<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] 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)
601 Union Street
Suite 1100
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 September 30, 1999, was 592 shares and 40,600
shares, respectively.
1
<PAGE> 2
FIRST CHOICE HEALTH NETWORK, INC.
INDEX TO FORM 10-Q
Page
Part I Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets
at September 30, 1999 and
December 31, 1998 . . . . . . . . . . . . . . . . . . .3
Consolidated Statements of Income
for the Three Months and Nine Months Ended
September 30, 1999 and 1998 . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows
for the Nine Months Ended
September 30, 1999 and September 30, 1998. . . . . . . .6
Notes to Consolidated
Financial Statements . . . . . . . . . . . . . . . . . .7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . .. .11
Part II Other Information
Item 1 Legal Proceedings. . . . . . . . . . . . . . . . . . .13
Item 2 Changes in Securities . . . . . . . . . . . . . . . . .13
Item 3 Defaults Upon Senior Securities . . . . . . . . . . . .13
Item 4 Submission of Matters to a
Vote of Security Holders . . . . . . . . . . . . . . . 13
Item 5 Other Information . . . . . . . . . . . . . . . . . . 13
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . 14
2
<PAGE> 3
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
September 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1999 1998
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 8,007,087 $ 5,759,751
Service fees receivable, net of allowance
for doubtful accounts of $186,000 at September 30, 1999 3,191,216 2,234,969
and $146,000 at December 31, 1998
Service fees and premiums receivable from related parties 1,194,008 1,504,537
Premiums receivable, net of allowance for doubtful accounts
$352,473 at September 30, 1999 and $215,014 at
December 31, 1998 3,310,175 1,997,926
Due from unrelated provider organizations 3,084,315 1,586,381
Due from related provider organizations 287,985 972,785
Prepaid expenses 506,956 390,748
Deferred tax assets 622,121 152,318
Other current assets 35,402 81,178
----------- -----------
Total current assets 20,239,267 14,680,593
Furniture, Equipment, and Computer software:
Furniture and equipment 3,177,088 2,601,718
Computer equipment/software 320,338 306,522
------------- -------------
3,497,426 2,908,240
Less accumulated depreciation and amortization 1,879,081 1,488,358
------------- --------------
Furniture, equipment, and computer software, net 1,618,345 1,419,882
Other Assets:
Restricted indemnity cash 1,747,626 1,705,956
Goodwill, net of accumulated amortization of
$166,853 and $113,616 198,407 307,310
Other intangible assets, net of accumulated
amortization of $932,890 and $91,743 2,314,180 2,598,657
------------ ------------
Total other assets 4,260,213 4,611,923
------------- -------------
Total assets $26,117,825 $20,712,398
========== ===========
</TABLE>
See accompanying note to consolidated financial statements (unaudited).
3
<PAGE> 4
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
September 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
September 30, December 31,
Liabilities and Shareholders' Equity 1999 1998
<S> <C> <C>
Current Liabilities:
Accounts payable $ 586,444 $ 377,850
Accrued expenses 1,904,195 1,609,202
Reserve for unpaid claims and claims adjustment expenses 2,051,573 2,102,364
Due to unrelated provider organizations 4,216,319 1,229,331
Due to related provider organizations 1,107,644 247,355
Federal income tax payable 255,276 28,417
Unearned premiums 1,284,037 137,280
Deferred income taxes 122,170 136,715
Current portion of note payable 1,972,673 1,887,996
----------- ----------
Total current liabilities 13,500,331 7,756,510
Note payable 999,671
Deferred income taxes 42,541 112,624
Minority interest 876,131 1,320,085
Commitments
Shareholders' Equity:
Class A, par value $1-Authorized, 30,000 shares;
issued and outstanding, 592 and 619 shares 592 619
Class B, par value $1-Authorized, 70,000 shares;
issued and outstanding, 40,600 and 40,600 shares 40,600 40,600
Additional Paid-in Capital 4,357,250 4,385,102
Paid-in capital from affiliates 1,472,108 1,472,108
Retained Earnings 5,828,272 4,625,080
------------ -----------
Total shareholders' equity 11,698,822 10,523,508
------------ ------------
Total liabilities and shareholders' equity $26,117,825 $20,712,398
========== ==========
</TABLE>
See accompanying note to consolidated financial statements (unaudited).
4
<PAGE> 5
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
For the three months and nine months ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Operating Revenue:
Premium revenue $ 16,700,873 $10,770,216 $47,183,608 $30,078,151
Premium revenue, related parties 1,861,821 1,284,369 4,999,852 3,720,738
Medicare revenue 1,581,631 3,657,425
Network access fee 2,150,669 1,456,730 6,134,357 4,058,713
Hospital administrative fees 1,089,000 677,291 3,083,933 1,548,199
Hospital administrative fees, related party 421,000 702,564 1,168,000 1,427,399
---------- ----------- ---------- ----------
Total Operating Revenue 23,804,994 14,891,170 66,227,174 40,833,200
----------- ----------- ---------- ----------
Operating Expenses:
Medical expenses 10,851,457 6,464,727 29,806,159 18,247,876
Medical expenses, related parties 7,234,305 4,309,818 19,870,772 12,165,251
Payroll and related 2,502,770 1,602,592 7,297,423 4,744,337
Selling, general and
administrative costs 2,614,650 2,097,424 7,897,958 5,418,386
------------ ---------- ----------- ----------
Total Operating Expenses 23,203,182 14,474,561 64,872,312 40,575,850
------------ ----------- ---------- ----------
Operating income 601,812 416,609 1,354,863 257,350
Other Income (Expense):
Interest and dividends 105,024 118,780 212,609 314,208
------------ -------- ---------- ---------
Total Other Income 105,024 118,780 212,609 314,208
------------ -------- ---------- ---------
Income before taxes federal taxes
and minority interest 706,836 535,389 1,567,472 571,558
Federal income taxes 1,318 220,197 419,723 360,645
------------ --------- --------- ---------
705,518 315,192 1,147,748 210,913
Minority interest (438) 108,759 55,445 365,777
------------ --------- --------- ---------
Net Income $705,080 $423,951 $1,203,193 $576,690
========== ========= ========= ========
Net Income per common share $ 12.03 $ 7.23 $ 20.53 $ 9.83
========== ========== ========== ========
Weighted average shares outstanding 58,592 58,638 58,605 58,644
========== ========== ========== ========
</TABLE>
See accompanying note to consolidated financial statements (unaudited).
5
<PAGE> 6
FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
For the nine months ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Operating Activities:
Net income 1,203,193 576,690
Adjustments to reconcile net income to net cash
cash provided (used) by operating activities:
Depreciation 390,723 276,006
Amortization 894,384 48,783
Deferred Income Taxes, net (554,432) (91,994)
Provision for bad debts 227,459 177,386
Realized (gains) losses on sale of securities 390
Minority interest (55,445) (256,358)
Cash provided (used) by changed in operating assets and liabilities:
Service fees receivable (645,718) (869,152)
Premium receivable (1,312,249) (518,066)
Federal income tax receivable 383,101
Prepaid expenses (116,208) (39,343)
Other current assests 45,776 (54,547)
Accounts payable 208,594 228,258
Accrued expenses 294,993 (498,691)
Reserve for unpaid claims and claims adjustment expense (50,791) 223,262
Due to related provider organizations 1,545,089 (964,341)
Due to unrelated provider organizations 1,489,054 (1,023,626)
Federal income tax payable 226,859
Unearned premiums 1,146,757 (185,018)
Other (627,339)
------------ ----------
Net cash provided (used) by operating activities 4,310,699 (2,587,260)
Investing Activities:
Purchase of furniture, equipment, and computer software (589,186) (607,460)
Increase in restricted indemnity cash (41,671) (1,597,850)
------------ ------------
Net cash used for investing activities (630,857) (2,205,310)
Financing Activities:
Payment on note payable (1,415,997)
Repurchase of Class A common stock and membership rights
from physicians (16,509) (9,320)
------------ ------------
Net cash used for financing activities (1,432,506) (9,320)
------------ ------------
Net increase (decrease) in cash and cash equivalents 2,247,336 (4,801,890)
Cash and cash equivalents at beginning of period 5,759,751 11,356,346
--------------- ----------------
Cash and cash equivalents at end of period $8,007,087 $6,554,456
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for federal income taxes $800,000 $250,000
Cash paid during the period for interest 92,040
</TABLE>
See accompanying note to consolidated financial statements (unaudited).
6
<PAGE> 7
FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1:DESCRIPTION OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Presentation of interim information: The unaudited consolidated financial
statements and related notes have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
the management of First Choice Health Network, Inc. and Subsidiary, the
accompanying unaudited consolidated financial statements include all normal
adjustments considered necessary to present fairly the financial position
as of September 30, 1999, and the results of operations for the three
months and nine months ended September 30, 1999 and 1998, and cash flows
for nine months ended September 30, 1999 and 1998. The consolidated
results of operations presented are not necessarily indicative of the
consolidated results for a full year.
Description of business: First Choice Health Network, Inc. (the 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.
The Company's wholly owned subsidiary, First Choice Health Plan, Inc., (the
Plan) is a health care services contractor which was formed on January 31,
1995, to offer fully insured health care services to an enrolled population
in Washington state.
Principles of consolidation: The consolidated financial statements include
the accounts of the Company and the Plan. All significant intercompany
accounts have been eliminated in consolidation.
New accounting pronouncements: On June 16, 1998 the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities.
Under this statement, certain derivatives are recognized at fair value and
changes in fair market value are recognized as gains or losses. Management
is currently studying this pronouncement to determine its effect, if any,
on the Company's financial statements.
Cash equivalents: The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. At September 30, 1999 and December 31, 1998, cash equivalents
consist of cash management funds of $8,007,087 and $5,759,751,
respectively.
Service fees receivable: Service fees receivable consist 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 hospital administrative fees receivable
based on claims reported in subsequent periods. These estimates are
subject to the effects of trends in claims. 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 in the period new
information becomes known.
Allowance for doubtful accounts: The Company performs periodic credit
evaluations of its customers and maintains an allowance for potential
credit losses related to service fees receivable.
Premiums receivable: Premiums receivable represents monthly group health
insurance premiums billed and outstanding.
Furniture, equipment, and computer software: Furniture, equipment, and
computer software 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 or lease term ranging from three to five years.
7
<PAGE> 8
FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Restricted indemnity cash: Restricted indemnity cash consists of amounts
required to be restricted for potential claims from enrollees as required
by the Office of Insurance Commissioner.
Other intangible assets: Intangible assets assumed in the Sound Health PPO
network acquisition were trademarks, contracts, and a noncompetition
agreement. Intangible assets are amortized using the straight-line method
over three years.
Goodwill: Goodwill is determined as the difference between the purchase
price and fair value of identifiable net assets purchased. Goodwill is
amortized using the straight-line method over three to five years. Events
or changes in circumstances have not occurred that indicate the value of
goodwill has been impaired as of September 30, 1999 and 1998.
Reserve for unpaid claims and claims adjustment expenses: This liability
represents reported and unreported claims which have been incurred but have
not been paid at the date of the financial statements. The reserve for
unreported claims is determined actuarially using prior experience and the
nature of current health insurance contracts and volume. Included in the
liability is an estimate of the future expenses necessary to settle claims.
Due to the uncertainties inherent in the estimation process, actual costs
may differ from the estimated amounts in the near term, and these
differences may be significant.
Due to (from) related (unrelated) provider organizations: This liability
or asset is the amount due to (from) health care providers in conjunction
with capitation arrangements, which is computed by subtracting the claims
payments made on behalf of the provider from the capitated amounts
contractually allocated to them. The ultimate payout or receipt of these
amounts is subject to a settlement process subsequent to the contract year
end. The Company believes the amounts recorded appropriately reflect the
ultimate settlement amounts.
Unearned premiums: Unearned premiums consists of insurance premiums
received prior to fiscal year end for health insurance coverage subsequent
to year end.
Operating revenue: Operating revenue consists primarily of premium
revenue, network access fees, and hospital administrative fees. Premium
revenue represents amounts charged for health care services and is
recognized as revenue in the period for which enrollees are entitled to
medical care. Network access fees are recognized as earned during the
period of coverage and are recorded at contractual rates. Hospital
administrative fees are recognized as earned in the period hospital claims
are incurred by a subscriber and are recorded at a contractual percentage
of the claims.
One subscriber group provided 35.81% of the premium revenue for the nine
months ended September 30, 1999.
Income taxes: Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of 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 reverse. 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. A valuation allowance is
established to the extent that it is more likely than not that deferred tax
assets will not be realized.
Valuation of long-lived assets: Using its best estimates, based on
reasonable and supportable assumptions and projections, the Company reviews
its long-lived assets for impairment whenever events or changes in
circumstances have indicated that the carrying amounts of its assets might
not be recoverable. At September 30, 1999 and 1998, no write downs were
required.
8
<PAGE> 9
FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Earnings per share: Net income per common share is computed by dividing
income available to common shareholders by the weighted average number of
common shares outstanding during the period, including 41,192 and 41,232
common shares and 17,400 and 17,400 shares applicable to affiliate common
share equivalents for period ended September 30, 1999 and 1998,
respectively. Shares issued during the period and shares reacquired during
the period were weighted for the portion of the period that they were
outstanding. There are no dilutive securities.
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.
NOTE 2:SHAREHOLDERS' EQUITY
Ownership of stock: Class A voting 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 voting common stock may be held by hospitals in the state of
Washington that contract with the Company to provide health care services.
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.
Transfer of stock: Shareholders may transfer their stock in the Company
only to the Company for repurchase. The repurchase price is established by
the Board of Directors each fiscal year as set forth in the bylaws. Class
A shares were repurchased at $1,031.95 and $1,014.91 per share for period
ended September 30, 1999 and 1998, respectively.
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 contractual rights to distributions equivalent to that
of the Class B shareholders.
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 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 of the Class B shareholders must be shared with the
nonshareholder hospitals that have contractual rights to distributions
equivalent to that Class B shareholders.
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 nonshareholders 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.
9
<PAGE> 10
FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Common stock: In January 1998, the owners of the Plan entered into an
agreement which increased the Company's ownership in the common stock of
the Plan from 75.1% to 80%. The purpose of the increase in common stock
ownership was to allow for the consolidation of tax returns between the
Company and the Plan. This transaction included exchanging of the Plan's
common stock held by the minority owners for the same number of preferred
shares. This preferred stock is nonvoting and noncumulative and has a
dividend rate of 10.0%.
<PAGE> 11
FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS 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 1998 Annual Statement on Form 10-K.
Financial Condition
Financial Condition
The Company's consolidated assets increased by $5.4 million, or 26.1%, from
$20.7 million as of December 31, 1998 to $26.1 million as of September 30,
1999. Premium receivable, net increased $1.3 million, from $2.0 million at
December 31, 1998 to $$3.3 million at September 30, 1999. Service fees
receivable, net increased $1.0 million, from 2.2 million as of December 31,
1998 to $3.2 million at September 30, 1999. This increases are due to Plan's
health insurance member months, Medicare product effective January 1999, and
the purchase of Sound Health PPO network in December 1998.
Overall liabilities increased $4.6 million, or 52.70%, from $8.9 million as of
December 31, 1998 to $13.6 million as of September 30, 1999. This increase is
primarily due to timing of certain claim and capitation payments. In addition
unearned premium has increased as a result of an earlier billing cycle.
Stockholders' equity totaled $11.7 million as of September 30, 1999, an
increase of $1.2 million. The increase resulted primarily from net income of
$1.2 million for the nine months ended September 30, 1999.
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Operating revenue increased 59.9% to approximately $23.8 million for the third
quarter of 1999, from approximately $14.9 million during the same period of
1998. The majority of the increase was due to a 54% increase in the Plan's
health insurance member months. In addition, 18% of the increase resulted
from the commencement of a Medicare Risk product effective January 1, 1999.
Network access fees also increased 47.6% to $2.1 million in 1999 from $1.4
million in 1998 as a result the purchase of the Sound Health PPO network and
related membership in December 1998 as well as growth of the Company's rental
of the PPO network.
Total operating expenses increased 60.3% to approximately $23.2 million for
the third quarter of 1999, from approximately $14.5 million in the same
quarter of 1998. Medical expenses drove the majority of the increase as the
result of the increase in Plan health insurance membership. Payroll and
related expenses increased 56.2% resulting from the Sound Health acquisition
and the hiring of additional employees needed to administrate the increased
growth and new product lines. Operating expenses also increased as the
result of increased marketing expenditures related to the new Medicare product
as well as the premium and taxes associated with The Plan's business.
Federal income taxes decreased to $1,318 in 1999 from $220,197 in 1998
resulting from a year-to-date deferred tax adjustment.
Minority interest also decreased from $108,759 in 1998 to $(438) in 1999 as a
result of decreased net losses on the Company's majority owned subsidiary.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
Operating revenue increased 62.2% to approximately $66.2 million for the third
quarter of 1999, from approximately $40.8 million during the same period of
1998. The majority of the increase was due to a 54.4% increase in the Plan's
health insurance member months. In addition, The Plan commenced offering a
Medicare Risk product effective January 1, 1999 resulting in approximately
$3.6 million of additional revenue. Network access fees also increased 51.1%
as a result the purchase of the Sound Health PPO network and related
membership in December 1998 as well as growth of the Company's rental of the
PPO network.
11
<PAGE> 12
Total operating expenses increased 59.9% to approximately $64.9 million for
the third qtr of 1999, from approximately $40.6 million in the same quarter of
1998. Medical expenses drove the majority of the increase as the result of
claims and capitation offsetting the premium revenue. Payroll and related
expenses increased 53.8% resulting from the Sound Health acquisition and the
hiring of additional employees needed to administrate the increased growth.
Operating expenses also increased as the result of increased marketing
expenditures related to the new Medicare products as well as the premium taxes
associated with The Plan's business.
Federal income taxes increased to $419,723 in 1999 from $360,645 in 1998
resulting from decreased Plan losses to offset the Company's net income in
addition to temporary timing differences in the recognition of the goodwill
related to the Sound Health acquisition.
Minority interest decreased 84.84% from $365,777 in 1998 to $55,445 in 1999 as
a result of decreased net losses on the Company's majority owned subsidiary.
Liquidity and Capital Resources
At September 30, 1999, the Company had cash, cash equivalents and investment
securities at fair market value of approximately $8.0 million compared to
approximately $5.7 million at December 31, 1998.
In January 1998, the owners of the Plan signed an agreement which gave the
Company an 80% ownership in the common stock of the Plan. The purpose of the
increase in common stock ownership was to allow for the consolidation of tax
returns between the Company and the Plan. This transaction by the minority
shareholders exchanged 8,613 shares of common stock for the same number of
preferred shares. Two other owners made a similar exchange of 4,187 shares
each. In order to facilitate this transaction, the Plan amended its Articles
of Incorporation to authorize 100,000 shares of preferred stock. This stock
has a par value of $29.10 and is nonvoting and noncumulative, but has a
dividend preference a dividend rate of 10.0% of the par value per share.
Effective February 1, 1998, the Network and Plan entered into a tax sharing
agreement which provides for the sharing of Federal income tax liabilities in
the filing of consolidated tax returns.
In July 1998, the Plan amended the Articles of Incorporation to increase the
authorization of preferred shares to one million (1,000,000). The Network
then increased its investment in the Plan by purchasing 103,092 shares of the
Plan's preferred stock for $3.0 million reducing Network's payable to Plan by
$3.0 million. These shares are cumulative and have a dividend rate of 8.75%.
Effective December 1, 1998, the Company executed a purchase agreement to
acquire Providence Plan Partners Preferred-Washington PPO Business. The
acquired business consists of approximately 125,000 subscribers with an annual
revenue stream of $4.0 million. The Company purchased substantially all of
the assets of Providence Plan Partners PPO Business for a minimum price of
$2.8 million to be paid with interest at a rate of six percent over 18 months.
There is a potential contingent payment of up to $700,000 to be determined
based on the revenues received by First Choice Health Network from the PPO
Business during the twelve months after the closing date. The Company expects
that contingent payment will be made and has been reflected in an increase in
the note payable and goodwill in the financial statements.
The Company anticipates that the revenues generated by operations, investment
and financing, plus the capital it currently has in reserves, will be
sufficient to meet its cash requirements throughout 1999.
Year 2000 update:
The Company has assessed its computer systems and facilities regarding the
Year 2000 problem. The Year 2000 problem is defined as storing the year as
two digits rather than storing the year with four digits to include the
century. Date sensitive calculations or reports may treat the year 00 as 1900
rather than 2000 resulting in erroneous results or calculations. The Company
has worked on the Year 2000 problem to ensure that all computer systems are
Year 2000 compliant and has determined that the systems are compliant. The
Company has contracted with an outside consulting team to verify the Company's
Year 2000 compliance. However, although the company has completed testing
the systems for compliance, there can be no assurance that the company's
operations will not be disrupted or put at risk to some degree. The Company
has incurred expenses in the amount of approximately $180,000 in costs
associated with Year 2000 compliance.
<PAGE> 13
The Company has been and continues to communicate with key vendors, service
providers, and customers to determine the extent to which the Company is
vulnerable to those parties' failure to resolve their own Year 2000 issues.
Potential business risks of the Year 2000 problem include the inability to
enroll and bill groups and members, processing and paying claims and other
core processes. However, based on the testing of the core business systems, it
does not appear that the Company will have difficulties in meeting core
responsibilities internally. In addition, the Company relies on other
companies for receiving payments and other information required to operate
effectively and therefore cannot reasonably estimate the impact of Year 2000
if key third parties are unsuccessful in completing their Year 2000 efforts.
The Company's have formulated detailed contingency plans in order to address
unexpected year 2000 readiness issues or issues beyond the Company's control.
These contingency plans are focused on identifying potential failure scenarios
for the Company's computer systems and those of third parties with which the
Company interacts and on ensuring the continuation of critical business
operations. In addition, these contingency plans have been submitted to
regulatory offices with respect to the medicare risk contract.
Part II Other Information
Item 1 Legal Proceedings
There are no material legal proceedings pending.
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:
27 - Financial Data Schedule
13
<PAGE> 14
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: November 15, 1999
By: / s /David Peel
David Peel
Vice President of Finance
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIRST
CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY THIRD QUARTER 1999 FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 8,007,087
<SECURITIES> 0
<RECEIVABLES> 7,695,399
<ALLOWANCES> 538,473
<INVENTORY> 0
<CURRENT-ASSETS> 20,239,267
<PP&E> 3,497,426
<DEPRECIATION> 1,879,081
<TOTAL-ASSETS> 26,117,825
<CURRENT-LIABILITIES> 13,500,331
<BONDS> 0
0
0
<COMMON> 41,192
<OTHER-SE> 11,698,822
<TOTAL-LIABILITY-AND-EQUITY> 26,117,825
<SALES> 66,227,174
<TOTAL-REVENUES> 66,439,783
<CGS> 49,676,931
<TOTAL-COSTS> 64,872,312
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,567,472
<INCOME-TAX> 419,723
<INCOME-CONTINUING> 1,147,748
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,203,193
<EPS-BASIC> 20.53
<EPS-DILUTED> 20.53
</TABLE>
