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, 1997
[ ] 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
(Insurer'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 1, 1997 was 644 shares and 40,600 shares,
respectively.
Transitional Small Business Disclosure Format ( check one ):
Yes ______ No __X__
Page 1 of 27 Pages
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, 1997 and
December 31, 1996 . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations
for the Three Months Ended
March 31, 1997 and 1996 . ..... . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows
for the Three Months Ended
March 31, 1997 and 1996. . . . . . . . . . . . . . ...... . 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
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
March 31, 1997 and December 31, 1996
March 31, December 31,
Assets 1997 1996
(Unaudited)
Current assets:
Cash and cash equivalents $ 2,346,194 2,407,355
Service fees receivable, net of allowance
for doubtful accounts of $98,275 in 1997
and $96,187 in 1996 740,856 773,337
Service fees receivable from related parties 650,635 668,046
Investment securities available for sale 5,410,880 3,072,445
Federal income tax receivable 8,854
Prepaid expenses 123,220 207,074
Licensure deposit refundable 60,900
Other assets 15,250 15,625
Total current assets 9,347,935 7,152,736
Furniture, equipment and computer software:
Furniture and equipment 1,184,157 1,030,286
Computer software 149,558 149,558
License fees 132,912 193,812
1,466,627 1,373,656
Less accumulated depreciation and amortization 792,749 728,819
Net furniture, equipment and
computer software 673,878 644,837
Investment securities available for sale 700,430 2,434,921
Restricted indemnity 150,610 150,000
Goodwill, net of accumulated amortization
of $13,000 in 1997 and $11,500 in 1996 77,000 78,500
Merger development costs 63,297
Deferred income taxes 12,159
$11,013,150 10,473,153
See accompanying notes to consolidated financial statements (unaudited).
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
March 31, 1997 and December 31, 1996
March 31, December 31
Liabilities and Shareholders' Equity 1997 1996
(unaudited)
Current liabilities:
Accounts payable $ 179,392 88,636
Accrued expenses 724,196 372,326
Federal income tax payable 71,255
Deferred income taxes 350,521 441,581
Total current liabilities 1,325,364 902,543
Deferred income taxes, net 25,790 -
Total liabilities 1,351,154 902,543
Shareholders' equity:
Common stock:
Class A, par value $1. Authorized 30,000
shares; issued and outstanding 648 shares
in 1997 and 656 shares in 1996 648 656
Class B, par value $1. Authorized 70,000
shares; issued and outstanding 40,600 shares
in 1997 and 1996 40,600 40,600
Additional paid-in capital 5,044,689 5,046,417
Shareholder receivable ( 500,000) ( 500,000)
Paid-in capital from affiliates 1,472,108 1,472,108
Retained earnings 3,674,899 3,540,660
Net unrealized gain (loss) on investment
securities available for sale, net of deferred
taxes of $36,549 in 1997 and $15,368 in 1996 ( 70,948) ( 29,831)
Total shareholders' equity 9,661,996 9,570,610
Commitments and subsequent events
$11,013,150 10,473,153
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, 1997 and 1996
1997 1996
Operating revenue:
Management fees $1,518,312 1,290,105
Medicare-based revenue 51,140
Premium revenue 835,215
Other 212
Total operating revenue 2,404,879 1,290,105
Less: medical expenses ( 757,669)
Gross profit 1,647,210 1,290,105
Operating expenses:
Payroll and related 898,638 722,269
Selling, general and administrative costs 698,062 524,470
Total operating expenses 1,596,700 1,246,739
Operating income 50,510 43,336
Other income (expense):
Interest and dividends 110,176 68,536
Other 21,798 ( 3,389)
131,974 65,147
Income before taxes 182,484 108,513
Federal income taxes ( 48,245) ( 19,522)
Net income $ 134,239 88,991
Net income per common share $ 2.85 1.89
Weighted average shares outstanding 47,074 58,653
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, 1997 and 1996
1997 1996
Cash flows from operating activities:
Net income $ 134,239 88,991
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 43,879 30,579
Deferred income taxes, net ( 31,930) ( 1,539)
(Gain) losses realized on
sales of investment securities ( 21,798) 3,389
Change in certain assets and liabilities:
Decrease in service fees receivable 49,892 79,479
Decrease in Federal income tax receivable 8,854 36,203
Decrease in prepaid expenses 83,854 65,922
Increase (decrease) in accounts payable 29,803 ( 138,269)
(Increase) decrease in accrued expenses 351,502 ( 14,307)
Increase in Federal income taxes payable 71,255 --
Total adjustments 585,311 61,457
Net cash provided by operating activities 719,550 150,448
Cash flows used in investing activities:
Purchase of investment securities
available for sale (2,678,865) ( 1,672,279)
Sales of investment securities
available for sale 184,714 527,904
Maturities of investment securities
available for sale 1,850,000
Purchase of furniture, equipment
and computer software ( 92,519) ( 13,001)
Principal received, bonds 21,602 13,866
Acquisition of merger development costs ( 63,297) --
Acquisition of license fees ( 707)
Increase in restricted indemnity ( 610)
Net cash used in investing activities ( 778,975) ( 1,144,217)
Cash flows from (used in) financing activities:
Reduction of note payable ( 45,000)
Repurchase of Class A common stock and membership
rights from physicians ( 1,736) ( 400)
Net cash used in financing activities ( 1,736) ( 45,400)
Decrease in cash and cash equivalents ( 61,161) ( 1,039,169)
Cash and cash equivalents at beginning of period 2,407,355 2,129,006
Cash and cash equivalents at end of period $ 2,346,194 1,089,837
(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, 1997 and 1996
1997 1996
(Continued)
Supplemental disclosures of cash flow information:
Cash paid (received) during the period
for Federal income taxes $ - ( 15,246)
Supplemental disclosure of non-cash investing activity
Licensure refund receivable $ 60,900 --
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) Adoption of a New Accounting Principle
Effective January 1, 1996, the Company adopted the provisions of the Statement
of Financial Accounting Standards No. 121 (SFAS 121), Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
There was no cumulative effect of adopting SFAS 121 or impact on operations for
the year ended December 31, 1996.
(d) 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, 1997 and
December 31, 1996, cash equivalents consist of money market funds amounting to
$151,565 and $232,152, and cash management funds of $1,705,143 and $2,038,291,
respectively.
(e) Operating Revenue
Management fee revenue consists primarily 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.
For the three months ended March 31, 1996, 10% of the Company's management fee
revenue was provided by one customer.
(Continued)
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
Premium revenue is generated from health insurance premiums billed to employer
groups. Premiums are billed in the month prior to the coverage date and are
recorded as revenue in the month of the subscriber's coverage.
Medical expenses are comprised of incurred health insurance claims as well as
capitation payments made to providers. Medical expenses also include an
estimate of claims incurred, but not reported (IBNR), based upon claims lag
schedule analysis.
(f) Investment Securities
The Company's investment securities are classified as available-for-sale and
are recorded at fair market value, with unrealized holding gains and losses
recognized as a separate component of shareholders' equity, net of deferred
taxes. Declines in the fair value of investment securities available for sale
determined to be other than temporary are recognized as a 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.
(g) Furniture, Equipment, Computer Software and License Fees
Furniture, equipment, computer software and license fees 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.
(h) Restricted Indemnity
Restricted indemnity are amounts established to account for potential claims
from enrollees as required by the Office of Insurance Commissioner.
(i) 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. Events or changes in circumstances have not
occurred that indicate the value of goodwill has been impaired as of
March 31, 1997.
(Continued)
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(j) 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
the period that includes the enactment date.
(k) Advertising
The Company expenses advertising costs as incurred. Advertising expense
amounted to $950 and $925 for the three months ended March 31, 1997 and 1996,
respectively.
(l) Accounts Receivable
Service fees receivable consists primarily of estimates 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 its receivables 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 its
receivables 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.
Premiums receivable consists of monthly health insurance premium revenue
payments to be received from the employer groups as of the balance sheet date.
(m) Use of Estimates
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.
(Continued)
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(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.
(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.
(Continued)
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(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
shareholders 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.
(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.
(3) Line of Credit
At March 31, 1997 and December 31, 1996, the Company had a $300,000 line of
credit, expiring on June 3, 1997. Borrowings under the line are unsecured and
bear interest at the prime rate plus 1%. There were no borrowings outstanding
under the line of credit at March 31, 1997 or December 31, 1996.
(4) Investment Securities
The amortized cost, gross unrealized gains, gross unrealized losses and fair
values of investment securities available for sale at March 31, 1997 are as
follows:
(Continued)
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
Marketable equity securities $ 639,430 69,901 26,352 682,979
Mortgage and asset-backed
securities 1,854,619 150,808 1,703,811
Corporate debt securities 3,724,758 2,654 2,892 3,724,520
$ 6,218,807 72,555 180,052 6,111,310
The amortized cost, gross unrealized gains, gross unrealized losses and fair
values of investment securities available for sale at December 31, 1996 are
as follows:
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
Marketable equity securities $ 600,336 73,975 11,531 662,780
Mortgage and asset-backed
securities 1,876,587 1,791 125,128 1,753,250
Corporate debt securities 3,075,642 15,999 305 3,091,336
$5,552,565 91,765 136,964 5,507,366
Realized gains (losses) were $21,798 and ($3,389) for the three months ended
March 31, 1997 and 1996, respectively.
The amortized cost and fair values of mortgage and asset-backed securities and
corporate debt securities at March 31, 1997, 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. Amounts shown as due in one year or less include
securities disposed of in April, 1997.
Amortized cost Fair value
Due in one year or less $4,729,968 4,727,901
Due after one year and through five years 698,601 700,430
$5,428,569 5,428,331
(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,
1997 1996
Current $ 80,175 21,061
Deferred ( 31,930) ( 1,539)
$ 48,245 19,522
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:
1997 1996
Amount Percent Amount Percent
Computed "expected" rate $ 62,045 34.0% 36,894 34.0%
Tax effect of permanent differences:
Dividend income received from
domestic corporations ( 915) ( .5) ( 1,123) (1.0)
Adjustment to prior year tax
returns ( 15,246) (14.0)
Other 1,061 .6 1,667 1.5
Tax effect of timing differences (13,946) ( 7.6) ( 2,670) ( 2.5)
$ 48,245 26.4% 19,522 18.0%
(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, 1997 and December 31, 1996 are presented below:
March 31, December 31,
1997 1996
Deferred tax assets:
Accounts payable and accrued expenses $128,019 142,395
Unrealized loss on investment securities 51,275 15,368
Total deferred tax assets 179,294 157,763
Deferred tax liabilities:
Service fees receivable 473,816 490,070
Prepaid expenses 41,895 70,405
Furniture, equipment and computer software 25,168 26,710
Unrealized gain on investment securities 14,726 --
Total gross deferred tax liabilities 555,605 587,185
Deferred Federal income taxes, net $376,311 429,422
There was no valuation allowance for deferred tax assets as of
March 31, 1997 and December 31, 1996.
(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 a license fee of $145,000 and additional license fees which are
priced
(Continued)
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
in tiers based upon the total number of users on the system, has no
specific term, and is cancelable by the Company or HSD at any time. At
March 31, 1997, HSD agreed to refund the initial licensure deposit of
$60,900 (which was paid by the Company in March, 1994) as a result of the
cooperative effort that the Company has put into the development of the
software.
(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 began on
the day VHS successfully installed 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
which was paid in 1995. On an ongoing basis, the agreement calls for
minimum monthly fees of $4,167, plus claim processing fees and out-of-
pocket costs with respect to storage and processing. The maximum annual
license fee shall not exceed $300,000.
(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 with 90 days notice at any
time by the Company. The agreement called for monthly fees of $11,000 until
April, 1996 and $2,500 monthly in May, 1996 through April, 1997. Total fees
related to this agreement amounted to $7,500 and $35,127 for the three months
ended March 31, 1997 and 1996, respectively.
(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, 1997 and 1996 was $43,791 and $36,026, respectively.
(Continued)
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
Future minimum lease payments under the operating lease for the years ended
December 31 are as follows:
1997 $138,949
1998 188,990
1999 132,608
$460,547
(7) Related Party Transactions -- Operating Revenue and Service Fees Receivable
Operating revenue includes $382,022 and $211,888 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, 1997 and 1996, respectively.
As of March 31, 1997 and December 31, 1996, service and access fees receivable
of $650,635 and $668,046, respectively, were outstanding related to these
revenues.
(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 non-
interest-bearing note of $45,000 paid in full on January 31, 1996. In addition
to the fixed purchase price, the Company will 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 incurred in 1996 and 1995. The acquisition has
been accounted for as a purchase with the entire purchase price allocated to
goodwill. The operation of the PPO was merged into the Company and the result
of operations of the PPO have been included in the Company's consolidated
financial statements from the date of acquisition.
(Continued)
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(9) Fair Value of Financial Instruments
On January 1, 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, 1997 and
December 31, 1996 balance sheet, consist of investment securities available for
sale. The fair value of the investment securities is based upon quoted market
prices (Note 4).
(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, 1997
and 1996 amounted to $14,186 and $11,965, respectively.
(11) Subsequent Events
In March, 1997, First Choice Health Plan, Inc., a wholly-owned subsidiary of
First Choice Health Network, Inc., signed a letter of intent to consolidate
First Choice Health Plan, Health First Partners and Health Washington health
plans. The terms of the merger agreement have not been formalized and would be
subject to approval by the Office of Insurance Commissioner in the State of
Washington.
In March, 1997, the Company transferred various long-term mortgage and asset-
backed securities to its subsidiary, First Choice Health Plan, Inc. These bonds
are shown as current assets in this financial statement, due to the sale of
these securities in April, 1997 by the Plan. The loss on that sale was
approximately $150,000.
(Continued)
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(12) Contingency
In connection with Overlake Hospital becoming a shareholder in December, 1996,
the Company incurred a contractual contingent liability for exclusivity damages
to another hospital shareholder of up to $600,000. Since the amount of any
damages is not reasonably estimable, no amount has been reflected in the
consolidated financial statements as of March 31, 1997.
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 1996 Annual Statement on Form 10-KSB.
Three Months Ended March 31, 1997 Compared to Three Months Ended
March 31, 1996
Operating revenue increased 86.4% to approximately $2.4 million in the first
quarter of 1997, from approximately $1.3 million during the same quarter of
1996. The majority of the increase, 68.7%, was primarily a result of the
Company's initial offering of health insurance in the state of Washington during
the first quarter of 1997. Offsetting the health insurance premium revenue were
medical payments for claims and capitation. The remaining increase was due to
an increase in network PPO membership and administrative fees.
Total operating expenses increased 21.9% to approximately $1.6 million in
the first quarter of 1997, from approximately $1.2 million in the same quarter
of 1996, primarily due to expenditures for marketing materials, contracts and
additional staffing necessary to introduce First Choice Health Plan's (FCHP),
the Company's subsidiary, first new commercial product since it received its
HCSC licensure in January 1995.
Payroll and related expenses increased 19.6% to approximately $900,000 in
the first quarter of 1997, from approximately $720,000 in the same quarter of
1996, primarily due to the addition of staff necessary to the introduction of
new health insurance products through the Company's subsdiary FCHP.
Selling, general and administrative costs increased 24.9% to approximately
$700,000 in the first quarter of 1997, from approximately $520,000 in same
quarter of 1996, primarily due to increases in the following: advertising - for
marketing materials needed to introduce new product. Increases in software
licensing fees, depreciation, and business taxes were all due to the
preparation and introduction of the new health insurance product.
Other income increased 37.8% to approximately $110,000 in the first quarter
of 1997, from approximately $69,000 during the same quarter in 1996, primarily
due an increase in cash available for investment.
Other expenses include a realized loss on sale of investment securities of
approximately $129,000 for the first quarter of 1997 and approximately $3,000
for the same quarter in 1996.
Income taxes increased to approximately $48,000 in the first quarter of 1997
from approximately $20,000 during the same quarter in 1996, as a direct result
of an increase in income before federal income taxes net of the tax effect of
timing differences.
Liquidity and Capital Resources
The Company has a $300,000 line of credit from Seafirst Bank. On June 1,
1996, this line of credit was renewed for a one-year period ending June 1, 1997.
At March 31, 1997, there were no borrowings outstanding under the line.
At March 31, 1997, the Company had cash, cash equivalents and investment
securities at fair market value of approximately $8.5 million compared to
approximately $7.9 million at December 31, 1996.
Net cash provided by operating activities during the first three months ended
March 31, 1997 was approximately $720,000, compared to approximately $150,000
for the same period in 1996, due primarily to realized losses on sales of
securities as well as decreases in prepaid and accrued expenses.
Net cash used in investing activities during the first three months ended
March 31, 1997, was approximately $800,000, compared to approximately $1.2
million used during the same period in 1996. The use of cash in the first
three months of 1997 was due primarily to the purchase of investment securities
offset by maturity of invement securities.
Net cash used by financing activities during the first three months ended
March 31, 1997 was approximately $2,000 compared to approximately $45,000 used
in the same period in 1996. The decrease in cash in 1997 was to repurchase
eight shares of Class A common stock from physicians.
On April 11, 1996, the Company transferred cash of $150,000 to its
subsidiary, First Choice Health Plan, Inc to be held as a restricted asset by
the state of Washington Office of Insurance Commissioner for payment of
potential claims from enrollees.
The Company previously transferred $1.5 million in January 1995 to fund the
required statutory reserve. Subsequent to year-end, an additional five million
dollars in investment securities were transferred to the Subsidiary. 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 were put into
operation in October 1996 and are currently being utilized for use in its
commercial business. The final stage of implementation for use in the Company's
PPO business is yet to be determined.
In May of 1996 the Company's subsidiary, First Choice Health Plan, Inc.,
introuced into the market place a Medicare Supplement program in conjunction
with two of its owner hospitals, Northwest Hospital and Valley Medical Center.
By the quarter ending March 31, 1997 there were 358 policies enforce and earned
premiums of $51,140. The Company has contracted with Olympic Health Management
Systems to act as the plan administrator. Their primary responsibilities are to
maintain a adequate sales force legally licensed in Washington state, premium
billing and collection, claims processing and payment, and financial reporting
to all applicable parties including the appropriate reports necessary for
compliance with the Office of Insurance Commissioner of the State of Washington.
In March, 1997, First Choice Health Plan, Inc., a wholly-owned subsidiary of
First Choice Health Network, Inc., signed a letter of intent to consolidate
First Choice Health Plan, Health First Partners and Health Washington health
plans. The terms of the merger agreement have not been formalized and would
be subject to approval by the Office of Insurance Commissioner in the State of
Washington.
Part II - Other Information
Item 1 Legal Proceedings
There are no material pending legal proceedings.
Item 2 Changes in Securities
No changes in the Company's securities occurred during this
period.
Item 3 Defaults Upon Senior Securities
No senior securities of the Company are outstanding.
Item 4 Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders.
Item 5 Other Information
None
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, 1997
By:/ s /David Peel
David Peel
Vice President of Finance
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
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, 1997
By:
David Peel
Vice President of Finance and Treasurer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
EXHIBITS
TO
FORM 10Q-SB
QUARTERLY REPORT
UNDER
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1996
______________________
FIRST CHOICE HEALTH NETWORK, INC.
(Name of small business issuer in its charter)
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIRST
CHOICE HEALTH NETWORK, INC., FIRST QUARTER 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<NAME> FIRST CHOICE HEALTH NETWORK INC
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<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> MAR-31-1997 DEC-31-1996
<CASH> 2,346,194 2,407,355
<SECURITIES> 5,410,880 3,072,445
<RECEIVABLES> 1,489,766 1,537,570
<ALLOWANCES> (98,275) (96,187)
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<CURRENT-ASSETS> 9,347,935 7,152,736
<PP&E> 1,466,627 1,373,656
<DEPRECIATION> (792,749) (728,819)
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0 0
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<COMMON> 41,248 41,256
<OTHER-SE> 9,620,748 9,529,354
<TOTAL-LIABILITY-AND-EQUITY> 11,013,150 10,473,153
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<TOTAL-REVENUES> 2,404,879 6,199,506
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<OTHER-EXPENSES> 1,596,700 4,944,416
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<INCOME-PRETAX> 182,484 1,587,991
<INCOME-TAX> 48,245 550,277
<INCOME-CONTINUING> 134,239 1,037,714
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
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<NET-INCOME> 134,239 1,037,714
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