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, 1997.
[ ] 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 December 11, 1997 was 2,564,736 shares
after deducting 468,102 shares of treasury stock.
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, Inc.
FORM 10-QSB
For the Quarter Ended
October 31, 1997
TABLE OF CONTENTS
Part I. Financial Information Page
----
Item 1 Financial Statements (Unaudited)
Balance Sheet as of October 31, 1997 .................................3
Statement of Income for the quarters
ended October 31, 1997 and 1996.....................................4
Statement of Cash Flows for the quarters
ended October 31, 1997 and 1996.....................................5
Notes to the Financial Statements..............................................6
Item 2. Management's Discussion and Analysis..................................8
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
Page 2
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- ------------------------------------
FIRST AMERICAN HEALTH CONCEPTS, Inc.
BALANCE SHEET
- ------------------------------------
ASSETS October 31,1997
- --------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 326,931
Marketable investment securities 1,506,960
Member fees receivable, net of allowance for
doubtful accounts of $4,500 561,094
Note receivable-officer, current 18,621
Deferred expenses 146,529
Prepaid expenses and other current assets 321,600
-----------
Total Current Assets 2,881,735
Property and Equipment:
Office furniture and fixtures 307,038
Office equipment 1,504,941
Leasehold improvements 112,362
Systems under development 1,608,139
-----------
3,532,480
Less accumulated depreciation and amortization (1,296,627)
-----------
Net Property and Equipment 2,235,853
Other Assets:
Marketable investment securities, long term 890,233
Note receivable-officer, long term 25,721
-----------
Total Assets $ 6,033,542
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 37,347
Current portion of capital lease obligation (Note 2) 20,195
Current portion of bank loan (Note 3) 84,400
Income taxes payable (101,827)
Deferred revenue 773,175
Accrued expenses and other current liabilities 136,441
Deferred income taxes 98,000
-----------
Total Current Liabilities 1,047,731
Long-Term Liabilities:
Capital lease obligation (Note 2) 5,133
Bank loan (Note 3) 84,400
-----------
Total Long-Term Liabilities 89,533
Shareholders' Equity:
Common stock, no par value; Authorized
8,000,000 shares; Issued, 3,032,838 shares 681,546
Additional paid-in capital 2,552,223
Net unrealized gain on marketable investment securities 1,618
Unearned ESOP shares (Note 3) (160,766)
Retained earnings 3,307,389
-----------
6,382,010
Treasury stock, at cost, 468,102 shares (1,485,732)
-----------
Total Shareholders' Equity 4,896,278
-----------
Total Liabilities and Shareholders' Equity $ 6,033,542
===========
See notes to the financial statements
Page 3
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- ------------------------------------
FIRST AMERICAN HEALTH CONCEPTS, Inc.
STATEMENT OF INCOME
- ------------------------------------
Quarter ended October 31,
1997 1996
- --------------------------------------------------------------------------------
Operating Revenues $ 2,003,608 $ 1,617,545
Operating Expenses:
Sales and marketing costs 732,967 517,037
Direct membership costs 503,415 471,679
General and administration 598,602 401,778
ESOP Charges 14,398 17,314
Depreciation 130,841 75,492
------------------------------
Total Operating Expenses 1,980,223 1,483,300
------------------------------
Operating Income 23,385 134,245
Non-operating Income (Expense):
Interest income 39,514 57,252
Interest expense (4,985) (7,354)
------------------------------
Total Non-operating Income 34,529 49,898
Income Before Income Taxes 57,914 184,143
Income Taxes 21,015 70,000
------------------------------
Net Income $ 36,899 $ 114,143
==============================
Net Income Per Share $ 0.01 $ 0.04
==============================
Weighted Average Shares
Outstanding 2,513,668 2,636,478
==============================
See notes to the financial statements
Page 4
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- ------------------------------------
FIRST AMERICAN HEALTH CONCEPTS, Inc.
STATEMENT OF CASH FLOWS
- ------------------------------------
<TABLE>
<CAPTION>
Quarter ended October 31,
1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 36,899 $ 114,143
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 130,841 75,492
Amortization 12,330
ESOP shares committed to be released 14,397 17,314
Change In Assets and Liabilities:
Decrease in member fees receivable 564,633 8,586
Decrease in deferred expenses 84,738 18,767
Decrease (increase) in prepaid expenses and other current assets (29,422) 36,599
Decrease in accounts payable (149,740) (49,574)
Increase in income taxes payable 21,014 70,000
Decrease in deferred revenue (612,578) (344,980)
Increase (decrease) in accrued expenses and other current liabilities (55,754) 13,522
--------------------------
Net Cash Used In Operating Activities 5,028 (27,801)
Cash Flows from Investing Activities:
Decrease in marketable investment securities 32,937 87,642
Decrease in note receivable-officer 18,183 18,020
Purchases of property and equipment (277,399) (189,819)
--------------------------
Net Cash (Used) Provided By Investing Activities (226,279) (84,157)
Cash Flows from Financing Activities:
Purchase of treasury stock 0 (152,859)
Proceeds from stock options exercised 26,250 468
Repayments of bank loan (21,100) (21,100)
Repayments of capital lease obligation (4,654) (4,074)
--------------------------
Net Cash Used By Financing Activities 496 (177,565)
Net (Decrease) Increase In Cash and Cash Equivalents (220,755) (289,523)
Cash and Cash Equivalents, Beginning of Period 547,686 1,599,566
--------------------------
Cash and Cash Equivalents, End of Period $ 326,931 $ 1,310,043
==========================
Supplemental Disclosures of Non-Cash Activities:
Unrealized gain (loss) on marketable investment securities ($ 3,305) $ 9,917
==========================
</TABLE>
See notes to the financial statements
Page 5
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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 1997 audited
financial statements, filed on Form 10-KSB with the Securities and Exchange
Commission on October 29, 1997. Operating results for the three months ended
October 31, 1997 are not necessarily indicative of the results that may be
expected for the year ending July 31, 1998.
Note 2 - Obligation Under Capital Lease
- ---------------------------------------
The Company leases telephone equipment under the terms of a capital lease. The
lease terms provide for sixty (60) monthly installments of $1,867 including
principal and interest, through January, 1999. At October 31, 1997, office
equipment included $82,052 and accumulated amortization included $64,583 related
to the asset covered by this lease. Following is a schedule by year of future
minimum lease payments as of October 31, 1997:
Fiscal year ending July 31,
- ----------------------------------------------------------
1998................................................16,800
1999................................................10,980
-------
Total minimum lease payments........................27,780
Less amount representing interest................2,321
-------
Principal balance..................................$25,459
=======
- ----------------------------------------------------------
Page 6
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Note 3 - 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: 1998 - $63,300; 1999 - $84,400; 2000 - $21,100.
Page 7
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Management's Discussion and Analysis
- ------------------------------------
Results of Operations
- ---------------------
Operating revenues for the quarter ended October 31, 1997 were $2,004,000
compared to $1,618,000 for the quarter ended October 31, 1996, an increase of
24%. Although membership in the Company's traditional vision plan, ECPA
Non-Insured, increased from the prior year to 10.2 million members, related
revenues increased 22% due to the addition of relatively higher-priced groups.
Increased revenues were also generated by the Company's indemnity plans, ECPA
Insured and ECPA Self-funded, which increased enrollments by approximately 50%
during the past year. Revenues from these plans increased 32% to $273,000 for
the first quarter. Management expects all revenue categories to increase in the
second quarter as a result of increasing market acceptance of the indemnity
plans and the effect of increased enrollment of employees into all of the
Company's vision care plans effective January 1, 1998.
Total operating expenses increased 34% to $1,980,000 reflecting the increased
costs of business and network development as well as marketing and servicing the
indemnity plans. Management expects total operating expenses to reflect a
moderate increase over the prior year as the Company continues to upgrade its
customer service and computer processing capabilities, and expand its provider
network.
Sales and marketing costs of $733,000 for the quarter ended October 31, 1997
increased 42% over the same period in fiscal 1997. The increase was the result
of the addition of marketing, account services, and sales support personnel and
increased focus on quality assurance activities including an intensified
provider credentialing program. The increasing focus on ECPA Insured and ECPA
Self-Funded products will not require more sales support personnel to
accommodate these sales efforts. This focus will result in moderate increased
sales and marketing costs during fiscal 1998 that will serve to increase
business and projected rate increases which will, in turn, benefit the Company's
managed care margins.
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 from $472,000 for the
quarter ended October 31, 1996 to $503,000 for the quarter ended October 31,
1997. This 7% increase resulted from the addition of customer service,
enrollment, and claims administration personnel, and higher claims
administration costs, both tied to increased insured and self-funded membership.
Management expects direct membership costs to rise as the anticipated membership
growth continues, especially in the indemnity programs.
General and administration costs, amounting to $599,000 for the three months
ended October 31, 1997, show an increase compared to the same period in 1996.
The increase was the result of expanded employment support services and expenses
related to the Company's overall increased employment levels.
Depreciation was $131,000 for the quarter ended October 31, 1997 compared to
$75,000 for the corresponding three months of 1996. Depreciation increased due
to purchases of computer systems and mail processing and telephone equipment to
accommodate personnel additions and increased member communication requirements.
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.
Page 8
<PAGE>
Interest income was $40,000 for the three months ended October 31, 1997 compared
to $57,000 in 1996 reflecting the Company's use of cash to promote further
infrastructure development. For the quarter ended October 31, 1997, average
invested cash and marketable investment securities (current and long term)
decreased compared to the same period in 1996. This decrease was a direct result
of the Company's internal investment. Disregarding rate fluctuations, interest
income should show a modest increase in fiscal 1998 as management continues to
seek improved investment opportunities.
Interest expense increased compared to the first quarter of fiscal 1997 as a
result of interest on borrowings by the ESOP trust which are guaranteed and
therefore recorded by the Company.
Liquidity and Capital Resources
- -------------------------------
Working capital was $4,896,000 and the current ratio was 2.8 to 1 at October 31,
1997 while cash and cash equivalents comprised $1,834,000. The Company's
principal source of funds during the first quarter was from operations. Maturing
long-term investments were also reinvested in securities classified as cash
equivalents.
Major uses of funds during the quarter included investing activities related to
increased marketable security investments and purchases of property and
equipment. The Company did not repurchase any treasury stock during the quarter,
though the Board of Directors has authorized up to $1 million for such
acquisitions as market conditions present attractive opportunity.
Management anticipates continuing expansion efforts through additional
management and staff support personnel, capital additions and infrastructure
expenditures to accommodate future growth. The Company believes its ongoing cash
flow will support all anticipated expenditures and operating expenses.
Page 9
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Incorporated by reference to the Notice of Meeting and Proxy
Statement for Annual Meeting of Shareholders filed October 29,
1997 with Form 10-KSB for the year ended July 31, 1997.
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.
Page 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/ John A. Raycraft
--------------------
John A. Raycraft
President and Chief Executive Officer
By: /s/ Richard A. Kiser
--------------------
Richard A. Kiser
Vice President of Finance and Chief Financial Officer
Date: December 11, 1997
Page 11
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