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, 2000.
[ ] 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, including 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 29, 2000 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, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Balance Sheet as of January 31, 2000 ............................ 3
Statement of Operations for the quarter and six months
ended January 31, 2000 and 1999................................ 4
Statement of Cash Flows for the six months
ended January 31, 2000 and 1999................................ 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................................................................ 11
2
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, Inc. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Unaudited)
ASSETS 1/31/00
-------
Current Assets:
Cash and cash equivalents $1,258,638
Marketable investment securities 218,500
Member fees receivable, net of allowance for
doubtful accounts of $43,503 3,416,052
Deferred expenses 338,989
Prepaid expenses 153,327
Income tax receivable 310,515
Other Current Assets 87,226
----------
Total Current Assets 5,783,247
Property and Equipment:
Office furniture and fixtures 320,583
Office equipment 3,699,817
Leasehold improvements 201,083
----------
4,221,483
Less accumulated depreciation and amortization (2,614,489)
----------
Net Property and Equipment 1,606,994
Total Assets $7,390,241
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 231,501
Deferred revenue 1,212,699
Accrued expenses and other current liabilities 102,327
Deferred income taxes 340,827
----------
Total Current Liabilities 1,887,354
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 (32,272)
Unearned ESOP shares (Note 2) (675)
Retained earnings 3,699,203
----------
6,988,619
Treasury stock, at cost, 468,102 shares (1,485,732)
----------
Total Shareholders' Equity $5,502,887
Total Liabilities and Shareholders' Equity $7,390,241
==========
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 January 31, Six months ended January 31,
------------------------- ----------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fee revenues $1,684,681 $1,763,706 $3,454,646 $3,381,139
Premiums assumed 921,161 284,326 1,739,334 503,151
---------- ---------- ---------- ----------
Total 2,605,842 2,048,032 5,193,980 3,884,290
Operating Expenses:
Sales and marketing costs 317,571 367,071 631,613 718,166
Direct membership costs 677,989 655,004 1,316,431 1,360,493
General and administration 697,796 691,578 1,349,040 1,303,253
Assumed incurred loss expense 274,087 82,947 651,799 164,132
Assumed underwriting expense 289,468 83,463 540,772 155,365
ESOP charges 19,361 12,822 21,885 26,948
Depreciation 177,628 135,298 313,599 269,856
---------- ---------- ---------- ----------
Total Operating Expenses 2,453,900 2,028,183 4,825,139 3,998,213
---------- ---------- ---------- ----------
Operating Income/(Loss) 151,942 19,849 368,841 (113,923)
Non-operating Income (Expense):
Interest income 22,020 21,042 49,470 100,315
Interest expense (11) (5,494) (458) (8,027)
---------- ---------- ---------- ----------
Total Non-operating Income 22,009 15,548 49,012 92,288
Income/(Loss) Before Income Taxes 173,951 35,397 417,853 (21,635)
Income Taxes/(Benefit) 69,070 8,890 158,872 (8,219)
---------- ---------- ---------- ----------
Net Income/(Loss) Before Change in
Accounting Principle $ 104,881 $ 26,507 $ 258,981 $ (13,416)
========== ========== ========== ==========
Cumulative Effect of Change in
Accounting Principle, Net of Tax $ -- $ -- $ (727,258) $ --
========== ========== ========== ==========
Net Income/(Loss) After Change in
Accounting Principle $ 104,881 $ 26,507 $ (468,277) $ (13,416)
========== ========== ========== ==========
Net Income/(Loss) Per Share - Basic
Before Change in Accounting Principle $ 0.04 $ 0.01 $ 0.10 $ (0.01)
========== ========== ========== ==========
Cumulative Effect of Change in
Accounting Principle , Net of Tax - Basic $ -- $ -- $ (0.28) $ --
========== ========== ========== ==========
Net Income/(Loss) Per Share - Basic After
Change in Accounting Principle $ 0.04 $ 0.01 $ (0.18) $ (0.01)
========== ========== ========== ==========
Net Income/(Loss) Per Share - Diluted
Before Change in Accounting Principle $ 0.04 $ 0.01 $ 0.10 $ (0.01)
========== ========== ========== ==========
Cumulative Effect of Change in Accounting
Principle , Net of Tax - Diluted $ -- $ -- $ (0.28) $ --
========== ========== ========== ==========
Net Income/(Loss) Per Share - Diluted
After Change in Accounting Principle $ 0.04 $ 0.01 $ (0.18) $ (0.01)
========== ========== ========== ==========
Weighted Average Shares Outstanding - Basic 2,604,736 2,604,736 2,604,736 2,591,403
========== ========== ========== ==========
Weighted Average Shares Outstanding - Diluted 2,623,715 2,632,132 2,625,155 2,591,403
========== ========== ========== ==========
</TABLE>
See notes to the financial statements (unaudited)
4
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, Inc. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Six months ended January 31,
----------------------------
2000 1999
----------- -----------
Cash Flows from Operating Activities:
Net loss $ (468,277) $ (13,416)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 313,599 269,856
ESOP shares committed to be released 21,885 26,948
Provision for losses on accounts receivable 5,642 --
(Decrease) in deferred taxes (408,145) --
Decrease in cash resulting from changes in:
Member fees receivable (1,014,585) (1,579,241)
Deferred expenses 960,173 (117,842)
Prepaid expenses and other current assets 85,163 209,519
Income tax receivable 72,374 (8,628)
Accounts payable 170,576 243,378
Deferred revenue 111,061 95,523
Accrued expenses and other current liabilities (66,119) (30,515)
----------- -----------
Net Cash (Used In) Operating Activities (216,653) (904,418)
----------- -----------
Cash Flows from Investing Activities:
Decrease in marketable investment securities -- 271,458
Decrease in note receivable-officer 28,794 17,609
Purchases of property and equipment (158,277) (248,188)
----------- -----------
Net Cash (Used In) Provided By
Investing Activities (129,483) 40,879
----------- -----------
Cash Flows from Financing Activities:
Proceeds from stock options exercised -- 75,750
Repayments of bank loan (21,100) (42,200)
Repayments of capital lease obligation -- (7,206)
----------- -----------
Net Cash (Used In) Provided By
Financing Activities (21,100) 26,344
----------- -----------
Net Decrease in Cash and Cash Equivalents (367,236) (837,195)
Cash and Cash Equivalents, Beginning of Period 1,625,874 1,342,759
----------- -----------
Cash and Cash Equivalents, End of Period $ 1,258,638 $ 505,564
=========== ===========
Supplemental Disclosures of Non-Cash Activities:
Unrealized (loss) on marketable investment
securities $ (21,375) $ (94)
=========== ===========
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 1999 audited
financial statements, filed on Form 10-KSB with the Securities and Exchange
Commission on October 29, 1999. Operating results for the six months ended
January 31, 2000 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 loan was paid in full during the quarter ended January 31, 2000.
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 January 31, 2000 were $2,606,000
compared to $2,048,000 for the quarter ended January 31, 2000, an increase of
over 27%. Revenues generated from the Company's indemnity plans increased 101%
to $1,502,000 for the second quarter 2000, as compared to $746,000 for the same
period in the prior year. Indemnity plan revenues for the first half of 2000 are
$2,827,000, a 96% increase over the same period in 1999. 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 and six months ended January
31, 1999, FARC only reinsured business written January 1998 and later. This
contract change represents $240,000 of the quarter increase and $423,000 of the
year to date increase. The remaining increase is due to the sale of new
business. Revenues from the Company's traditional vision care savings product
are $943,000 and $1,963,000 for the quarter and six months ended January 31,
2000. Revenue for the corresponding periods in 1999 were $1,114,000 and
$2,138,000. Management expects revenues from indemnity plans to continue to
increase in the remaining half of the fiscal year. A significant portion of
sponsor companies maintain employee benefit plans with calendar-year terms,
resulting from the Company's third quarter generally showing the largest
increase in enrollment and revenues. 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 21% for the quarter ended January 31, 2000 to
$2,454,000. Total operating expenses for the year to date 2000 increased 21% to
$4,825,000. However, the ratio of total operating expenses to total revenue
decreased to 93%, as compared to 103% for the same six-month period in the prior
year. The increased expenses result from increased reinsurance expenses
corresponding with the increase in reinsurance premium revenue and increased
general and administrative expenses associated with the Company's California
subsidiary Eye Care Plan of America - California, Inc (ECPA-CA).
Sales and marketing costs decreased 13% to $318,000 for the quarter ended
January 31, 2000, as compared to $367,000 for the quarter ended January 31,
1999. Sales and marketing expense for the six-month period ended January 31,
2000 was $632,000 as compared to $718,000 for the same period in 1999. 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 increased to $678,000 for the quarter
ended January 31, 2000, as compared to $655,000 for the same period in fiscal
1999. However, direct membership costs decreased for the six-month period to
$1,316,000, as compared to $1,360,000 for the same period in 1999. The
7
<PAGE>
membership expenses decreased, despite increased enrollment, as operating
efficiencies are achieved through utilization of the managed care information
system.
General and administration expenses totaled $698,000 for the three months ended
January 31, 2000, as compared to $692,000 to the same quarter in the prior year.
General and administration expenses for the six months ended January 31, 2000
were $1,349,000, as compared to $1,303,000 for the same period in the prior
year. This increase is due to the treatment of expenses associated with the
licensing of ECPA-CA. These costs are expensed through operations in fiscal
2000, but were deferred in fiscal 1999. Those previously deferred costs were
written off in the first quarter of 2000 due to the mandatory adoption of SOP
98-5, REPORTING THE COSTS OF START-UP ACTIVITIES.
Assumed incurred loss expense increased to $274,000 for the quarter ended
January 31, 2000, as compared to $83,000 for the quarter ended January 31, 1999.
Assumed incurred loss expense increased to $652,000 for the six-month period, as
compared to $164,000 for the same period in 1999. 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.
Assumed underwriting expense increased for both the three months and the six
months ended January 31, 2000. The assumed underwriting expense was $289,000 and
$541,000 for the three and six months ended January 31, 2000. The expense was
$83,000 and $155,000 for the corresponding periods in 1999. The increase is due
to increased revenues as discussed above.
Depreciation was $178,000 for the three months ended January 31, 2000, as
compared to $135,000 for the corresponding period in the prior year.
Depreciation for the six months ended January 31, 2000 was $314,000, as compared
to $270,000 for the same period in the prior year. The increase was due to a
shortened depreciation period on some information system equipment.
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 $22,000 and $49,000 for three and six months ended January
31, 2000, as compared to $21,000 and $100,000 for the corresponding periods in
1999. Interest income during the first quarter 1999 included a one-time gain on
the sale and reinvestment of securities.
Interest expense decreased for the quarter and year to date 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 $3,896,000 and the current ratio was 3.1 to 1 at January 31,
2000 while cash, cash equivalents and marketable securities comprised
$1,477,000. This level of liquid assets, combined with budgeted cash flow, is
adequate to meet periodic needs.
8
<PAGE>
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.
The Company verified Year 2000 readiness of third parties (vendors and
customers) with whom the Company has material relationships. 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.
9
<PAGE>
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 4(a) Annual Meeting of Shareholders - December 10, 1999
Item 4(b) Proposal #1 - Election of Directors
John R. Behrmann 2,046,949 For
24,200 Withhold Authority
3,412 Broker Non-Votes
Robert J. Delsol 2,046,949 For
24,200 Withhold Authority
423,541 Broker Non-Votes
Thomas B. Morgan 2,046,949 For
24,200 Withhold Authority
423,541 Broker Non-Votes
John A. Raycraft 2,046,949 For
24,200 Withhold Authority
423,541 Broker Non-Votes
Robert M. Topol 2,046,949 For
24,200 Withhold Authority
423,541 Broker Non-Votes
Item 4(c) Proposal #2 - To ratify the Board of Directors recommendation to
appoint KPMG LLP the Company's independent public accountants for
fiscal year 2000.
2,066,599 For
4,400 Against
150 Abstain
423,541 Broker Non-Votes
Item 4(d) There were no settlements between registrant and any other participant
terminating any solicitation, subject to Rule 14a-11
10
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Item 6(a) Exhibit 27 -- Financial Data Schedule
Item 6(b) 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: James D. Hyman
-------------------------------------
James D. Hyman
President and Chief Executive Officer
Chief Operating Officer
Date: March 15, 2000
11
<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, 2000 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-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> JAN-31-2000
<EXCHANGE-RATE> 1
<CASH> 1,258,638
<SECURITIES> 218,500
<RECEIVABLES> 3,416,052
<ALLOWANCES> 43,503
<INVENTORY> 0
<CURRENT-ASSETS> 5,783,247
<PP&E> 4,221,483
<DEPRECIATION> 2,614,489
<TOTAL-ASSETS> 7,390,241
<CURRENT-LIABILITIES> 1,887,354
<BONDS> 0
0
0
<COMMON> 757,296
<OTHER-SE> 5,502
<TOTAL-LIABILITY-AND-EQUITY> 7,390,241
<SALES> 0
<TOTAL-REVENUES> 5,193,980
<CGS> 0
<TOTAL-COSTS> 4,819,497
<OTHER-EXPENSES> (49,012)
<LOSS-PROVISION> 5,642
<INTEREST-EXPENSE> 458
<INCOME-PRETAX> 417,853
<INCOME-TAX> 158,872
<INCOME-CONTINUING> 258,981
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (727,258)
<NET-INCOME> (468,277)
<EPS-BASIC> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
