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 April 30, 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 May 25, 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
APRIL 30, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
----
Item 1 Financial Statements (Unaudited)
Balance Sheet as of April 30, 1999 ................................. 3
Statement of Operations for the quarters and nine months
ended April 30, 1999 and 1998..................................... 4
Statement of Cash Flows for the nine months
ended April 30, 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.................................................................. 10
2
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, Inc. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Unaudited)
ASSETS 4/30/99
- --------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents 450,105
Marketable investment securities 747,167
Member fees receivable, net of allowance for
doubtful accounts of $37,870 2,509,434
Note receivable-officer, current 28,355
Deferred expenses 569,098
Prepaid expenses and other current assets 415,883
Income tax receivable 120,003
----------
Total Current Assets 4,840,045
Property and Equipment:
Office furniture and fixtures 318,986
Office equipment 3,386,337
Leasehold improvements 201,083
----------
3,906,406
Less accumulated depreciation and amortization (2,164,916)
----------
Net Property and Equipment 1,741,490
Deferred Costs 785,632
----------
Total Assets 7,367,167
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable 260,137
Current portion of capital lease obligation 2,278
Current portion of bank loan (Note 2) 42,200
Deferred revenue 789,658
Accrued expenses and other current liabilities 147,093
Deferred income taxes 504,155
----------
Total Current Liabilities 1,745,521
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 2,224
Unearned ESOP shares (Note 2) (57,493)
Retained earnings 3,851,002
----------
7,107,377
Treasury stock, at cost, 468,102 shares (1,485,731)
----------
Total Shareholders' Equity 5,621,646
----------
Total Liabilities and Shareholders' Equity 7,367,167
==========
See notes to the financial statements (unaudited)
3
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, Inc. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Quarter ended April 30, Nine months ended April 30,
-------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Fee revenues $ 1,895,712 $ 1,831,621 $ 5,276,852 $ 5,772,539
Reinsurance revenues 350,616 167,388 853,766 209,476
----------- ----------- ----------- -----------
Total 2,246,328 1,999,009 6,130,618 5,982,015
Operating Expenses:
Sales and marketing costs 239,427 367,800 957,594 1,457,967
Direct membership costs 624,082 698,016 1,985,301 2,080,121
General and administration 592,101 487,068 1,894,627 1,477,155
Reinsurance expense 277,108 126,140 596,605 133,929
ESOP charges 11,504 14,652 38,452 43,990
Depreciation 135,973 130,112 405,829 385,484
----------- ----------- ----------- -----------
Total Operating Expenses 1,880,195 1,823,788 5,878,408 5,578,646
----------- ----------- ----------- -----------
Operating Income 366,133 175,221 252,210 403,369
Non-operating Income (Expense):
Interest income 16,753 35,490 117,068 116,321
Interest expense (916) (3,770) (8,943) (13,134)
----------- ----------- ----------- -----------
Total Non-operating Income 15,837 31,720 108,125 103,187
Income Before Income Taxes 381,970 206,941 360,335 506,556
Income Taxes 141,372 80,252 133,153 194,106
----------- ----------- ----------- -----------
Net Income $ 240,598 $ 126,689 $ 227,182 $ 312,450
=========== =========== =========== ===========
Net Income/(Loss) Per Share - Basic $ 0.09 $ 0.05 $ 0.09 $ 0.12
=========== =========== =========== ===========
Net Income/(Loss) Per Share - Diluted $ 0.09 $ 0.05 $ 0.09 $ 0.12
=========== =========== =========== ===========
Weighted Average Shares
Outstanding - Basic 2,604,736 2,564,736 2,596,091 2,558,143
=========== =========== =========== ===========
Weighted Average Shares
Outstanding - Diluted 2,625,112 2,614,183 2,626,851 2,614,855
=========== =========== =========== ===========
</TABLE>
See notes to the financial statements (unaudited)
4
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, Inc. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine months ended April 30,
---------------------------
1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income/(loss) $ 227,182 $ 312,450
Adjustments to reconcile net income/(net loss)
to net cash provided by operating activities:
Depreciation 405,829 385,484
ESOP shares committed to be released 38,452 43,990
Change In Assets and Liabilities:
(Increase) decrease in member fees receivable (1,122,988) (231,059)
(Increase) decrease in deferred expenses (415,598) (111,194)
Decrease (increase) in prepaid expenses and
other current assets 154,235 (326,201)
Decrease (increase) in income tax receivable 129,899 --
Increase (decrease) in accounts payable 52,478 277,013
Increase (decrease) in income taxes payable -- 191,504
(Decrease) increase in deferred revenue (484,769) 381,069
(Decrease) increase in accrued expenses and
other current liabilities (7,860) (44,335)
----------- -----------
Net Cash (Used) Provided by Operating Activities (1,023,140) 878,721
Cash Flows from Investing Activities:
Decrease in marketable investment securities 255,169 1,150,081
Decrease in note receivable-officer 17,170 17,306
Purchases of property and equipment (146,949) (961,264)
----------- -----------
Net Cash Provided (Used) By Investing Activities 125,390 206,123
Cash Flows from Financing Activities:
Purchase of treasury stock -- 3,889
Proceeds from stock options exercised 75,749 26,250
Repayments of bank loan (63,300) (63,300)
Repayments of capital lease obligation (7,353) (15,219)
----------- -----------
Net Cash Provided (Used) By Financing Activities 5,096 (48,380)
Net Decrease in Cash and Cash Equivalents (892,654) 1,036,464
Cash and Cash Equivalents, Beginning of Period 1,342,759 547,686
----------- -----------
Cash and Cash Equivalents, End of Period $ 450,105 $ 1,584,150
=========== ===========
Supplemental Disclosures of Non-Cash Activities:
Unrealized gain (loss) on marketable investment securities $ 176 $ (3,795)
=========== ===========
</TABLE>
See notes to the financial statements (unaudited)
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 nine
months ended April 30, 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
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 - $21,100; 2000 - $21,100.
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 April 30, 1999 were $2,246,000 compared
to $1,999,000 for the quarter ended April 30, 1998, an increase of over 12%.
Revenues generated from the Company's indemnity plans increased 35% to $841,000
for the third quarter 1999, as compared to $623,000 for the same period in the
prior year. Indemnity plan revenues for the three-quarters ended April 30, 1999
are $2,258,000; a 46% 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 April 30, 1999 was $351,000, as
compared to $167,000 for the same quarter in 1998. Revenue's from the Company's
traditional vision care savings product increased 7% from the same three-month
period in 1998 to $1,209,000. Revenues from this line were $3,347,000 for the
nine-month period ended April 30, 1999 as compared to $3,485,000 for the same
period in 1998. The decrease was due to the loss of two large customers.
Management expects revenues to remain strong in the remaining quarter of the
year as a result of continued strength in all of the Company's vision care plans
effective January 1, 1999, continued market acceptance of the plans and
favorable new contract terms negotiated with the fronting carrier.
Total operating expenses increased 3% for the quarter ended April 30, 1999 to
$1,880,000. Total operating expenses for the year to date 1999 increased 5% to
$5,878,000. Decreases in sales and marketing, and direct membership were offset
by increases in general and administrative expenses, and reinsurance expenses.
Sales and marketing costs decreased 35% to $239,000 for the quarter ended April
30, 1999, as compared to $368,000 for the quarter ended April 30, 1998. Sales
and marketing expense for the nine-month period ended April 30, 1999 was
$958,000 as compared to $1,458,000 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, 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 decreased to $624,000 for the quarter
and $1,985,000 for the nine months ended April 30, 1999, as compared to $698,000
and $2,080,000 for the same periods in 1998. Both the quarter and the year to
date expenses decreased as operating efficiencies are achieved through
utilization of the managed care information system that was fully implemented
last year.
General and administration expenses totaled $592,000 for the quarter and
$1,895,000 for the nine months ended April 30, 1999, as compared to $487,000 and
$1,477,000 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
7
<PAGE>
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 totaled $277,000 for the quarter and $597,000 for the nine
months ended April 30, 1999, as compared to $126,000 and $134,000 for the
corresponding periods in 1998. The increase is due to increased premium volume.
Depreciation was $136,000 for the three months and $406,000 for the nine months
ended April 30, 1999, as compared to $130,000 and $385,000 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.
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 $17,000 for three months and $117,000 for the nine months
ended April 30, 1999, as compared to $35,000 and $116,000 for the corresponding
periods in 1998. The decrease for the quarter ended April 30, 1999 as compared
to the quarter ended April 30, 1998 is due to lower average invested balances.
The second and third quarter decreases are offset by a first quarter gain on the
sale and reinvestment of certain U.S. Treasury Securities.
Interest expense decreased slightly for both the quarter and the year to date.
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 will
be paid in full during the first quarter of fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $3,095,000 and the current ratio was 2.8 to 1 at April 30,
1999, while cash, cash equivalents and marketable securities comprised
$1,197,000. 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 90% complete and
implementation is expected to be complete by June 1999. The Company believes
that it will not incur additional material costs in the implementation of the
improvements.
8
<PAGE>
The Company is also working with its non-IT systems vendors. Testing on these
modifications is 90% complete and implementation is expected by May 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.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters submitted to a vote of security holders.
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.
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: John A. Raycraft
--------------------------------
John A. Raycraft
President and Chief Executive Officer
By: Margaret M. Eardley
--------------------------------
Margaret M. Eardley
Vice President of Finance and Chief Financial Officer
Date: May 25, 1999
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED APRIL 30, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> APR-30-1999
<EXCHANGE-RATE> 1
<CASH> 450,105
<SECURITIES> 747,167
<RECEIVABLES> 2,509,434
<ALLOWANCES> 37,870
<INVENTORY> 0
<CURRENT-ASSETS> 4,840,045
<PP&E> 3,906,406
<DEPRECIATION> 2,164,916
<TOTAL-ASSETS> 7,367,167
<CURRENT-LIABILITIES> 1,745,521
<BONDS> 0
0
0
<COMMON> 757,296
<OTHER-SE> 4,864,350
<TOTAL-LIABILITY-AND-EQUITY> 7,367,167
<SALES> 0
<TOTAL-REVENUES> 6,130,618
<CGS> 0
<TOTAL-COSTS> 5,878,408
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,943
<INCOME-PRETAX> 360,335
<INCOME-TAX> 133,153
<INCOME-CONTINUING> 227,182
<DISCONTINUED> 0
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<NET-INCOME> 227,182
<EPS-BASIC> .09
<EPS-DILUTED> .09
</TABLE>
