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, 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) (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 January 1, 2001 was 2,604,736 shares
after deducting 468,102 shares of treasury stock.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of October 31, 2000 2
Consolidated Statements of Operations for the three months
ended October 31, 2000 and 1999 (Restated) 3
Consolidated Statements of Cash Flows for the three months
ended October 31, 2000 and 1999 (Restated) 4
Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders Directors,
Executive Officers, Promoters and Control Persons; 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
OCTOBER 31, 2000
ASSETS
Current assets:
Cash and cash equivalents $ 2,083,991
Marketable investment securities 229,000
Member fees receivable, net of an allowance of $322,082 1,352,254
Deferred costs 148,976
Prepaid expenses 93,558
Deferred income taxes 175,029
Other current assets 345,747
-----------
Total current assets 4,428,555
-----------
Property and equipment:
Office furniture and fixtures 325,372
Computers and office equipment 4,011,005
Leasehold improvements 201,083
-----------
4,537,460
Less accumulated depreciation and amortization (3,029,420)
-----------
Net property and equipment 1,508,040
-----------
Intangible assets, net 763,376
-----------
Total assets $ 6,699,971
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 169,682
Claims payable 299,000
Accrued expenses 416,555
Accrued income taxes 30,877
Deferred revenue 870,290
-----------
Total current liabilities 1,786,404
-----------
Commitments and contingencies --
Shareholders' equity:
Common stock, no par value; 8,000,000 shares authorized;
3,072,838 shares issued 757,296
Additional paid-in capital 2,550,795
Retained earnings 3,112,980
Net unrealized loss on marketable investment securities (21,772)
Treasury stock, at cost, 468,102 shares (1,485,732)
-----------
Total shareholders' equity 4,913,567
-----------
Total liabilities and shareholders' equity $ 6,699,971
===========
See accompanying notes to consolidated financial statements.
2
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
----------------------------
2000 1999
----------- -----------
(RESTATED)
<S> <C> <C>
Operating revenues:
Fee revenues $ 2,043,850 $ 1,689,433
Reinsurance revenues 1,763,275 814,440
----------- -----------
Total operating revenues 3,807,125 2,503,873
Operating expenses:
Sales and marketing expenses 342,845 297,464
Direct membership expenses 613,135 571,729
General and administrative expenses 930,793 748,814
Reinsurance expense 1,520,300 646,703
Depreciation and amortization 141,133 135,972
ESOP charges 21,000 2,525
----------- -----------
Total 3,569,206 2,403,207
----------- -----------
Operating income 237,919 100,666
----------- -----------
Non-operating income (expense):
Interest income 31,661 27,451
Interest expense -- (448)
----------- -----------
Total non-operating income 31,661 27,003
----------- -----------
Net income before income tax expense and
change in accounting principle 269,580 127,669
Income tax expense (80,162) (43,408)
----------- -----------
Net income before change in accounting principle 189,418 84,261
Change in accounting principle, net of tax benefit of $95,337 -- (158,896)
----------- -----------
Net income (loss) $ 189,418 $ (74,635)
=========== ===========
Basic and diluted net income (loss) per share:
Net income before change in accounting principle $ 0.07 $ 0.03
Change in accounting principle -- (0.06)
----------- -----------
Basic and diluted net income (loss) per share $ 0.07 $ (0.03)
=========== ===========
Basic weighted average common
and equivalent shares outstanding 2,604,736 2,604,736
=========== ===========
Diluted weighted average common
and equivalent shares outstanding 2,613,656 2,621,106
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
------------------------------
2000 1999
----------- -----------
(RESTATED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 189,418 $ (74,635)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Change in accounting principle -- 158,896
Depreciation and amortization 141,133 135,972
ESOP shares committed to be released -- 2,525
Provision for losses on accounts receivable (23,210)
Deferred taxes (26,247) (39,099)
Changes in assets and liabilities:
Member fees receivable 636,969 425,787
Deferred costs (9,385) (7,628)
Prepaid expenses and other current assets 95,752 57,557
Income taxes receivable -- (57,319)
Accounts payable (11,086) (22,016)
Claims payable (13,400) 17,000
Accrued expenses 80,717 (49,509)
Accrued income taxes 106,420 --
Deferred revenue (336,143) (599,264)
----------- -----------
Net cash provided by (used in) operating activities 830,938 (51,733)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (31,843) (49,125)
Note receivable-officer -- 28,794
----------- -----------
Net cash used in investing activities (31,843) (20,331)
----------- -----------
Net increase (decrease) in cash and cash equivalents 799,095 (72,064)
Cash and cash equivalents, beginning of period 1,284,896 1,625,874
----------- -----------
Cash and cash equivalents, end of period $ 2,083,991 $ 1,553,810
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for taxes $ (2,150) $ 114,900
=========== ===========
Cash paid during the period for interest $ -- $ 458
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES:
Unrealized loss on marketable investment securities $ -- $ (10,375)
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
First American Health Concepts, Inc. ("FAHC" or the "Company") was incorporated
in Arizona in 1981 and first offered common stock publicly in October 1985. FAHC
markets and administers vision care programs under the registered trade names of
Eye Care Plan of America(R) and ECPA(R).
Initially, FAHC's growth came from the development of a direct access preferred
pricing program. This program is delivered through a national preferred provider
("PPO") network of independent and retail optometrists, opticians and
ophthalmologists. The most significant growth in the past three years has
occurred in the self-funded products and the insured products that are
underwritten by primary insurance carriers. Prior to January 1998, the Company
received administrative fee revenue in association with the insured revenue. In
January 1998, FAHC formed a captive reinsurance company, First American
Reinsurance Company ("FARC") in order to share in the underwriting profits of
the primary carrier.
In December 1999, the subsidiary Eye Care Plan of America - California, Inc.
("ECPA-CA") received licensure approval from the state of California. ECPA-CA
allows the Company to operate as an HMO in the number one vision care market in
the country. ECPA-CA operates as a specialized Knox-Keene Health Care Service
Organization.
PRINCIPLES OF CONSOLIDATION AND BASIS FOR PRESENTATION
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
consolidated financial statements include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial
position, the results of operations, and statements of cash flows for the
periods presented.
The unaudited consolidated financial statements presented herein were prepared
using the underlying accounting principles utilized in the Company's fiscal year
2000 annual audited consolidated financial statements, filed on Form 10-KSB with
the Securities and Exchange Commission on December 22, 2000. Operating results
for the three months ended October 31, 2000 are not necessarily indicative of
the results that may be expected for the year ending July 31, 2001. Certain
information, accounting policies and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading. These financial statements should be read in
conjunction with the Company's audited consolidated financial statements
included in the Company's Annual Report on Form 10-KSB for the year ended July
31, 2000.
The consolidated financial statements include the financial statements of the
Company and its three wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. As discussed in
Note 4, the Company restated its consolidated financial statements for the three
months ended October 31, 1999. Accordingly, amounts included within the
footnotes for the three months ended October 31, 1999 have also been restated to
conform with that presentation. Additionally, certain prior year amounts have
been reclassified to conform to current year presentation. The effects of the
reclassifications had no impact on net income (loss).
5
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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) (the "Plan"), 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 had guaranteed the bank loan, it was
reported as long term debt of the Company. The shares sold by the Company to the
Trust were reflected in shareholders' equity, and an amount corresponding to the
borrowing (the guaranteed ESOP obligation) was reported as a reduction of
shareholders' equity.
The loan agreement required quarterly payments of principal and interest, which
were 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
were reduced. The Company recognized compensation expense equal to the average
fair market value of the shares committed to be released for allocation to
participants in the ESOP, which was based on total debt service requirements.
The remaining principal balance of $21,100 was repaid during November 1999.
NOTE 3 - EARNINGS PER SHARE
The following is presented as a reconciliation of the numerators and the
denominators of basic and diluted earnings per share computations, in accordance
with SFAS No. 128.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED OCTOBER 31,
------------------------------------------------------------------------------------
2000 1999
---------------------------------------- ----------------------------------------
INCOME SHARES PER SHARE INCOME (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS (NUMERATOR) (DENOMINATOR) AMOUNTS
----------- ------------- ------- ----------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
Income available to
Common shareholders $ 189,418 2,604,736 $0.07 $ 84,261 2,604,736 $ 0.03
Change in accounting
principle (158,896) (0.06)
EFFECT OF DILUTIVE SECURITIES:
Common stock options 8,920 16,370
--------- ---------- ----- -------- --------- ------
DILUTED EPS:
Income (Loss) available to
Common shareholders $ 189,418 2,613,656 $0.07 $(74,635) 2,621,106 $(0.03)
========= ========== ===== ======== ========= ======
</TABLE>
6
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - RESTATEMENT
During 2000, subsequent to the initial filing of the Company's form 10-QSB for
the three months ended October 31, 1999, several accounting errors were
identified that required adjustment. The Company restated its Form 10-QSB on
June 20, 2000 to reflect those accounting adjustments.
On December 22, 2000, the Company filed its fiscal year 2000 annual report on
Form 10-KSB, which included its consolidated financial statements covering
fiscal years 2000 and 1999. Prior to filing the fiscal year 2000 Form 10-KSB,
the Company discovered that several additional adjustments were required to
correct the previously restated consolidated financial statements for fiscal
year 1999 which were originally restated and filed on June 20, 2000.
Additionally, the audit of fiscal year 2000 resulted in accounting adjustments;
some of which impacted the amounts previously reported in Form 10QSB/A for the
three months ended October 31, 1999.
The principal reasons and significant effects of the original restatement of
Form 10-QSB for the three months ended October 31, 1999, the fiscal year 1999
restatements and the fiscal year 2000 audit adjustments and their collective
impact on the accompanying consolidated financial statements from amounts
originally reported in Form 10QSB for the three months ended October 31, 1999
are summarized as follows:
ORIGINAL RESTATEMENT OF FORM 10-QSB FOR THE THREE MONTHS ENDED OCTOBER 31, 1999
UNRECORDED CLAIMS RESERVE
In January 1998, the Company formed a captive reinsurance company with
operations commencing in early 1999. The Company determined that it had failed
to accurately accrue a liability for "incurred but not reported" insured claims
in the period in which they were incurred. Accordingly, reinsurance expense for
the three months ended October 31, 1999 was increased by $17,000 and a
corresponding liability was recorded.
DEFERRED COSTS
Subsequent to the filing of the Form 10-QSB for the three months ended October
31, 1999, management determined that certain member costs deferred and amortized
over the life of the renewal premiums were in fact period costs and should have
been charged to expense as incurred. In evaluating both the capitalized deferred
cost balances in years prior to 1999, as well as the total cost amortized to
expense in those years, all amounts were comparable and the amounts capitalized
were consistent from period to period. Correspondingly, the Company originally
restated its financial statements to reflect these costs retroactively and
record the expense as incurred. Accordingly, deferred member costs were reduced
by $14,969 at October 31, 1999 and recorded as expense for the quarter.
CHANGE IN ACCOUNTING PRINCIPLE
The Company adopted SOP 98-5, REPORTING THE COSTS OF START-UP ACTIVITIES, in the
quarter ended October 31, 1999. Subsequent to the filing of the Form 10-QSB for
the three months ended October 31, 1999, management determined that the tax
benefit of the write-off of deferred organizational costs was not correctly
determined. Accordingly, the change in accounting principle was reduced by
$85,000 to correctly reflect the change in accounting principle, net of the
appropriate amount of taxes, and a corresponding tax receivable was recorded to
recognize the asset in the period it was realized.
7
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESTATEMENT OF FISCAL YEAR 1999
As referred to above, the consolidated financial statements for fiscal 1999 were
further restated and are included in the Company's fiscal year 2000 Annual
Report on Form 10KSB filed on December 22, 2000. The overall effect on the
consolidated financial statements as of and for the three months ended October
31, 1999 resulting from the fiscal year 1999 restatements reduced total assets
by $1,299,900 and total equity by $1,037,414.
AUDIT OF FISCAL YEAR 2000
The audit of fiscal year 2000 resulted in additional accounting adjustments;
some of which impacted the amounts previously reported on Form 10QSB/A for the
three months ended October 31, 1999. The impact of these adjustments are as
follows:
REVENUE RECOGNITION
During fiscal year 2000, the Company failed to reconcile, on a timely basis, the
detailed activity of its customer accounts receivable to the general ledger. The
reconciliation process revealed that various of its customers' account histories
did not properly account for billings, billing adjustments and/or bad debts that
should have been reflected in the periods in which they were incurred or
realized. Accordingly, revenues for the three months ended October 31, 1999 have
been reduced by $33,404, resulting from accounting errors, to correctly reflect
revenue in the period realized and a corresponding reduction in accounts
receivable was recorded.
CHANGE IN ACCOUNTING PRINCIPLE
The Company adopted SOP 98-5, REPORTING THE COSTS OF START-UP ACTIVITIES, during
the three months ended October 31, 1999. The Company was previously deferring
start-up costs associated with its California subsidiary. ECPA-CA now operates
as a Specialized Knox-Keene Health Care Services Organization licensed by the
California Department of Corporations. Included within deferred costs were
expenditures associated with obtaining its Knox-Keene license which qualified
for capitalization as an intangible asset. Thus $779,618 of costs, $483,363 net
of tax, originally recorded as expense within the "change in accounting
principle" during the three months ended October 31, 1999, has been capitalized
as an intangible asset.
The overall affect of the restatements resulting from the audit of fiscal year
2000 on the consolidated financial statements as of and for the three months
ended October 31, 1999 increased total assets by $869,461 and reduced the net
loss by $461,316 or $0.18 per share, basic and diluted.
8
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY
The affects of the restatements on the consolidated financial statements from
the amounts that were originally reported on Form 10QSB for the three months
ended October 31, 1999 are as follows:
Total assets:
Originally reported $6,411,792
Restated $5,981,383
Total Equity:
Originally reported $5,389,644
Restated $4,813,546
Net income before change in accounting principle:
Originally reported $ 243,903
Restated $ 84,261
Net loss:
Originally reported $ (573,158)
Restated $ (74,635)
Net income per share before change in accounting
principle (basic and diluted):
Originally reported $ 0.06
Restated $ 0.03
Net loss per share (basic and diluted):
Originally reported $ (0.22)
Restated $ (0.03)
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results
of Operations for the three months ended October 31, 1999 presented below
reflects certain restatements to the Company's previously reported results of
operations. See Note 4 of the notes to consolidated financial statements for
discussions of these restatements.
RESULTS OF OPERATIONS
Net income, before change in accounting principle, for the three months
ended October 31, 2000 was $189,000, or $0.07 per share basic and diluted,
compared to net income, before change in accounting principle, of $84,000, or
$0.03 per share basic and diluted, for the same period a year ago. Net Income
for the three months ended October 31, 2000 significantly increased as a result
of an increase in insured and self-funded revenue which was due to a significant
increase in the volume of insured customers marketed through the Company's
captive reinsurance subsidiary. Net income for the three months ended October
31, 1999 was reduced by $159,000, net of taxes of $95,000, or $0.06 per share
basic and diluted, due to a change in accounting principle resulting from the
Company's adoption of Statement of Position 98-5 which requires that costs
incurred during start-up activities, including organization costs, be expensed
as incurred. Net income for the three months ended October 31, 2000 was
$189,000, or $0.07 per share basic and diluted. After giving effect to the
change in accounting principle, net income for the three months ended October
31, 1999 was reduced to a net loss of $75,000, or $0.03 per share basic and
diluted.
Operating revenues for the three months ended October 31, 2000 increased
$1,303,000 or 52% to $3,807,000 from $2,504,000 for the same period in 1999.
Non-insured products decreased $15,000 or 1% to $925,000, as compared to
$940,000 for the same period in 1999. This decrease is a reflection of changing
market demand for vision care preferred pricing or "discount" programs that the
Company has been anticipating for several years. Insured and self-funded product
revenues increased $1,032,000 or 91% to $2,171,000, as compared to $1,139,000
for the same period in 1999. The significant increase in insured and self-funded
revenue was due to a significant increase in the volume of insured customers
marketed through the Company's captive reinsurance subsidiary. Other revenues
increased $285,000 or 67% to $711,000, as compared to $426,000 for the same
period in 1999. The significant increase in other revenues was due to various
administrative and marketing services provided to the Company's carriers through
its captive reinsurance subsidiary, as well as an increase in new self-funded
clients. Market research continues to show an increasing demand for
full-benefit, managed vision care programs. The Company anticipates that
revenues from its managed vision care programs (insured and self-funded) will
continue to be the source of growth in the future. This is the reason that FARC
was formed in January 1998. FARC assumes a portion of the insured premium from
the underwriting carrier through a Quota Share agreement. The premium assumed
under this agreement during the three months ended October 31, 2000 was
$1,763,000 of the insured and self-funded revenues discussed above, as compared
to $814,000 for the same period in 1999.
Total operating expenses for the three months ended October 31, 2000
increased $1,166,000 or 49% for the three months ended October 31, 2000 to
$3,569,000, as compared to $2,403,000 for the same period in 1999. However, the
ratio of total operating expenses to total revenue decreased to 94%, as compared
to 96% for the same period in the prior year. The majority of the increase in
operating expenses resulted from an increase in reinsurance expense which
corresponds with the increase in reinsurance premium revenue. Overall operating
expenses as a percentage of operating revenues are expected to continue to
decrease as the Company continues to increase its volume of activity through its
reinsurance subsidiary.
10
<PAGE>
Sales and marketing costs increased $46,000 or 15% to $343,000 for the
three months ended October 31, 2000, as compared to $297,000 for the period in
the prior year. The increase is due to sales and marketing salaries, brokerage
commissions and a slight increase in travel related expenses all of which are
attributable to continued increased sales marketing efforts. The Company expects
that sales and marketing expenses will continue to increase in the future
commensurate with its anticipated growth in its insured and self-funded
products.
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 $41,000 or 7% to $613,000
for the three months ended October 31, 2000, as compared to $572,000 for the
same period in the prior year. The increase in direct member costs is due to
higher payroll as a result of increased staffing needs offset by a reduction in
contract labor and lower printing and postage expenses.
General and administration expenses ("G&A") increased $182,000 or 24% to
$931,000 for the three months ended October 31, 2000, as compared to $749,000
for the same period in the prior year. G&A increased as a result of higher
salary and related benefits, costs of opening five new sales offices and
increased professional services costs attributable to the fiscal year 2000 and
1999 restatements offset by lower contract labor and travel related expenses.
Reinsurance expense increased $874,000 or 135% to $1,520,000 for the three
months ended October 31, 2000, as compared to $646,000 for the three months
ended October 31, 1999. The increased expense corresponds to the increase in
reinsurance revenues.
Depreciation and amortization was $141,000 for the three months ended
October 31, 2000, as compared to $136,000 for the corresponding period in the
prior year. The slight increase was due to the amortization of the Knox-Keene
license which was granted in late December 1999. There was no such amortization
during the three months ended October 31, 1999.
ESOP compensation expense represents contributions committed for the
periods in accordance with the Company's employee stock ownership plan
implemented during fiscal 1994. Contributions to the ESOP plan are discretionary
and considers the profitability of the Company. ESOP expense recognized is also
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 $32,000 for three months ended October 31, 2000, as
compared to $27,000 for the corresponding period in 1999. The increase in
interest income is due to higher weighted average amount of invested funds as
compared to the prior year.
Interest expense decreased due to the ESOP loan being fully repaid in
November 1999.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased 13% from $2,343,000 and a current ratio of 2.15
to 1 at July 31, 2000 to working capital of $2,642,000 and a current ratio of
2.48 to 1 at October 31, 2000. Cash and cash equivalents and marketable
investment securities increased $799,000 or 53% from $1,514,000 at July 31, 2000
to $2,313,000 at October 31, 2000.
The Company's cash and cash equivalents increased $799,000 or 62% from
$1,285,000 at July 31, 2000 to $2,084,000 at October 31, 2000. Cash flow from
operating activities was $831,000 for the three months ended October 31, 2000
compared to cash used in operating activities of $(52,000) for the same period
in 1999. The significant increase in cash flows from operating activities for
the three months ended October 31, 2000 was due to a focus on collection efforts
of past due accounts and due to the significant increase in the volume of
insured customers marketed through the Company's captive reinsurance subsidiary
which accounted for the majority of the increase in overall earnings. The
majority of the Company's use of funds for the three months ended October 31,
2000 and 1999 was the purchase of new computer hardware and software and
necessary system implementation support.
Management anticipates moderate capital expansion in 2001 through capital
additions and infrastructure expenditures to accommodate growth as it occurs.
The Company believes its ongoing cash flow will support all anticipated capital
expenditures and operating expenses.
SUBSTANTIAL PROFESSIONAL SERVICES EXPENSES
The Company has incurred substantial costs in connection with the process
of reviewing, reconciling and restating its books and records, the investigation
of its prior accounting practices and preparation of its audited consolidated
financial statements for the years ended July 31, 2000 and 1999 included in its
annual report on Form 10KSB filed on December 22, 2000. Included in these
expenses are the costs of the audits for fiscal year 2000 and 1999, legal costs,
and costs of retaining outside accounting assistance to assist management in
reviewing and reconciling its books and records. Total cost incurred to date is
$241,000 of which $48,000 has been expensed during the three months ended
October 31, 2000. Management estimates that an additional $143,000 of
professional service costs will be incurred to complete the fiscal year 2000
review which will be expensed during the second quarter of fiscal 2001.
CHANGE IN ACCOUNTING PRINCIPLE
The Company adopted Statement of Position ("SOP") 98-5 "REPORTING THE COSTS
OF START-UP ACTIVITIES" which requires that costs incurred during start-up
activities, including organization costs, be expensed as incurred. This new
standard, which was effective for the Company for the fiscal year ended July 31,
2000, was evaluated by management and any relevant costs were expensed during
the quarter ended October 31, 1999. The Company was previously deferring
start-up costs associated with ECPA-CA. Accordingly, the Company recorded a
$159,000 change in accounting principle (after reduction for income taxes of
$95,000) which is included in the net loss for the three months ended October
31, 1999. This change in accounting principle resulted in a reduction of net
income per share of $0.06 per share basic and diluted.
12
<PAGE>
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.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Item 6(a) Exhibit 11.1 -- Computation of Per Share Earnings
Item 6(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
13
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
FIRST AMERICAN HEALTH CONCEPTS, INC.
(Registrant)
Date: January 12, 2001 By: /s/ James D. Hyman
-------------------------------------
James D. Hyman
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ James D. Hyman President and Chief Executive Officer 1/11/01
---------------------------
James D. Hyman
/s/ James A. Gresko Vice President Finance and 1/11/01
--------------------------- Chief Financial Officer
James A. Gresko
14
