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 January 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 February 26, 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
January 31, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Balance Sheet as of January 31, 1999 ............................. 3
Statement of Operations for the quarters and six months
ended January 31, 1999 and 1998................................. 4
Statement of Cash Flows for the six months
ended January 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.............. 10
Item 6. Exhibits and Reports on Form 8-K................................. 11
SIGNATURES................................................................ 12
Page 2
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, Inc. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Unaudited)
ASSETS 1/31/99
-----------
Current Assets:
Cash and cash equivalents $ 505,564
Marketable investment securities 730,700
Member fees receivable, net of allowance for
doubtful accounts of $37,870 2,965,687
Note receivable-officer, current 27,916
Deferred expenses 271,342
Prepaid expenses and other current assets 360,599
Income tax receivable 258,530
-----------
Total Current Assets 5,120,338
Property and Equipment:
Office furniture and fixtures 317,167
Office equipment 3,489,302
Leasehold improvements 201,083
-----------
4,007,552
Less accumulated depreciation and amortization (2,028,943)
-----------
Net Property and Equipment 1,978,609
Deferred Licensing Expense and Other Costs 785,632
-----------
Total Assets $ 7,884,579
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 451,037
Current portion of capital lease obligation 2,425
Current portion of bank loan (Note 2) 63,300
Deferred revenue 1,369,950
Accrued expenses and other current liabilities 124,438
Deferred income taxes 504,155
-----------
Total Current Liabilities 2,515,305
Shareholders' Equity:
Common stock, no par value; Authorized
8,000,000 shares; Issued, 3,072,838 shares 757,296
Additional paid-in capital 2,554,348
Net unrealized gain on marketable investment securities 1,954
Unearned ESOP shares (Note 2) (68,997)
Retained earnings 3,610,405
-----------
6,855,006
Treasury stock, at cost, 468,102 shares (1,485,732)
-----------
Total Shareholders' Equity 5,369,274
-----------
Total Liabilities and Shareholders' Equity $ 7,884,579
===========
See notes to the financial statements (unaudited)
Page 3
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, Inc. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Quarter ended January 31, Six months ended January 31,
------------------------- ----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fee revenues $1,763,706 $1,937,310 $3,381,139 $3,940,918
Reinsurance revenues 284,326 42,087 503,151 42,087
---------- ---------- ---------- ----------
Total 2,048,032 1,979,397 3,884,290 3,983,005
Operating Expenses:
Sales and marketing costs 367,071 488,795 718,166 1,082,378
Direct membership costs 655,004 636,309 1,360,493 1,382,106
General and administration 691,578 499,658 1,303,253 997,875
Reinsurance expense 166,410 7,789 319,497 7,789
ESOP charges 12,822 14,940 26,948 29,338
Depreciation 135,298 124,531 269,856 255,372
---------- ---------- ---------- ----------
Total Operating Expenses 2,028,183 1,772,022 3,998,213 3,754,858
---------- ---------- ---------- ----------
Operating Income/(Loss) 19,849 207,375 (113,923) 228,147
Non-operating Income (Expense):
Interest income 21,042 41,318 100,315 80,832
Interest expense (5,494) (4,380) (8,027) (9,365)
---------- ---------- ---------- ----------
Total Non-operating Income 15,548 36,938 92,288 71,467
Income/(Loss) Before Income Taxes 35,397 244,213 (21,635) 299,614
Income Taxes 8,890 92,839 (8,219) 113,854
---------- ---------- ---------- ----------
Net Income/(Loss) $ 26,507 $ 151,474 $ (13,416) $ 185,760
========== ========== ========== ==========
Net Income/(Loss) Per Share --
Basic $ 0.01 $ 0.06 $ (0.01) $ 0.07
========== ========== ========== ==========
Net Income/(Loss) Per Share --
Diluted $ 0.01 $ 0.06 $ (0.01) $ 0.07
========== ========== ========== ==========
Weighted Average Shares
Outstanding - Basic 2,604,736 2,564,736 2,591,403 2,554,736
========== ========== ========== ==========
Weighted Average Shares
Outstanding - Diluted 2,632,132 2,616,025 2,591,403 2,611,143
========== ========== ========== ==========
</TABLE>
See notes to the financial statements (unaudited)
Page 4
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, Inc. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Six months ended January 31
---------------------------
1999 1998
----------- -----------
Cash Flows from Operating Activities:
Net income/(loss) $ (13,416) $ 185,760
Adjustments to reconcile net income (net loss)
to net cash provided by operating activities:
Depreciation 269,856 255,372
ESOP shares committed to be released 26,948 29,338
Change In Assets and Liabilities:
(Increase) decrease in member fees receivable (1,579,241) (1,182,073)
(Increase) decrease in deferred expenses (117,842) (157,098)
Decrease (increase) in prepaid expenses and
other current assets 209,519 (128,546)
(Increase) decrease in income tax receivable (8,628) --
Increase (decrease) in accounts payable 243,378 178,602
Increase (decrease) in income taxes payable -- 113,854
Increase (decrease) in deferred revenue 95,523 687,140
(Decrease) increase in accrued expenses and
other current liabilities (30,515) (32,943)
----------- -----------
Net Cash Used In Operating Activities (904,418) (50,594)
Cash Flows from Investing Activities:
Decrease in marketable investment securities 271,458 331,428
Decrease in note receivable-officer 17,609 17,745
Purchases of property and equipment (248,188) (519,321)
----------- -----------
Net Cash Provided (Used) By Investing
Activities 40,879 (170,148)
Cash Flows from Financing Activities:
Proceeds from stock options exercised 75,750 26,250
Repayments of bank loan (42,200) (42,200)
Repayments of capital lease obligation (7,206) (10,170)
----------- -----------
Net Cash Provided (Used) Used By Financing
Activities 26,344 (26,120)
Net Decrease in Cash and Cash Equivalents (837,195) (246,862)
Cash and Cash Equivalents, Beginning of Period 1,342,759 547,686
----------- -----------
Cash and Cash Equivalents, End of Period $ 505,564 $ 300,824
=========== ===========
Supplemental Disclosures of Non-Cash Activities:
Unrealized gain (loss) on marketable investment
securities $ (94) $ 3,181
=========== ===========
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 1998 audited
financial statements, filed on Form 10-KSB with the Securities and Exchange
Commission on October 28, 1998. Operating results for the three months and six
months ended January 31, 1999 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
Page 6
<PAGE>
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.
Minimum remaining principal payments required to be made during fiscal years
ending July 31 are as follows: 1999 - $42,200; 2000 - $21,100.
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 January 31, 1999 were $2,048,000
compared to $1,979,000 for the quarter ended January 31, 1998, an increase of
3.5%. Revenues generated from the Company's indemnity plans increased 62% to
$769,000 for the second quarter 1999, as compared to $476,000 for the same
period in the prior year. Indemnity plan revenues for the first half of 1999 are
$1,473,000; a 58% increase over the same period in 1998. Prior to 1998, revenues
on indemnity plans were essentially fee based. In early 1998, 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 for the quarter ended January 31, 1999 was $284,000, as compared
to $42,000 for the same quarter in 1998. Revenue's from the Company's
traditional vision care savings product decreased 11% from the same three-month
period in 1998 to $1,114,000. Revenues from this line were $2,138,000 for the
six-month period ended January 31, 1999 as compared to $2,634,000 for the same
period in 1998. The decrease was due to the loss of two large customers.
Page 7
<PAGE>
Management expects revenues to remain strong in the remaining half of the year
as a result of continued strength in all of the Company's vision care plans and
continued market acceptance of the plans. A significant portion of sponsor
companies maintain employee benefit plans with calendar-year terms, resulting in
the Company's third quarter generally showing the largest increase in enrollment
and revenues compared to other quarters.
Total operating expenses increased 14% for the quarter ended January 31, 1999 to
$2,028,000. Total operating expenses for the year to date 1999 increased 6% to
$3,998,000. Decreases in sales and marketing were offset by increases in direct
membership, and general and administrative expenses.
Sales and marketing costs decreased 25% to $367,000 for the quarter ended
January 31, 1999, as compared to $489,000 for the quarter ended January 31,
1998. Sales and marketing expense for the six-month period ended January 31,
1999 was $718,000 as compared to $1,082,000 for the same period in 1998. The
decrease is due to a cost containment program implemented last year. The program
realigned the sales staff, centralized the sales support function and
streamlined the sales process that resulted in reduced salaries, office, travel,
advertising and administrative 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 increased to $655,000 for the quarter
and decreased to $1,360,000 for the six months ended January 31, 1999, as
compared to $636,000 and $1,382,000 for the same periods in 1998. The direct
membership costs for the current quarter increased in correspondence to the
increase in revenues. The year- to-date costs have decreased as a result of the
1998 implementation of a new managed care information system.
General and administration expenses totaled $692,000 for the quarter and
$1,303,000 for the six months ended January 31, 1999, as compared to $500,000
and $998,000 for the same periods in 1998. 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, as well as additional staff and consulting expense associated with
the implementation of the new managed care information system.
Reinsurance Expense for the three and six month periods ended January 31, 1999
was $166,000 and $319,000, as compared to $8,000 for the three and six-month
periods ended January 31, 1998. The increase in reinsurance expense is
attributable to the increase in reinsurance revenue. FARC was created and began
assuming business in January 1998, therefore the reinsurance revenue and expense
was not material.
Depreciation was $135,000 for the three months and $270,000 for the six months
ended January 31, 1999, as compared to $125,000 and $255,000 for the
corresponding periods in the prior year. The increase is due to minor capital
additions associated with the upgrade of telephone and computer systems, as well
as increased depreciation on a client server computer system.
Page 8
<PAGE>
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 $21,000 for three months and $100,000 for the six months
ended January 31, 1999, as compared to $41,000 and $81,000 for the corresponding
periods in 1998. The decrease for the quarter ended January 31, 1999 as compared
to the quarter ended January 31, 1998 is due to lower average invested yields,
combined with lower average cash and marketable securities balances. The second
quarter decrease is offset by a first quarter gain on the sale and reinvestment
of certain U.S. Treasury Securities.
Interest expense increased slightly for the three months and decreased for the
six-month periods ended January 31, 1999 as compared to the same periods in
1998. The slight increase in the current quarter was due to an adjustment to the
amortization schedule of a capital lease. The decrease of the year to date
interest expense is 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 $2,605,000 and the current ratio was 1.9 to 1 at January 31,
1999, while cash, cash equivalents and marketable securities comprised
$1,236,000. The Company's principal source of funds during the first half was
from investing activities.
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 is currently testing improvements, related to Year 2000 issues, from
its software vendors. The testing is approximately 85% complete and
implementation is expected to be complete by April 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 90% complete and implementation is expected by the end of third
quarter 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.
Page 9
<PAGE>
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 4(a) Annual Meeting of Shareholders - December 11, 1999
Item 4(b) Proposal # 1 - Election of Directors
John R. Behrmann 2,558,082 For
5 Withhold Authority
3,412 Broker Non-Votes
Robert J. Delsol 2,558,082 For
5 Withhold Authority
3,412 Broker Non-Votes
John W. Heidt 2,558,082 For
5 Withhold Authority
3,412 Broker Non-Votes
James J. Meenaghan 2,558,082 For
5 Withhold Authority
3,412 Broker Non-Votes
Thomas B. Morgan 2,558,082 For
5 Withhold Authority
3,412 Broker Non-Votes
John A. Raycraft 2,558,082 For
5 Withhold Authority
3,412 Broker Non-Votes
Robert M. Topol 2,558,082 For
5 Withhold Authority
3,412 Broker Non-Votes
10
<PAGE>
Item 4(c) Proposal # 2 - To ratify the Board of Directors recommendation to
appoint KPMG Peat Marwick the Company's independent public
accountants for fiscal year 1999.
2,558,082 For
0 Against
6 Abstain
3,412 Broker Non-Votes
Proposal # 3 - To approve the Company's 1998 Stock Option Plan.
2,558,082 For
68,444 Against
1,500 Abstain
712,385 Broker Non-Votes
Item 4(d) There were no settlements between registrant and any other
participant terminating any solicitation, subject to Rule 14a-11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Item 6(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
11
<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: March 15, 1999
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JANUARY 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> 6-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JAN-31-1999
<EXCHANGE-RATE> 1
<CASH> 505,564
<SECURITIES> 730,700
<RECEIVABLES> 2,965,687
<ALLOWANCES> 37,870
<INVENTORY> 0
<CURRENT-ASSETS> 5,120,338
<PP&E> 4,007,552
<DEPRECIATION> 2,028,943
<TOTAL-ASSETS> 7,884,579
<CURRENT-LIABILITIES> 2,515,305
<BONDS> 0
0
0
<COMMON> 757,296
<OTHER-SE> 4,611,978
<TOTAL-LIABILITY-AND-EQUITY> 7,884,579
<SALES> 0
<TOTAL-REVENUES> 3,884,290
<CGS> 0
<TOTAL-COSTS> 3,998,213
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,027
<INCOME-PRETAX> (21,635)
<INCOME-TAX> (8,219)
<INCOME-CONTINUING> (13,416)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,416)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
