<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 April 30, 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 June 10, 1996 was 2,619,137 shares
after deducting 375,402 shares of treasury stock.
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FIRST AMERICAN HEALTH CONCEPTS, INC.
FORM 10-QSB
FOR THE QUARTER ENDED
APRIL 30, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (Unaudited)
Balance Sheet as of April 30, 1996.............................. 3
Statement of Income for the quarter and nine months
ended April 30, 1996 and 1995................................. 4
Statement of Cash Flows for the nine months
ended April 30, 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............. 11
Item 6. Exhibits and Reports on Form 8-K................................ 11
SIGNATURES............................................................... 12
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- ------------------------------------
FIRST AMERICAN HEALTH CONCEPTS, Inc.
BALANCE SHEET
- ------------------------------------
<TABLE>
<CAPTION>
ASSETS April 30, 1996
- --------------------------------------------------------------------------------
<S> <C>
Current Assets:
Cash and cash equivalents $ 4,518,992
Marketable investment securities 290,638
Member fees receivable, net of allowance for
doubtful accounts of $22,895 575,478
Note receivable-officer, current 18,621
Deferred expenses 262,270
Prepaid expenses and other current assets 220,677
-------------
Total Current Assets 5,886,676
Property and Equipment:
Office furniture and fixtures 287,083
Office equipment 1,134,222
Leasehold improvements 102,818
Systems under development 380,318
-------------
1,904,441
Less accumulated depreciation and amortization (805,376)
-------------
Net Property and Equipment 1,099,065
Other Assets:
Note receivable-officer, long term 59,363
-------------
Total Assets $ 7,045,104
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 237,279
Current portion of capital lease obligation (Note 2) 18,890
Current portion of bank loan (Note 3) 84,400
Income taxes payable (22,669)
Deferred revenue 1,512,339
Accrued expenses and other current liabilities 263,889
Deferred income taxes 12,676
-------------
Total Current Liabilities 2,106,804
Long Term Liabilities:
Capital lease obligation (Note 2) 30,128
Bank loan (Note 3) 211,000
-------------
Total Long Term Liabilities 241,128
Shareholders' Equity:
Common stock, no par value; Authorized
8,000,000 shares; Issued, 2,992,772 shares 625,691
Additional paid-in capital 2,559,168
Net unrealized loss on marketable investment securities 241
Unearned ESOP shares (Note 3) (284,596)
Retained earnings 2,902,487
-------------
5,802,991
Treasury stock, at cost, 375,402 shares (1,105,819)
-------------
Total Shareholders' Equity 4,697,172
-------------
Total Liabilities and Shareholders' Equity $ 7,045,104
=============
</TABLE>
See notes to the financial statements
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- ------------------------------------
FIRST AMERICAN HEALTH CONCEPTS, Inc.
STATEMENT OF INCOME
- ------------------------------------
<TABLE>
<CAPTION>
QUARTER ENDED APRIL 30, NINE MONTHS ENDED APRIL 30,
1996 1995 1996 1995
- -------------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C>
Operating Revenues $ 1,553,394 $ 1,160,689 $ 4,127,336 $ 3,485,309
Operating Expenses:
Sales and marketing costs 535,621 319,398 1,410,973 1,011,353
Direct membership costs 386,113 241,026 963,140 588,934
General and administration 426,898 350,019 1,222,987 995,101
Depreciation 62,534 39,038 171,196 112,272
ESOP charges 20,008 18,581 64,601 64,239
----------- ----------- ----------- -----------
Total Operating Expenses 1,431,174 968,062 3,832,897 2,771,899
----------- ----------- ----------- -----------
Operating Income 122,220 192,627 294,439 713,410
Non-operating Income (Expense):
Interest income 51,289 43,121 171,459 139,870
Interest expense (8,300) (10,507) (27,060) (25,021)
----------- ----------- ----------- -----------
Total Non-operating Income 42,989 32,614 144,399 114,849
Income Before Income Taxes 165,209 225,241 438,838 828,259
Income Taxes 60,000 67,000 154,000 293,000
----------- ----------- ----------- -----------
Net Income $ 105,209 $ 158,241 $ 284,838 $ 535,259
=========== =========== =========== ===========
Net Income Per Share: $ 0.04 $ 0.06 $ 0.11 $ 0.20
=========== =========== =========== ===========
Weighted Average Shares
Outstanding: 2,642,139 2,711,016 2,663,189 2,723,256
=========== =========== =========== ===========
</TABLE>
See notes to the financial statements
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- ------------------------------------
FIRST AMERICAN HEALTH CONCEPTS, Inc.
STATEMENT OF CASH FLOWS
- ------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED APRIL 30,
1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 284,838 $ 535,259
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 171,196 112,272
Amortization 18,495 --
Income tax benefit arising from stock option plan -- 57,423
ESOP shares committed to be released 65,689 64,239
Change In Assets and Liabilities:
Decrease (Increase) in member fees receivable 20,562 (81,967)
Increase in deferred expenses (69,363) (123)
Increase in prepaid expenses and other current assets (181,415) (3,405)
Reduction in frames inventory 4,626 --
Increase in accounts payable 119,937 6,394
Increase (decrease) in income taxes payable (11,941) 39,265
Increase in deferred revenue 382,148 222,030
Increase (decrease) in accrued expenses and other
current liabilities 134,231 (118,813)
----------- -----------
Net Cash Provided By Operating Activities 939,003 832,574
Cash Flows for Investing Activities:
Decrease in certificates of deposit -- 90,000
Decrease (Increase) in marketable investment securities 2,381,410 (606,775)
Change in note receivable-officer 16,356 (27,887)
Purchases of property and equipment (652,487) (272,194)
----------- -----------
Net Cash Provided By (Used In) Investing Activities 1,745,279 (816,856)
Cash Flows from Financing Activities:
Purchases of treasury stock (167,914) (338,079)
Proceeds from sale of treasury stock -- 500,129
Proceeds from stock options exercised 9,908 93,279
Repayments of bank loan (63,300) (21,100)
Repayments of capital lease obligation (13,113) (7,694)
----------- -----------
Net Cash Provided By Financing Activities (234,419) 226,535
----------- -----------
Net Increase (Decrease) In Cash and Cash Equivalents 2,449,863 242,253
Cash and Cash Equivalents, Beginning of Period 2,069,129 914,901
----------- -----------
Cash and Cash Equivalents, End of Period $ 4,518,992 $ 1,157,154
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the nine month period for income taxes $ 166,277 $ 196,313
=========== ===========
Supplemental Disclosure of Non-Cash Activities:
Unrealized (loss) gain on marketable investment securities $ (3,044) $ 13,100
=========== ===========
</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 nine months
ended April 30, 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 April 30, 1996, office
equipment included $82,052 and accumulated depreciation included $41,346 related
to the assets covered by this lease. Following is a schedule by year of future
minimum lease payments as of April 30, 1996:
<TABLE>
<CAPTION>
Fiscal year ending July 31,
- ---------------------------
<C> <C>
1996.......................................................... $ 3,733
1997.......................................................... 22,400
1998.......................................................... 22,400
1999.......................................................... 10,980
-------
Total minimum lease payments.................................. 59,513
Less amount representing interest...................... 10,495
-------
Principal balance............................................ $49,018
=======
</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 - $21,100; 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 April 30, 1996 were $1,553,000 compared
to $1,160,000 for the quarter ended April 30, 1995, an increase of 34%. Although
membership in the Company's traditional vision plan, ECPA Non-Insured, increased
approximately 2% from the prior year to 9.7 million members, related revenues
increased 25% due to the addition of relatively higher-priced groups. For the
nine months ended April 30, 1996 non-insured revenues increased 16% 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 46% during the past
fiscal year. Revenues from these plans increased 123% for the third quarter to
$295,000 and 82% for the nine months ended April 30, 1996 to $598,000.
Management expects revenues to increase in the fourth quarter as a result of the
ongoing effect of increased enrollment in all of the Company's vision care plans
effective from 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 48% for the third quarter to $1,431,000 and
38% to $3,833,000 for the nine months ended April 30, 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 continue to reflect increases over the prior year due to the
ongoing effect of upgraded customer service and computer processing
capabilities, maintenance of the expanded provider network, claim processing
expenses related to increased indemnity business, 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, 1996
of $536,000 and $1,411,000 increased 68% and 40%, respectively, compared to 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 increased emphasis on ECPA-Insured and ECPA Self-Funded products
requires more sales support staff 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 provider locator and
referral service, and administering claims processing functions, increased from
$241,000 for the quarter ended April 30, 1995 to $386,000 for the quarter ended
April 30, 1996 and from $589,000 to $963,000 for the respective nine-month
periods then ended. The increases resulted from the addition of customer
service, membership enrollment, and claims administration personnel, and higher
outsourced claims administration costs, all tied to increased insured and
self-
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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 $427,000 for the three months and
$1,223,000 for the nine months ended April 30, 1996 increased 22% and 23%,
respectively, compared to the same periods in 1995. The increases were generally
attributable to expanded employment support services and professional fees
related to the Company's overall increased employment levels.
Depreciation was $63,000 for the three months and $171,000 for the nine months
ended April 30, 1996 compared to $39,000 and $112,000 for the corresponding
three- and nine-month periods of 1995 reflecting purchases over the past year of
computer systems and software and office furniture and fixtures to handle the
Company's personnel additions as well as mail processing and telephone equipment
and programming 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 $51,000 for the three months and $171,000 for the nine
months ended April 30, 1996 compared to $43,000 and $140,000 for the
corresponding three- and nine-month periods in 1995, reflecting a higher rate of
operating cash flow investment. For the quarter ended April, 1996 invested cash
and marketable investment securities (all of which presently have maturities
within one year) increased compared to the same period in 1995 due to an excess
of cash from operating activities over the financial resources allocated to fund
investment in offices and equipment and other capital aquisitions. Average
investment yield has decreased compared to the prior year as investments in
municipal bonds matured and proceeds reinvested were in lower-rate short-term
money market funds. 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 expected to be sufficient to fund planned computer systems and
other equipment upgrades needed to service existing customers and new business.
Interest expense decreased compared to the third quarter of fiscal 1995 as a
result of scheduled repayments of borrowings by the ESOP Trust which are
guaranteed and therefore recorded by the Company. Interest for the nine months
ended April 30 increased since the borrowings were outstanding less than the
full period in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $3,780,000 and the current ratio was 2.8 to 1 at April 30,
1996 while cash and cash equivalents comprised $4,810,000. 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 funds
classified as cash equivalents.
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The major use of funds during the nine months ended April 30, 1996 was for
purchases of property and equipment totaling $652,000. The Company also
repurchased $168,000 of treasury stock during the nine months ended April 30,
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 staffing
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: John A. Raycraft
----------------
John A. Raycraft
President and Chief Executive Officer
By: Charles P. Stanford, Jr.
------------------------
Charles P. Stanford, Jr.
Vice President - Finance and Chief Financial Officer
Date: June 14, 1996
Page 12
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<NAME> FIRST AMERICAN HEALTH CONCEPTS, INC.
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<S> <C>
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<PERIOD-END> APR-30-1996
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