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, 1998.
[ ] 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.
AND SUBSIDIARIES
(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 2, 1998 was 2,564,736 shares after
deducting 468,102 shares of treasury stock.
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, Inc.
AND SUBSIDIARIES
FORM 10-QSB
For the Quarter Ended
April 30, 1998
TABLE OF CONTENTS
Part I. Financial Information Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of April 30, 1998.....................3
Consolidated Statement of Income for the quarter and nine months
ended April 30, 1998 and 1997.......................................4
Consolidated Statement of Cash Flows for the nine months
ended April 30, 1998 and 1997.......................................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.
CONSOLIDATED BALANCE SHEET
- ------------------------------------
ASSETS April 30, 1998
- --------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 1,584,150
Marketable investment securities 861,549
Member fees receivable, net of allowance for
doubtful accounts of $37,870 1,175,420
Note receivable-officer, current 18,621
Deferred expenses 342,463
Prepaid expenses and other current assets 799,742
-----------
Total Current Assets 4,781,945
Property and Equipment:
Office furniture and fixtures 314,093
Office equipment 1,636,201
Leasehold improvements 192,702
Systems under development 2,143,441
-----------
4,286,437
Less accumulated depreciation and amortization (1,625,252)
-----------
Net Property and Equipment 2,661,185
Marketable investment securities, long term 418,010
Note receivable-officer, long term 26,599
-----------
Total Assets $ 7,887,738
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 461,488
Current portion of capital lease obligation (Note 2) 14,761
Current portion of bank loan (Note 3) 84,400
Deferred revenue 1,766,822
Accrued expenses and other current liabilities 216,523
Deferred income taxes 98,000
-----------
Total Current Liabilities 2,641,993
Long Term Liabilities:
Bank loan (Note 3) 42,200
-----------
Total Long-Term Liabilities 42,200
Shareholders' Equity:
Common stock, no par value, Authorized
8,000,000 shares; Issued, 3,007,838 shares 681,546
Additional paid-in capital 2,552,223
Net unrealized loss on marketable investment securities 1,128
Unearned ESOP shares (Note 3) (131,174)
Retained earnings 3,585,554
-----------
6,689,277
Treasury stock, at cost, 468,102 shares (1,485,732)
-----------
Total Shareholders' Equity 5,203,545
-----------
Total Liabilities and Shareholders' Equity $ 7,887,738
===========
See notes to the financial statements
Page 3
<PAGE>
- ------------------------------------
FIRST AMERICAN HEALTH CONCEPTS, Inc.
CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------
<TABLE>
<CAPTION>
Quarter ended April 30, Nine months ended April 30,
1998 1997 1998 1997
- ----------------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C>
Operating Revenues: $ 1,999,009 $ 1,806,907 $ 5,982,015 $ 5,135,334
Operating Expenses:
Sales and marketing costs 513,396 626,843 1,915,650 1,694,074
Direct membership costs 560,455 600,308 1,455,709 1,591,591
General and administration 605,173 486,518 1,777,813 1,371,546
Depreciation 130,112 76,526 385,484 227,677
ESOP charges 14,652 15,843 43,990 48,861
---------------------------- ----------------------------
Total Operating Expenses 1,823,788 1,806,038 5,578,646 4,933,749
---------------------------- ----------------------------
Operating Income 175,221 869 403,369 201,585
Non-Operating Income (Expense):
Interest income 35,490 44,347 116,322 149,514
Interest expense (3,770) (6,178) (13,135) (20,301)
---------------------------- ----------------------------
Total Non-Operating Income 31,720 38,169 103,187 129,213
---------------------------- ----------------------------
Income Before Income Taxes 206,941 39,038 506,556 330,798
Income Taxes 80,252 16,000 194,106 125,000
---------------------------- ----------------------------
Net Income $ 126,689 $ 23,038 $ 312,450 $ 205,798
============================ ============================
Net Income Per Share: $ 0.05 $ 0.01 $ 0.12 $ 0.08
============================ ============================
Weighted Average Shares
Outstanding: 2,564,736 2,557,391 2,564,736 2,588,959
============================ ============================
</TABLE>
See notes to the financial statements
Page 4
<PAGE>
- -------------------------------------
FIRST AMERICAN HEALTH CONCEPTS, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
<TABLE>
<CAPTION>
Nine months ended April 30,
1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 312,453 $ 205,798
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 385,484 227,677
Amortization -- 36,990
Income tax benefit arising from stock option plan -- --
ESOP shares committed to be released 43,989 48,861
Change in Assets and Liabilities:
Increase in member fees receivable (231,059) (642,277)
Increase in deferred expenses (111,196) (72,250)
Increase in prepaid expenses and other current assets (326,201) (217,786)
Increase in accounts payable 277,013 29,430
Increase (decrease) in income taxes payable 191,504 (2,262)
Increase in deferred revenue 381,069 512,726
Increase (decrease) in accrued expenses and other current liabilities (44,335) 885
----------------------------
Net Cash Provided by Operating Activities 878,721 127,792
Cash Flows from Investing Activities:
Decrease in marketable investment securities 1,150,081 171,133
Decrease in note receivable from officer 17,306 16,820
Purchases of property and equipment (961,264) (832,472)
----------------------------
Net Cash (Used In) Provided By Investing Activities 206,123 (644,519)
Cash Flows from Financing Activities:
Purchase of treasury stock 3,889 (344,290)
Proceeds from stock options exercised 26,250 17,802
Repayments of bank loan (63,300) (42,200)
Repayments of capital lease obligation (15,219) (12,639)
----------------------------
Net Cash Used In Financing Activities (48,380) (381,327)
----------------------------
Net (Decrease) Increase In Cash and Cash Equivalents 1,036,464 (898,054)
Cash and Cash Equivalents, Beginning of Period 547,686 1,599,566
----------------------------
Cash and Cash Equivalents, End of Period $ 1,584,150 $ 701,512
============================
Supplemental Disclosure of Cash Flow Information:
Cash paid during nine-month period for income taxes $ 0 $ 127,262
============================
Supplemental Disclosure of Non-Cash Activities:
Unrealized gain (loss) on marketable investment securities ($ 3,795) ($ 4,502)
============================
</TABLE>
See notes to the financial statements
Page 5
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, Inc.
AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
Note 1 - General
- ----------------
These financial statements have been prepared by First American Health Concepts,
Inc. (the ACompany@) 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 and nine months
ended April 30, 1998 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 April 30, 1998, office
equipment included $82,052 and accumulated amortization included $72,143 related
to the asset covered by this lease. Following is a schedule by year of future
minimum lease payments as of April 30, 1998:
Fiscal year ending July 31,
- ----------------------------------------------------------
1998.................................................5,600
1999................................................10,980
-------
Total minimum lease payments........................16,580
Less amount representing interest...............882
-------
Principal balance..................................$17,462
=======
- ----------------------------------------------------------
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: 1998 - $21,100; 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, 1998 were $1,999,000 compared
to $1,806,000 for the quarter ended April 30, 1997, an increase of 11%.
Revenue's from the Company's traditional vision plan, ECPA Access Program,
decreased approximately 6% from the prior year to $1,127,000 due to the loss of
one customer which previously accounted for 10% of ECPA revenue. For the nine
months ended April 30, 1998 ECPA Access revenues increased 9% from $3,459,000 to
$3,760,000 as a result of average revenue rate improvements. Increased revenues
were also generated by the Company's indemnity plans, ECPA Insured and ECPA
Self-funded. Revenues from these plans increased 19% for the third quarter to
$551,000 and 29% for the nine months ended April 30, 1998 to $1,481,000.
Management expects revenues to remain strong in the fourth quarter as a result
of continued strength in all of the Company's vision care plans.
Total operating expenses increased 1% for the third quarter to $1,824,000 and
13% to $5,579,000 for the nine months ended April 30, 1998 reflecting a minimal
increase in costs of business and network development as well as marketing and
servicing ECPA's indemnity plans. Management expects that total operating
expenses over the final quarter of FY1998 will reflect slight decreases over the
prior year due to the effect of upgraded customer service and computer
processing capabilities.
Sales and marketing costs for the quarter and nine months ended April 30, 1998
of $513,000 and $1,916,000 decreased 18% and increased 13%, respectively, over
the same periods in fiscal 1997. The third quarter decrease in Marketing
expenses comes as a result of the Company's emphasis on the Broker Advantage
Program. The year-to-date increase is the result of the addition of account
services support personnel and increased focus on quality assurance activities
including intensified provider credentialing programs.
Direct membership costs, those costs associated with supplying vision plan
members with membership materials, maintaining a national locator service, and
administering claims processing functions, decreased from $600,000 for the
quarter ended April 30, 1997 to $560,000 for the quarter ended April 30, 1998
and from $1,592,000 to $1,456,000 for the respective nine-month periods then
ended. The decreases resulted from successful efforts in streamlining internal
processes and the implementation of more efficient card production and telephone
policies. Management does expect direct membership costs to rise as the
anticipated membership growth continues, especially with respect to the
indemnity programs.
General and administration costs totaling $605,000 for the three months and
$1,778,000 for the nine months ended April 30, 1998 increased 24% and 30%,
respectively, compared to the same periods in 1997. The increases were the
result of expanded employment support services and professional fees related to
the Company's overall increased employment levels as well as the Company's
administrative investment in future revenue producing programs.
Depreciation was $130,000 for the three months and $385,000 for the nine months
ended April 30, 1998 compared to $77,000 and $228,000 for the corresponding
three- and nine-month periods of 1997 reflecting the beginning of depreciation
on a client server computer system as well as purchases of office furniture and
fixtures to handle the Company's personnel.
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
Page 8
<PAGE>
expense of eligible participating employees and the average market price of the
Company's common stock during the quarter.
Interest income for the three months was $35,000 and $116,000 for the nine
months ended April 30, 1998 compared to $44,000 and $150,000 for the
corresponding three- and nine-month periods in 1997, reflecting a lower rate of
operating cash flow investment. For the quarter ended April 30, 1998 invested
cash and marketable investment securities (current and long-term) decreased
compared to the same period in 1997 due to financial resources allocated to fund
investment in newly formed subsidiaries, offices and equipment. Investment
yields remained consistent with those of Fiscal 1997 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.
Interest expense decreased compared to the three and nine months ended April 30,
1997 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 $5,204,000 and the current ratio was 1.8 to 1 at April 30,
1998 while cash and cash equivalents comprised $1,584,000. The Company's
principal sources of funds during the quarter and nine months were from
operations and maturing long-term investments.
Major uses of funds during the nine months ended April 30, 1998 included
operational activities and investment of funds to support future programs
designed to generate revenue. The Board of Directors has authorized up to $1
million for Treasury Stock acquisitions as market conditions present attractive
opportunity.
Year 2000 Many currently installed computer systems and software products are
coded to accept only tow digit entries in the date code field. As a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements. Although the Company
believes that its products and systems are Year 2000 compliant, the business,
operating results and financial condition of the Company's customers could be
adversely affected to the extent that they utilize software and computer systems
which are not Year 2000 compliant. Furthermore, the purchasing patterns of
customers or potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct their current systems for Year
2000 compliance. These expenditures may result in reduced funds available to
purchase services such as those offered by the Company, which could have an
adverse effect on the Company's business, operating results and financial
conditions.
Given the information available at this time, management currently believes that
this issue should not have a material adverse effect on the Company's liquidity
or its results of operations, and that those costs should not cause reported
financial information not to be indicative of future operating results or future
financial condition.
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 holders.
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: John A. Raycraft
----------------
John A. Raycraft
President and Chief Executive Officer
By: Richard A. Kiser
----------------
Richard A. Kiser
Vice President of Finance and Chief Financial Officer
Date: June 2, 1998
Page 11
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<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> APR-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,584,150
<SECURITIES> 1,279,599
<RECEIVABLES> 1,213,290
<ALLOWANCES> 37,870
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<PP&E> 4,286,437
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