UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the quarter ended October 31, 1998.
[ ] Transition Report under 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.
(Exact 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 [ ]
Registrant's common stock outstanding at December 3, 1998 was 2,604,736 shares
after deducting 468,102 shares of treasury stock.
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC.
FORM 10-QSB
FOR THE QUARTER ENDED
OCTOBER 31, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
----
Item 1 Financial Statements (Unaudited)
Balance Sheet as of October 31, 1998 .............................. 3
Statements of Operations for the quarters
ended October 31, 1998 and 1997.................................. 4
Statements of Cash Flows for the quarters
ended October 31, 1998 and 1997.................................. 5
Notes to Financial Statements............................................... 6
Item 2.Management's Discussion and Analysis................................. 7
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................ 9
Item 6. Exhibits and Reports on Form 8-K................................... 9
SIGNATURES.................................................................. 10
Page 2
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, Inc.
BALANCE SHEET (Unaudited)
ASSETS October 31, 1998
- --------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 1,166,961
Marketable investment securities 632,081
Member fees receivable, net of allowance for
doubtful accounts of $37,870 1,657,493
Note receivable-officer, current 27,477
Deferred expenses 125,767
Prepaid expenses and other current assets 154,476
Income tax receivable 266,851
-----------
Total Current Assets 4,031,106
Property and Equipment:
Office furniture and fixtures 317,167
Office equipment 3,462,431
Leasehold improvements 201,083
-----------
3,980,681
Less accumulated depreciation and amortization (1,893,645)
-----------
Net Property and Equipment 2,087,036
Deferred Costs 716,306
-----------
Total Assets $ 6,834,448
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 227,393
Current portion of capital lease obligation 4,301
Current portion of bank loan (Note 2) 63,300
Deferred revenue 577,358
Accrued expenses and other current liabilities 106,067
Deferred income taxes 504,155
-----------
Total Current Liabilities 1,482,574
Long-Term Liabilities:
Bank loan (Note 3) 21,100
-----------
Total Long-Term Liabilities 21,100
Shareholders' Equity:
Common stock, no par value; Authorized
8,000,000 shares; Issued, 3,032,838 shares 757,296
Additional paid-in capital 2,553,348
Net unrealized gain on marketable investment securities 3,786
Unearned ESOP shares (Note 3) (81,820)
Retained earnings 3,583,896
-----------
6,816,506
Treasury stock, at cost, 468,102 shares (1,485,732)
-----------
Total Shareholders' Equity 5,330,774
-----------
Total Liabilities and Shareholders' Equity $ 6,834,448
===========
See notes to the financial statements (unaudited)
Page 3
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FIRST AMERICAN HEALTH CONCEPTS, Inc.
STATEMENTS OF OPERATIONS (Unaudited)
Quarter ended October 31,
1998 1997
- --------------------------------------------------------------------------------
Fee revenues $ 1,617,433 $ 2,003,608
Reinsurance revenues 218,825 --
----------- -----------
Total 1,836,258 2,003,608
Operating Expenses:
Sales and marketing costs 351,096 590,970
Direct membership costs 659,845 745,798
General and administration 657,319 498,216
Reinsurance expense 153,088 --
ESOP charges 14,125 14,398
Depreciation 134,559 130,841
----------- -----------
Total Operating Expenses 1,970,032 1,980,223
----------- -----------
Operating Income/(Loss) (133,774) 23,385
Non-operating Income (Expense):
Interest income 79,273 39,514
Interest expense (2,532) (4,985)
----------- -----------
Total Non-operating Income 76,741 34,529
Income/(Loss) Before Income Taxes (57,033) 57,914
Income Taxes (17,109) 21,015
----------- -----------
Net Income/(Loss) $ (39,924) $ 36,899
=========== ===========
Net Income/(Loss) Per Share - Basic $ (0.02) $ 0.01
=========== ===========
Net Income/(Loss) Per Share - Diluted $ (0.02) $ 0.01
=========== ===========
Weighted Average Shares
Outstanding - Basic 2,578,069 2,513,668
=========== ===========
Weighted Average Shares
Outstanding - Basic 2,578,069 2,513,668
=========== ===========
See notes to the financial statements (unaudited)
Page 4
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FIRST AMERICAN HEALTH CONCEPTS, Inc.
STATEMENTS OF CASH FLOWS (Unaudited)
Quarter ended October 31,
1998 1997
- --------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income/(loss) $ (39,924) $ 36,899
Adjustments to reconcile net income/(loss) to
net cash provided by operating activities:
Depreciation 134,559 130,841
Amortization
ESOP shares committed to be released 14,125 14,397
Change In Assets and Liabilities:
(Increase) decrease in member fees receivable (271,047) 564,633
Decrease in deferred expenses 97,060 84,738
Decrease (increase) in prepaid expenses and
other current assets 415,642 (29,422)
Decrease (increase) in income tax receivable (16,949) --
Increase (decrease) in accounts payable 19,734 (149,740)
(Decrease) increase in income taxes payable -- 21,014
(Decrease) in deferred revenue (697,069) (612,578)
(Decrease) in accrued expenses and other
current liabilities (48,886) (55,754)
----------- ---------
Net Cash Provided By (Used In) In
Operating Activities (392,755) 5,028
Cash Flows from Investing Activities:
Decrease in marketable investment securities 370,077 32,937
Decrease in note receivable-officer 18,048 18,183
Purchases of property and equipment (220,988) (277,399)
----------- ---------
Net Cash Provided By (Used In)
Investing Activities 167,137 (226,279)
Cash Flows from Financing Activities:
Purchase of treasury stock -- --
Proceeds from stock options exercised 76,250 26,250
Repayments of bank loan (21,100) (21,100)
Repayments of capital lease obligation (5,330) (4,654)
----------- ---------
Net Cash Provided By Financing Activities 49,820 496
Net Increase (Decrease) In Cash and
Cash Equivalents (175,798) (220,755)
Cash and Cash Equivalents, Beginning of Period 1,342,759 547,686
----------- ---------
Cash and Cash Equivalents, End of Period $ 1,166,961 $ 326,931
=========== =========
Supplemental Disclosures of Non-Cash Activities:
Unrealized gain (loss) on marketable
investment securities $ 1,738 $ (3,305)
=========== =========
See notes to the financial statements (unaudited)
Page 5
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - GENERAL
These financial statements have been prepared by First American Health Concepts,
Inc. (the Company) without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of the Company, the unaudited
financial statements include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position,
results of operations, and cash flows for the periods presented.
The unaudited financial statements presented herein were prepared using the
underlying accounting principles utilized in the Company's 1998 audited
financial statements, filed on Form 10-KSB with the Securities and Exchange
Commission on October 28, 1998. These financial statements should be read in
conjunction with the 1998 audited financial statements. Operating results for
the three months ended October 31, 1998 are not necessarily indicative of the
results that may be expected for the year ending July 31, 1999.
Certain accounts related to prior years have been reclassified to conform to
current year presentation.
NOTE 2 - EMPLOYEE STOCK OWNERSHIP PLAN
During fiscal 1994, the Company implemented an employee stock ownership plan
(First American Health Concepts, Inc. Employee Stock Ownership Plan and related
Trust), qualified as a stock bonus plan under Section 401(a) of the Internal
Revenue Code. The Plan is designed to invest primarily in Company stock
exclusively for the benefit of eligible employees of the Company. Each eligible
employee becomes a participant 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 the participants in proportion to their total
compensation.
In October 1994, the Trust borrowed $422,000 from a bank for a term of five
years at an annual interest rate of 8.42%. The proceeds, along with the
Company's 1994 ESOP contribution, were used to purchase 91,978 treasury shares
from the Company. Because the Company has guaranteed the bank loan, it is
reported as long term debt of the Company. The shares sold by the Company to the
Trust are reflected in shareholders' equity, and an amount corresponding to the
borrowing or unearned ESOP shares (the guaranteed ESOP obligation) is reported
as a reduction of shareholders' equity.
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.
Minimum remaining principal payments required to be made during fiscal years
ending July 31 are as follows: 1999 - $63,300; 2000 - $21,100.
Page 6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Total revenue for the first quarter ended October 31, 1998 was $1,836,000
compared to $2,004,000 for the quarter ended October 31, 1997. Revenues
generated from the Company's indemnity plans increased 27% to $578,000 for the
first quarter, as compared to $456,000 for the same period in the prior year.
During the first quarter 1998, revenues from the indemnity plans were
essentially fee-based. FAHC formed a captive reinsurance company, First American
Reinsurance Company (FARC) in order to share in underwriting gains achieved on
the book of business. The associated premium revenue was $219,000 for the
quarter ending October 31, 1998. Revenue's from the Company's traditional vision
care savings product were $1,024,000 for the first quarter 1999 as compared to
$1,378,000 for first quarter 1998. The decrease was due to the non-renewal of
two large accounts. While management does expect a gradual shift from the
traditional vision care savings product to indemnity products over time, it does
not believe that the first quarter decrease is indicative of future periods.
Management expects all revenue categories to increase in the second quarter as a
result of the successful implementation of a new marketing strategy that will
result in new enrollees in the company's vision plans effective January 1, 1999.
Total operating expenses decreased 1% for the first quarter to $1,970,000 as
compared to $1,980,000 for the same period last year. The decrease is related to
the decrease in revenue.
Sales and marketing costs decreased 41% to $351,000 for the quarter ended
October 31, 1998, as compared to $591,000 for the quarter ended October 31,
1997. The decrease is due to a cost containment program implemented last year.
The program centralized the sales support function and streamlined the sales
process which resulted in reduced office, travel, administrative and printing
expense.
Direct membership costs, those costs associated with supplying vision plan
members with membership materials, maintaining a national locator service, and
administering claims processing functions decreased almost 12% to $660,000 for
the three months ended October 31, 1998. The decrease is due to processing
efficiencies gained through the completed implementation of a managed care
information system.
General and administration expenses totaled $657,000 for the first quarter ended
October 31, 1998, as compared to $498,000 for the first quarter ended October
31, 1997. The increase was due to timing differences in legal and audit
expenses, and 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.
Depreciation was $135,000 for the quarter ended October 31, 1998, as compared to
$131,000 for the corresponding period in the prior year. The slight increase is
due to minor capital additions associated with the upgrade of telephone and
computer systems.
ESOP compensation expense represents contributions committed for the periods in
accordance with the Company's employee stock ownership plan implemented during
fiscal 1994. Expense recognized is affected by compensation expense of eligible
participating employees and the average market price of the Company's common
stock during the quarter.
Page 7
<PAGE>
Interest income for the first quarter 1999 was $79,000, as compared to $40,000
for the corresponding period in 1998. While investment yields remained
consistent with those of the first quarter of 1998, the increase resulted from a
gain on the sale and reinvestment of certain U.S. Treasury Securities.
Interest expense decreased compared to the first quarter 1998 as a result of
repayments of borrowings by the ESOP trust, which are guaranteed and therefore
recorded by the Company.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $2,548,530 and the current ratio was 2.7 to 1 at October 31,
1998, while cash, cash equivalents and marketable securities comprised
$1,799,000. The Company's principal source of funds during the quarter was from
investing activities.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits (rather than four) to define the applicable year. Computer programs that
have time-sensitive software may not recognize dates beginning in the year 2000,
which could result in miscalculations or system failures.
The Company formed a Year 2000 Task Force over two years ago to perform a
comprehensive review of its core business applications (i.e. those systems that
the Company is dependent upon for the conduct of daily business operations). The
review was performed in conjunction with planning efforts to enhance the
Company's existing infrastructure and to support the Company's addition of
full-benefit insured and self-funded group vision care products. From this
effort, a managed vision care software system was purchased to support the new
products and to replace the software system utilized for the vision care savings
product. In addition, other information systems were identified for upgrade. In
no case was a system replaced or purchased solely because of Year 2000 issues.
Thus, the Company does not believe the costs of these software replacements are
specifically Year 2000 related.
The Company recently received improvements, related to Year 2000 issues, from
its software vendors. These improvements are being tested and are scheduled for
implementation by the first half of 1999. The Company believes that it will not
incur additional material costs in the implementation of the improvements. All
personal computers and related equipment have already been reviewed and upgraded
(if necessary) for any imbedded software that was not Year 2000 capable.
The Year 2000 Task Force also assessed additional Year 2000 issues such as
non-information technology systems (i.e. telephone systems). Some improvements
and/or upgrades were identified as a result of the review. As with the
information technology systems, the review was made in conjunction with a formal
planning process to enhance infrastructure. All upgrades will be completed by
November 1998. The Task Force is also reviewing the Company's relationships with
vendors, financial institutions, customers and other third parties to identify
possible Year 2000 issues.
The Company is aware that it could be adversely affected by Year 2000 issues in
that purchasing patterns of customers or potential customers may be affected by
Year 2000 issues as companies expense significant resources to correct their
current systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase services such as those offered by the
Company, which could have an adverse effect on the Company's business, operating
results and financial condition. Given the information available at this time,
Page 8
<PAGE>
management believes that this issue should not have a material adverse effect on
the Company's liquidity, its results of operations or its customers.
The Company has not at this time established a formal Year 2000 contingency plan
but will consider and, if necessary, address doing so as part of its Year 2000
Task Force activities. The Company does maintain contingency plans designed to
address other potential business interruptions that may be usable in this
situation.
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
Incorporated by reference to the Company's 1998 Definitive Notice and
Proxy Statement filed November 12, 1998.
ITEM 6. Exhibits and Reports on Form 8-K
Item 6(a) Exhibit 27 -- Financial Data Schedule
Item6 (b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
Page 9
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST AMERICAN HEALTH CONCEPTS, INC.
(Registrant)
By: /s/ John A. Raycraft
----------------------------------------------------------
John A. Raycraft
President and Chief Executive Officer
By: /s/ Margaret M. Eardley
----------------------------------------------------------
Margaret M. Eardley
Vice President of Finance and Chief Financial Officer
Date: December 14, 1998
Page 10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED OCTOBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
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<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,166,961
<SECURITIES> 632,081
<RECEIVABLES> 1,657,493
<ALLOWANCES> 37,870
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<CURRENT-ASSETS> 4,031,106
<PP&E> 3,980,681
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<COMMON> 757,296
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