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 January 31, 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.
(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 February 28, 1998 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
January 31, 1998
TABLE OF CONTENTS
Part I. Financial Information Page
----
Item 1. Financial Statements (Unaudited)
Balance Sheet as of January 31, 1998.................................3
Statement of Income for the quarter and six months
ended January 31, 1998 and 1997......................................4
Statement of Cash Flows for the six months
ended January 31, 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.................11
Item 6. Exhibits and Reports on Form 8-K....................................11
SIGNATURES...................................................................12
Page 2
<PAGE>
- ---------------------------------------------
FIRST AMERICAN HEALTH CONCEPTS, Inc.
BALANCE SHEET
- ---------------------------------------------
ASSETS January 31, 1998
- --------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 300,824
Marketable investment securities 1,208,355
Member fees receivable, net of allowance for
doubtful accounts of $9000 2,307,798
Note receivable-officer, current 18,621
Deferred expenses 388,365
Income taxes receivable 8,988
Prepaid expenses and other current assets 420,724
-----------
Total Current Assets 4,653,675
Property and Equipment:
Office furniture and fixtures 310,099
Office equipment 1,535,734
Leasehold improvements 133,587
Systems under development 1,868,964
-----------
3,848,384
Less accumulated depreciation and amortization (1,495,140)
-----------
Net Property and Equipment 2,353,244
Marketable investment securities, long term 896,833
Note receivable-officer, long term 26,160
-----------
Total Assets $ 7,929,912
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 363,076
Capital lease obligation (Note 2) 19,811
Current portion of bank loan (Note 3) 84,400
Deferred revenue 2,072,893
Accrued expenses and other current liabilities 159,253
Deferred income taxes 98,000
-----------
Total Current Liabilities 2,797,433
Long Term Liabilities:
Bank loan (Note 3) 63,300
-----------
Total Long-Term Liabilities 63,300
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 8,105
Unearned ESOP shares (Note 3) (145,826)
Retained earnings 3,458,863
-----------
6,554,911
Treasury stock, at cost, 468,102 shares (1,485,732)
-----------
Total Shareholders' Equity 5,069,179
-----------
Total Liabilities and Shareholders' Equity $ 7,929,912
===========
See notes to the financial statements Page 3
<PAGE>
- ---------------------------------------------
FIRST AMERICAN HEALTH CONCEPTS, Inc.
STATEMENT OF INCOME
- ---------------------------------------------
<TABLE>
<CAPTION>
Quarter ended January 31, Six months ended January 31,
1998 1997 1998 1997
- ---------------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C>
Operating Revenues: $ 1,979,397 $ 1,710,882 $ 3,983,005 $ 3,328,427
Operating Expenses:
Sales and marketing costs 669,287 550,193 1,402,254 1,067,232
Direct membership costs 391,839 519,604 895,254 991,283
General and administration 571,425 483,250 1,172,640 885,028
Depreciation 124,531 75,659 255,372 151,150
ESOP charges 14,940 15,704 29,338 33,018
-------------------------- --------------------------
Total Operating Expenses 1,772,022 1,644,410 3,754,858 3,127,711
-------------------------- --------------------------
Operating Income 207,375 66,472 228,147 200,716
Non-operating Income (Expense):
Interest income 41,318 47,914 80,832 105,167
Interest expense (4,380) (6,769) (9,365) (14,123)
-------------------------- --------------------------
Total Non-operating Income 36,938 41,145 71,467 91,044
-------------------------- --------------------------
Income Before Income Taxes 244,313 107,617 299,614 291,760
Income Taxes 92,839 39,000 113,854 109,000
-------------------------- --------------------------
Net Income $ 151,474 $ 68,617 $ 185,760 $ 182,760
========================== ==========================
Net Income Per Share: $ 0.06 $ 0.03 $ 0.07 $ 0.07
========================== ==========================
Weighted Average Shares
Outstanding: 2,533,451 2,571,077 2,523,560 2,673,646
========================== ==========================
</TABLE>
See notes to the financial statements Page 4
<PAGE>
- ---------------------------------------------
FIRST AMERICAN HEALTH CONCEPTS, Inc.
STATEMENT OF CASH FLOWS
- ---------------------------------------------
<TABLE>
<CAPTION>
Six months ended January 31,
1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 185,760 $ 182,760
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 255,372 151,150
Amortization -- 24,660
Income tax benefit arising from stock option plan -- --
ESOP shares committed to be released 29,338 33,018
Change in Assets and Liabilities:
Increase in member fees receivable (1,182,073) (1,398,378)
Increase in deferred expenses (157,098) (43,009)
Increase in prepaid expenses and other current assets (128,546) (203,236)
Increase (decrease) in accounts payable 178,602 (9,534)
Increase in income taxes payable 113,854 8,800
Increase in deferred revenue 687,140 835,755
Decrease in accrued expenses and other current liabilities (32,943) (548)
----------------------------
Net Cash Used in Operating Activities (50,594) (418,562)
Cash Flows from Investing Activities:
Decrease in marketable investment securities 331,428 178,493
Decrease in note receivable from officer 17,745 17,419
Purchases of property and equipment (519,321) (569,083)
----------------------------
Net Cash Used In Investing Activities (170,148) (373,171)
Cash Flows from Financing Activities:
Purchase of treasury stock -- (320,540)
Proceeds from stock options exercised 26,250 13,593
Repayments of bank loan (42,200) (42,200)
Repayments of capital lease obligation (10,170) (8,286)
----------------------------
Net Cash Used In Financing Activities (26,120) (357,433)
----------------------------
Net Decrease In Cash and Cash Equivalents (246,862) (1,149,166)
Cash and Cash Equivalents, Beginning of Period 547,686 1,599,566
----------------------------
Cash and Cash Equivalents, End of Period $ 300,824 $ 450,400
============================
Supplemental Disclosure of Cash Flow Information:
Cash paid during six-month period for income taxes $ 0 $ 100,200
============================
Supplemental Disclosure of Non-Cash Activities:
Unrealized gain (loss) on marketable investment securities $ 3,181 $ 4,974
============================
</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 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 six months
ended January 31, 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 January 31, 1998, office
equipment included $82,052 and accumulated amortization included $68,363 related
to the asset covered by this lease. Following is a schedule by year of future
minimum lease payments as of January 31, 1998:
Fiscal year ending July 31,
- -------------------------------------------------------
1998.............................................11,200
1999.............................................10,980
-------
Total minimum lease payments.....................22,180
Less amount representing interest..........1,520
-------
Principal balance...............................$20,660
=======
- -------------------------------------------------------
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 - $42,200; 1999 - $84,400; and 2000 -
$21,100.
Page 7
<PAGE>
Management's Discussion and Analysis
- ------------------------------------
Results of Operations
- ---------------------
Operating revenues for the quarter ended January 31, 1998 were $1,979,000
compared to $1,711,000 for the quarter ended January 31, 1997, an increase of
16%. Revenue's from the Company's traditional vision plan, ECPA Access Program,
increased approximately 11% from the prior year to $1,255,000. For the six
months ended January 31, 1998 ECPA Access revenues increased 17% from $2,260,000
to $2,634,000 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 40% for the second quarter
to $474,000 and 36% for the six months ended January 31, 1998 to $930,000.
Management expects revenues to remain strong in the third and fourth quarters as
a result of continued strength in all of the Company's vision care plans
effective January 1, 1998 and continued market acceptance of the Access and
indemnity 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 8% for the second quarter to $1,772,000 and
20% to $3,755,000 for the six months ended January 31, 1998 reflecting the
increased costs of business and network development as well as marketing and
servicing ECPA's indemnity plans. Management expects that total operating
expenses 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 six months ended January 31, 1998
of $669,000 and $1,402,000 increased 22% and 31%, respectively, over the same
periods 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 intensified provider credentialing
programs. The increased emphasis on ECPA-Insured and ECPA Self-funded products
has required more sales support personnel to accommodate these marketing and
sales efforts and thus, resulted in an elevation of Sales and Marketing costs.
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 $520,000 for the
quarter ended January 31, 1997 to $392,000 for the quarter ended January 31,
1998 and from $991,000 to $895,000 for the respective six-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 $571,000 for the three months and
$1,173,000 for the six months ended January 31, 1998 increased 18% and 33%,
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 $125,000 for the three months and $255,000 for the six months
ended January 31, 1998 compared to $76,000 and $151,000 for the corresponding
three- and six-month periods of 1997 reflecting the beginning of
Page 8
<PAGE>
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 expense of eligible
participating employees and the average market price of the Company's common
stock during the quarter.
Interest income was $41,000 for the three months and $81,000 for the six months
ended January 31, 1998 compared to $48,000 and $105,000 for the corresponding
three- and six-month periods in 1997, reflecting a lower rate of operating cash
flow investment. For the quarter ended January 31, 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 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 six months ended January
31, 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 $5,069,000 and the current ratio was 1.7 to 1 at January 31,
1998 while cash and cash equivalents comprised $301,000. The Company's principal
sources of funds during the quarter and six months were from operations and
maturing long-term investments.
Major uses of funds during the six months ended January 31, 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
its software and systems are Year 2000 compliant and 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>
Provider Network
- ----------------
The Company enhanced its vision care provider network with the addition of
LensCrafters, a unit of Luxottica Group S.P.A. (Lux). LensCrafters, the world's
largest super optical chain with more than 700 optical centers throughout the
United States, will provide easy access to eyewear for the Company's members.
LensCrafters joins the Company's national network of more than 7,500 independent
practices and retail optical locations. While 60% of the Company's network is
comprised of independent optometrists, ophthalmologists and opticians, the
network now includes LensCrafters as well as U.S. Vision, Cohen Fashion Optical,
D.O.C. Optical, Eye Drx, EyeMasters, VisionWorks, S.H. Laufer Vision World, H.
Ruben Vision Centers, General Vision Centers and National Vision Associates.
The Company has also offered a buying discount program to all of its providers
through an alliance with Vision West, Inc. This alliance allows the Company's
providers excellent buying discounts for their professional needs.
Page 10
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Company held its annual meeting of shareholders on
December 8, 1997.
(b) Directors elected at the annual meeting were John R. Behrmann,
Robert J. Delsol, John W. Heidt, James J. Meenaghan, Thomas B.
Morgan, John A. Raycraft and Robert M. Topol.
(c) Other matters voted upon at the meeting included the
following:
1. Elected directors John R. Behrmann, Robert J. Delsol, John
W. Heidt, James J. Meenaghan, Thomas B. Morgan and Robert M.
Topol in Item 4(b) received the following vote tabulation
(2,418,027 for; 8,775 withhold authority).
2. Elected director John A. Raycraft in item 4(b) received the
following vote tabulation (2,418,427 for; 8,375 withhold
authority).
3. Ratification of the Board of Directors' recommendation that
KPMG Peat Marwick LLP be appointed the Company's independent
public accountants for fiscal year 1998 (2,412,777 votes for;
5,375 votes against; 10,150 abstained).
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 11
<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: March 10, 1998
Page 12
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