May 10, 1996
VIA FEDERAL EXPRESS
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: First Choice Health Network, Inc.
File No. 0-23998
Ladies and Gentlemen :
Enclosed kindly find eight complete copies of the above-referenced
corporation's second quarter report on Form 10-QSB for the period
ended March 31, 1996, one of which is manually signed.
Kindly acknowledge receipt of the enclosed by date stamping the
duplicate copy of the letter and returning the same in the
enclosed self-addressed stamped envelope.
Very truly yours,
Randolph R. Barker
kk:RB
Enclosures
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-23998
FIRST CHOICE HEALTH NETWORK, INC.
(Name of small business issuer as specified in its charter)
Washington 91-1272766
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
1100 Olive Way
Suite 1480
Seattle, Washington 98101
(Address of principal
executive offices)
(206)292-8255
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the 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 ______
The aggregate number of Registrant's shares of Class A Common Stock and
Class B Common Stock outstanding on May 10, 1996 was 671 shares and
29,000 shares, respectively.
Transitional Small Business Disclosure Format ( check one ):
Yes ______ No __X__
FIRST CHOICE HEALTH NETWORK, INC.
INDEX TO FORM 10-Q
Page
Part I Financial Information
Item I Financial Statements
Consolidated Balance Sheets
at March 31, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations
for the Three Months Ended
March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows
for the Three Months Ended
March 31, 1996 and 1995. . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . . . 8
Item 2 Management's Discussion and Analysis
or Plan of Operation . . . . . . . . . . . . . . . . . . . . 20
Part II Other Information
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . 23
Item 2 Changes in Securities . . . . . . . . . . . . . . . . 23
Item 3 Defaults Upon Senior Securities . . . . . . . . . . . 23
Item 4 Submission of Matters to a
Vote of Security Holders . . . . . . . . . . . . . . 23
Item 5 Other Information . . . . . . . . . . . . . . . . . . 23
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . 23
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Part I - Financial Information
Item I - Financial Statements
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
March 31, 1996 and December 31, 1995
March 31, December 31,
Assets 1996 1995
(Unaudited)
Current assets:
Cash and cash equivalents $1,089,837 2,129,006
Service fees receivable, net of allowance for
doubtful accounts of $96,187 in 1996 and 1995 1,024,685 1,104,164
Investment securities
available for sale (note 4) 2,462,829 1,276,783
Federal income tax receivable 53,926 90,129
Prepaid expenses 116,547 182,469
Other assets 15,250 15,625
Total current assets 4,763,074 4,798,176
Furniture, equipment and computer software:
Furniture and equipment 825,560 813,663
Computer software 149,558 149,558
License fees (note 6) 192,582 191,876
1,167,700 1,155,097
Less accumulated depreciation and amortization 608,670 574,377
Net furniture, equipment and
computer software 559,030 580,720
Investment securities available for sale
(note 4) 1,867,223 1,940,454
Deferred Federal income taxes, net (note 5) 17,982 -
Goodwill, net of accumulated amortization of
$7,000 in 1996 and $5,500 in 1995 (note 1) 83,000 84,500
$7,290,309 7,403,850
See accompanying notes to consolidated financial statements (unaudited).
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
March 31, 1996 and December 31, 1995
March 31, December 31
Liabilities and Shareholders' Equity 1996 1995
(unaudited)
Current liabilities:
Note payable $ - 45,000
Accounts payable 67,233 206,606
Accrued expenses 198,113 212,420
Deferred Federal income taxes, net (note 5) 319,393 286,451
Other liabilities 16,863 11,575
Total current liabilities 601,602 762,052
Deferred Federal income taxes, net (note 5) - 25,062
Total liabilities 601,602 787,114
Shareholders' equity (note 2):
Common stock:
Class A, par value $1. Authorized 30,000
shares; issued and outstanding 672 shares
in 1996 and 676 shares in 1995 672 676
Class B, par value $1. Authorized 70,000
shares; issued and outstanding 29,000 shares
in 1996 and 1995 29,000 29,000
Additional paid-in capital 2,629,872 2,630,268
Paid-in capital from affiliates 1,472,108 1,472,108
Retained earnings 2,591,937 2,502,946
Net unrealized loss on investment securities
available for sale, net of deferred taxes
of $17,970 in 1996 and $9,407 in 1995
(notes 4 and 5) ( 34,882) ( 18,262)
Total shareholders' equity 6,688,707 6,616,736
Commitments and subsequent events (notes 3, 6, and 8)
$7,290,309 7,403,850
See accompanying notes to consolidated financial statements (unaudited).
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
For the Three Months Ended March 31, 1996 and 1995
1996 1995
Operating revenue (note 7) $1,290,105 1,220,703
Operating expenses:
Payroll and related 722,269 529,612
Selling, general and administrative costs 524,470 548,512
Total operating expenses 1,246,739 1,078,124
Operating income 43,366 142,579
Other income:
Interest and dividends 68,536 58,925
Other income (loss) ( 3,389) ( 4,156)
65,147 54,769
Income before Federal income taxes 108,513 197,348
Federal income taxes (note 5) 19,522 67,687
Net income $ 88,991 129,661
Net income per common share $ 1.89 $ 2.75
See accompanying notes to consolidated financial statements (unaudited).
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended March 31, 1996 and 1995
1996 1995
Cash flows from operating activities:
Net income $ 88,991 129,661
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 30,579 29,736
Deferred Federal income taxes, net ( 1,539) ( 132,804)
Losses realized on sales of investment securities 3,389 4,156
Change in certain assets and liabilities:
Decrease in service fees receivable 79,479 284,258
Decrease in Federal income tax receivable 36,203
Decrease in prepaid expenses 65,922 73,824
Increase (decrease) in accounts payable ( 138,269) 78,828
Decrease in accrued expenses ( 14,307) ( 48,168)
Increase in Federal income taxes payable - 170,428
Total adjustments 61,457 460,258
Net cash provided by operating activities 150,448 589,919
Cash flows used in investing activities:
Purchase of investment securities available
for sale (1,672,279) ( 25,906)
Sales of investment securities available for
sale 527,904 26,115
Purchase of furniture, equipment and computer
software ( 13,001) ( 54,335)
Principal received, bonds 13,866 10,801
Acquisition of goodwill - ( 45,000)
Acquisition of license fees ( 707) ( 4,004)
Net cash used in investing activities ( 1,144,217) ( 92,329)
Cash flows from (used in) financing activities:
Note receivable - 18,500
Reduction of note payable ( 45,000)
Repurchase of Class A common stock and
membership rights from physicians ( 400) ( 800)
Net cash provided by (used in)
financing activities ( 45,400) 17,700
Increase (decrease) in cash and
cash equivalents ( 1,039,169) 515,290
Cash and cash equivalents at beginning of period 2,129,006 1,934,776
Cash and cash equivalents at end of period $ 1,089,837 2,450,066
(Continued)
See accompanying notes to consolidated financial statements (unaudited).
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended March 31, 1996 and 1995
1996 1995
(Continued)
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for Federal
income taxes $( 15,246) 30,000
Supplemental disclosure of noncash investing
activities:
Note payable incurred for acquisition of goodwill $ - 45,000
Unrealized gains (losses) on securities available
for sale:
Current $ 68,804 ( 11,762)
Noncurrent (116,367) (215,155)
$ ( 47,563) (226,917)
Unrealized losses on securities sold under
agreements to repurchase:
Current $ ( 5,288) -
Deferred income taxes on unrealized gains
(losses) on securities available for sale
and securities sold under agreements to
repurchase:
Current $ ( 21,595) 3,999
Noncurrent 39,565 73,153
$ 17,970 77,152
See accompanying notes to consolidated financial statements (unaudited).
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
First Choice Health Network, Inc. (Company) was incorporated under the laws
of the State of Washington on September 28, 1984. The Company was formed to
organize a network of independent participating physicians and hospitals to
provide a comprehensive, managed health care delivery system for group plans
established by employers and benefit groups. The Company's business is
conducted primarily in Washington, Oregon and Alaska.
(b) Principles of Consolidation
The consolidated financial statements include the consolidated accounts of
the Company and its wholly-owned subsidiary, First Choice Health Plan, Inc.,
a health care services contractor which was formed on January 31, 1995. All
significant intercompany balances have been eliminated in consolidation.
(c) Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At
March 31, 1996 and December 31, 1995, cash equivalents consist of money
market funds amounting to $201,611 and $100,764, and cash management funds
of $743,394 and $1,880,210, respectively.
(d) Operating Revenue
Operating revenue consists of network access fees and hospital
administrative fees. Network access fees are recognized as earned during
the month of coverage and are recorded at contractual rates. Hospital
administrative fees are recognized as earned in the month hospital claims
are incurred by a subscriber and are recorded at a contractual percentage
of the claims.
(e) Investment Securities
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investment in Debt
and Equity Securities, (Statement 115). Statement 115 applies to investments
in equity securities that have a readily determinable fair market value and
all debt securities.
(Continued)
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
Under Statement 115, investments are classified as held-to-maturity, trading
securities, or available-for-sale. The Company classifies all investment
securities as available-for-sale. Statement 115 requires that all securities
classified as available-for-sale be recorded at fair market value on the
balance sheet, with unrealized holding gains and losses excluded from
earnings and recognized as a separate component of shareholders' equity.
Declines in the fair values of investment securities available for sale
determined to be other than temporary are recognized as component of net
income.
The cost used in determining the gain or loss on sales of marketable equity
securities and debt securities is average cost and specific identification,
respectively.
(f) Furniture, Equipment, Computer Software and License Fee
Furniture, equipment, computer software and license fee are recorded at
cost. Depreciation and amortization are computed using the straight-line
method over the lesser of the estimated useful lives of the assets,
licensing agreement or lease term, ranging from three to five years.
(g) Goodwill
Goodwill is determined as the difference between the purchase price and fair
market value of net assets purchased. Goodwill is amortized using the
straight-line method over fifteen years.
(h) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
the deferred tax assets and liabilities of a change in tax rates is recognized
in income in hte period that includes the enactment date.
(Continued)
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(i) Advertising
The Company expenses advertising costs as incurred. Advertising expense
amounted to $925 and $20,821 for the three months ended March 31, 1996 and
1995, respectively.
(j) Accounts Receivable
Accounts receivable consists primarily of an estimate for hospital
administrative fees receivable related to claims incurred on or before the
balance sheet date, but not reported. The Company evaluates the
reasonableness of hospital administrative fees receivable based upon claims
reported in subsequent periods. These estimates are subject to the effects
of trends in claim. Although considerable variability is inherent in such
estimates, management believes that the hospital administrative fees
receivable are reasonable. The estimates are continually reviewed and adjusted
as necessary as new information becomes known; such adjustments are included
in the current year operations.
The Company performs periodic credit evaluations of its customers and
maintains allowance for potential credit losses.
(k) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(2) Shareholders' Equity
(a) Ownership of Stock
Class A common stock may be held solely by physicians licensed in the State
of Washington who contract with the Company to provide health care services
and who hold active, associate or provisional medical staff privileges at
one or more of the hospitals that contract with the Company to provide
health care services.
Class B common stock may be held by hospitals in the State of Washington
that contract with the Company to provide health care services.
(Continued)
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(b) Voting Rights
Holders of each outstanding share of Class A or Class B common stock are
entitled to one vote on each matter submitted to a vote at meetings of
shareholders and each class of common stock votes as a separate class.
(c) Transfer of Stock
Shareholders may only transfer their stock in the Company to the Company for
repurchase. The repurchase price is established by the Board of Directors
each fiscal year as set forth in the Bylaws.
(d) Dividends
The Board of Directors may declare and pay dividends on one or more classes
of common stock at such times and in such amounts as it designates, but in
no event may dividends be paid while there is an outstanding obligation to
repurchase shares. Dividends are allocated among shareholders of each class
of stock according to the number of shares outstanding to each Class A or B
shareholder. Any dividends paid to the Class B shareholders must be shared
with the nonshareholder district hospitals that have rights equivalent to
that of the Class B shareholders.
(e) Liquidation Rights
Upon liquidation or dissolution, the Board of Directors, at its discretion,
will allocate the value of assets among the classes of its outstanding stock
in proportion to the capital contributions of shareholders of each class.
For these purposes, the contributions by the nonshareholder district
hospitals that have rights equivalent to that of the Class B shareholders
and the membership fees paid by Class A shareholders are considered capital
contributions. The allocation to Class A shareholders will be shared among
all Class A shareholder in accordance with the number of shares outstanding
to each Class A shareholder . The allocation to the Class B shareholders
must be shared with the nonshareholder hospitals that have rights equivalent
to that of Class B shareholders.
(Continued)
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(f) Paid-in Capital from Affiliates
District hospitals are not shareholders of the Company, but have contractual
agreements with the Company that provide for certain rights and obligations
equivalent, but not identical, to those of Class B shareholders, including
liquidation and dividend rights. The capital contributions of the non-
shareholders are recorded as paid-in-capital from affiliates. These
contractual agreements are considered to be common share equivalents for
purposes of calculating net income per common share.
(g) Net Income Per Common Share
The weighted average number of common share and common share equivalents
used in computing net income per common share amounted to 47,074 and 47,095
for the three months ended March 31, 1996 and 1995, respectively.
(3) Line of Credit
At March 31, 1996 and December 31, 1995, the Company had a $300,000 line of
credit, expiring on June 3, 1996. Borrowings under the line bear interest at
the prime rate plus 1%. There were no borrowings outstanding under the line
of credit at March 31, 1996 or December 31, 1995.
(4) Investment Securities
The amortized cost, gross unrealized gains, gross unrealized losses and fair
values of investment securities available for sale at March 31, 1996 are as
follows:
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
Marketable equity securities $ 583,723 91,145 25,820 649,048
Mortgage and asset-backed
securities 1,983,590 2,794 119,161 1,867,223
Corporate debt securities 1,810,302 7,728 4,249 1,813,781
$ 4,377,615 101,667 149,230 4,330,052
(Continued)
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
The amortized cost, gross unrealized gains, gross unrealized losses and fair
values of investment securities available for sale at December 31, 1995 are
as follows:
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
Marketable equity securities $ 545,101 59,911 31,134 573,878
Mortgage and asset-backed
securities 1,997,823 7,063 64,432 1,940,454
Corporate debt securities 701,982 923 - 702,905
$3,244,906 67,897 95,566 3,217,237
Securities sold under agreements to repurchase are carried at fair market
value, with unrealized holding gains and losses recognized as a separate
component of shareholders' equity. The net unrealized loss on securities
sold under agreements to repurchase for the three months ended
March 31, 1996 and December 31, 1995 amounted to $5,288 and $0.00.
The amortized cost and fair values of mortgage and asset-backed securities
and corporate debt securities at March 31, 1996, based on contractual
maturity, are shown below. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized cost Fair value
Due in one year or less $1,810,302 1,813,781
Due after one year and through five years 62,586 56,428
Due after five years and through ten years 97,291 98,146
Due after ten years 1,823,713 1,712,649
$3,793,892 3,681,004
(Continued)
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(5) Income Taxes
Federal income taxes consist of the following components:
Three months ended
March 31, March 31,
1996 1995
Current $ 21,061 200,491
Deferred ( 1,539) (132,804)
$ 19,522 67,687
In 1995, the Company filed amended corporate tax returns to recharacterize
certain equity payments, and received tax refunds of $16,868, including
interest of $1,622 in 1996, and $233,634, including interest of $18,920
in 1995, related to these filings.
Federal income taxes differ from the amount computed by applying the
"expected" U.S. corporate income tax rate to income before Federal income
taxes for the three months ended March 31, as follows:
1996 1995
Amount Percent Amount Percent
Computed "expected" rate $ 36,894 34.0% $ 404,273 34.0%
Tax effect of permanent differences:
Dividend income received from
domestic corporations ( 1,123) ( 1.0) ( 17,139) 1.4
Adjustment to prior year tax
returns ( 15,246) (14.0) (214,714) (18.1)
Other 1,667 1.5 ( 3,430) ( . 3)
Tax effect of timing differences ( 2,670) ( 2.5) - -
$ 19,522 18.0% 168,991 14.2%
(Continued)
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
The tax effects of temporary differences and carryforwards that give rise to
significant portions of the deferred tax asset and deferred tax liabilities
at March 31, 1996 and December 31, 1995 are presented below:
March 31, December 31,
1996 1995
Deferred tax assets:
Accounts payable and accrued expenses $ 90,221 $141,810
Unrealized loss on investment securities 17,970 9,407
Total deferred tax assets 108,191 151,217
Deferred tax liabilities:
Service fees receivable 348,392 375,416
Prepaid expenses 39,626 62,039
Furniture, equipment and computer software 21,584 25,059
Other - 216
Total gross deferred tax liabilities 409,602 462,730
Deferred Federal income taxes, net $301,411 $311,513
There was no valuation allowance for deferred tax assets as of
March 31, 1996 and December 31, 1995. However, deferred tax assets as of
March 31, 1996 and December 31, 1995 include $17,970 and $9,407,
respectively, of potential tax benefit if securities were to be disposed of
at their current market value. The Federal tax law limits the deductibility
of capital losses (permitted only to the extent of recognized gains), with
a limited carryback of three years to offset prior recognized gains, and a
limited carryforward of five years to offset future recognized gains.
Although management does not currently intend to dispose of these assets,
the Company's ability to obtain tax benefit from a disposition of this type
is uncertain.
(Continued)
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(6) Commitments
(a) License Fees
(i) HSD Software License
On March 21, 1994, the Company entered into a software license and beta site
agreement with Health Services Design Corporation (HSD) for the use of the
software application developed and owned by HSD. The agreement calls for an
initial one-time license fee of $145,000.
(ii) VHS Software License
On May 31, 1995, the Company entered into a software licensing agreement
with Value Health Science, Inc. (VHS). The initial license term begins on
the day VHS successfully installs the related software, and ends three years
later. The license term will automatically renew for one more year at the
third anniversary of the commencement date and each anniversary thereafter.
The agreement calls for a $30,000 one-time customization fee and a $30,000
start-up fee. On an ongoing basis, the agreement calls for minimum monthly
fees plus claim processing fees and out-of-pocket costs with respect to
storage and processing. The current monthly fee, as of March 31, 1996,
was $3,125. The maximum annual license fee shall not exceed $300,000. The
total amount paid for the three months ended March 31, 1996 and 1995 related
to this agreement was $9,375 and $0.00, respectively.
(b) Consulting Agreement
On October 20, 1995, the company entered into a consulting agreement with
Olympic Health Management System, Inc. to develop and implement a Medicare
supplement product. The agreement may be terminated without cause at any
time by the Company. The agreement calls for a minimum monthly fee of
$11,000 through the sooner of the completion of certain phases or for the
first six months this agreement is in effect. Total fees related to this
agreement amounted to $35,127 and $0.00 for the three months ended
March 31, 1996 and 1995, respectively.
(Continued)
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(c) Leases
The Company leases its office facilities under terms of an operating lease
expiring in September, 1999. The lease provides for monthly minimum rent
payments and includes a renewal option for an additional five years.
Rental expense charged to operations under the operating lease for the three
months ended March 31, 1996 and 1995 was $36,026 and $33,882, respectively.
Future minimum lease payments under the operating lease for the years ended
December 31 are as follows:
1996 $103,653
1997 138,204
1998 138,204
1999 96,358
$476,419
(7) Related Party Transactions
(a) Note Receivable
At December 31, 1994, the Company had an $18,500 note receivable from an
officer of the Company. The note bore interest at 4.5% and was paid in full
in February, 1995.
(b) Operating Revenue and Service Fees Receivable
Operating revenue includes approximately $211,888 and $204,784 for
administrative service fees charged to owner and affiliated hospitals and
network access fees charged to owner and affiliated hospitals through
third-party administrators for the three months ended March 31, 1996 and
1995, respectively.
(Continued)
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(8) Acquisition
Effective January 31, 1995, the Company acquired 100% of the stock interest
in Pacific Health Systems, Inc., a dental Preferred Provider Organization
(PPO) operating in the state of Washington, by delivering cash of $45,000
and a noninterest-bearing note of $45,000 due in full on January 31, 1996.
In addition to the fixed purchase price, the Company shall make contingent
purchase price payments to be calculated as 50% of the dental PPO net income,
as defined in the purchase agreement, in excess of $295,000 for each of the
calendar years 1995 and 1996 with an aggregate amount not to exceed $260,000.
No contingent purchase price payments were due for calendar year 1995. The
entire purchase price was allocated to goodwill. The operation of the PPO
was merged into the Company.
(9) Fair Value of Financial Instruments
On December 31, 1995, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 107, Disclosures About Fair Values of Financial
Instruments, as modified by SFAS No. 119, Disclosure About Derivative
Financial Instruments and Fair Value of Financial Instruments. SFAS No. 107
requires disclosures of fair value for financial instruments, whether or not
they are included in the balance sheet, for which it is practicable to
estimate fair value. SFAS No. 119 requires disclosures about amount, nature and
terms of derivative financial instruments.
The Company's financial instruments, included in the March 31, 1996 and
December 31, 1995 balance sheet, consist of investment securities available
for sale. The fair value of the investment securities is based upon quoted
market prices (Note 4).
The Company has invested in derivative financial instruments held for non-
trading purposes that are subject to off-balance-sheet market risk related
to investment securities available for sale. In 1995, the Company placed
$250,000 with Prudential Securities Incorporated (Prudential) with the
primary investment objective of capital appreciation and secondary objective
of current growth. The risk tolerance in the investment portfolio is moderate.
(Continued)
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(10) Retirement Plans
The Company has a qualified 401(k) Employee Savings and Profit Sharing Plan
(Plan) covering substantially all employees that are not already covered by
a collective bargaining agreement. Under the Plan, employees can defer up to
12% of the eligible compensation. The Company matches 50% of the employee
contribution, up to 6% of the participant's eligible salary. The Company
also has the option to make an additional profit sharing contribution to the
Plan. Employer contributions to the Plan for the three months ended
March 31, 1996 and 1995 amounted to $11,965 and $8,682, respectively.
(11) Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents and trade
accounts receivable. The Company places its cash and temporary cash
investments with high credit quality institutions. At times, such
investments may be in excess of the FDIC insurance limit. The Company
routinely assesses the financial strength of its customers and, as a
consequence, believes that its trade accounts receivable credit risk
exposure is limited.
Item 2
Management's Discussion and Analysis
or Plan of Operation
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto included in this quarterly
report and with the Company's 1995 Annual Statement on Form 10-KSB.
Three Months Ended March 31, 1996 Compared to
Three Months Ended March 31, 1995
Operating revenue increased 5.7% to approximately $1.3 million in the first
quarter of 1996, from approximately $1.2 million during the same quarter of
1995, primarily as a result of an increase in the number of subscribers (or
members) and their dependents (collectively, "Covered Persons") utilizing
the Company's network of physicians, hospitals or other health care
providers ("PPO"), and an increase in rates to renewing groups.
Total operating expenses increased 15.6% to approximately $1.25 million in
the first quarter of 1996, from approximately $1.1 million in the same
quarter of 1995. This change is primarily due to changes in staffing
necessary to handle enrollment expected with the first offering of new
products under the licensure "First Choice Health Plan, Inc.," received from
the State of Washington on January 13,1995. Continued work on the computer
system increased consulting and depreciation costs to obtain specialized
programming assistance and the additional hardware necessary for completion.
Payroll and related expenses increased 36.4% to $722,269 in the first
quarter of 1996, from $529,612 in the same quarter of 1995. This change is
primarily due to staffing required to service the addition of the dental
system and licensure for FCHP, the expansion of technical support for data
systems, the internalization of communications and public affairs, placement
of a full time medical director and increased costs for employee benefits.
Payroll and related expenses increased to 56% of operating revenue for the
three month period ending March 31, 1996, compared to 43.3% in the same
period of 1995.
Selling, general and administrative costs decreased 4.4% to $524,470 in the
first quarter ending March 31, 1996, from $548,512 in same quarter in 1995.
This is primarily due to decreases in advertising, legal and accounting,
travel and entertainment, and subscriptions and memberships. Increased
software licenses due to the installation of a new physician profiling
system; and increases in postage, insurance, and depreciation were all due
to increased business activity.
Other income increased 18.9% to $65,147 in the first quarter ending
March 31, 1996, from $54,769 during the same quarter in 1995, primarily due
to an increase in cash available for investment.
Income taxes decreased 71.2% to $19,522 in the first quarter ending
March 31, 1996, from $67,687 during the same quarter in 1995, primarily due
to the decrease in income before federal income taxes.
Liquidity and Capital Resources
The Company has a $300,000 line of credit from Seafirst Bank. On
June 1, 1995, this line of credit was renewed for a one-year period ending
June 1, 1996. At March 31, 1996, there were no borrowings outstanding under
the line.
At March 31, 1996, the Company had cash, cash equivalents and investment
securities at fair market value of approximately $5.5 million compared to
approximately $5.3 at December 31, 1995, and approximately $4.6 million at
March 31, 1995.
Net cash provided by operating activities during the first three months
ended March 31, 1996 was $150,448, compared to $589,919 for the same period
in 1995, due primarily to decreases in service fees receivable and in
prepaid expenses. Income from operating activities is expected to remain
consistent until year-end.
Net cash used in investing activities during the first three months ended
March 31, 1996, was approximately $1.15 million, compared to approximately
$.9 million used during the same period in 1995. The use of cash in the
first three months of 1996 was due primarily to the purchase of investment
securities.
Net cash used by financing activities during the first three months ended
March 31, 1996 was $45,400 compared to $17,700 provided in the same 1995
period. The reduction in cash from financing activities is due to the
payment, in February 1996, of the note held by Pacific Health Systems, Inc.
for the purchase of First Choice Dental System, Inc.
On February 1, 1995, the Company purchased all of the issued and outstanding
stock of a dental PPO for $90,000, $45,000 of which was paid at the closing
and the $45,000 balance of which is payable on February 1, 1996. Under the
related purchase agreement, First Choice is required to make additional
contingent purchase-price payments equal to 50% of the dental PPO's net
income in excess of $295,000 for each of the calendar years 1995 and 1996,
with aggregate additional purchase price payments not to exceed $260,000.
The additional aggregate purchase price, due in January 1996 for 1995, will
not be owed because net income projections were not realized.
On July 25, 1995, First Choice Health Network, Inc. submitted amended
Federal corporate income tax returns for the years 1992 and 1993. KPMG
Peat Marwick had been asked to study payments made by shareholders which
were recorded as additional income for income tax purposes rather than the
equity basis used on our financial statements. It has been determined that,
except for certain physician non-membership contracts, these shareholder
payments should have been recorded as equity for all purposes. The total of
these amended returns is $229,091. As of this filing, the Internal Revenue
Service has refunded all portions inclusive of interest, penalty decrease
and reduction of interest previously charged.
Subsequent to year-end, the Company transferred cash of $150,000 to its
subsidiary, First Choice Health Plan, Inc., in connection with its licensure
as an HCSC. The Company previously transferred $1.5 million in January 1995
to fund the required statutory reserve. Additional funds may be required
when the Company introduces products pursuant to the license. There can be
no assurance the Company will be able to obtain the requisite financing to
expand its operations to introduce such new products. As of this filing
these funds remain on deposit.
The Company signed contracts for software development on March 21, 1994,
commenced implementation thereof, and have obtained necessary programming
assistance and additional hardware. Portions of the new system have been
installed on a pilot test basis and the Company expects to have fully
operational systems in place by early Summer, 1996.
Part II - Other Information
Item 1 Legal Proceedings
Not applicable.
Item 2 Changes in Securities
Not applicable.
Item 3 Defaults Upon Senior Securities
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
Not applicable
Item 5 Other Information
Mr. Gary R. Gannaway assumed the position of President and CEO
on January 15, 1996. Mr. Randolph R. Barker, Vice President/Chief
Financial Officer, had served as Acting Chief Executive Officer
during an interim period lasting from April 28, 1995 to the date
that Mr. Gannaway assumed that position.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K
None.
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 CHOICE HEALTH NETWORK, INC.
Date: May 15, 1996
By: / s /Randolph R. Barker
Randolph R. Barker
Vice President of Finance and Treasurer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
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