UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[X] Quarterly Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For quarter ended January 31, 2000.
[ ] Transition Report Pursuant to 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.
(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 29, 2000 was 2,604,736 shares
after deducting 468,102 shares of treasury stock.
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC.
FORM 10-QSB/A
FOR THE QUARTER ENDED
JANUARY 31, 2000
PART I. FINANCIAL INFORMATION (RESTATED) Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of January 31, 2000 (Restated) 3
Consolidated Statement of Operations for the quarter
ended January 31, 2000 and 1999 (Restated) 4
Consolidated Statement of Cash Flows for the three months
ended January 31, 2000 and 1999 (Restated) 5
Notes to Consolidated Financial Statements (Unaudited) 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 10
Signatures 11
2
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Unaudited)
January 31, 2000
(Restated)
ASSETS
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 162,269
Prepaid expenses 153,327
Income taxes receivable 435,872
Other current assets 87,226
-----------
Total current assets 5,731,884
-----------
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 $ 7,338,878
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 231,501
Claims payable 328,000
Deferred revenue 1,212,699
Accrued expenses and other current liabilities 102,327
Deferred income taxes 285,549
-----------
Total current liabilities 2,160,076
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 3,375,118
-----------
6,664,534
Treasury stock, at cost, 468,102 shares (1,485,732)
-----------
Total shareholders' equity 5,178,802
-----------
Total liabilities and shareholders' equity $ 7,338,878
===========
See accompanying notes to the consolidated financial statements (unaudited).
3
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
Quarter Ended January 31, 2000 and 1999 and
the Six Months Ended January 31, 2000 and 1999
(Restated)
<TABLE>
<CAPTION>
Quarter Ended January 31, Six Months Ended January 31,
------------------------- ----------------------------
2000 1999 2000 1999
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues:
Fee revenues $ 1,684,681 1,763,706 3,403,785 3,381,139
Premiums assumed 921,161 284,326 1,739,334 503,151
----------- ---------- ---------- ----------
Total operating revenues 2,605,842 2,048,032 5,143,119 3,884,290
Operating expenses:
Sales and marketing costs 317,571 367,071 631,613 718,166
Direct membership costs 692,938 587,189 1,346,349 1,218,947
General and administrative expenses 697,796 691,578 1,349,040 1,303,253
Assumed incurred loss expense 324,087 141,947 718,798 282,132
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 2,518,849 2,019,368 4,922,056 3,974,667
----------- ---------- ---------- ----------
Operating income (loss) 86,993 28,664 221,063 (90,377)
----------- ---------- ---------- ----------
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 before income taxes 109,002 44,212 270,075 1,911
Income taxes 37,061 16,801 91,826 726
----------- ---------- ---------- ----------
Net income before change in accounting principle 71,941 27,411 178,249 1,185
----------- ---------- ---------- ----------
Cumulative effect of change in accounting
principle, net of tax -- -- (642,259) --
----------- ---------- ---------- ----------
Net income (loss) after change in accounting principle $ 71,941 27,411 (464,010) 1,185
=========== ========== ========== ==========
Net income per share - basic before change
in accounting principle $ 0.03 0.01 0.07 --
Cumulative effect of change in accounting principle,
net of tax - basic -- -- (0.25) --
----------- ---------- ---------- ----------
Net income (loss) per share - basic after change in
accounting principle $ 0.03 0.01 (0.18) --
=========== ========== ========== ==========
Net income per share - diluted before change in
accounting principle $ 0.03 0.01 0.07 --
Cumulative effect of change in accounting principle,
net of tax - diluted -- -- (0.25) --
----------- ---------- ---------- ----------
Net income (loss) per share - diluted after change in
accounting principle $ 0.03 0.01 (0.18) --
=========== ========== ========== ==========
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 accompanying notes to the consolidated financial statements (unaudited).
4
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Six months ended January 31, 2000 and 1999
(Restated)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (464,010) 1,185
Adjustments to reconcile net income (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 (963,724) (1,395,571)
Deferred expenses 990,091 (259,387)
Prepaid expenses and other current assets 85,163 25,849
Income tax receivable (79,671) 317
Accounts payable 170,576 243,378
Claims payable 67,000 118,000
Deferred revenue 111,061 95,523
Accrued expenses and other current liabilities (66,121) (30,515)
----------- -----------
Net cash used in operating activities (216,654) (904,417)
----------- -----------
Cash flows from investing activities:
Decrease in marketable investment securities -- 271,364
Decrease in note receivable - officer 28,794 17,609
Purchases of property and equipment (158,276) (248,095)
----------- -----------
Net cash (used in) provided by investing activities (129,482) 40,878
----------- -----------
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)
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements (unaudited).
5
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2000 and 1999
(Unaudited)
NOTE 1 - GENERAL
These restated 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 (restated) 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 (restated) 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.
During 2000, subsequent to the issuance of the Company's January 31, 2000
consolidated financial statements, certain accounting items that affect those
consolidated financial statements as of and for the periods ended January 31,
2000 and 1999 were identified as requiring adjustment. The need for adjustment
was identified in the following items: an unrecorded claims reserve, tax
adjustments, other adjustments related to general expenses, and costs that do
not qualify for deferral. All presentations have been restated accordingly. The
adjustments change net income (loss) per share after change in accounting
principle as follows: Quarter ended January 31, 2000: $0.01 decrease; January
31, 1999: no change; and six months ended January 31, 2000: no change; January
31, 1999: $0.01 increase.
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 designated 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/A 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. Revenue's 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. Revenues 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 25% for the quarter ended January 31, 2000 to
$2,519,000. Total operating expenses for the year-to-date 2000 increased 24% to
$4,922,000. However, the ratio of total operating expenses to total revenue
decreased to 96%, as compared to 102% 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 $693,000 for the quarter
ended January 31, 2000, as compared to $587,000 for the same period in fiscal
1999. Direct membership costs increased for the six-month period to $1,346,000,
as compared to $1,219,000 for the same period in 1999. The membership expenses
increased due to increased enrollment.
7
<PAGE>
General and administrative expenses totaled $698,000 for the three months ended
January 31, 2000, as compared to $692,000 for 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 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 $324,000 for the quarter ended
January 31, 2000, as compared to $142,000 for the quarter ended January 31,
1999. Assumed incurred loss expense increased to $719,000 for the six-month
period, as compared to $282,000 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 $422,000 and
$800,000 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 the three 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 $3,572,000 and the current ratio was 2.7 to 1 at January 31,
2000 while cash and cash equivalents and marketable investment securities
comprised $1,477,000. 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 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.
8
<PAGE>
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 that it did not incur additional
material costs in the implementation of the improvements.
The Company is 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 No. 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 Against
423,541 Broker Non-Votes
Thomas B. Morgan 2,046,949 For
24,200 Against
423,541 Broker Non-Votes
John A. Raycraft 2,046,949 For
24,200 Against
423,541 Broker Non-Votes
Robert M. Topol 2,046,949 For
24,200 Against
423,541 Broker Non-Votes
ITEM 4(c) Proposal No. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 -- Restated 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.
10
<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/ James D. Hyman
--------------------------------
James D. Hyman
President & CEO
By: /s/ James Gresko
---------------------------------
(James Gresko)
Vice President Finance and Chief Financial Officer
Date: June 20, 2000
11
