UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934. For the quarter ended April 30, 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 June 12, 1997 was 2,539,736 shares
after deducting 468,102 shares of treasury stock.
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, Inc.
FORM 10-QSB
For the Quarter Ended
April 30, 1997
TABLE OF CONTENTS
Part I. Financial Information Page
----
Item 1. Financial Statements (Unaudited)
Balance Sheet as of April 30, 1997 .............................. 3
Statements of Income for the quarter and nine months
ended April 30, 1997 and 1996................................... 4
Statements of Cash Flows for the nine months
ended April 30, 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
<PAGE>
- --------------------------------------------------------------------------------
FIRST AMERICAN HEALTH CONCEPTS, Inc.
BALANCE SHEET
- --------------------------------------------------------------------------------
ASSETS April 30, 1997
- --------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 701,512
Marketable investment securities 1,205,216
Member fees receivable, net of allowance for
doubtful accounts of $9,787 1,288,527
Note receivable-officer, current 18,621
Deferred expenses 296,220
Income taxes receivable 35,070
Prepaid expenses and other current assets 412,791
-----------
Total Current Assets 3,957,957
Property and Equipment:
Office furniture and fixtures 307,038
Office equipment 1,416,393
Leasehold improvements 112,362
Systems under development 1,246,926
-----------
3,082,719
Less accumulated depreciation and amortization (1,149,512)
-----------
Net Property and Equipment 1,933,207
Marketable investment securities, long term 1,214,873
Note receivable-officer, long term 43,302
-----------
Total Assets $ 7,149,339
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 245,779
Current portion of capital lease obligation (Note 2) 18,890
Current portion of bank loan (Note 3) 105,500
Deferred revenue 1,666,404
Accrued expenses and other current liabilities 262,497
Deferred income taxes 19,676
-----------
Total Current Liabilities 2,318,746
Long Term Liabilities:
Capital lease obligation (Note 2) 15,593
Bank loan (Note 3) 126,600
-----------
Total Long-Term Liabilities 142,193
Shareholders' Equity:
Common stock, no par value, Authorized
8,000,000 shares; Issued, 3,007,838 shares 648,108
Additional paid-in capital 2,560,544
Net unrealized loss on marketable investment securities (6,116)
Unearned ESOP shares (Note 3) (210,943)
Retained earnings 3,182,538
-----------
6,174,131
Treasury stock, at cost, 468,102 shares (1,485,731)
-----------
Total Shareholders' Equity 4,688,400
-----------
Total Liabilities and Shareholders' Equity $ 7,149,339
===========
See notes to the financial statements
Page 3
<PAGE>
- --------------------------------------------------------------------------------
FIRST AMERICAN HEALTH CONCEPTS, Inc.
STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter ended April 30, Nine months ended April 30,
1997 1996 1997 1996
- ------------------------------------------------------------ --------------------------
<S> <C> <C> <C> <C>
Operating Revenues: $ 1,806,907 $ 1,553,394 $ 5,135,334 $ 4,127,336
Operating Expenses:
Sales and marketing costs 626,843 535,621 1,694,074 1,410,973
Direct membership costs 600,308 386,113 1,591,591 963,140
General and administration 486,518 426,898 1,371,546 1,222,987
Depreciation 76,526 62,534 227,677 171,196
ESOP charges 15,843 20,008 48,861 64,601
-------------------------- --------------------------
Total Operating Expenses 1,806,038 1,431,174 4,933,749 3,832,897
-------------------------- --------------------------
Operating Income 869 122,220 201,585 294,439
Non-Operating Income (Expense):
Interest income 44,347 51,289 149,514 171,459
Interest expense (6,178) (8,300) (20,301) (27,060)
-------------------------- --------------------------
Total Non-Operating Income 38,169 42,989 129,213 144,399
-------------------------- --------------------------
Income Before Income Taxes 39,038 165,209 330,798 438,838
Income Taxes 16,000 60,000 125,000 154,000
-------------------------- --------------------------
Net Income $ 23,038 $ 105,209 $ 205,798 $ 284,838
========================== ==========================
Net Income Per Share: $ 0.01 $ 0.04 $ 0.08 $ 0.11
========================== ==========================
Weighted Average Shares
Outstanding: 2,557,391 2,642,139 2,588,959 2,663,189
========================== ==========================
</TABLE>
See notes to the financial statements
Page 4
<PAGE>
- --------------------------------------------------------------------------------
FIRST AMERICAN HEALTH CONCEPTS, Inc.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended April 30,
1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 205,798 $ 284,838
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 227,677 171,196
Amortization 36,990 18,495
Income tax benefit arising from stock option plan -- --
ESOP shares committed to be released 48,861 65,689
Change in Assets and Liabilities:
(Increase) decrease in member fees receivable (642,277) 20,562
Reduction in frames inventory -- 4,626
Increase in deferred expenses (72,250) (69,363)
Increase in prepaid expenses and other current assets (217,786) (181,415)
Increase in accounts payable 29,430 119,937
Decrease in income taxes payable (2,262) (11,941)
Increase in deferred revenue 512,726 382,148
Increase in accrued expenses and other current liabilities 885 134,231
--------------------------
Net Cash Provided by Operating Activities 127,792 939,003
Cash Flows from Investing Activities:
Decrease in marketable investment securities 171,133 2,381,410
Decrease in note receivable from officer 16,820 16,356
Purchases of property and equipment (832,472) (652,487)
--------------------------
Net Cash (Used In) Provided By Investing Activities (644,519) 1,745,279
Cash Flows from Financing Activities:
Purchase of treasury stock (344,290) (167,914)
Proceeds from stock options exercised 17,802 9,908
Repayments of bank loan (42,200) (63,300)
Repayments of capital lease obligation (12,639) (13,113)
--------------------------
Net Cash Used In Financing Activities (381,327) (234,419)
--------------------------
Net (Decrease) Increase In Cash and Cash Equivalents (898,054) 2,449,863
Cash and Cash Equivalents, Beginning of Period 1,599,566 2,069,129
--------------------------
Cash and Cash Equivalents, End of Period $ 701,512 $ 4,518,992
==========================
Supplemental Disclosure of Cash Flow Information:
Cash paid during nine-month period for income taxes $ 127,262 $ 166,277
==========================
Supplemental Disclosure of Non-Cash Activities:
Unrealized gain (loss) on marketable investment securities ($ 4,502) ($ 3,044)
==========================
</TABLE>
See notes to the financial statements
Page 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 1996 audited
financial statements, filed on Form 10-KSB with the Securities and Exchange
Commission on October 28, 1996. Operating results for the three and nine months
ended April 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending July 31, 1997.
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 April 30, 1997, office
equipment included $82,052 and accumulated amortization included $57,052 related
to the asset covered by this lease. Following is a schedule by year of future
minimum lease payments as of April 30, 1997:
Fiscal year ending April 30,
- --------------------------------------------------
1997 ................................... $ 5,600
1998 ................................... 22,400
1999 ................................... 10,980
-------
Total minimum lease payments ........... 38,980
Less amount representing interest 4,497
-------
Principal balance ...................... $34,483
=======
- --------------------------------------------------
Page 6
<PAGE>
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: 1997 - $42,200; 1998 - $84,400; 1999 - $84,400;
and 2000 - $21,100.
Page 7
<PAGE>
Management's Discussion and Analysis
- ------------------------------------
Results of Operations
- ---------------------
Operating revenues for the quarter ended April 30, 1997 were $1,807,000 compared
to $1,553,000 for the quarter ended April 30, 1996, an increase of 16%.
Membership in the Company's traditional vision plan, ECPA Non-Insured, increased
approximately 6%, compared to the prior 9 month period, to 10.3 million members.
Related revenues increased 13%, compared to the same prior period, because of
the addition of relatively higher-priced groups. For the nine months ended April
30, 1997 non-insured revenues increased 18% as a result of these same membership
increases. Increased revenues were also generated by the Company's ECPA Insured
and ECPA Self-funded plans, which increased enrollments by 60% during the past
year. Revenues from these plans increased 57% for the third quarter to $464,000
and 120% for the nine months ended April 30, 1997 to $1,317,000. Management
expects revenues to increase in the fourth quarter as a result of the ongoing
effect of increased enrollment into all of the Company's vision care plans and
continued market acceptance of the non-insured and insured plans. A significant
portion of sponsor companies maintain employee benefit plans with calendar-year
terms, resulting in the Company's third quarter generally showing the largest
increase in enrollment and revenues compared to other quarters.
Total operating expenses increased 26% for the third quarter to $1,806,000 and
28% to $4,934,000 for the nine months ended April 30, 1997 reflecting the
increased costs of business and network development as well as marketing and
servicing ECPA's plans. Management expects that total operating expenses will
reflect increases over the prior year due to the continuing effect of upgraded
customer service and computer processing capabilities, maintenance of the
expanded provider network, and building of marketing and sales support functions
to accommodate membership growth and market demands.
Sales and marketing costs for the quarter and nine months ended April 30, 1997
of $627,000 and $1,694,000 increased 16% and 20%, respectively, over the same
periods in fiscal 1996. The increase was the result of the addition of
marketing, account services, and sales support personnel and increased focus on
quality assurance activities including intensified provider credentialing
programs. The increasing emphasis on ECPA-Insured and ECPA Self-funded products
requires more sales support personnel to accommodate these marketing and sales
efforts and will result in increased sales and marketing costs during the
remainder of fiscal 1997.
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 $386,000 for the
quarter ended April 30, 1996 to $600,000 for the quarter ended April 30, 1997
and from $963,000 to $1,592,000 for the respective nine-month periods then
ended. The increases resulted from the addition of customer service, enrollment,
and claims administration personnel, tied to increased insured and self-funded
membership. Management expects direct membership costs to rise as the
anticipated membership growth continues, especially with respect to the
indemnity programs.
General and administration costs totaling $487,000 for the three months and
$1,372,000 for the nine months ended April 30, 1997 increased 13% and 12%,
respectively, compared to the same periods in 1996. The increases were the
result of expanded employment support services and professional fees related to
the Company's overall increased employment levels.
Depreciation was $77,000 for the three months and $228,000 for the nine months
ended April 30, 1997 compared to $63,000 and $171,000 for the corresponding
three- and nine-month periods of 1996 reflecting purchases over the
Page 8
<PAGE>
past year of computer systems and office furniture and fixtures to handle the
Company's personnel additions as well as mail processing and telephone equipment
to accommodate 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.
Interest income was $44,000 for the three months and $150,000 for the nine
months ended April 30, 1997 compared to $51,000 and $171,000 for the
corresponding three- and nine-month periods in 1996, reflecting a lower rate of
operating cash flow investment. For the quarter ended April 30, 1997 invested
cash and marketable investment securities (current and long-term) decreased
compared to the same period in 1996 due to financial resources allocated to fund
investment in offices and equipment. Investment yield increased compared to the
prior year as investments in municipal bonds matured and proceeds were
reinvested in higher-yielding securities. Invested funds are expected to remain
stable as cash provided by operations is utilized to fund planned computer
systems and other equipment upgrades needed to service existing customers and
new business. The Company believes its ongoing cash flow will support all
anticipated expenditures and operating expenses.
Interest expense decreased compared to the three and nine months ended April 30,
1996 as a result of repayments of borrowings by the ESOP trust which are
guaranteed and therefore recorded by the Company.
Liquidity and Capital Resources
- -------------------------------
Working capital was $1,639,000 and the current ratio was 1.7 to 1 at April 30,
1997 while cash and cash equivalents comprised $702,000. The Company's principal
sources of funds during the quarter and nine months were from operations and
maturing long-term investments which were reinvested in securities classified as
cash equivalents.
Major uses of funds during the nine months ended April 30, 1997 included
reinvestment activities related to maturities of marketable securities and
purchases of property and equipment totaling $263,000. The Company repurchased
$344,000 of treasury stock during the nine months ended April 30, 1997 and the
Board of Directors has authorized up to $1 million for such acquisitions as
market conditions present an attractive opportunity.
Contractual Arrangements
- ------------------------
The Company's insured line of business is underwritten by Security Life
Insurance of America (SLICA.) According to the management agreement between the
Company and SLICA, dated April 15, 1992, SLICA is responsible to "process,
investigate, settle, and pay all claims arising." The Company is fully
indemnified against loss or liability. Therefore, the Company does not record
any claims liability on the balance sheet.
Page 9
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters submitted to a vote of security shareholders
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 has
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 - Finance and Chief Financial Officer
Date: June 12, 1997
Page 11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<EXCHANGE-RATE> 1
<CASH> 701,512
<SECURITIES> 2,420,090
<RECEIVABLES> 1,298,314
<ALLOWANCES> 9,787
<INVENTORY> 0
<CURRENT-ASSETS> 3,957,957
<PP&E> 3,082,719
<DEPRECIATION> 1,149,512
<TOTAL-ASSETS> 7,149,339
<CURRENT-LIABILITIES> 2,318,746
<BONDS> 0
0
0
<COMMON> 648,108
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,149,339
<SALES> 0
<TOTAL-REVENUES> 5,135,334
<CGS> 0
<TOTAL-COSTS> 4,933,749
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,301
<INCOME-PRETAX> 330,798
<INCOME-TAX> 125,000
<INCOME-CONTINUING> 205,798
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 205,798
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
