
Increase in member fees receivable (298,589) (476,215)
Increase in deferred costs (707,864) (7,296)
Increase in prepaid expenses and other
current assets (277,941) (97,173)
(Increase) in income taxes receivable (127,061) (90,034)
Increase (decrease) in accounts payable 23,184 (31,875)
Decrease in accrued expenses (37,243) (60,145)
Increase (decrease) in deferred revenue (111,327) 222,806
---------- ----------
Net cash provided by (used in)
operating activities (141,435) 265,671
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (430,394) (1,078,816)
Purchases of marketable investment securities (380,709) (1,245,459)
Redemptions/sales of marketable investment
securities 1,809,112 1,411,345
Decrease in note receivable-- officer 16,999 16,220
---------- ----------
Net cash provided by (used in)
investing activities 1,015,008 (896,710)
---------- ----------
Cash flows from financing activities:
Repayments of bank loan (84,400) (84,400)
Repayments of capital lease obligation (20,350) (17,141)
Proceeds from exercised stock options 26,250 24,990
Purchases of treasury stock -- (344,290)
---------- ----------
Net cash used in financing activities (78,500) (420,841)
---------- ----------
Net increase (decrease) in cash
and cash equivalents 795,073 (1,051,880)
Cash and cash equivalents, beginning of year 547,686 1,599,566
---------- ----------
Cash and cash equivalents, end of year $1,342,759 547,686
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ -- 180,949
========== ==========
Cash paid during the year for interest $ 13,418 25,885
========== ==========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING ACTIVITIES:
Unrealized gain (loss) on marketable
investment securities $ (2,875) 6,536
========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 31, 1998 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION AND 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 Programs
are calculated and billed on a monthly basis and recognized accordingly.
The premium for these policies is remitted directly to the insurance
carrier. For policies incepting prior to January 1, 1998, the insurance
carrier remits fees to the Company on a monthly basis. The Company
created a captive reinsurance company, First American Reinsurance Company
(FARC) in January 1998. Therefore, for policies incepting after January
1, 1998, the insurance carrier remits a quota share portion of the
premium to the Company on a monthly basis.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
the Company and its three wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
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.
MARKETABLE INVESTMENT SECURITIES
Marketable investment securities at July 31, 1998 consist of U.S.
Treasury securities. Under the provisions of Statement of Financial
Accounting Standards (SFAS) 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.
1
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
DEFERRED COSTS
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.
Non-current deferred costs relate primarily to direct and incremental
costs associated with activities in key geographical locations, and which
are capitalized until the commencement of operations, at which time they
are charged to operations.
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. Costs of the integrated
managed care information system are amortized using the straight-line
method over a seven-year period.
NET INCOME PER SHARE
The Company adopted Statement of Accounting Standards No. 128 "Earnings
per Share" (SFAS 128) during 1998. The Company's net income per share for
the prior period was not materially effected by adoption of SFAS 128. In
accordance with SFAS 128, basic net income per share is computed by
dividing net income, after deducting preferred stock dividends
requirements (if any), by the weighted average number of shares of common
stock outstanding.
Diluted net income per share reflects the maximum dilution that would
result after giving effect to dilutive stock options and warrants and to
the assumed conversion of all dilutive convertible securities and stock.
Weighted average outstanding shares do not include shares held by the
Employee Stock Ownership Plan at July 31, 1998 and 1997. Shares held by
the ESOP are not considered outstanding for net income per share
calculations until the shares are released to the employees accounts.
STOCK OPTION PLAN
The Company accounts for its stock option plan in accordance with the
provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
which permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to apply the provisions
of APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related operations and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
2
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
INCOME TAXES
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.
IMPAIRMENT OF LONG-LIVED ASSETS
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates of financial instruments 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 judgment 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, 1998, the amounts that will actually be realized or paid at
settlement or maturity of the instruments could be significantly
different. The Company does not trade in derivative financial
instruments.
Management believes that the recorded amount of current assets and
current liabilities approximate fair value because of the short maturity
of these instruments. The recorded balance of long-term debt approximates
fair value, as the terms of the debt are similar to rates currently
offered to the Company for similar debt instruments.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities, disclosure of contingent assets and
liabilities, and the reporting of revenues and expenses to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
RECLASSIFICATION
Certain accounts related to prior years have been reclassified to conform
to current year presentation.
3
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) MARKETABLE INVESTMENT SECURITIES
At July 31, 1998, the amortized cost, net of unrealized holding gains and
the fair value of available-for-sale securities by major security type
were as follows. There were no realized gains or losses included in
income in 1998.
NET UNREALIZED
HOLDING
COST GAINS FAIR VALUE
---------- ---------- ----------
Equity Securities $ 71,250 -- 71,250
U.S. Treasury Securities 928,860 2,048 930,908
---------- ---------- ----------
$1,000,110 2,048 1,002,158
========== ========== ==========
Although there is a concentration of credit risk related to the U.S.
Treasuries, management does not consider these investments to be high
risk.
All marketable investment securities are scheduled to mature prior to
July 31, 1999.
(3) NOTE RECEIVABLE - OFFICER
The Company has an outstanding note receivable due from the President and
Chief Executive Officer. The note is secured by an insurance policy on
the life of the officer. The terms of the note require annual
installments through August 1, 1999. The balance of the note on July 31,
1998 was $45,525.
(4) 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, 1998, office
equipment included $82,052 and accumulated amortization included $73,847
related to the leased equipment.
4
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Following is a schedule by year of future minimum lease payments:
YEAR ENDING JULY 31, 1998
Future minimum lease payments $ 11,202
Less amount representing interest 1,571
------
Principal balance 9,631
Less current portion (9,631)
------
Long-term portion $ --
======
The Company also operates from leased premises under operating leases.
Rental expense related to these leases was $289,712 in 1998 and $240,499
in 1997.
Future minimum lease payments under noncancelable operating leases as of
July 31, 1998 are as follows:
YEARS ENDING JULY 31,
1999 $ 262,827
2000 299,216
2001 312,610
2002 320,984
2003 53,730
----------
$ 1,249,367
==========
(5) NET INCOME PER SHARE
Options for 64,375 shares of common stock were included in diluted EPS
for 1997. Options to purchase 281,902 shares of common stock at an
average price of $4.19 were outstanding at July 31, 1998 but were not
included in the computation of diluted EPS because the options' exercise
price was greater than the average market price of the common shares.
(6) STOCK OPTIONS
The Company stock option plan (the "Plan") which covered all employees,
officers and directors of the Company and provided for the granting of
incentive and non-qualified stock options expired on December 31, 1997,
however, under the Plan, all outstanding options that were granted prior
to the Plan expiration continue in full force and effect until exercised
or expired under the provisions of the Plan as if the Plan had remained
in full force and effect. The Company is in the process of adopting a new
Executives Incentive Plan which is subject to shareholder approval.
5
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Options were 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.
As previously discussed, the Company applies APB Opinion No. 25 and
related interpretations in accounting for the Plan. Accordingly, no
compensation cost has been recognized for the Plan.
Had compensation costs for the Company's plan been determined consistent
with FASB Statement No. 123, the Company's net income and net income per
share would have been the same as those reported.
At July 31, 1998, no stock options were available for grant under this
plan and 179,069 stock options were exercisable. Activity related to
stock options is summarized, as follows:
<TABLE>
<CAPTION>
INCENTIVE STOCK OPTIONS NONQUALIFIED STOCK OPTIONS
------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTION OPTION
NUMBER PRICE PER NUMBER PRICE PER
DATE ACTIVITY OF SHARES SHARE OF SHARES SHARE
- ------------- ----------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
July 31, 1996 Outstanding 62,102 $ 4.71 275,000 $ 4.30
Granted -- -- -- --
Exercised (2,734) 1.71 (15,000) 1.35
Expired (11,233) 5.52 (15,000) 6.06
---------- --------- --------- ---------
July 31, 1997 Outstanding 48,135 4.69 245,000 4.37
Granted -- -- 17,500 3.31
Exercised -- -- (20,000) 1.31
Expired (8,733) 5.60 -- --
---------- --------- --------- ---------
July 31, 1998 Outstanding 39,402 $ 4.83 242,500 $ 4.09
========== ========= ========= =========
Exercisable 39,069 140,000
========== =========
</TABLE>
The Company realizes an income tax benefit from the exercise or early
disposition of certain stock options. For financial reporting purposes,
the tax effect of this deduction is accounted for an increase in
additional paid-in capital, rather than as a reduction of income tax
expense. A tax benefit of approximately $21,400 was recognized for the
year ended July 31, 1998.
6
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains an employee stock ownership plan (ESOP), 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, 1998, the fair market value of the 16,716 unearned ESOP shares was
$73,133.
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 $59,951 for 1998 and $61,388 for 1997.
Minimum remaining principal payments required to be made during fiscal
years ending July 31 are $84,400 in 1999 and $21,100 in 2000.
(8) INCOME TAXES
Components of income tax expense for the years ended July 31, 1998 and
1997 include:
CURRENT DEFERRED TOTAL
---------- ---------- ----------
1998:
Federal $ (56,616) 245,565 188,948
State (15,012) 65,112 50,100
---------- ---------- ----------
$ (71,628) 310,677 239,049
========== ========== ==========
1997:
Federal $ 84,000 62,000 146,000
State 22,000 16,000 38,000
---------- ---------- ----------
$ 106,000 78,000 184,000
========== ========== ==========
7
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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:
1998 1997
-------- --------
Computed "expected" tax expense $200,521 163,000
Increase (reduction) in income taxes resulting from:
State income taxes, net of Federal benefit 33,066 25,000
Other items 5,462 (4,000)
-------- --------
$239,049 184,000
======== ========
The temporary differences that give rise to deferred tax assets and
liabilities at July 31, 1998 include:
Deferred tax assets:
Capital loss carryforward $ 169,403
Accrued expenses 18,060
---------
Total gross deferred tax assets 187,463
Less valuation allowance --
---------
Net deferred tax asset 187,463
---------
Deferred tax liabilities:
Deferred costs (274,895)
Accelerated depreciation (416,723)
---------
Total gross deferred tax liabilities (691,618)
---------
Net deferred tax liability $(504,155)
=========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Accordingly, the Company
has determined that a valuation allowance is not necessary and there was
no change in the valuation allowance during the year ended July 31, 1998.
8
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) BUSINESS SEGMENTS AND MAJOR CUSTOMERS
The Company's operations are in one business segment throughout the
United States - the development and marketing of vision care
cost-containment programs. One customer accounted for 4% of revenues
during fiscal 1998. During fiscal 1997, one customer accounted for 10.5%
of revenues.
The Company operates in a very competitive market. The Company's success
is dependent upon the ability of its marketing group, and its network of
agents, to identify and contract with businesses and organizations
nationwide, and to administer its networks. Changes in the insurance and
health care industries, including the regulation thereof by federal and
state agencies, may significantly affect management's estimates of the
Company's performance.
The allowance for doubtful accounts is based on the creditworthiness of
the Company's customers as well as consideration for general economic
conditions. Consequently, an adverse change in those factors could affect
the Company's estimate of its bad debts.
(10) COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims and litigation arising out of
the ordinary course of business. In the opinion of management, the
Company has adequate legal defenses and the outcome of those matters will
not materially effect the Company's financial position.
Certain agreements with customer companies and networks are cancelable at
the option of those parties with written notice which varies from 30 to
90 days. Management generally attempts to renegotiate any such canceled
agreements. Management believes that there is very little likelihood that
there would be cancellations sufficient to have a material adverse effect
on the Company's results of operations or financial condition.
Management has developed a plan to address the Year 2000 problem and all
computer systems are in the process of conversion to be Year 2000
compliant. The Year 2000 problem is the result of computer programs being
written using two digits rather than four digits to define the applicable
year. The total cost of the project is not material and the Company is
expensing all associated costs as they are incurred.
9
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC.
SCHEDULE OF EXHIBITS
- --------------------------------------------------------------------------------
27 Financial Data Schedule
28 Notice of Meeting and Proxy Incorporated by reference to
Statement the Company's 1998 Definitive
Notice and Proxy Statement.
- --------------------------------------------------------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JULY 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,342,759
<SECURITIES> 1,002,158
<RECEIVABLES> 1,424,316
<ALLOWANCES> 37,870
<INVENTORY> 0
<CURRENT-ASSETS> 4,843,226
<PP&E> 3,759,457
<DEPRECIATION> 1,759,087
<TOTAL-ASSETS> 7,536,410
<CURRENT-LIABILITIES> 2,235,225
<BONDS> 0
0
0
<COMMON> 681,546
<OTHER-SE> 4,598,539
<TOTAL-LIABILITY-AND-EQUITY> 7,536,410
<SALES> 0
<TOTAL-REVENUES> 7,809,122
<CGS> 0
<TOTAL-COSTS> 7,366,233
<OTHER-EXPENSES> (163,164)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,286
<INCOME-PRETAX> 589,767
<INCOME-TAX> 239,049
<INCOME-CONTINUING> 589,767
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 350,718
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
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