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, 1997.
[ ] 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, 1997 was 2,537,226 shares
after deducting 468,102 shares of treasury stock.
<PAGE>
FIRST AMERICAN HEALTH CONCEPTS, Inc.
FORM 10-QSB
For the Quarter Ended
January 31, 1997
TABLE OF CONTENTS
Part I. Financial Information Page
----
Item 1. Financial Statements (Unaudited)
Balance Sheet as of January 31, 1997 ............................. 3
Statement of Income for the quarter and six months
ended January 31, 1997 and 1996 ................................. 4
Statement of Cash Flows for the six months
ended January 31, 1997 and 1996 ................................. 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
- -------------------------------------------------------------------------------
ASSETS January 31, 1997
- --------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $450,400
Marketable investment securities 1,215,409
Member fees receivable, net of allowance for
doubtful accounts of $6,481 2,047,663
Note receivable-officer, current 18,621
Deferred expenses 266,982
Income taxes receivable 24,007
Prepaid expenses and other current assets 398,427
-----------------
Total Current Assets 4,421,509
Property and Equipment:
Office furniture and fixtures 287,877
Office equipment 1,364,972
Leasehold improvements 112,362
Systems under development 1,053,932
-----------------
2,819,143
Less accumulated depreciation and amortization (1,060,655)
-----------------
Net Property and Equipment 1,758,488
Marketable investment securities, long term 1,203,765
Note receivable-officer, long term 42,701
-----------------
Total Assets $7,426,463
=================
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $206,816
Current portion of capital lease obligation (Note 2) 18,270
Current portion of bank loan (Note 3) 84,400
Deferred revenue 1,998,703
Accrued expenses and other current liabilities 251,793
Deferred income taxes 19,676
-----------------
Total Current Liabilities 2,579,658
Long Term Liabilities:
Capital lease obligation (Note 2) 20,568
Bank loan (Note 3) 147,700
-----------------
Total Long-Term Liabilities 168,268
Shareholders' Equity:
Common stock, no par value, Authorized
8,000,000 shares; Issued, 3,005,328 shares 643,899
Additional paid-in capital 2,560,544
Net unrealized gain on marketable investment securities 3,361
Unearned ESOP shares (Note 3) (226,786)
Retained earnings 3,159,501
-----------------
6,140,519
Treasury stock, at cost, 463,102 shares (1,461,982)
-----------------
Total Shareholders' Equity 4,678,537
-----------------
Total Liabilities and Shareholders' Equity $7,426,463
=================
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,
1997 1996 1997 1996
- ------------------------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Operating Revenues: $1,710,882 $1,322,238 $3,328,427 $2,573,942
Operating Expenses:
Sales and marketing costs 550,193 462,063 1,067,232 875,352
Direct membership costs 519,604 296,035 991,283 577,027
General and administration 483,250 433,389 885,028 794,999
Depreciation 75,659 56,899 151,150 108,662
ESOP charges 15,704 21,405 33,018 45,682
----------------------------- ---------------------------------
Total Operating Expenses 1,644,410 1,269,791 3,127,711 2,401,722
----------------------------- ---------------------------------
Operating Income 66,472 52,447 200,716 172,220
Non-operating Income (Expense):
Interest income 47,914 56,652 105,167 120,170
Interest expense (6,769) (9,091) (14,123) (18,760)
----------------------------- ---------------------------------
Total Non-operating Income 41,145 47,561 91,044 101,410
----------------------------- ---------------------------------
Income Before Income Taxes 107,617 100,008 291,760 273,630
Income Taxes 39,000 33,100 109,000 94,000
----------------------------- ---------------------------------
Net Income $68,617 $66,908 $182,760 $179,630
============================= =================================
Net Income Per Share: $0.03 $0.03 $0.07 $0.07
============================= =================================
Weighted Average Shares
Outstanding: 2,571,077 2,668,027 2,604,022 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,
1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $182,760 $179,630
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 151,150 108,662
Amortization 24,660 12,330
Income tax benefit arising from stock option plan ---- ----
ESOP shares committed to be released 33,018 45,682
Change in Assets and Liabilities:
Increase in member fees receivable (1,398,378) (947,884)
Reduction in frames inventory ---- 4,626
Increase in deferred expenses (43,009) (66,920)
Increase in prepaid expenses and other current assets (203,236) (173,970)
(Decrease) increase in accounts payable (9,534) 67,016
Increase (decrease) in income taxes payable 8,800 (14,796)
Increase in deferred revenue 835,755 549,853
(Decrease) increase in accrued expenses and other current liabilities (548) 35,508
-----------------------------------------
Net Cash Used in Operating Activities (418,562) (200,263)
Cash Flows from Investing Activities:
Decrease in marketable investment securities 178,493 2,067,248
Decrease in note receivable from officer 17,419 17,111
Purchases of property and equipment (569,083) (257,366)
-----------------------------------------
Net Cash (Used In) Provided By Investing Activities (373,171) 1,826,993
Cash Flows from Financing Activities:
Purchase of treasury stock (320,540) (140,194)
Proceeds from stock options exercised 13,593 763
Repayments of bank loan (42,200) (42,200)
Repayments of capital lease obligation (8,286) (7,254)
-----------------------------------------
Net Cash Used In Financing Activities (357,433) (188,885)
-----------------------------------------
Net (Decrease) Increase In Cash and Cash Equivalents (1,149,166) 1,437,845
Cash and Cash Equivalents, Beginning of Period 1,599,566 2,069,129
-----------------------------------------
Cash and Cash Equivalents, End of Period $450,400 $3,506,974
=========================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during six-month period for income taxes $100,200 $109,132
=========================================
Supplemental Disclosure of Non-Cash Activities:
Unrealized gain (loss) on marketable investment securities $4,974 ($1,701)
=========================================
</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 1996 audited
financial statements, filed on Form 10-KSB with the Securities and Exchange
Commission on October 28, 1996. Operating results for the three and six months
ended January 31, 1997 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 January 31, 1997, office
equipment included $82,052 and accumulated amortization included $53,302 related
to the asset covered by this lease. Following is a schedule by year of future
minimum lease payments as of January 31, 1997:
Fiscal year ending July 31,
- --------------------------------------------------------------
1997...................................................$11,200
1998....................................................22,400
1999....................................................10,980
-------
Total minimum lease payments............................44,580
Less amount representing interest.................5,742
-------
Principal balance......................................$38,838
=======
- --------------------------------------------------------------
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 - $42,200; 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 January 31, 1997 were $1,711,000
compared to $1,322,000 for the quarter ended January 31, 1996, an increase of
29%. Although membership in the Company's traditional vision plan, ECPA
Non-Insured, increased approximately 9% from the prior year to 10.6 million
members, related revenues increased 24% due to the addition of relatively
higher-priced groups. For the six months ended January 31, 1997 non-insured
revenues increased 20% 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 29% during the past year. Revenues from these plans increased
116% for the second quarter to $338,000 and 126% for the six months ended
January 31, 1997 to $683,000. 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, 1997
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 30% for the second quarter to $1,644,000 and
30% to $3,128,000 for the six months ended January 31, 1997 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, 1997
of $550,000 and $1,067,000 increased 19% and 22%, respectively, over the same
periods in fiscal 1996. 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 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 from $296,000 for the
quarter ended January 31, 1996 to $520,000 for the quarter ended January 31,
1997 and from $577,000 to $991,000 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. 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 $483,000 for the three months and
$885,000 for the six months ended January 31, 1997 increased 12% and 11%,
respectively, compared to the same periods in 1996. The increases were the
result of expanded employment support services and professional fees related to
the Company's overall increased employment levels.
Page 8
<PAGE>
Depreciation was $76,000 for the three months and $151,000 for the six months
ended January 31, 1997 compared to $57,000 and $109,000 for the corresponding
three- and six-month periods of 1996 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 $48,000 for the three months and $105,000 for the six months
ended January 31, 1997 compared to $57,000 and $120,000 for the corresponding
three- and six-month periods in 1996, reflecting a lower rate of operating cash
flow investment. For the quarter ended January 31, 1997 invested cash and
marketable investment securities (current and long-term) decreased compared to
the same period in 1996 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. 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, 1996 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 $1,842,000 and the current ratio was 1.7 to 1 at January 31,
1997 while cash and cash equivalents comprised $450,000. 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, 1997 included
reinvestment activities related to maturities of marketable securities and
purchases of property and equipment totaling $569,000. The Company repurchased
$321,000 of treasury stock during the six months ended January 31, 1997 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.
Page 9
<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 January
9, 1997.
(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. All elected directors in Item 4.(b) received the following
vote tabulation (2,476,408 votes for; 0 votes against; 14,405
abstained).
2. Ratification of the Board of Directors' recommendation that
KPMG Peat Marwick LLP be appointed the Company's independent
public accountants for fiscal year 1997 (2,477,563 votes for;
12,800 votes against; 450 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 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: Shannon L. Moyer
----------------
Shannon L. Moyer
Controller
Date: March 8, 1997
Page 11
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<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JAN-31-1997
<EXCHANGE-RATE> 1
<CASH> 450,400
<SECURITIES> 2,419,174
<RECEIVABLES> 2,054,144
<ALLOWANCES> 6,481
<INVENTORY> 0
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<PP&E> 2,819,143
<DEPRECIATION> 1,060,655
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<CURRENT-LIABILITIES> 2,579,658
<BONDS> 0
0
0
<COMMON> 643,899
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<INCOME-TAX> 109,000
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