UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the fiscal year August 1, 1998 to July 31, 1999.
[ ] 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, 1999 was $8,447,291.
Registrant's Common Stock outstanding at October 19, 1999 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 $3,933,256.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on December 10, 1999 are incorporated in Part III as set
forth herein.
<PAGE>
TABLE OF CONTENTS
PART I PAGE
----
Item 1. Description of Business 3
Item 2. Description of Property 3
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of Security Holders 4
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 4
Item 6. Management's Discussion and Analysis 5
Item 7. Financial Statements (Restated) 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 9
Item 10. Executive Compensation 9
Item 11. Security Ownership of Certain Beneficial Owners and Management 10
Item 12. Certain Relationships and Related Transactions 10
Item 13. Exhibits and Reports on Form 8-K 10
Signatures 11
2
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PART I
FIRST AMERICAN HEALTH CONCEPTS, INC.
This amended filing has been made to reflect the effect of a restatement of
the Company's consolidated financial statements as discussed in Note 12 of notes
to the consolidated financial statements.
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.
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,
Minnetonka, Minnesota) and The MEGA Life and Health Insurance Company (founded
in 1982, Oklahoma City, Oklahoma).
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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases an aggregate of 17,000 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 $21,902 per month
with an expiration date of September 2002. Sales offices are located in
California, Colorado, Georgia, Massachusetts and Ohio 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.
3
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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,
-----------------------------------
1999 1998
------------ -------------
High Low High Low
---- --- ---- ---
Quarter Ended:
October 31 $4 3/8 $3 1/2 $5 $2 7/8
January 31 $4 1/4 $3 1/2 $5 1/2 $2 7/8
April 30 $5 $2 7/8 $5 $3 1/4
July 31 $4 1/4 $2 3/4 $5 1/4 $3 1/2
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 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 4, 1999 there were approximately 102 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.
4
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
RESULTS OF OPERATIONS
During 2000, subsequent to the issuance of the Company's July 31, 1999
audited consolidated financial statements, certain accounting items that affect
those consolidated financial statements were identified as requiring adjustment.
The need for adjustment was identified in the following items: an
unrecorded claims reserve of $261,000; a tax credit of $109,000 originally
recorded in fiscal 1999 that the Company now knows will not be realized; and
adjustments further reducing general expenses by $171,000. In addition, $163,000
of costs were identified that do not qualify for deferral. This item only
affects retained earnings accumulated in prior years.
After restatement of these items, the net income of the Company is reduced
by $165,000 ($0.06 per share) in fiscal 1999. Financial statement balances and
footnote presentation have been restated accordingly.
First American Health Concepts, Inc. ("FAHC" or the "Company") reported an
8% increase in operating revenues, with a growth from $7,809,000 for 1998 to
$8,447,000 for 1999. Products comprising total operating revenues include
non-insured product of $4,446,000, insured and self-funded product revenues of
$3,360,000 and other incidental income of $641,000. While the non-insured
product still generated the largest portion of the Company's revenues, its
revenues did decrease 6% from the year ended July 31, 1998. 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.
Market research continues to show an increasing demand for full-benefit, managed
vision care programs. The Company's $1,296,000 increase in insured and
self-funded product revenues supports this research. 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 1999 was $1,396,000 of the insured
and self-funded revenues discussed above. The premium assumed during fiscal 1998
was $398,000.
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 8%, from $7,366,000 in 1998 to
$7,984,000 in 1999. Total operating expense increased as a percentage of total
operating revenue from 94% in 1998 to 95% in 1999. The increases in operating
expenses in recent years have reflected an investment in the infrastructure
necessary to support managed vision care.
5
<PAGE>
Sales and marketing expenses were $1,839,000 in 1998 compared to $1,304,000
in 1999. This 29% decrease was the result of a cost containment program
implemented in 1998. The program realigned the sales staff, centralized the
sales support function and streamlined the sales process that resulted in
reduced salaries, travel and administrative expense. Expenses decreased despite
the addition of sales staff.
Direct membership expenses decreased 10%, from $2,758,000 for 1998 compared
to $2,477,000 for 1999. These costs are associated with supplying vision plan
members with membership materials, maintaining a national provider network and
administering claims processing functions. The decrease was achieved through the
realization of operating efficiencies gained through the utilization of the
managed care information system that was fully implemented last fiscal year.
General and administrative expenses were $2,453,000 in 1998 compared to
$2,884,000 in 1999. The increase was due to the addition of staff and associated
expenses required to complete the specialized Knox-Keene Health Care licensing
and begin preparation for ECPA of California to administer vision plans.
Reinsurance expense increased from $257,000 in 1998 to $1,268,000 in 1999.
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.
Interest income was $163,000 in 1998 compared to $146,000 in 1999. The
decrease is due to lower average invested balances.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $2,869,000 and the current ratio was 2.2 to 1 at July
31, 1999. Cash and cash equivalents and marketable investment securities totaled
$1,866,000.
The Company's cash and cash equivalents increased $283,000 from the 1998
balance to $1,626,000 at July 31, 1999. The Company's principal source of funds
for the year ended July 31, 1999 was cash flow from investment activities.
Management anticipates moderate expansion in 2000 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.
YEAR 2000 ISSUE
The Company formed a Year 2000 Task Force over two years ago to perform a
comprehensive review of its core business applications (information technology
("IT") and non-IT). 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.
6
<PAGE>
The Company is currently testing improvements, related to Year 2000 issues,
from its software vendors. The testing is approximately 90% complete and
implementation is expected to be complete by November 1999. The Company believes
that it will not incur additional material costs in the implementation of the
improvements.
The Company is also working with its non-IT systems vendors. Testing on
these modifications is complete and implementation is expected by November 1999.
The Company continues to verify Year 2000 readiness of third parties
(vendors and customers) with whom the Company has material relationships. The
Company will formulate a contingency plan if it identifies vendors or customers
that it feels will not be compliant.
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.
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 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 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. Both FAHC and FAA hold various third-party administrator
licenses in markets where they do business. The Company holds 20 licenses at the
present time, 10 states do not require a license. The Company anticipates
completing the licensing process in the remaining states in 2000.
The primary licensing activity involving FAHC's subsidiary, Eye Care Plan
of American - California, Inc. (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. Upon review and approval of this
application by the California Department of Corporations, ECPA-CA will also
provide a complete complement of vision care services in the State of
California.
RECENT ACCOUNTING PRONOUNCEMENTS
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, which
will be effective for the Company for the fiscal year ending July 31, 2000, was
evaluated by management and any relevant costs will be expensed during the
quarter ending October 31, 1999.
7
<PAGE>
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 (RESTATED)
The Company's financial statements (restated) and notes thereto are
included in this report beginning at page 12.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
8
<PAGE>
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 1999 Definitive Notice of Meeting and Proxy
Statement.
Current Title and Positions
Executive Officer Age at 7/31/99 Held During the Last Five Years
----------------- -------------- -------------------------------
John A. Raycraft 52 Chief Executive Officer since May 1993;
President since 1992; Executive Vice
President from 1991 to 1992.
Laura J. Arnold 38 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 42 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 54 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.
Carolyn Hall 59 Secretary and Treasurer since 1988;
Secretary since 1987.
Margaret Eardley 30 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.
Burt Leonard 45 Director of Information Systems since
June 1999; President for Western
Software Technologies from 1993 to 1999.
ITEM 10. EXECUTIVE COMPENSATION
The information called for by this Item is incorporated by reference to the
Company's 1999 Definitive Notice of Meeting and Proxy Statement.
9
<PAGE>
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 1999 Definitive Notice of Meeting and Proxy Statement.
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, 1999 was $28,794. Additional
information called for by this Item is incorporated by reference to the
Company's 1999 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 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
28 Notice of Meeting and Proxy Incorporated by reference to the
Statement Company's 1999 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.
10
<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: June 20, 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 6/20/00
----------------------- Chief Executive Officer
(James D. Hyman)
/s/ James Gresko Vice President Finance and Chief 6/20/00
----------------------- Financial Officer
(James Gresko)
/s/ John R. Behrmann Chairman of the Board 6/20/00
-----------------------
(John R. Behrmann)
/s/ Robert J. Delsol Director 6/20/00
-----------------------
Robert J. Delsol
/s/ Thomas B. Morgan Director 6/20/00
-----------------------
(Thomas B. Morgan)
/s/ Robert M. Topol Director 6/20/00
-----------------------
(Robert M. Topol)
11
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
July 31, 1999
(Restated)
(With Independent Auditors' Report Thereon)
12
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
First American Health Concepts, Inc.:
We have audited the accompanying consolidated balance sheet (restated) of First
American Health Concepts, Inc. and subsidiaries as of July 31, 1999, and the
related consolidated statements of income (restated), shareholders' equity
(restated), and cash flows (restated) for each of the years in the two-year
period ended July 31, 1999. 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 (restated) referred to
above present fairly, in all material respects, the financial position of First
American Health Concepts, Inc. and subsidiaries as of July 31, 1999 and the
results of their operations and their cash flows for each of the years in the
two-year period ended July 31, 1999 in conformity with generally accepted
accounting principles.
As discussed further in Note 12, the consolidated financial statements have been
restated to reflect the correction of certain accounting errors.
/s/ KPMG LLP
Phoenix, Arizona
October 13, 1999, except for Note 12,
which is as of June 7, 2000
13
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
July 31, 1999
(Restated)
ASSETS
Current assets:
Cash and cash equivalents $ 1,625,874
Marketable investment securities (note 2) 239,875
Member fees receivable, net of allowance of $37,870 2,457,970
Note receivable-- officer (note 3) 28,794
Deferred costs 141,055
Prepaid expenses 149,950
Income taxes receivable 356,201
Other current assets 175,766
-----------
Total current assets 5,175,485
-----------
Property and equipment:
Office furniture and fixtures 318,986
Computers and office equipment 3,543,137
Leasehold improvements 201,083
-----------
4,063,206
Less accumulated depreciation and amortization (2,300,889)
-----------
Net property and equipment 1,762,317
-----------
Deferred costs 1,011,305
-----------
Total assets $ 7,949,107
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 60,925
Claims payable 261,000
Bank loan, current (note 7) 21,100
Accrued expenses 168,448
Deferred tax liability 693,694
Deferred revenue 1,101,638
-----------
Total current liabilities 2,306,805
Commitments and contingencies (notes 4, 7, 10 and 11)
Shareholders' equity (notes 6 and 7):
Common stock, no par value; authorized, 8,000,000 shares;
issued 3,072,838 shares 757,296
Additional paid-in capital 2,565,067
Retained earnings 3,839,128
Unearned ESOP shares (note 7) (22,560)
Net unrealized loss on marketable investment securities (note 2) (10,897)
-----------
7,128,034
Treasury stock, at cost, 468,102 shares (1,485,732)
-----------
Total shareholders' equity 5,642,302
-----------
Total liabilities and shareholders' equity $ 7,949,107
===========
See accompanying notes to consolidated financial statements.
14
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended July 31, 1999 and 1998
1999 1998
----------- ----------
(Restated)
Operating revenues:
Fee revenues $ 7,051,722 7,411,460
Reinsurance revenues 1,395,569 397,662
----------- ----------
Total operating revenues 8,447,291 7,809,122
Operating expenses:
Sales and marketing expenses 1,304,004 1,838,767
Direct membership expenses 2,477,132 2,757,550
General and administrative expenses 2,883,837 2,452,586
Reinsurance expense 1,267,837 257,379
ESOP charges (note 7) 50,770 59,951
----------- ----------
Total operating expenses 7,983,580 7,366,233
----------- ----------
Operating income 463,711 442,889
----------- ----------
Non-operating income (expense):
Interest income 146,170 163,164
Interest expense (6,725) (16,286)
----------- ----------
Total non-operating income 139,445 146,878
----------- ----------
Income before income taxes 603,156 589,767
Income taxes (note 9) 224,935 239,049
----------- ----------
Net income $ 378,221 350,718
=========== ==========
Net income per share - basic $ 0.15 0.14
=========== ==========
Net income per share - diluted $ 0.14 0.14
=========== ==========
Weighted average common and equivalent
shares outstanding - basic 2,598,270 2,559,750
=========== ==========
Weighted average common and equivalent
shares outstanding - diluted 2,627,541 2,559,750
=========== ==========
See accompanying notes to consolidated financial statements.
15
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
July 31, 1999 and 1998
(Restated)
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) on
Outstanding Additional Unearned 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, 1997 2,544,736 $655,296 $2,552,223 $3,273,102 $(175,164) $ 4,923 $(1,485,732) $4,824,648
Effect of restatement for
deferred costs -- -- -- (162,913) -- -- -- (162,913)
--------- -------- ---------- ---------- --------- -------- ----------- ----------
Restated balance at
July 31, 1997 2,544,736 655,296 2,552,223 3,110,189 (175,164) 4,923 (1,485,732) 4,661,735
Stock options exercised 20,000 26,250 -- -- -- -- -- 26,250
Net unrealized (loss)
on marketable
investment securities -- -- -- -- -- (2,875) -- (2,875)
Income tax benefit
arising from employee
stock option plan -- -- 21,393 -- -- -- -- 21,393
Cost of ESOP shares
released -- -- (19,268) -- 79,219 -- -- 59,951
Net income -- -- -- 350,718 -- -- -- 350,718
--------- -------- ---------- ---------- --------- -------- ----------- ----------
Balances at July 31, 1998
(Restated) 2,564,736 681,546 2,554,348 3,460,907 (95,945) 2,048 (1,485,732) 5,117,172
Stock options exercised 40,000 75,750 -- -- -- -- -- 75,750
Net unrealized (loss)
on marketable
investment securities -- -- -- -- -- (12,945) -- (12,945)
Income tax benefit
arising from employee
stock option plan -- -- 33,333 -- -- -- -- 33,333
Cost of ESOP shares
released -- -- (22,614) -- 73,385 -- -- 50,771
Net income -- -- -- 378,221 -- -- -- 378,221
--------- -------- ---------- ---------- --------- -------- ----------- ----------
Balances at July 31, 1999 2,604,736 $757,296 $2,565,067 $3,839,128 $ (22,560) $(10,897) $(1,485,732) $5,642,302
========= ======== ========== ========== ========= ======== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended July 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
(Restated)
Cash flows from operating activities:
Net income $ 378,221 350,718
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 541,802 519,319
Income tax benefit arising from stock option plan 33,333 21,393
ESOP shares committed to be released 50,771 59,951
Provision for losses on accounts receivable -- 37,870
Increase in deferred taxes 118,069 310,677
Changes in assets and liabilities:
Increase in member fees receivable (887,854) (482,259)
Increase in deferred costs (360,030) (707,864)
(Decrease) increase in prepaid expenses and
other current assets 60,732 (94,271)
Increase in income taxes receivable (116,116) (31,583)
(Decrease) increase in accounts payable (146,734) 23,184
Increase in claims payable 261,000 --
Decrease in accrued expenses 78,671 (37,243)
Decrease in deferred revenue (172,789) (111,327)
----------- ----------
Net cash used in operating activities (160,924) (141,435)
----------- ----------
Cash flows from investing activities:
Purchases of property and equipment (303,749) (430,394)
Purchases of marketable investment securities (250,772) (380,709)
Redemptions/sales of marketable investment securities 1,000,110 1,809,112
Decrease in note receivable-- officer 16,731 16,999
----------- ----------
Net cash provided by investing activities 462,320 1,015,008
----------- ----------
Cash flows from financing activities:
Repayments of bank loan (84,400) (84,400)
Repayments of capital lease obligation (9,631) (20,350)
Proceeds from exercised stock options 75,750 26,250
Purchases of treasury stock -- --
----------- ----------
Net cash used in financing activities (18,281) (78,500)
----------- ----------
Net increase in cash and cash equivalents 283,115 795,073
Cash and cash equivalents, beginning of year 1,342,759 547,686
----------- ----------
Cash and cash equivalents, end of year $ 1,625,874 1,342,759
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 2,651 --
=========== ==========
Cash paid during the year for interest $ 4,554 13,418
=========== ==========
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES:
Unrealized (loss) on marketable investment securities $ (12,945) (2,875)
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
(Restated)
(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
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, 1999 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, 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.
18
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
DEFERRED COSTS
The Company defers the direct costs of initiating vision plan memberships.
Such costs 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 incremental costs
associated with entering key geographical locations 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 accounts for net income per share in accordance with the
provisions of Statement of Accounting Standards No. 128 "Earnings per
Share" (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, 1999 and 1998. 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.
19
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 1999, 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.
20
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) MARKETABLE INVESTMENT SECURITIES
At July 31, 1999, 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 1999.
NET UNREALIZED
COST HOLDING LOSSES FAIR VALUE
--------- -------------- ----------
Equity Securities $ 250,772 (10,897) 239,875
========= ======= =======
(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, 1999 was
$28,794.
(4) LEASE OBLIGATIONS
The Company operates from leased premises under operating leases. Rental
expense related to these leases was $299,175 in 1999 and $289,712 in 1998.
Future minimum lease payments under noncancelable operating leases as of
July 31, 1999 are as follows:
YEARS ENDING JULY 31,
2000 $ 299,216
2001 312,610
2002 320,984
2003 53,730
---------
$ 986,540
=========
(5) NET INCOME PER SHARE
Options for 29,271 shares of common stock were included in diluted EPS for
1999. Options to purchase 193,550 shares of common stock at an average
price of $5.92 were outstanding at July 31, 1999 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 maintains a 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.
21
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has reserved 300,000 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 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, 1999, 272,500 stock options were available for grant under this
plan and 181,902 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>
July 31, 1997 Outstanding 43,135 $ 4.69 250,000 $ 4.37
Granted -- -- 17,500 3.31
Exercised -- -- (20,000) 1.31
Expired (8,733) 5.60 -- --
-------- ------- ----------- -------
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
======== ======= =========== =======
Exercisable 29,402 152,500
======== ===========
</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 $33,333 was recognized for the year ended July 31,
1999.
22
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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 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, 1999, the fair market
value of the 3,220 unearned ESOP shares was $11,070. 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 $50,771 for 1999 and $59,951
for 1998.
Minimum remaining principal payment required to be made during the fiscal
year ending July 31, 2000 is $21,100.
(8) 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.
23
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) INCOME TAXES
Components of income tax expense for the years ended July 31, 1999 and 1998
include:
CURRENT DEFERRED TOTAL
------- -------- -----
1999:
Federal (Restated) $ 98,749 95,938 194,687
State (Restated) 8,117 22,131 30,248
--------- ------- -------
$ 106,866 118,069 224,935
========= ======= =======
1998:
Federal $ (56,616) 245,565 188,949
State (15,012) 65,112 50,100
--------- ------- -------
$ (71,628) 310,677 239,049
========= ======= =======
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:
1999 1998
---------- -------
(Restated)
Computed "expected" tax expense $ 214,989 200,521
Increase (reduction) in income taxes resulting from:
Effect of permanent items (37,622) 33,066
State income taxes, net of Federal benefit 47,568 5,462
--------- -------
$ 224,935 239,049
========= =======
24
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The temporary differences that give rise to deferred tax assets and
liabilities at July 31, 1999 (Restated) include:
Deferred tax assets:
Bad debt reserve $ 14,694
Accrued expenses 95,006
----------
Total gross deferred tax assets 109,700
Less valuation allowance --
----------
Net deferred tax asset 109,700
Deferred tax liabilities:
Deferred costs (697,983)
Accelerated depreciation (26,588)
Prepaid expenses (53,139)
Other (25,684)
----------
Total gross deferred tax liabilities (803,394)
----------
Net deferred tax liability $ (693,694)
==========
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, 1999.
(10) 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 1999.
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.
25
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) 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.
(12) RESTATEMENT
During 2000, subsequent to the issuance of the Company's July 31, 1999
audited consolidated financial statements, certain accounting items that
affect those consolidated financial statements were identified as requiring
adjustment.
The need for adjustment was identified in the following items: an
unrecorded claims reserve of $261,000; a tax credit of $109,000 originally
recorded in fiscal 1999 that the Company now knows will not be realized;
and adjustments further reducing general expenses by $171,000. In addition,
$163,000 of costs were identified that do not qualify for deferral. This
item only affects retained earnings accumulated in prior years.
After restatement of these items, the net income of the Company is reduced
by $165,000 ($0.06 per share) in fiscal 1999. Financial statement balances
and footnote presentation have been restated accordingly.
26
