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, 1996.
[ ] 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 13, 1996 was 2,556,226 shares
after deducting 449,102 shares of treasury stock.
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, Inc.
FORM 10-QSB
For the Quarter Ended
October 31, 1996
TABLE OF CONTENTS
Part I. Financial Information Page
----
Item 1. Financial Statements (Unaudited)
Balance Sheet as of October 31, 1996 ...............................3
Statement of Income for the quarters
ended October 31, 1996 and 1995...................................4
Statement of Cash Flows for the quarters
ended October 31, 1996 and 1995...................................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
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS October 31,1996
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Current Assets:
Cash and cash equivalents $1,310,043
Marketable investment securities 1,313,723
Member fees receivable, net of allowance for
doubtful accounts of $30,859 640,697
Note receivable-officer, current 18,621
Deferred expenses 205,204
Prepaid expenses and other current assets 158,592
---------------------
Total Current Assets 3,646,880
Property and Equipment:
Office furniture and fixtures 287,083
Office equipment 1,324,701
Leasehold improvements 102,818
Systems under development 725,278
---------------------
2,439,880
Less accumulated depreciation and amortization (972,666)
---------------------
Net Property and Equipment 1,467,214
Other Assets:
Marketable investment securities, long term 1,201,246
Note receivable-officer, long term 42,100
---------------------
Total Assets $6,357,440
=====================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $166,775
Current portion of capital lease obligation (Note 2) 17,667
Current portion of bank loan (Note 3) 84,400
Income taxes payable 37,193
Deferred revenue 802,518
Accrued expenses and other current liabilities 281,313
Deferred income taxes 19,676
---------------------
Total Current Liabilities 1,409,542
Long-Term Liabilities:
Capital lease obligation (Note 2) 25,383
Bank loan (Note 3) 168,800
---------------------
Total Long-Term Liabilities 194,183
Shareholders' Equity:
Common stock, no par value; Authorized
8,000,000 shares; Issued, 2,995,328 shares 630,774
Additional paid-in capital 2,560,544
Net unrealized gain on marketable investment securities 8,304
Unearned ESOP shares (Note 3) (242,490)
Retained earnings 3,090,884
---------------------
6,048,016
Treasury stock, at cost, 418,302 shares (1,294,301)
---------------------
Total Shareholders' Equity 4,753,715
---------------------
Total Liabilities and Shareholders' Equity $6,357,440
=====================
</TABLE>
See notes to the financial statements
Page 3
<PAGE>
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FIRST AMERICAN HEALTH CONCEPTS, Inc.
STATEMENT OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter ended October 31,
1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C>
Operating Revenues $1,617,545 $1,251,704
Operating Expenses:
Sales and marketing costs 517,037 413,289
Direct membership costs 471,679 280,992
General and administration 401,778 362,700
ESOP Charges 17,314 23,188
Depreciation 75,492 51,763
---------------------------------------
Total Operating Expenses 1,483,300 1,131,932
---------------------------------------
Operating Income 134,245 119,772
Non-operating Income (Expense):
Interest income 57,252 63,518
Interest expense (7,354) (9,669)
---------------------------------------
Total Non-operating Income 49,898 53,849
Income Before Income Taxes 184,143 173,621
Income Taxes 70,000 60,900
---------------------------------------
Net Income $114,143 $112,721
=======================================
Net Income Per Share $0.04 $0.04
=======================================
Weighted Average Shares
Outstanding 2,636,478 2,679,447
=======================================
</TABLE>
See notes to the financial statements
Page 4
<PAGE>
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FIRST AMERICAN HEALTH CONCEPTS, Inc.
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter ended October 31,
1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $114,143 $112,721
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 75,492 51,763
Amortization 12,330 6,165
ESOP shares committed to be released 17,314 23,188
Loss on sale of frames inventory - 7,692
Change In Assets and Liabilities:
Decrease in member fees receivable 8,586 195,540
Decrease (increase) in deferred expenses 18,767 (27,866)
Decrease (increase) in prepaid expenses and other current assets 36,599 (36,804)
Decrease in accounts payable (49,574) (48,092)
Increase in income taxes payable 70,000 61,236
Decrease in deferred revenue (344,980) (422,576)
Increase (decrease) in accrued expenses and other current liabilities 13,522 (10,351)
-------------------------------
Net Cash Used In Operating Activities (27,801) (87,384)
Cash Flows from Investing Activities:
Decrease in marketable investment securities 87,642 626,496
Decrease in note receivable-officer 18,020 17,868
Purchases of property and equipment (189,819) (130,505)
-------------------------------
Net Cash (Used) Provided By Investing Activities (84,157) 513,859
Cash Flows from Financing Activities:
Purchase of treasury stock (152,859) -
Proceeds from stock options exercised 468 763
Repayments of bank loan (21,100) (21,100)
Repayments of capital lease obligation (4,074) (3,567)
-------------------------------
Net Cash Used By Financing Activities (177,565) (23,904)
Net (Decrease) Increase In Cash and Cash Equivalents (289,523) 402,571
Cash and Cash Equivalents, Beginning of Period 1,599,566 2,069,129
===============================
Cash and Cash Equivalents, End of Period $1,310,043 $2,471,700
===============================
Supplemental Disclosures of Non-Cash Activities:
Unrealized gain (loss) on marketable investment securities $9,917 ($1,102)
===============================
</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 same
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 months ended
October 31, 1996 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 October 31, 1996 office
equipment included $82,052 and accumulated amortization included $49,551 related
to the asset covered by this lease. Following is a schedule by year of future
minimum lease payments as of October 31, 1996:
Fiscal year ending July 31,
- -------------------------------------------------------------------
1997........................................................$16,800
1998.........................................................22,400
1999.........................................................10,980
-------
Total minimum lease payments.................................50,180
Less amount representing interest..........................7,130
-------
Principal balance...........................................$43,050
=======
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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 - $63,300; 1998 through 1999 - $84,400; and
2000 - $21,100.
Page 7
<PAGE>
Management's Discussion and Analysis
- ------------------------------------
Results of Operations
- ---------------------
Operating revenues for the quarter ended October 31, 1996 were $1,618,000
compared to $1,252,000 for the quarter ended October 31, 1995, an increase of
29%. Membership in the Company's traditional direct access vision plan, ECPA
Non-Insured, increased approximately 5% from the prior year to 10.1 million
members. Related revenues increased 25% due to the addition of relatively
higher-priced groups and a higher proportion of direct fee-paying members.
Increased revenues were also generated by the Company's indemnity plans, ECPA
Insured and ECPA Self-funded, which increased enrollments by 55% during the past
year. Revenues from these plans increased 136% to $345,000 for the first quarter
also due to the addition of relatively higher priced groups. 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, 1997.
Total operating expenses increased 31% to $1,483,000 reflecting the increased
costs of expanded marketing and sales staff and network development as well as
servicing the indemnity plans. Management expects total operating expenses to
reflect increases over the prior year as the Company continues to upgrade its
provider panel quality assurance programs and computer processing capabilities,
and build its marketing and sales support functions to accommodate anticipated
membership growth and market demands.
Sales and marketing costs of $517,000 for the quarter ended October 31, 1996
increased 25% over the same period in fiscal 1996. The increase was the result
of the addition of more experienced sales personnel and increased focus on
quality assurance activities including a newly-instituted "mystery shopper"
program designed to enhance quality control at the point of service. The
increased focus on ECPA Insured and ECPA Self-Funded products will continue to
require more sales support personnel to accommodate these sales efforts and will
result in increased sales and marketing costs during 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 68% from $281,000 for the
quarter ended October 31, 1995 to $472,000 for the quarter ended October 31,
1996. The increase resulted from the addition of customer service 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 $402,000 for the three months
ended October 31, 1996, increased 11% compared to the same period in 1995. The
increase was the result of expanded management information services capabilities
and the addition of new I/S staff to support the company's managed care
information system under development.
Page 8
<PAGE>
Depreciation was $75,000 for the quarter ended October 31, 1996 compared to
$52,000 for the corresponding three months of 1995. Depreciation increased due
to purchases of telecommunications and computer systems and office furniture and
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.
Interest income was $57,000 for the three months ended October 31, 1996 compared
to $64,000 in 1995 reflecting a lower rate of operating cash flow investment.
For the quarter ended October 31, 1996 average invested cash and marketable
investment securities (current and long term) decreased by approximately 15%
compared to the same period in 1995 reflecting the use of cash generated by
operations and from investments for development of an integrated managed care
information system and for the Company's treasury stock reacquisition program.
Investment yield has also increased slightly compared to the prior year as
investments in municipal bonds matured and proceeds were reinvested in
higher-yielding securities. Disregarding rate fluctuations, interest income
should continue to decrease through the second quarter of fiscal 1996 as
development and funding of the new computer system continues. Invested cash will
stabilize following the second quarter when cash from annual program renewals is
received.
Interest expense decreased compared to the first quarter of fiscal 1995 as a
result of reduced interest on borrowings by the ESOP trust which are guaranteed
and therefore recorded by the Company.
Liquidity and Capital Resources
- -------------------------------
Working capital was $2,237,000 and the current ratio was 2.6 to 1 at October 31,
1996 while cash and cash equivalents comprised $1,310,000. Cash and marketable
securities totaled $3,825,000. The Company's principal source of funds during
the first quarter was from operations while cash was applied principally to
purchases of property and equipment and shares of the Company's common stock
which were added to treasury. Maturing long-term investments were also
reinvested in securities classified as cash equivalents.
Major uses of funds during the quarter included the purchase of $190,000 of
property and equipment. The Company also repurchased 35,200 shares of the
Company's treasury stock during the quarter for an aggregate of $153,000. The
Board of Directors has authorized up to $1 million for such acquisitions as
market conditions present attractive opportunity.
Management anticipates continuing expansion efforts, though with slower
additions of management and staff support personnel. Capital additions and
infrastructure expenditures will continue as needed 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 28, 1996 with Form 10-KSB
for the year ended July 31, 1996.
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: John A. Raycraft
-------------------------
John A. Raycraft
President and Chief Executive Officer
By: Charles P. Stanford, Jr.
-------------------------
Charles P. Stanford, Jr.
Vice President of Finance and Chief Financial Officer
Date: December 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 776997
<NAME> FIRST AMERICAN HEALTH CONCEPTS, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> OCT-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,310,043
<SECURITIES> 2,514,969
<RECEIVABLES> 671,556
<ALLOWANCES> 30,859
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<CURRENT-ASSETS> 3,646,880
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0
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<COMMON> 630,774
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