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, 1999.
[ ] 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 1, 1999 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, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Balance Sheet as of October 31, 1999 ............................ 3
Statement of Operations for the quarter
ended October 31, 1999 and 1998................................ 4
Statement of Cash Flows for the three months
ended October 31, 1999 and 1998................................ 5
Notes to the 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................................................................ 9
Page 2
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, Inc. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Unaudited)
ASSETS 10/31/99
--------
Current Assets:
Cash and cash equivalents $1,553,810
Marketable investment securities 229,500
Member fees receivable, net of allowance for
doubtful accounts of $40,385 2,064,782
Deferred expenses 310,454
Prepaid expenses 159,215
Income tax receivable 308,813
Other Current Assets 109,748
----------
Total Current Assets $4,736,322
Property and Equipment:
Office furniture and fixtures $ 318,986
Office equipment 3,592,262
Leasehold improvements 201,083
----------
4,112,331
Less accumulated depreciation and amortization (2,436,861)
----------
Net Property and Equipment 1,675,470
Total Assets $6,411,792
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 38,908
Current portion of bank loan (Note 2) 21,100
Deferred revenue 502,374
Accrued expenses and other current liabilities 118,939
Deferred income taxes 340,827
----------
Total Current Liabilities 1,022,148
Shareholders' Equity:
Common stock, no par value; Authorized
8,000,000 shares; Issued, 3,072,838 shares 757,296
Additional paid-in capital 2,565,067
Net unrealized loss on marketable investment securities (21,272)
Unearned ESOP shares (Note 2) (20,035)
Retained earnings 3,594,320
----------
6,875,376
Treasury stock, at cost, 468,102 shares (1,485,732)
----------
Total Shareholders' Equity 5,389,644
Total Liabilities and Shareholders' Equity $6,411,792
==========
See notes to the financial statements (unaudited)
Page 3
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, Inc. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Quarter ended October 31,
1999 1998
----------- -----------
Fee revenues $ 1,769,965 $ 1,617,433
Premiums assumed 818,173 218,825
----------- -----------
Total 2,588,138 1,836,258
Operating Expenses:
Sales and marketing costs 314,041 351,096
Direct membership costs 638,442 659,845
General and administration 651,244 657,319
Assumed losses incurred and fees 629,014 153,088
ESOP charges 2,525 14,125
Depreciation 135,972 134,559
----------- -----------
Total Operating Expenses 2,371,238 1,970,032
----------- -----------
Operating Income/(Loss) 216,900 (133,774)
Non-operating Income (Expense):
Interest income 27,451 79,273
Interest expense (448) (2,532)
----------- -----------
Total Non-operating Income 27,003 76,741
Income/(Loss) Before Income Taxes 243,903 (57,033)
Income Taxes/(Benefit) 89,802 (17,109)
----------- -----------
Net Income/(Loss) Before Change in
Accounting Principle $ 154,101 $ (39,924)
=========== ===========
Cumulative Effect of Change in Accounting
Principle, Net of Tax $ (727,259) $ --
Net (Loss) After Change in Accounting Principle $ (573,158) $ (39,924)
Net Income/(Loss) Per Share - Basic Before Change
in Accounting Principle $ 0.06 $ (0.02)
=========== ===========
Cumulative Effect of Change in Accounting Principle,
Net of Tax - Basic $ (0.28) $ --
=========== ===========
Net Income/(Loss) Per Share - Basic After Change in
Accounting Principle $ (0.22) $ (0.02)
=========== ===========
Net Income/(Loss) Per Share - Diluted Before Change
in Accounting Principle $ 0.06 $ (0.02)
=========== ===========
Cumulative Effect of Change in Accounting Principle,
Net of Tax - Diluted $ (0.28) $ --
=========== ===========
Net Income/(Loss) Per Share - Diluted After Change
in Accounting Principle $ (0.22) $ (0.02)
=========== ===========
Weighted Average Shares Outstanding - Basic 2,604,736 2,578,069
=========== ===========
Weighted Average Shares Outstanding - Diluted 2,621,250 2,578,069
=========== ===========
See notes to the financial statements (unaudited)
Page 4
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, Inc. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Three months ended October 31,
------------------------------
1999 1998
----------- -----------
Cash Flows from Operating Activities:
Net (loss)/income $ (573,158) $ (39,924)
Adjustments to reconcile net (loss)/income
to net cash used in operating activities:
Depreciation 135,972 134,559
ESOP shares committed to be released 2,525 14,125
Provision for losses on accounts receivable 2,515 --
(Decrease) in deferred taxes (408,145) --
Increase (decrease) in cash resulting from
changes in:
Member fees receivable 339,812 (271,047)
Deferred expenses 988,708 97,060
Prepaid expenses and other current assets 56,753 415,642
Income tax receivable 74,076 (16,949)
Accounts payable (22,018) 19,734
Deferred revenue (599,264) (697,069)
Accrued expenses and other current liabilities (49,509) (48,886)
----------- -----------
Net Cash (Used In) Operating Activities (51,733) (392,755)
----------- -----------
Cash Flows from Investing Activities:
Decrease in marketable investment securities -- 370,077
Decrease in note receivable-officer 28,794 18,048
Purchases of property and equipment (49,125) (220,988)
----------- -----------
Net Cash (Used In) Provided By Investing
Activities (20,331) 167,137
----------- -----------
Cash Flows from Financing Activities:
Proceeds from stock options exercised -- 76,250
Repayments of bank loan -- (21,100)
Repayments of capital lease obligation -- (5,330)
----------- -----------
Net Cash Provided By Financing Activities -- 49,820
----------- -----------
Net Decrease in Cash and Cash Equivalents (72,064) (175,798)
Cash and Cash Equivalents, Beginning of Period 1,625,874 1,342,759
----------- -----------
Cash and Cash Equivalents, End of Period $ 1,553,810 $ 1,166,961
=========== ===========
Supplemental Disclosures of Non-Cash Activities:
Unrealized (loss) gain on marketable
investment securities $ (10,375) $ 1,738
=========== ===========
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, the
results of operations, and statement of cash flows for the periods presented.
The unaudited financial statements presented herein were prepared using the
underlying accounting principles utilized in the Company's 1999 audited
financial statements, filed on Form 10-KSB with the Securities and Exchange
Commission on October 29, 1999. Operating results for the three months ended
October 31, 1999 are not necessarily indicative of the results that may be
expected for the year ending July 31, 2000.
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 (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.
The minimum remaining principal payment required to be made during the fiscal
year ending July 31, 2000 is $21,100.
Page 6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD-LOOKING STATEMENTS
This Report on Form 10-QSB 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
Operating revenues for the quarter ended October 31, 1999 were $2,588,000
compared to $1,836,000 for the quarter ended October 31, 1998, an increase of
over 41%. Revenues generated from the Company's indemnity plans increased 90% to
$1,325,000 for the first quarter 2000, as compared to $699,000 for the same
period in the prior year. The Company's reinsurance captive, First American
Reinsurance Company (FARC), revised its quota share agreement with the primary
insurance carrier in July 1999. FARC now reinsures all insured business. During
the quarter ended October 31, 1998, FARC only reinsured business written January
1998 and later. This contract change represents $183,000 of the increase. The
remaining $443,000 increase is due to the sale of new business. Revenue's from
the Company's traditional vision care savings product remained unchanged, at
$1,020,000, from the same three-month period in fiscal 1999. Management expects
revenues from indemnity plans to continue to increase in the second quarter due
to the significant number of calendar year benefit plans. Non-insured revenues
from the vision care savings product are expected to remain flat due to a
decreasing demand for this product.
Total operating expenses increased 20% for the quarter ended October 31, 1999 to
$2,369,000. However, the ratio of total operating expenses to total revenue
decreased to 92%, as compared to 107% for the same period in the prior year. The
increased expenses result from increased reinsurance expenses corresponding with
the increase in reinsurance premium revenue.
Sales and marketing costs decreased 11% to $314,000 for the quarter ended
October 31, 1999, as compared to $351,000 for the quarter ended October 31,
1998. The decrease is due, in part, to a timing issue related to travel expense.
The remaining difference is related to certain reclassification of expense. As
discussed above, FARC changed the terms of its quota share agreement in July
1999. Therefore, some broker-related expenses that were previously related to
fee income and charged to sales and marketing, have now become reinsurance
expenses.
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 to $638,000 for the quarter
ended October 31, 1999, as compared to $660,000 for the same period in fiscal
1999. These expenses decreased, despite increased enrollment, as operating
efficiencies are achieved through utilization of the managed care information
system.
General and administration expenses totaled $651,000 for the three months ended
October 31, 1999, as compared to $657,000 for the same period in the prior year.
Reinsurance expense increased to $629,000 for the quarter ended October 31,
1999, as compared to $153,000 for the quarter ended October 31, 1998. The
increased expense corresponds to the increase in reinsurance revenues. As
discussed above, the increase is due to increased sales and a revision of
contract terms.
Page 7
<PAGE>
Depreciation was $136,000 for the three months ended October 31, 1999, as
compared to $135,000 for the corresponding period in the prior year.
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.
Interest income was $27,000 for three months ended October 31, 1999, as compared
to $79,000 for the corresponding period in 1998. Interest income during the
quarter ended October 31, 1998 included a one-time gain on the sale and
reinvestment of securities.
Interest expense decreased slightly for the quarter to quarter comparison. The
decrease is a result of repayments of borrowings by the ESOP trust, which are
guaranteed and therefore recorded by the Company. The ESOP commitment was paid
in full in November 1999.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $3,714,000 and the current ratio was 4.6 to 1 at October 31,
1999, while cash, cash equivalents and marketable securities comprised
$1,784,000. This level of liquid assets, combined with budgeted cash flow, is
adequate to meet periodic needs.
CHANGE IN ACCOUNTING PRINCIPLE
The Company adopted SOP 98-5, REPORTING THE COSTS OF START-UP ACTIVITIES, in the
quarter ended October 31, 1999. The Company was previously deferring start-up
costs associated with its California subsidiary. The subsidiary will operate as
a Specialized Knox-Keene Health Care Services Organization upon approval and
licensure by the California Department of Corporations.
YEAR 2000
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.
The Company tested and implemented improvements, related to Year 2000 issues,
from its software vendors. The Company believes it did not incur additional
material costs in the implementation of the improvements.
The Company also worked with its non-IT systems vendors. Testing and
implementation of these modifications is complete.
Page 8
<PAGE>
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. There can be no assurance that the Company will be
able to completely resolve all Year 2000 issues, or that the ultimate cost to
identify and implement solutions to all Year 2000 issues will not be material.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Incorporated by reference to the Company's 1999 Definitive Notice and Proxy
Statement Filed November 15, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 -- Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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 15, 1999
Page 9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED OCTOBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,553,810
<SECURITIES> 229,500
<RECEIVABLES> 2,064,782
<ALLOWANCES> 40,385
<INVENTORY> 0
<CURRENT-ASSETS> 4,736,322
<PP&E> 4,112,331
<DEPRECIATION> 2,436,861
<TOTAL-ASSETS> 6,411,792
<CURRENT-LIABILITIES> 1,022,148
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0
0
<COMMON> 757,296
<OTHER-SE> 4,632,348
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<INCOME-TAX> 89,802
<INCOME-CONTINUING> 154,101
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<CHANGES> (727,259)
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