<PAGE> 1
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, 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 February 20, 1996 was 2,618,574 shares
after deducting 369,402 shares of treasury stock.
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FIRST AMERICAN HEALTH CONCEPTS, INC.
FORM 10-QSB
FOR THE QUARTER ENDED
JANUARY 31, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements (Unaudited)
Balance Sheet as of January 31, 1996 ........................ 3
Statement of Income for the quarter and six months
ended January 31, 1996 and 1995 ............................. 4
Statement of Cash Flows for the six months
ended January 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
</TABLE>
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FIRST AMERICAN HEALTH CONCEPTS, Inc.
BALANCE SHEET
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS January 31, 1996
=============================================================================
<S> <C>
Current Assets:
Cash and cash equivalents $3,506,974
Marketable investment securities 606,144
Member fees receivable, net of allowance for
doubtful accounts of $20,750 1,409,861
Note Receivable Officer, current 18,621
Deferred expenses 259,828
Prepaid expenses and other current assets 347,299
----------
Total Current Assets 6,148,727
Property and Equipment:
Office furniture and fixtures 287,083
Office equipment 1,025,161
Leasehold improvements 100,725
Systems under development 96,351
----------
1,509,320
Less accumulated depreciation and amortization (736,677)
----------
Net Property and Equipment 772,643
Note receivable-officer, long term 58,605
----------
Total Assets $6,979,975
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
=============================================================================
Current Liabilities:
Accounts Payable $ 184,358
Current portion of capital lease obligation (Note 2) 15,986
Current portion of bank loan (Note 3) 84,400
Income taxes (25,525)
Deferred revenue 1,629,669
Accrued expenses and other current liabilities 215,546
Deferred income taxes 12,676
----------
Total Current Liabilities 2,117,110
Long Term Liabilities:
Capital lease obligation (Note 2) 38,891
Bank loan (Note 3) 232,100
----------
Total Long-Term Liabilities 270,991
Shareholders' Equity:
Common Stock, no par value, Authorized
8,000,000 shares; Issued, 2,987,976 shares 616,547
Additional paid-in capital 2,559,168
Net unrealized gain on marketable investment securities 1,584
Unearned ESOP shares (Note 3) (304,602)
Retained Earnings 2,797,277
----------
5,669,974
Treasury stock, at cost, 369,402 shares (1,078,100)
----------
Total Shareholders' Equity 4,591,874
----------
Total Liabilities and Shareholders' Equity $6,979,975
==========
</TABLE>
See notes to the financial statements
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FIRST AMERICAN HEALTH CONCEPTS, Inc.
STATEMENT OF INCOME
- --------------------------------------
<TABLE>
<CAPTION>
Quarter ended January 31, Six months ended January 31,
1996 1995 1996 1995
===============================================================================================================
<S> <C> <C> <C> <C>
Operating Revenues: $1,322,238 $1,188,357 $2,573,942 $2,324,620
Operating Expenses:
Sales and marketing costs 462,063 343,578 875,352 691,955
Direct membership costs 296,035 182,214 577,027 347,908
General and administration 433,389 324,905 794,999 645,083
Depreciation 56,899 38,946 108,662 73,235
ESOP charges 21,405 21,819 45,682 45,656
---------------------------- ----------------------------
Total Operating Expenses 1,269,791 911,462 2,401,722 1,803,837
---------------------------- ----------------------------
Operating Income 52,447 276,895 172,220 520,783
Non-operating Income (Expense):
Interest income 56,652 59,168 120,170 96,749
Interest expense (9,091) (11,828) (18,760) (14,514)
---------------------------- ----------------------------
Total Non-operating Income 47,561 47,340 101,410 82,235
---------------------------- ----------------------------
Income Before Income Taxes 100,008 324,235 273,630 603,018
Income Taxes 33,100 124,500 94,000 226,000
---------------------------- ----------------------------
Net Income $ 66,908 $ 199,735 $ 179,630 $ 377,018
============================ ============================
Net Income Per Share: $ 0.03 $ 0.07 $ 0.07 $ 0.14
============================ ============================
Weighted Average Shares
Outstanding: 2,668,027 2,748,444 2,673,646 2,735,032
============================ ============================
</TABLE>
See notes to the financial statements
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FIRST AMERICAN HEALTH CONCEPTS, Inc.
STATEMENT OF CASH FLOWS
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<TABLE>
<CAPTION>
Six months ended January 31,
1996 1995
==========================================================================================================
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 179,630 $377,018
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 108,662 73,235
Change in deferred systems cost 12,330 --
Income tax benefit arising from stock option plan -- 57,423
ESOP shares committed to be released 45,682 45,657
Change in Assets and Liabilities:
Increase in member fees receivable (947,884) (873,108)
Reduction in frames inventory 4,626 --
(Increase) decrease in deferred expenses (66,920) 5,597
Increase in prepaid expenses and other current assets (173,970) (104,169)
Increase in accounts payable 67,016 60,646
Increase (decrease) in income taxes payable (14,796) 48,228
Increase in deferred revenue 549,853 390,238
Increase (decrease) in accrued expenses and other current liabilities 35,508 (178,886)
--------------------------
Net Cash Used in Operating Activities (200,263) (98,121)
Cash Flows from Investing Activities:
Decrease in certificates of deposit -- 90,000
Decrease (increase) in marketable investment securities 2,067,248 (846,983)
(Decrease) increase in note receivable from officer 17,111 (23,987)
Purchases of property and equipment (257,366) (217,655)
--------------------------
Net Cash Used in Provided By Investing Activities 1,826,993 (998,625)
Cash Flows from Financing Activities:
(Purchase of) proceeds from sale of treasury stock (140,194) 500,129
Proceeds from stock options exercised 763 63,820
Repayments of bank loan (42,200) (21,100)
Repayments of capital lease obligation (7,254) (4,370)
--------------------------
Net Cash (Used In) Provided By Financing Activities (188,885) 538,479
--------------------------
Net Increase (Decrease) In Cash and Cash Equivalents 1,437,845 (558,267)
Cash and Cash Equivalents, Beginning of Period 2,069,129 914,901
--------------------------
Cash and Cash Equivalents, End of Period $3,506,974 $356,634
==========================
Supplemental Disclosure of Cash Flow Information:
Cash paid during six-month period for income taxes $ 109,132 $121,430
==========================
Supplemental Disclosure of Non-Cash Activities:
Unrealized loss on marketable investment securities $ 1,701 $ 6,457
==========================
</TABLE>
See notes to the financial statements
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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 1995 audited
financial statements, filed on Form 10-KSB with the Securities and Exchange
Commission on October 28, 1995. Operating results for the three and six months
ended January 31, 1996 are not necessarily indicative of the results that may be
expected for the year ending July 31, 1996. Certain fiscal 1995 balances have
been reclassified to conform to the 1996 presentation.
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, 1996, office
equipment included $82,052 and accumulated amortization included $36,891 related
to the asset covered by this lease. Following is a schedule by year of future
minimum lease payments as of January 31, 1996:
<TABLE>
<CAPTION>
Fiscal year ending July 31,
- --------------------------------------------------------------------------------
<S> <C>
1996................................................................. $11,200
1997................................................................. 22,400
1998................................................................. 22,400
1999................................................................. 10,980
Total minimum lease payments......................................... ------
66,980
Less amount representing interest............................. 12,103
Principal balance.................................................... -------
$54,877
=======
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</TABLE>
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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: 1996 - $42,200; 1997 through 1999 - $84,400; and
2000 - $21,100.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Operating revenues for the quarter ended January 31, 1996 were $1,322,000
compared to $1,188,000 for the quarter ended January 31, 1995, an increase of
11%. Although membership in the Company's traditional vision plan, ECPA
Non-Insured, increased approximately 4% from the prior year to 9.7 million
members, related revenues increased 17% due to the addition of relatively
higher-priced groups. For the six months ended January 31, 1996 non-insured
revenues increased 12% as a result of these same membership increases and
average revenue rate improvements. Increased revenues were also generated by the
Company's indemnity plans, ECPA Insured and ECPA Self-funded, which increased
enrollments by 52% during the past year. Revenues from these plans increased 42%
for the second quarter to $157,000 and 55% for the six months ended January 31,
1996 to $303,000. Management expects revenues to increase in the third and
fourth quarters as a result of the ongoing effect of increased enrollment into
all of the Company's vision care plans effective January 1, 1996 and continued
market acceptance of the non-insured 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 39% for the second quarter to $1,270,000 and
33% to $2,402,000 for the six months ended January 31, 1996 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 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 six months ended January 31, 1996
of $462,000 and $875,000 increased 34% and 43%, respectively, over the same
periods in fiscal 1995. 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 1996.
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 $182,000 for the
quarter ended January 31, 1995 to $296,000 for the quarter ended January 31,
1996 and from $348,000 to $577,000 for the respective six-month periods then
ended. The increases 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.
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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 $433,000 for the three months and
$795,000 for the six months ended January 31, 1996 increased 33% and 23%,
respectively, compared to the same periods in 1995. The increases were the
result of expanded employment support services and and professional fees related
to the Company's overall increased employment levels.
Depreciation was $57,000 for the three months and $109,000 for the six months
ended January 31, 1996 compared to $39,000 and $73,000 for the corresponding
three- and six-month periods of 1995 reflecting purchases over the 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 $57,000 for the three months and $120,000 for the six months
ended January 31, 1996 compared to $59,000 and $97,000 for the corresponding
three- and six-month periods in 1995, reflecting a higher rate of operating cash
flow investment. For the quarter ended January 31, 1996 invested cash and
marketable investment securities (current and long-term) decreased compared to
the same period in 1995 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. Disregarding rate fluctuations, interest income
should continue to increase in fiscal 1996 as improved investment opportunities
are identified. 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 second quarter of fiscal 1995 as a
result of repayments of borrowings by the ESOP trust which are guaranteed and
therefore recorded by the Company. Interest for the six months ended January 31
increased since the borrowings were outstanding less than the full period in
1995.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $4,032,000 and the current ratio was 2.9 to 1 at January 31,
1996 while cash and cash equivalents comprised $3,507,000. The Company's
principal sources of funds during the quarter and six months were from
operations and maturing long-term investments which were reinvested in
securities classified as cash equivalents.
Major uses of funds during the six months ended January 31, 1996 included
reinvestment
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activities related to maturities of marketable securities and purchases of
property and equipment totaling $257,000. The Company repurchased $140,000 of
treasury stock during the six months ended January 31, 1996 and 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 sales and
support staff personnel, as well as information systems additions and
infrastructure expenditures to accommodate future growth. The Company believes
its ongoing cash flow will support all anticipated expenditures and operating
expenses.
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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
February 15, 1996.
(b) Directors elected at the annual meeting were John R.
Behrmann, Robert J. Delsol, John W. Heidt, Thomas B. Morgan
and Robert M. Topol.
(c) Other matters voted upon at the meeting included the
following:
1. Ratification of the Board of Directors' recommendation
that Article X of the Company's Articles of Incorporation be
amended to allow from five (5) to seven (7) directors rather
than requiring specifically seven (7) (2,507,130 votes for;
5,440 votes against; 2,375 abstained).
2. All elected directors in Item 4.(b) received the following
vote tabulation (2,511,770 votes for; 3,175 votes against; 0
abstained).
3. Ratification of the Board of Directors' recommendation
that KPMG Peat Marwick LLP be appointed the Company's
independent public accountants for fiscal year 1996
(2,510,470 votes for; 3,000 votes against; 1,475 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.
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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/ Charles P. Stanford, Jr.
----------------------------------------
Charles P. Stanford, Jr.
Vice President - Finance and Chief Financial Officer
Date: March 8, 1996
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<TABLE> <S> <C>
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<NAME> FIRST AMERICAN HEALTH CONCEPTS, INC.
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<PERIOD-END> JAN-31-1995
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