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 July 31, 2000.
[ ] 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 Securities 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, 2000 was $12,133,034.
Registrant's Common Stock outstanding at November 22, 2000 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 AMEX on such date
was approximately $4,659,515.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on January 24, 2001 are incorporated in Part III as
set forth herein.
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TABLE OF CONTENTS
PART I PAGE
----
Item 1. Description of Business 2
Item 2. Description of Property 3
Item 3. Legal Proceedings 3
Item 4. Submission of Matters to a Vote of Security Holders 3
Part II
Item 5. Market for Common Equity and Related Stockholder Matters 4
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 4
Item 7. Financial Statements 8
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 8
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act 10
Item 10. Executive Compensation 10
Item 11. Security Ownership of Certain Beneficial Owners and Management 10
Item 12. Certain Relationships and Related Transactions 11
Item 13. Exhibits and Reports on Form 8-K 11
Signatures 12
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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).
Initially, FAHC's growth came from the development of a direct access
preferred pricing program. This program is delivered through a national
preferred provider ("PPO") network of independent and retail optometrists,
opticians and ophthalmologists. The most significant growth in the past three
years has occurred in the self-funded products and the insured products that are
underwritten by primary insurance carriers. Prior to January 1998, the Company
received administrative fee revenue in association with the insured revenue. In
January 1998, FAHC formed a captive reinsurance company, First American
Reinsurance Company ("FARC") in order to share in the underwriting profits of
the primary carrier.
In December 1999, the California subsidiary Eye Care Plan of America -
California, Inc. ("ECPA-CA") received licensure approval from the state. ECPA-CA
allows the Company to operate as an HMO in the number one vision care market in
the country. ECPA-CA operates as a specialized Knox-Keene Health Care Service
Organization.
BUSINESS OF ISSUER
FAHC markets and administers three related products under its d.b.a. ECPA;
a direct access preferred pricing program, an insured program underwritten by
various insurance carriers and a self funded program.
The direct access preferred pricing program membership accesses providers
directly and obtains savings on products and services based upon fee schedule
agreements. The insured and self-funded programs are similar. Members access
providers directly and pay only a co-payment (if applicable) for scheduled
vision care benefits. The Company performs the claims administration for the
underwriting carrier and interacts directly with the providers. Insured benefits
are underwritten by Security Life Insurance Company of America (founded in
1956), The MEGA Life and Health Insurance Company (founded in 1982), Columbian
Life Insurance Company (founded in 1990), Columbian Mutual Life Insurance
(founded in 1882), and Starmount Life Insurance Company (founded in 1983).
The preferred pricing, insured and self-funded products are distributed
both directly and through a broker/agent network 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.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company leases an aggregate of 18,247 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 $28,292 per month
with an original expiration date of September 2003, subject to renewal options.
Sales offices are located in California, Colorado, Georgia, Massachusetts, Ohio,
Pennsylvania and Texas with effective rates ranging from $400 to $1,800 per
month and lease expiration dates through March 2002.
The Company maintains cash reserves for use in corporate expansion,
financing growth of its business and general corporate purposes. FAHC invests
excess cash in interest-bearing securities including U.S. Treasuries, generally
with maturities of less than one year. The Company also invests in equity
securities consisting of preferred stock. 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
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 condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
3
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PART II
FIRST AMERICAN HEALTH CONCEPTS, INC.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK PRICES
TRADING RANGE DURING THE YEARS ENDED JULY 31,
---------------------------------------------
2000 1999
---------------- --------------
HIGH LOW HIGH LOW
QUARTER ENDED:
October 31 $3.938 $2.438 $4.375 $3.5
January 31 $4.375 $2.375 $4.25 $3.5
April 30 $4.375 $2.125 $5 $2.875
July 31 $3 $2.5 $4.25 $2.75
Beginning August 4, 1999, the Company's common stock is traded on the
American Stock Exchange (symbol: FAH) in order to take advantage of the AMEX
specialist system. From February 27, 1995 to August 3, 1999, the Company's
common stock 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 November 22, 2000 there were approximately 100 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 OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results
of Operations for the years ended July 31, 2000 and July 31, 1999 presented
below reflects certain restatements to the Company's previously reported results
of operations for the year ended July 31, 1999. See Note 11 of the notes to
consolidated financial statements for discussions of these restatements.
ACCOUNTING SYSTEMS AND CONTROLS
As a result of the appointment of new senior executive officers by the
Board and their review of the Company's books and records, current management
concluded that there had been a break down in the internal accounting controls
and the related audit function. Accordingly, they immediately undertook steps to
strengthen and maintain the adequacy of their internal accounting systems and
controls and replaced the former auditors, KPMG. Since then, management has
adopted a comprehensive plan to improve, implement and maintain reliable
accounting systems and controls which address the reportable conditions
identified.
RESULTS OF OPERATIONS
Loss before change in accounting principle for the year ended July 31, 2000
was $10,000, or $0.00 per share basic and diluted, compared to a net loss,
before change in accounting principle, of $125,000, or $0.05 per share basic and
diluted, for the year ended July 31, 1999. The loss for the year ended July 31,
2000 was further increased by $159,000, net of taxes of $95,000, or $0.06 per
share basic and diluted, due to a change in accounting principle resulting from
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the Company's adoption of Statement of Position 98-5 which requires that costs
incurred during start-up activities, including organization costs, be expensed
as incurred. After giving effect for the change in accounting principle the net
loss for the year ended July 31, 2000 was $169,000, or $0.06 per share basic and
diluted, compared to a net loss of $125,000, or $0.05 per share basic and
diluted for the year ended July 31, 1999.
First American Health Concepts, Inc. ("FAHC" or the "Company") reported a
$4,192,000 or 53% increase in operating revenues, with a growth from $7,941,000
for 1999 to $12,133,000 for 2000. Non-insured products decreased $216,000 or 5%
from $3,969,000 in 1999 to $3,753,000 in 2000. This decrease is a reflection of
changing market demand for vision care preferred pricing or "discount" programs
that the Company has been anticipating for several years. Insured and
self-funded product revenues increased $2,698,000 or 77% from $3,487,000 in 1999
to $6,185,000 in 2000. The significant increase in insured and self-funded
revenue was due to a significant increase in the volume of insured customers
marketed through its captive reinsurance subsidiary. Other revenues increased
$1,710,000 or 353% from $485,000 in 1999 to $2,195,000 in 2000. The significant
increase in other revenues was due to various administrative and marketing
services provided to the Company's carriers through its captive reinsurance
subsidiary, as well as an increase in new self-funded clients. Market research
continues to show an increasing demand for full-benefit, managed vision care
programs. 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. This is the reason that FARC was formed in January 1998. FARC
assumes a portion of the insured premium from the underwriting carrier through a
Quota Share agreement. The premium assumed under this agreement during fiscal
2000 was $4,695,000 of the insured and self-funded revenues discussed above. The
premium assumed during fiscal 1999 was $1,353,000.
The Company does not experience significant seasonal fluctuations. While
the non-insured product membership is renewed annually, most fees are remitted
and recognized as revenue monthly. The insured product and self-funded products
are calculated and billed monthly and recognized accordingly. The Company's
largest growth in membership, and resultant revenues, normally occurs in its
second and third quarters due to the significant number of companies whose
benefits are coordinated with the calendar year.
Total operating expenses increased $3,975,000 or 48% from $8,291,000 in
1999 to $12,266,000 in 2000. The majority of the increase in total operating
expenses is due to reinsurance expense which increases proportionately with
reinsurance revenues. Total operating expense decreased as a percentage of total
operating revenue from 104% in 1999 to 101% in 2000, reflective of an investment
made in prior years in the infrastructure necessary to support managed vision
care. Overall operating expenses as a percentage of operating revenues are
expected to continue to decrease as the Company continues to increase its volume
of activity through its reinsurance subsidiary.
Sales and marketing expenses increased $58,000 or 4% from $1,385,000 in
1999 to $1,443,000 in 2000. The majority of the increase is attributable to
approximately $58,000 of product development expense incurred during fiscal 2000
as a result of new product enhancements and was further increased by consulting
costs and the opening of five new sales offices. This increase was offset by
lower telemarketing expenses resulting from an elimination of telemarketing
sales and staff due to our broker driven strategy.
Direct membership expenses increased $526,000 or 25% from $2,109,000 in
1999 to $2,635,000 in 2000. The majority of the increase of direct membership
expenses is due to increased staffing and contract labor which increased by
approximately $395,000 from 1999 and costs associated with supplying vision plan
members with membership materials, maintaining a national provider network and
administering claims processing functions which further increased expenses by
approximately $172,000. These cost increases were offset by lower costs of
consulting, travel and entertainment, employee training -nd subscriptions
primarily due to continued efforts by management to cut cost.
5
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General and administrative expenses ("G&A") increased $507,000 or 17% from
$2,936,000 in 1999 to $3,443,000 in 2000. G&A increased by $166,000 as a result
of opening five new sales offices. The remainder of the increase in G&A during
2000 is primarily due to costs incurred for information systems contract labor
and software support necessary for various fiscal year 2000 hardware, software
systems upgrades, normal rent escalations of existing office leases, higher
accounting and audit fees.
Reinsurance expense increased $2,865,000 or 226% from $1,268,000 in 1999 to
$4,133,000 in 2000. Reinsurance expense is the claims, marketing and
administration expense associated with the assumed reinsurance premium. FARC was
created in January 1998 and only assumed insured business incepting during or
after January 1998, all other insured revenue was fee related and only included
overhead expense. All new insured business written in 1999, plus all business
written January 1, 1998 and later, was subject to the Quota Share agreement in
fiscal 1999. Furthermore, beginning July 1, 1999 all business written prior to
January 1998 is also subject to the Quota Share agreement. Therefore, the
increase in reinsurance expense corresponds to the increase in reinsurance
revenue. Reinsurance expense as a percentage of reinsurance revenue was 94% in
1999 compared to 88% in 2000. Reinsurance expense as a percentage of reinsurance
revenue is expected to continue to decrease in the future as the volume of
insured product sales increases.
Interest income was $146,000 in 1999 compared to $113,000 in 2000. The
decrease is due to lower average invested balances.
Income tax benefit decreased $76,000 or 89% from $86,000 in 1999 to $10,000
in 2000. The decrease is attributable to the lower net loss from operations
CHANGE IN ACCOUNTING PRINCIPLE
The Company adopted Statement of Position ("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. This new
standard, which was effective for the Company for the fiscal year ending July
31, 2000, was evaluated by management and any relevant costs were expensed
during the quarter ending October 31, 1999. The Company was previously deferring
start-up costs associated with ECPA-CA. Accordingly, the Company recorded a
$159,000 change in accounting principle (after reduction for income taxes of
$95,000) which is included in the net loss for the year ended July 31, 2000.
This change in accounting principle resulted in an increase of loss per share of
$0.06 per share basic and diluted.
SUBSTANTIAL PROFESSIONAL SERVICES EXPENSES
The Company has incurred substantial costs in connection with the process
of reviewing, reconciling and restating its books and records, the investigation
of its prior accounting practices and preparation of its audited financial
statements for the years ended July 31, 2000 and July 31, 1999. Included in
these expenses are the costs of the PKF audits, legal costs, and costs of
retaining outside accounting assistance to assist management in reviewing and
reconciling its books and records of which $50,000 has been accrued as of July
31, 2000. Management expects that an additional $120,000 to $150,000 of
professional service costs will be incurred to complete the fiscal year 2000
review which will be expensed during the first two quarters of fiscal 2001.
6
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LIQUIDITY AND CAPITAL RESOURCES
Working capital increased 10% from $2,122,000 and a current ratio of 2.17
to 1 at July 31, 1999 to working capital of $2,343,000 and the current ratio was
2.15 to 1 at July 31, 2000. Cash and cash equivalents and marketable investment
securities decreased $352,000 or 19% from $1,866,000 at July 31, 1999 to
$1,514,000 at July 31, 2000.
The Company's cash and cash equivalents decreased $341,000 or 21% from
$1,626,000 at July 31, 1999 to $1,285,000 at July 31, 2000. The majority of the
Company's use of funds for the year ended July 31, 2000 was the purchase of new
computer hardware and software and necessary system support. Cash flow from
operating activities was $94,000 for the year ended July 31, 2000 compared to
cash used in operating activities of $(161,000) for the year ended July 31,
1999. A majority of cash flows during the year ended July 31, 1999 was derived
from the redemption of certain marketable securities of approximately $1
million, the proceeds of which were used to acquire property and equipment,
purchase additional marketable securities and to continue funding the start-up
operations of ECPA-CA while it was awaiting licensure approval from the state of
California.
Management anticipates moderate capital expansion in 2001 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.
CONTRACTUAL ARRANGEMENTS
The Company's insured line of business is underwritten by Security Life
Insurance Company of America ("SLICA"), The MEGA Life and Health Insurance
Company ("MEGA"), Columbian Life, Columbian Mutual, and Starmount Life.
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 FARC and SLICA (dated January 1, 1998). The risk
of loss is based upon the schedule of benefits attached to each policy. Under
the terms of the agreement, SLICA retains adequate cash reserves on a funds
withheld basis.
LICENSURE ISSUES
The Company markets and administers insured vision care under its own
licenses, or the license of other insurance carriers, in each state where
insured vision care is provided. To meet legal and regulatory requirements, a
subsidiary, First American Administrators, Inc. ("FAA") was created to provide
these services. Both FAHC and FAA hold various third-party administrator
licenses in markets where they do business. The Company holds 33 licenses at the
present time, 11 states do not require a license. The Company anticipates
completing the licensing process in the remaining states in 2001 for the
remaining 7 licenses.
The primary licensing activity involving FAHC's subsidiary, ECPA-CA
resulted in the filing of an application for licensure as a Specialized
Knox-Keene Health Care Services Organization in the State of California. The
license was approved on December 30, 1999.
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RECENT ACCOUNTING PRONOUNCEMENTS
DERIVATIVES - In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities that require an entity to recognize all derivatives as an asset or
liability measured at fair value. Depending on the intended use of the
derivatives, changes in its fair value will be reported in the period of change
as either a component of earnings or a component of other comprehensive income.
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE
EFFECTIVE DATE OF FASB STATEMENT NO. 133" ("SFAS No. 137"). SFAS No. 137 delays
the effective date for implementation of SFAS No. 133 for one year making SFAS
No. 133 effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000. Retroactive application to periods prior to adoption is not
allowed. The Company has not quantified the impact of adoption on its financial
statements or the date it intends to adopt. Earlier application of SFAS No. 133
is encouraged, but not prior to the beginning of any fiscal quarter that begins
after issuance of SFAS No. 137.
There are certain matters affecting accounting and disclosure, which have
been pronounced by the Financial Accounting Standards Board and other
authoritative accounting bodies. Management has evaluated and implemented those
currently required, and is evaluating the applicability and impact of those
pronouncements that are not yet effective.
FORWARD-LOOKING STATEMENTS
This Report on Form 10-KSB contains forward-looking statements. The words
"believe," "expect," "anticipate," and "project," and similar expressions
identify forward-looking statements, which speak only as of the date the
statement was made. Such forward-looking statements are within the meaning of
that term in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements may
include, but are not limited to, projections of revenues, income, or loss,
capital expenditures, plans for future operations, financing needs or plans, the
impact of inflation and plans relating to the foregoing.
ITEM 7. FINANCIAL STATEMENTS
The Company's financial statements and notes thereto are included in this
report beginning at page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
During the fiscal year ending July 31, 2000 Company management and the firm
of KPMG LLP ("KPMG") engaged in discussions regarding the Company's present size
and scope of operations and mutually agreed that the Company may better be
served by a different firm of independent auditors. Prior to Company management
making a change, KPMG resigned as independent auditors on July 24, 2000. On
September 7, 2000, the Company engaged Pannell Kerr Forster of Texas, P.C.
("PKF") to replace KPMG as its independent auditors. On July 31, 2000, a Form
8-K was filed in connection with the resignation of KPMG which included a letter
delivered by KPMG regarding its resignation as the Company's independent
auditors. On September 12, 2000, a Form 8-K was filed in connection with its
engagement of PKF to replace KPMG. The complete text of each of the Form 8-Ks
and their respective exhibits are incorporated herein by reference. In
connection with a review, by new management, of past accounting practices and
the conduct of the fiscal year 2000 audit, and subsequent to filing of the
restated 1999 Form 10-KSB/A on June 20, 2000, the Company discovered that
further adjustments were required to correct the previously restated financial
statements. The Company then engaged PKF to reaudit the year ended July 31,
1999, which resulted in a further restatement of the finacial statements of the
Company as of and for the fiscal year ended July 31, 1999. See Note 11 to the
consolidated financial statements for further discussion.
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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 to the Company's 2000 Definitive Notice of Meeting and Proxy
Statement.
AGE AT CURRENT TITLE AND POSITIONS HELD
EXECUTIVE OFFICER 7/31/00 DURING THE LAST FIVE YEARS
----------------- ------- --------------------------
James D. Hyman 55 President and Chief Executive Officer since April
2000; Vice President of Marketing and Sales from May
1997 to April 2000; 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.
David M. Bungert 50 Vice President of Sales and Marketing since May 2000;
formerly Vice President, Special Markets Marketing
1997 to May 2000; Vice President, Group Division 1992
to 1997; Director, Group Division 1989 to 1992 with
Security Life Insurance Company of America.
James A. Gresko 47 Vice President of Finance and Chief Financial Officer
since April 2000; Executive Vice President/CFO of
Acordia of California from October 1997 to April 2000;
Chief Financial Officer of Acordia of Arizona from
October 1993 to October 1997.
Carolyn Hall 60 Secretary and Treasurer since 1988; Secretary since
1987.
Timothy MacDonald 42 Vice President of Administration since August, 2000;
Director of Customer Satisfaction August 1995 to
August 2000.
Glenn M. Sheley 60 Vice President of Corporate Development since October
2000; Director of Provider Relations for Eye Care Plan
of America - California, Inc. from May 2000 to October
2000; President and CEO of National Health Plans from
June 1995 to June 1998; Chief Operating Officer of PPO
Alliance from March 1993 to February 1995.
ITEM 10. EXECUTIVE COMPENSATION
The information called for by this Item is incorporated by reference to the
Company's 2000 Definitive Notice of Meeting and Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item is incorporated by reference to the
Company's 2000 Definitive Notice of Meeting and Proxy Statement.
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Additional information called for by this Item is incorporated by reference
to the Company's 2000 Definitive Notice of Meeting and Proxy Statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
------ ----------- ----------------
3-A Articles of Incorporation Incorporated by reference to Exhibit
of the Company as amended 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
11.1 Earnings Per Share Included herein
27.1 Financial Data Schedule Included herein
28 Notice of Meeting and Incorporated by reference to the
Proxy Statement Company's 2000 Definitive Notice and
Proxy Statement
(b) Reports on Form 8-K
The Company filed a Form 8-K on July 31, 2000 as a result of the
resignation of KPMG L.L.P, the Company's Independent Public
Accountants. The Company filed a Form 8-K on September 12, 2000 to
announce the appointment of Pannell Kerr Forster of Texas, P.C. as its
Independent Public Accountants. The complete text of each of the Form
8-Ks and their respective exhibits are incorporated herein by
reference.
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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: December 21, 2000 By: /s/ James D. Hyman
-------------------------------------
James D. Hyman
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/ James D. Hyman President and Chief Executive Officer 12/21/00
---------------------------
(James D. Hyman)
/s/ James A. Gresko Vice President Finance and Chief 12/21/00
--------------------------- Financial Officer
(James A. Gresko)
/s/ John R. Behrmann Chairman of the Board 12/21/00
---------------------------
(John R. Behrmann)
/s/ Robert J. Delsol Director 12/21/00
---------------------------
Robert J. Delsol
/s/ Thomas B. Morgan Director 12/21/00
---------------------------
(Thomas B. Morgan)
/s/ Robert M. Topol Director 12/21/00
---------------------------
(Robert M. Topol)
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FIRST AMERICAN HEALTH CONCEPTS, INC.
AND SUBSIDIARIES
INDEX
Index to Consolidated Financial Statements
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements:
Independent Auditors' Report............................................F-1
Consolidated Balance Sheets as of July 31, 2000 and 1999................F-2
Consolidated Statements of Operations for the Years Ended
July 31, 2000 and 1999..................................................F-3
Consolidated Statements of Shareholders' Equity for the Years Ended
July 31, 2000 and 1999..................................................F-4
Consolidated Statements of Cash Flows for the Years Ended
July 31, 2000 and 1999..................................................F-5
Notes to Consolidated Financial Statements..............................F-6
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
NONE
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
First American Health Concepts, Inc.
We have audited the accompanying consolidated balance sheets of First American
Health Concepts, Inc. and subsidiaries as of July 31, 2000 and 1999, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years then ended. 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, 2000 and 1999 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed further in Note 11, the consolidated financial statements have been
restated to reflect the correction of certain accounting errors.
/s/ Pannell Kerr Forster of Texas, P.C.
Houston, Texas
December 21, 2000
F-1
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31,
-----------------------------
2000 1999
----------- -----------
(RESTATED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,284,896 $ 1,625,874
Marketable investment securities 229,000 239,875
Member fees receivable, net of an allowance
of $345,292 and $230,245, respectively 1,966,013 1,515,262
Note receivable-officer -- 28,794
Deferred costs 139,591 79,428
Prepaid expenses 98,789 149,950
Income taxes receivable 75,543 61,576
Deferred income taxes 148,782 67,511
Other current assets 436,268 175,766
----------- -----------
Total current assets 4,378,882 3,944,036
----------- -----------
Property and equipment:
Office furniture and fixtures 325,372 318,986
Computers and office equipment 3,979,162 3,543,137
Leasehold improvements 201,083 201,083
----------- -----------
4,505,617 4,063,206
Less accumulated depreciation and amortization (2,893,160) (2,300,889)
----------- -----------
Net property and equipment 1,612,457 1,762,317
----------- -----------
Intangible assets, net 768,249 1,011,305
----------- -----------
Total assets $ 6,759,588 $ 6,717,658
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 180,768 $ 60,925
Claims payable 312,400 261,000
Bank loan, current -- 21,100
Accrued expenses 335,838 355,197
Deferred revenue 1,206,433 1,123,405
----------- -----------
Total current liabilities 2,035,439 1,821,627
----------- -----------
Commitments and contingencies
Shareholders' equity:
Common stock, no par value; 8,000,000 shares
authorized; 3,072,838 shares issued 757,296 757,296
Additional paid-in capital 2,550,795 2,565,067
Retained earnings 2,923,562 3,092,857
Unearned ESOP shares -- (22,560)
Net unrealized loss on marketable investment securities (21,772) (10,897)
Treasury stock, at cost, 468,102 shares (1,485,732) (1,485,732)
----------- -----------
Total shareholders' equity 4,724,149 4,896,031
----------- -----------
Total liabilities and shareholders' equity $ 6,759,588 $ 6,717,658
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
-------------------------------
2000 1999
------------ ------------
(RESTATED)
<S> <C> <C>
Operating revenues:
Fee revenues $ 7,437,965 $ 6,587,662
Reinsurance revenues 4,695,069 1,353,118
------------ ------------
Total operating revenues 12,133,034 7,940,780
Operating expenses:
Sales and marketing expenses 1,442,664 1,385,081
Direct membership expenses 2,635,497 2,109,175
General and administrative expenses 3,443,038 2,936,027
Reinsurance expense 4,132,754 1,267,837
Depreciation and amortization 603,640 541,802
ESOP charges 8,288 50,770
------------ ------------
Total 12,265,881 8,290,692
------------ ------------
Operating loss (132,847) (349,912)
------------ ------------
Non-operating income (expense):
Interest income 113,354 146,170
Interest expense (458) (6,725)
------------ ------------
Total non-operating income 112,896 139,445
------------ ------------
Loss before income tax benefit and
change in accounting principle (19,951) (210,467)
Income tax benefit 9,552 85,946
------------ ------------
Loss before change in accounting principle (10,399) (124,521)
Change in accounting principle, net of tax benefit of $95,337 (158,896) --
------------ ------------
Net loss $ (169,295) $ (124,521)
============ ============
Basic and diluted net loss per share:
Loss before change in accounting principle $ -- $ (0.05)
Change in accounting principle (0.06) --
------------ ------------
Basic and diluted net loss per share $ (0.06) $ (0.05)
============ ============
Basic and diluted weighted average common
and equivalent shares outstanding 2,604,736 2,598,270
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
JULY 31, 2000 AND 1999
(RESTATED)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
OUTSTANDING ADDITIONAL UNEARNED ON MARKETABLE TOTAL
COMMON COMMON PAID-IN RETAINED ESOP INVESTMENT TREASURY SHAREHOLDERS'
SHARES STOCK CAPITAL EARNINGS SHARES SECURITIES STOCK EQUITY
------ ----- ------- -------- ------ ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at July 31, 1998 2,564,736 $681,546 $ 2,554,348 $ 3,460,907 $(95,945) $ 2,048 $(1,485,732) $ 5,117,172
Prior period effect of
restatement -- -- -- (243,529) -- -- -- (243,529)
--------- -------- ----------- ----------- -------- -------- ----------- -----------
Restated balances at
July 31, 1998 2,564,736 681,546 2,554,348 3,217,378 (95,945) 2,048 (1,485,732) 4,873,643
Stock options exercised 40,000 75,750 -- -- -- -- -- 75,750
Income tax benefit arising
from employee stock option
plan -- -- 33,333 -- -- -- -- 33,333
Cost of ESOP shares
released -- -- (22,614) -- 73,385 -- -- 50,771
Comprehensive loss:
Net loss -- -- -- (124,521) -- -- -- (124,521)
Net unrealized loss on
marketable investment
securities -- -- -- -- -- (12,945) -- (12,945)
-----------
Comprehensive loss -- -- -- -- -- -- -- (137,466)
--------- -------- ----------- ----------- -------- -------- ----------- -----------
Balances at July 31, 1999 2,604,736 757,296 2,565,067 3,092,857 (22,560) (10,897) (1,485,732) 4,896,031
Cost of ESOP shares
released -- -- (14,272) -- 22,560 -- -- 8,288
Comprehensive loss:
Net loss -- -- -- (169,295) -- -- -- (169,295)
Net unrealized loss on
marketable investment
securities -- -- -- -- -- (10,875) -- (10,875)
-----------
Comprehensive loss -- -- -- -- -- -- -- (180,170)
--------- -------- ----------- ----------- -------- -------- ----------- -----------
Balances at July 31, 2000 2,604,736 $757,296 $ 2,550,795 $ 2,923,562 $ -- $(21,772) $(1,485,732) $ 4,724,149
========= ======== =========== =========== ======== ======== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
-----------------------------
2000 1999
----------- -----------
(RESTATED)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (169,295) $ (124,521)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Change in accounting principle 158,896 --
Depreciation and amortization 603,640 541,802
Income tax benefit arising from stock option plan -- 33,333
ESOP shares committed to be released 8,288 50,771
Provision for losses on accounts receivable 115,047 83,145
Increase in deferred taxes 2,889 (91,368)
Changes in assets and liabilities:
Member fees receivable (566,603) (349,472)
Deferred costs (71,532) (298,403)
Prepaid expenses and other current assets (208,537) 57,955
Income taxes receivable (13,967) (152,384)
Accounts payable 119,844 (146,735)
Claims payable 51,400 261,000
Accrued expenses (19,359) 124,975
Deferred revenue 83,028 (151,022)
----------- -----------
Net cash provided by (used in) operating activities 93,739 (160,924)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (442,411) (303,749)
Purchases of marketable investment securities -- (250,772)
Redemptions/sales of marketable investment securities -- 1,000,110
Note receivable-officer 28,794 16,731
----------- -----------
Net cash provided by (used in) investing activities (413,617) 462,320
----------- -----------
Cash flows from financing activities:
Repayments of bank loan (21,100) (84,400)
Repayments of capital lease obligation -- (9,631)
Proceeds from exercised stock options -- 75,750
----------- -----------
Net cash used in financing activities (21,100) (18,281)
----------- -----------
Net increase (decrease) in cash and cash equivalents (340,978) 283,115
Cash and cash equivalents, beginning of year 1,625,874 1,342,759
----------- -----------
Cash and cash equivalents, end of year $ 1,284,896 $ 1,625,874
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ -- $ 152,740
=========== ===========
Cash paid during the year for interest $ 458 $ 4,554
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES:
Unrealized loss on marketable investment securities $ (10,875) $ (12,945)
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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. Beginning July 1, 1999 all business written
prior to January 1998 is also subject to the quota share agreement.
PRINCIPLES OF CONSOLIDATION AND BASIS FOR PRESENTATION
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. As discussed in Note 11, the Company restated its
consolidated financial statements for fiscal year 1999. Similarly, amounts
included within the footnotes for fiscal 1999 have also been restated to
conform with that presentation. Additionally, Certain prior year amounts
have been reclassified to conform to current year presentation.
CHANGE IN ACCOUNTING PRINCIPLE
The Company adopted Statement of Position ("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. This new standard, which was effective for the Company for the
fiscal year ending July 31, 2000, was evaluated by management and any
relevant costs was expensed during the quarter ending October 31, 1999.
The Company was previously deferring start-up costs associated with the
Eye Care Plan of America-California, Inc. ("ECPA-CA"). Accordingly, the
Company recorded a $158,896 change in accounting principle (after
reduction for income taxes of $95,377) which is included in the net loss
for the year ended July 31, 2000. This change in accounting principle
resulted in an increase of loss per share of $0.06 per share basic and
diluted. ECPA-CA operates as a Specialized Knox-Keene Health Care Service
Organization having received its licensure in the State of California in
December 1999.
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.
F-6
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 2000 consist of preferred
stock securities. Under the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 115, "ACCOUNTING FOR CERTAIN INVESTMENTS
IN DEBT AND EQUITY SECURITIES" ("SFAS No. 115"), the Company classifies
its equity 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.
INTANGIBLE ASSETS
Intangible assets consist of costs associated with ECPA-CA's preparation
and application for a Specialized Knox-Keene Health Care Services
Organization license with the State of California This license was
necessary in order to market and administer vision care products and
services in the State of California. The cost of this license is being
amortized to expense on a straight-line basis over 40 years.
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.
EARNINGS (LOSS) PER SHARE
The Company accounts for its earnings (loss) per share in accordance with
Statement of Financial Accounting Standards No. 128, "EARNINGS PER SHARE,"
("SFAS No. 128") which establishes the requirements for presenting
earnings per share ("EPS"). SFAS No. 128 requires the presentation of
"basic" and "diluted" EPS on the face of the income statement. Basic
earnings (loss) per common share amounts are calculated using the average
number of common shares outstanding during each period. Diluted earnings
(loss) per share assumes the exercise of all stock options having exercise
prices less than the average market price of the common stock using the
treasury stock method. During the years ended July 31, 2000 and 1999, the
Company reported a net loss, thus the effects of stock options are
antidilutive.
Weighted average outstanding shares do not include shares held by the
Employee Stock Ownership Plan at July 31, 2000 and 1999. Shares held by
the ESOP are not considered outstanding for net income (loss) per share
calculations until the shares are released to the employees' accounts.
F-7
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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"
("SFAS No. 123"). SFAS No. 123 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" ("APB No. 25"), 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
No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
INCOME TAXES
The Company accounts for income taxes using an asset and liability
approach for accounting for income taxes. Under this approach, deferred
tax assets and liabilities are recognized based on anticipated future tax
consequences, using currently enacted tax laws, attributable to
differences between financial statement carrying amounts of assets and
liabilities and their respective tax bases (see Note 8).
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" ("SFAS No. 123"), 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. At July 31, 2000 and July 31, 1999, there was no impairment.
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, 2000,
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 term nature of
these instruments.
CLAIMS PAYABLE
Claims payable consist of estimated claims relating to insured events that
have occurred but have not been reported by the insured as of the date of
financial statements.
F-8
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
RECENT ACCOUNTING PRONOUNCEMENTS
DERIVATIVES - In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133, "ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS No. 133"). SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities that require an entity to recognize all
derivatives as an asset or liability measured at fair value. Depending on
the intended use of the derivatives, changes in its fair value will be
reported in the period of change as either a component of earnings or a
component of other comprehensive income.
In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -
DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133" ("SFAS No.
137"). SFAS No. 137 delays the effective date for implementation of SFAS
No. 133 for one year making SFAS No. 133 effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. Retroactive application
to periods prior to adoption is not allowed. The Company has not
quantified the impact of adoption on its financial statements or the date
it intends to adopt. Earlier application of SFAS No. 133 is encouraged,
but not prior to the beginning of any fiscal quarter that begins after
issuance of SFAS No. 137.
There are certain matters affecting accounting and disclosure, which have
been pronounced by the Financial Accounting Standards Board and other
authoritative accounting bodies. Management has evaluated and implemented
those currently required, and is evaluating the applicability and impact
of those pronouncements that are not yet effective.
(2) MARKETABLE INVESTMENT SECURITIES
At July 31, 2000, the actual cost, net of unrealized holding losses and
the fair value of available-for-sale securities were as follows. There
were no material realized gains or losses included in income in 2000 and
1999.
2000 1999
--------- ---------
Equity securities, at cost $ 250,772 $ 250,772
Net unrealized holding loss (21,772) (10,897)
--------- ---------
Equity securities, at fair value $ 229,000 $ 239,875
========= =========
(3) NOTE RECEIVABLE - OFFICER
The Company had an outstanding note receivable due from the former
President and Chief Executive Officer. The note was secured by an
insurance policy on the life of the officer. The terms of the note
required annual installments through August 1, 1999. The July 31, 1999
outstanding balance of $28,794 was fully repaid during the first quarter
of fiscal year 2000.
F-9
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) LEASE OBLIGATIONS
The Company operates from leased premises under operating leases. Rental
expense related to these leases was $378,871 in 2000 and $299,175 in 1999.
Future minimum lease payments under noncancellable operating leases as of
July 31, 2000 are as follows:
YEARS ENDING JULY 31,
---------------------
2001 $377,505
2002 355,584
2003 77,922
--------
$811,011
========
(5) STOCK OPTIONS
The Company maintains a non-qualified stock option plan (the "Plan") which
covers all employees, officers, executives, and directors of, and
consultants and advisors to the Company and provides for the granting of
non-qualified stock options.
The Company has reserved 1,000,000 shares of common stock for issuance
upon exercise of stock options granted under the Plan.
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 five
years.
The Company's previous stock option 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.
As previously discussed, the Company applies APB 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 loss and net loss per share would have been the same as
those reported.
F-10
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) STOCK OPTIONS (CONTINUED)
At July 31, 2000, 730,598 stock options were available for grant under
this Plan and 186,902 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> <C>
July 31, 1998 Outstanding 34,402 $4.83 247,500 $4.09
Granted -- -- 27,500 4.97
Exercised -- -- (40,000) 1.91
Expired (5,000) 6.00 (50,000) 6.15
-------- ----- -------- -----
July 31, 1999 Outstanding 29,402 3.60 185,000 4.81
Granted -- -- 55,000 3.50
Exercised -- -- -- --
Expired -- -- -- --
-------- ----- -------- -----
July 31, 2000 Outstanding 29,402 $3.60 240,000 $4.51
======== ===== ======== =====
Exercisable 29,402 $3.60 157,500 $4.51
======== ===== ======== =====
</TABLE>
The Company realizes an income tax benefit from the exercise or ea rly
disposition of certain stock options. For financial reporting purposes,
the tax effect of this deduction is accounted for as an increase in
additional paid-in capital, rather than as a reduction of income tax
expense. A tax benefit of $33,333 was recognized for the year ended July
31, 1999.
(6) 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 ESOP is designed to invest primarily in Company stock exclusively for
the benefit of eligible employees of the Company. Eligible employees
become participants in the ESOP upon completion of one year of service, as
defined by the ESOP plan agreement. 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 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. On November 15, 1999 this
borrowing was completely repaid and the final 3,220 shares of common stock
were released by the bank and transferred to the ESOP plan. The loan
agreement required quarterly payments of principal and interest which were
paid from the Company's contributions to the ESOP. As the principal amount
F-11
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 $8,288 and $50,771 for the
years ended July 31, 2000 and 1999, respectively.
7) EMPLOYEE BENEFIT PLAN
The Company has a qualified 401(k) plan (defined contribution plan). The
plan covers substantially all employees who have completed at least three
months of service and attained age 18. Subject to limits imposed by
Internal Revenue Service regulations and other options retained by the
Company affecting participant contribution, participants may voluntarily
contribute a percentage of their annual wages not to exceed limits
established by the Tax Reform Act of 1986. Participants are immediately
vested in the amount of their direct contribution. The Company does not
contribute to the plan.
(8) INCOME TAXES
Components of income tax benefit (expense) for the years ended July 31,
2000 and 1999 are as follows:
CURRENT DEFERRED TOTAL
------- -------- -----
2000:
Federal $ 10,846 $ (2,519) $ 8,327
State 1,595 (370) 1,225
-------- -------- --------
$ 12,441 $ (2,889) $ 9,552
======== ======== ========
1999:
Federal $ (4,727) $ 73,835 $ 69,108
State (695) 17,533 16,838
-------- -------- --------
$ (5,422) $ 91,368 $ 85,946
======== ======== ========
Actual tax benefit (expense) differs from the "expected" tax benefit
(computed by applying the applicable U.S. Federal corporate tax rate of
34% to loss before income tax benefit and change in accounting principle)
as follows:
2000 1999
-------- --------
Computed "expected" tax benefit $ 6,783 $ 71,559
Increase (reduction) in income tax benefit
resulting from:
Effect of permanent items (13,217) (18,279)
State income taxes, net of federal benefit 1,225 16,838
Other 14,761 15,828
-------- --------
$ 9,552 $ 85,946
======== ========
F-12
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) INCOME TAXES (CONTINUED)
The temporary differences that give rise to deferred tax assets and
liabilities at July 31, 2000 and 1999 are as follows:
2000 1999
--------- ---------
Deferred tax assets:
Bad debt reserve $ 116,439 $ 89,796
Accrued expenses 223,588 184,201
Intangible assets 57,655 71,803
Other 4,906 4,906
--------- ---------
Total gross deferred tax assets 402,588 350,706
--------- ---------
Deferred tax liabilities:
Deferred costs (204,035) (209,529)
Accelerated depreciation (24,413) (19,382)
Prepaid expenses (25,358) (54,284)
--------- ---------
Total gross deferred tax liabilities (253,806) (283,195)
--------- ---------
Net deferred tax asset $ 148,782 $ 67,511
========= =========
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. Despite incurring losses in
recent years, the Company has determined that a valuation allowance is not
necessary.
During the year ended July 31, 2000 the Company was advised of the
preliminary results of an examination by the Internal Revenue Service
("IRS") of tax years 1996 and 1997. The Company is vigorously contesting
the results of this examination but has elected to reflect the preliminary
IRS findings in its fiscal years 2000 and 1999 financial statements. The
impact of the IRS examination has resulted in a reclassification of
amounts previously recorded as deferred tax liabilities to current tax
liabilities. Management believes that the final outcome of this IRS
examination will not have a materially adverse affect on the Company's
results of operations.
(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 5% and 4% of operating revenues
during fiscal 2000 and 1999, respectively.
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.
F-13
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 affect the Company's financial condition.
Certain agreements with customer companies and networks are cancelable at
the option of those -arties 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 affect
on the Company's results of operations or financial condition.
(11) RESTATEMENT
On June 20, 2000, the Company filed its restated fiscal 1999 annual report
on Form 10-KSB/A which included its consolidated financial statements
covering fiscal years 1999 and 1998 to correct for certain accounting
entries, a number of which were considered at the time of prior audits.
Subsequent to filing of the restated 1999 Form 10-KSB/A, the Company
discovered that additional adjustments were required to correct the
previously restated financial statements. These additional adjustments
consist of several items. The principal reasons and significant effects of
the adjustments to the accompanying consolidated financial statements from
amounts originally reported in the 1999 annual report on Form 10-KSB are
summarized as follows:
ORIGINAL RESTATEMENTS OF FISCAL 1999 FORM 10-KSB
During 2000, subsequent to the initial filing of the Company's 1999 annual
report on form 10-KSB, several accounting issues were identified that
required adjustment. The Company restated its 1999 annual report on Form
10-KSB/A on June 20, 2000 to reflect those accounting adjustments. These
1999 restatement adjustments are summarized as follows:
UNRECORDED CLAIMS RESERVE
In January 1998, the Company formed a captive reinsurance company with
operations commencing in early 1999. The Company determined that it had
failed to accurately accrue a liability for "incurred but not reported"
insured claims in the period in which they were incurred. Accordingly,
fiscal year 1999's reinsurance expense was increased by $261,000 and a
corresponding liability was recorded.
TAX CREDIT
During 1999, the Company recorded as a deferred tax asset, a tax credit
that was expected to be realized in future periods. Management determined
that this tax credit was not available to the Company and thus should not
be considered a deferred tax asset. Accordingly, tax expense was increased
by $109,000 to accurately reflect this expense in the period incurred.
F-14
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
ACCRUALS FOR REVENUE AND OPERATING EXPENSES
During 1999, several year end expense accruals were made by the Company
that had been expensed as paid in previous years. These accruals included
accounting fees, legal fees, Form 10-KSB annual report preparation and
printing costs and employee travel expenses. Thus, fiscal year 1999's
operating expenses were double counted as a result of similar expenses not
having been accrued in prior years. Management determined that comparable
amounts of costs, recorded as paid, were incurred in fiscal years prior to
1999. Correspondingly, the Company originally restated its financial
statements to reflect these costs retroactively and record the expense
when the liability was incurred. Accordingly, 1999's general and
administrative expenses were reduced by $119,856 and a corresponding
amount was recorded as a reduction of retained earnings at August 1, 1997,
before taxes of $46,631, to reflect these expenses in the period the
liability was incurred.
At July 31, 1999, the Company failed to accrue for certain member fee
revenues totaling $50,861. As reflected in the original restatement of the
1999 Form 10-KSB/A, filed on June 20, 2000, this accrual was inadvertently
recorded as a reduction of general and administrative expenses. This
amount has been reclassified to member fee revenue in these statements.
DEFERRED COSTS
Subsequent to the filing of the 1999 Form 10-KSB, management determined
that certain member costs deferred and amortized over the life of the
renewal premiums were in fact period costs and should have been charged to
expense as incurred. In evaluating both the capitalized deferred cost
balances in years prior to 1999, as well as the total cost amortized to
expense in those years, all amounts were comparable and the amounts
capitalized were consistent from period to period. Correspondingly, the
Company originally restated its financial statements to reflect these
costs retroactively and record the expense as incurred. Accordingly, the
reduction of deferred member costs at July 31, 1999 of $146,802 was
recorded as a reduction of opening retained earnings at August 1, 1997,
before taxes of $57,114, to reflect the expenses in the period incurred.
ADDITIONAL RESTATEMENTS OF FISCAL 1999 FORM 10-KSB/A
REVENUE RECOGNITION
Prior to the fiscal year ended July 31, 2000, the Company failed to
reconcile, on a timely basis, the detailed activity of its customer
accounts receivable to the general ledger. The reconciliation process
revealed that various of its customers' account histories did not properly
account for billings, billing adjustments and/or bad debts that should
have been reflected in prior years. Accordingly, fiscal year 1999's
revenues have been reduced by $557,372, resulting from accounting errors,
and general and administrative expenses have been increased by $83,146,
resulting from increased bad debt expense, to correctly reflect income or
expense in the period incurred or realized. Beginning 1999 retained
earnings was also reduced by $197,615, net of taxes of $126,344, to
correctly reflect the effect of the reconciliation, referred to above, on
fiscal years prior to fiscal 1999.
DEFERRED COMMISSIONS
In the normal course of conducting business, the Company employs third
party brokers to assist in marketing its insured and non-insured eyecare
products. As premiums are collected, the Company incurs brokerage
commission cost associated with selling its insured and non-insured
F-15
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
DEFERRED COMMISSIONS (CONTINUED)
eyecare products. These brokerage commissions are amortized to expense
over the life of the insurance policy, which is generally twelve months.
At July 31, 1999 certain deferred brokerage commissions, recorded as other
assets, should have been charged to expense in the period in which the
policy expired. Accordingly, fiscal year 1999's sales and marketing
expenses were increased by $61,627 to correctly reflect brokerage
commissions expense in the period in which they were incurred.
ACCRUALS FOR OPERATING EXPENSES
The restated financial statements reflect adjustments to general and
administrative expenses in the period incurred and to record a
corresponding liability for the items not paid at the end of the 1999
fiscal year. Such costs primarily include vacation pay, sick pay, employee
severance expense and miscellaneous general corporate expenses.
Accordingly, fiscal year 1999's sales and marketing expenses and general
and administrative expenses were increased by $51,609 and $59,869,
respectively. Opening 1999 retained earnings was also reduced by $45,914,
net of taxes of $29,355, to correctly reflect the effect of these accruals
on fiscal years prior to July 31, 1999.
RECLASSIFICATIONS
INCOME TAXES - During the year ended July 31, 2000, the Company was
advised of the preliminary results of an examination by the Internal
Revenue Service ("IRS") of tax years 1996 and 1997. The Company is
vigorously contesting the results of this examination but have elected to
reflect the preliminary IRS findings in its fiscal year 1999 financial
statements. The impact of the IRS examination has resulted in a
reclassification of amounts previously recorded as deferred tax
liabilities to current tax liabilities. Management believes that the final
outcome of this IRS examination will not have a materially adverse effect
on the Company's results of operations.
OPERATING EXPENSES - Certain amounts recorded within certain operating
expense captions have been reclassified to conform with the fiscal year
2000 presentation. The impact of these reclassifications had no impact on
the results of operations for the year ended July 31, 1999.
SUMMARY
The overall effect of the 1999 restatement adjustments previously
reflected in the 1999 Form 10-KSB/A, as filed on June 20, 2000, and
further 1999 adjustments subsequently discovered and their effects on the
accompanying consolidated 1999 balance sheet and statement of operations
are summarized below.
The total impact of the above restatements reduced fiscal 1999 net income
by $668,180, net of tax benefit of $235,626, from net income of $543,659
to a net loss of $(124,521). Earnings per share, basic and diluted, was
reduced by $0.26 per share from net income of $0.21 per share, basic and
diluted, to a net loss of $(0.05) per share, basic and diluted. The impact
of the above restatements also resulted in a reduction of beginning
retained earnings of $406,442, net of taxes of $259,444.
The affects on the July 31, 1999 financial statements of the above
restatements are as follows:
F-16
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Restatement
Adjustments as
Previously Further As Restated and
Reported in 1999 Restatement Reclassified
July 31, 1999 Form 10-KSB/A Adjustments Reclassifications July 31, 1999
------------- ------------- ----------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,625,874 $ -- $ -- $ -- $ 1,625,874
Marketable investment securities 239,875 -- -- -- 239,875
Member fees receivable, net allowance
for doubtful accounts of $230,245 2,407,109 50,861 (942,708) -- 1,515,262
Note receivable-officer 28,794 -- -- -- 28,794
Deferred expenses 287,857 (146,802) (61,627) -- 79,428
Prepaid expenses 149,950 -- -- -- 149,950
Income tax receivable 382,889 (26,688) 189,155 (483,780) 61,576
Deferred income taxes -- -- 264,796 (197,285) 67,511
Other current assets 175,766 -- -- -- 175,766
----------- ----------- ----------- ----------- -----------
Total current assets 5,298,114 (122,629) (550,384) (681,065) 3,944,036
----------- ----------- ----------- ----------- -----------
Property and equipment
Office furniture and fixtures 318,986 -- -- -- 318,986
Computers and office equipment 3,543,137 -- -- -- 3,543,137
Leasehold improvements 201,083 -- -- -- 201,083
----------- ----------- ----------- ----------- -----------
4,063,206 -- -- -- 4,063,206
Less accumulated
Depreciation and amortization (2,300,889) -- -- -- (2,300,889)
----------- ----------- ----------- ----------- -----------
Net property and equipment 1,762,317 -- -- -- 1,762,317
----------- ----------- ----------- ----------- -----------
Intangible assets, net 1,011,305 -- -- -- 1,011,305
----------- ----------- ----------- ----------- -----------
Total assets $ 8,071,736 $ (122,629) $ (550,384) $ (681,065) $ 6,717,658
=========== =========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 60,925 $ -- $ -- $ -- $ 60,925
Claims payable -- 261,000 -- -- 261,000
Current portion of bank loan 21,100 -- -- -- 21,100
Accrued expenses 168,448 -- 186,749 -- 355,197
Deferred revenue 1,101,638 -- 21,767 -- 1,123,405
Accrued income taxes -- -- 483,780 (483,780) --
Deferred income taxes 748,972 (55,278) (496,409) (197,285) --
----------- ----------- ----------- ----------- -----------
Total current liabilities 2,101,083 205,722 195,887 (681,065) 1,821,627
----------- ----------- ----------- ----------- -----------
Shareholders' equity
Common stock, no par value; authorized
8,000,000 shares; issued 3,072,838 shares 757,296 -- -- -- 757,296
Additional paid-in capital 2,565,067 -- -- -- 2,565,067
Retained earnings 4,167,479 (328,351) (746,271) -- 3,092,857
Unearned ESOP shares (22,560) -- -- -- (22,560)
Net unrealized gain on
marketable investment securities (10,897) -- -- -- (10,897)
Treasury stock, at cost, 468,102 shares (1,485,732) -- -- -- (1,485,732)
----------- ----------- ----------- ----------- -----------
Total shareholder's equity 5,970,653 (328,351) (746,271) -- 4,896,031
----------- ----------- ----------- ----------- -----------
Total liabilities and shareholders' equity $ 8,071,736 $ (122,629) $ (550,384) $ (681,065) $ 6,717,658
=========== =========== =========== =========== ===========
</TABLE>
F-17
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Restatement
Adjustments as
Previously Further As Restated and
Reported in 1999 Restatement Reclassified
July 31, 1999 Form 10-KSB/A Adjustments Reclassifications July 31, 1999
------------- ------------- ----------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Operating revenues
Fee revenues $ 7,051,722 $ -- $ (514,921) $ 50,861 $ 6,587,662
Reinsurance revenues 1,395,569 -- (42,451) -- 1,353,118
----------- ----------- ----------- ----------- -----------
Total 8,447,291 -- (557,372) 50,861 7,940,780
Operating expenses
Sales and marketing expenses 1,304,004 -- 113,236 (32,159) 1,385,081
Direct membership expenses 2,477,132 -- -- (367,957) 2,109,175
General and administrative expense 2,512,852 (170,817) 143,015 450,977 2,936,027
Reinsurance expenses 1,006,837 261,000 -- -- 1,267,837
Depreciation and amortization 541,802 -- -- -- 541,802
ESOP charges 50,770 -- -- -- 50,770
----------- ----------- ----------- ----------- -----------
Total 7,893,397 90,183 256,251 50,861 8,290,692
----------- ----------- ----------- ----------- -----------
Operating income (loss) 553,894 (90,183) (813,623) -- (349,912)
Non-operating income (expense)
Interest income 146,170 -- -- -- 146,170
Interest expense (6,725) -- -- -- (6,725)
----------- ----------- ----------- ----------- -----------
139,445 -- -- -- 139,445
----------- ----------- ----------- ----------- -----------
Income (loss) before income
tax (expense) benefit 693,339 (90,183) (813,623) -- (210,467)
Income tax (expense) benefit (149,680) (75,255) 310,881 -- 85,946
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 543,659 $ (165,438) $ (502,742) $ -- $ (124,521)
----------- ----------- ----------- ----------- -----------
Basic net income (loss) per share $ 0.21 $ (0.06) $ (0.19) $ (0.05)
Diluted net income (loss) per share $ 0.21 $ (0.07) $ (0.19) $ (0.05)
Basic weighted average common
equivalent shares outstanding 2,598,270 2,598,270 2,598,270 2,598,270
Diluted weighted average common
equivalent shares outstanding 2,627,541 2,627,541 2,598,270 2,598,270
</TABLE>
F-18
