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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 June 30, 2000
[ ] 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 June 30, 2000, was 584 shares and
40,600 shares, respectively.
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FIRST CHOICE HEALTH NETWORK, INC.
INDEX TO FORM 10-Q
Page
Part I Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets
at June 30, 2000 and
December 31, 1999 . . . . . . . . . . . . . . 3
Consolidated Statements of Income
for the Three Months and Six Months Ended
June 30, 2000 and 1999 . . . . . . . . . . . .. 4
Consolidated Statements of Cash Flows
for the Six Months Ended
June 30, 2000 and 1999. . . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations. . 6
Part II Other Information
Item 1 Legal Proceedings. . . . . . . . . . . . . . . . 7
Item 2 Changes in Securities . . . . . . . . . . . . . . 8
Item 3 Defaults Upon Senior Securities . . . . . . . . . 8
Item 4 Submission of Matters to a
Vote of Security Holders . . . . . . . . . . . . . 8
Item 5 Other Information . . . . . . . . . . . . . . . . . 10
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . 10
Signatures . . . . . . . . . . . . . . . . . . . . 10
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FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,447,867 $ 13,082,130
Premiums and service fees receivable, net of allowance
for doubtful accounts of $454,770 at June 30, 2000
and $317,788 at December 31, 1999 6,450,081 7,705,796
Due from unrelated provider organizations 5,596,015 1,891,651
Due from related provider organizations 2,211,906 684,606
Prepaid expenses 836,151 572,935
Deferred tax assets 1,127,450 548,735
Other current assets 56,148 170,581
----------- -----------
Total current assets 25,725,618 24,656,434
FURNITURE, EQUIPMENT, AND COMPUTER SOFTWARE, NET 1,816,414 1,666,140
OTHER ASSETS:
Other assets 2,055,074 2,062,010
Other intangible assets, net of accumulated
amortization of $1,937,626 and $1,350,371 1,696,033 2,283,289
------------ ------------
Total other assets 3,751,107 4,345,299
------------- -------------
TOTAL ASSETS 31,293,139 30,667,873
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued expenses and accounts payable 2,914,484 2,795,051
Reserve for unpaid claims and claims adjustment expenses 5,397,373 3,210,613
Due to unrelated provider organizations 5,225,878 5,104,101
Due to related provider organizations 22,528 421,711
Unearned premiums 3,412,860 3,104,521
Deferred income taxes 94,705 146,979
Current portion of note payable 1,612,004
----------- ----------
Total current liabilities 17,067,828 16,394,980
MINORITY INTEREST 808,370 864,249
COMMITMENTS (Note 2)
REDEEMABLE EQUITY PARTICIPATION 1,260,000 1,260,000
SHAREHOLDERS' EQUITY:
Common stock 41,184 41,185
Additional paid-in capital 5,821,111 5,822,142
Retained Earnings 6,294,647 6,285,317
----------- -----------
Total shareholders' equity 12,156,941 12,148,644
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $31,293,139 $30,667,873
========== ==========
</TABLE>
See notes to consolidated financial statements.
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FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
OPERATING REVENUE:
Premium revenue $ 21,790,527 $15,399,785 $42,377,738 $30,482,734
Premium revenue, related parties 3,747,67 1,562,665 7,227,090 3,138,031
Medicare revenue 5,005,011 1,286,121 9,543,609 2,075,794
Network access fee 1,686,624 1,971,481 3,452,142 3,842,885
Hospital administrative fees 1,019,000 1,021,173 2,211,838 1,994,933
Hospital administrative fees, related parties 431,000 381,000 887,000 747,000
Other 98,355 92,212 167,165 140,803
------------ ----------- ---------- ----------
Total Operating Revenue 33,778,191 21,714,437 65,866,582 42,422,180
------------ ------------ ----------- ----------
OPERATING EXPENSES:
Medical expenses 16,721,308 9,717,891 32,163,897 18,954,701
Medical expenses, related parties 11,147,539 6,478,594 21,442,598 12,636,468
Payroll and related expenses 3,267,998 2,450,204 6,269,970 4,794,652
Selling, general and
administrative costs 2,991,581 2,328,844 5,886,818 4,687,052
Amortization expense 293,628 298,128 587,256 596,256
------------ ---------- -------- ----------
Total Operating Expenses 34,422,053 21,273,661 66,350,539 41,669,129
------------ ---------- ---------- ------------
Operating income (loss) (643,862) 440,776 (483,957) 753,051
OTHER INCOME (EXPENSE):
Interest 215,884 98,694 426,612 201,025
Other (2,360) (40,680) (11,800) (93,440)
------------ ---------- ----------- ----------
Total Other Income 213,524 58,014 414,812 107,585
------------- ---------- ----------- ----------
Income (loss) before taxes federal taxes (430,338) 498,790 (69,145) 860,636
FEDERAL INCOME TAXES (145,922) 198,462 (22,598) 418,405
------------ ---------- ----------- ----------
Income (loss) before minority interest (284,416) 300,328 (46,547) 442,231
MINORITY INTEREST 63,281 24,041 55,879 55,883
------------- ---------- ----------- ----------
NET INCOME (LOSS) $(221,136) $324,370 $9,332 $498,114
========== =========== ========== =========
NET INCOME (LOSS) PER COMMON SHARE $ (3.77) $ 5.53 $ 0.16 $ 8.50
============ ========== =========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 58,585 58,608 58,585 58,612
============ =========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
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FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
June 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
OPERATING ACTIVITIES:
Net income 9,332 498,113
Adjustments to reconcile net income to net cash
cash provided (used) by operating activities:
Depreciation 277,673 260,373
Amortization 587,256 596,256
Deferred income taxes, net (572,980) 25,394
Provision for bad debts 143,536 142,736
Minority interest (55,879) (55,883)
Premium and service fees receivable 1,112,179 (689,369)
Prepaid expenses (263,216) (94,341)
Other current assets 114,433 (18,113)
Federal income tax payable 93,011
Accrued expenses and accounts payable 119,433 (225,535)
Reserve for unpaid claims and claims adjustment expenses 2,186,760 767,670
Due to (from) related provider organizations (3,582,587) 536,872
Due to (from) unrelated provider organizations (1,926,483) 746,766
Unearned premiums 308,338 381,404
------------ ---------
Net cash provided (used) by operating activities (1,542,203) 2,965,354
INVESTING ACTIVITIES:
Purchase of furniture, equipment, and computer software (427,947) (426,912)
Increase in restricted indemnity cash (51,073) (41,671)
------------ ------------
Net cash provided (used) by investing activities (479,020) (468,583)
FINANCING ACTIVITIES:
Repurchase of Class A common stock and membership rights
from physicians (1,032) (12,387)
Payment of note payable (1,612,004) (943,998)
------------ ------------
Net cash provided (used) by financing activities (1,613,036) (956,385)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,634,259) 1,540,386
CASH AND CASH EQUIVALENTS
Beginning of period 13,082,129 5,759,751
--------------- -------------
End of period $9,447,867 $7,300,137
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $11,800 $93,440
Cash paid during the year for federal income taxes 430,000 270,000
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
AND INVESTING ACTIVITIES:
Business acquired for note payable 167,001
</TABLE>
See notes to consolidated financial statements.
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FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: 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 June, 30 2000 and December 31, 1999, and the
results of operations for the three months and six months ended June
30, 2000 and 1999, and cash flows for the six months ended June 30,
2000 and 1999. The consolidated financial statements were prepared
on the same basis as the annual 1999 consolidated financial
statements.
NOTE 2: COMMITMENTS
First Choice Health Network, Inc. and Subsidiary has committed to
purchase software for a cost of approximately one million dollars.
The completion of this project is expected to occur in October 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Overview
The Company's operations consists of two business segments. The parent
company, First Choice Health Network, operates a PPO rental network.
The subsidiary Company, First Choice Health Plan (Plan), operates as a
health care service contractor that accepts insurance risk.
The Network's revenues consists of access fees arising from the rental
of the PPO network. The Plan's revenues consist primarily of commercial
and medicare risk premiums resulting from the offering of health
insurance products. Medical expenses are largely comprised of
capitation arrangements with the physician organizations (PO) in which
the risk for health insurance coverage has been passed to the PO. The
Plan passes much of the premium to the POs and keeps a certain
percentage for administrative fees, which covers services that the Plan
provides on behalf of the PO. The Plan is responsible should a PO fail
to fulfill its commitment to provide medical services and fund claims
for services. In addition the Plan reimburses some providers on a
discounted fee schedule. Under these arrangements the Plan is at risk
for health insurance coverage.
Three Months Ended June 30, 2000 Compared to Three Months Ended June
30, 1999
Operating revenue increased 56% to approximately $33.8 million for the
second quarter of 2000, from approximately $21.7 million during the
same period of 1999. This increase was the result of many factors.
The Medicare risk product line became a larger component of overall
Plan revenue. The Medicare Risk revenue increased 289% from $1.3
million to $5.0 million which was driven by membership growth of
11,380 member months versus 4,098. Commercial premium revenue increased
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from $16.9 million to $25.5 million, an increase of 51%, consisting
of an increase in membership of 31% and an increase in rates of 15%.
The mix of Medicare Risk is 16% of Plan revenues versus 7% for the
previous year's comparative quarter.
Total operating expenses increased 62% to approximately $34.4 million for
the second quarter of 2000, from approximately $21.3 million in the same
quarter of 1999. Medical expenses drove the majority of the increase as
a result of the increase in commercial and medicare risk health insurance
membership. Payroll and related expenses increased 33% resulting from
the hiring of additional employees needed to administrate the membership
growth.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30,
1999
Operating revenue increased 55% to approximately $65.9 million for the
first half of 2000, from approximately $42.4 million during the same
period of 1999. This increase was the result of many factors. The
Medicare risk product line became a larger component of overall Plan
revenue. The Medicare Risk revenue increased 360% from $2.1 million
to $9.5 million. This was driven by membership growth of 23,664 member
months versus 7,836 and a 15% increase in rates over the previous period.
Commercial premium revenue increased from $33.6 million to $49.6 million,
an increase of 48%, consisting of an increase in membership of 32% and
an increase in rates of 10%. The mix of Medicare Risk revenue is now
16% of Plan revenues versus 5% for the previous half year.
Total operating expenses increased 59.2% to approximately $66.4 million
for the second quarter of 2000, from approximately $41.7 million in the
same quarter of 1999. Medical expenses drove the majority of the
increase as a result of the increase in commercial and medicare risk
health insurance membership. Payroll and related expenses increased
30.8% resulting from the hiring of additional employees needed to
administrate the membership growth.
Federal income taxes decreased from $418,405 expense in 1999 to a
$22,598 tax benefit resulting from the company's decrease in net income.
Liquidity and Capital Resources
At June 30, 2000, the Company had cash and cash equivalents of
approximately $9.4 million compared to approximately $7.3 million at
June 30, 1999. The Company anticipates that the revenues generated by
operations will be sufficient to meet its cash requirements throughout
2000.
Part II Other Information
Item 1 Legal Proceedings
There are no material legal proceedings pending.
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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
(a) The Annual Meeting of Stockholders was held on June 22, 2000.
(b)(1) The following individual was elected to the Board of Directors as
a Director for a three-year terms expiring at the Company's 2003
Annual Meeting of Stockholders: Richard A. McGee.
(b)(2) The following individual was elected to the Board of Directors as
a Director for a three-year terms expiring at the Company's 2003
Annual Meeting of Stockholders: Richard E. Rust.
(b)(3) The following individual was elected to the Board of Directors as
Directors for a three-year terms expiring at the Company's 2003
Annual Meeting of Stockholders: Kenneth D. Graham.
(b)(4) The following individual was elected to the Board of Directors as
Directors for a three-year terms expiring at the Company's 2003
Annual Meeting of Stockholders: Richard H. Peterson.
(b)(5) The following individual was elected to the Board of Directors as
Directors for a three-year terms expiring at the Company's 2003
Annual Meeting of Stockholders: Paul G. Ramsey.
(b)(6) The following individual was elected to the Board of Directors as
Directors for a three-year terms expiring at the Company's 2003
Annual Meeting of Stockholders: Barbara L. Mauk.
(b)(7) The following individual was elected to the Board of Directors as
Directors for a one-year term expiring at the Company's 2001
Annual Meeting of Stockholders: William J. MacDonald.
(c) The matters submitted for vote at the Annual Meeting were as follows:
(c)(1) Election of Class A Directors for one, two, and three-year terms
expiring at the Company's 2001, 2002, and 2003 Annual Meeting of
Stockholders. The shares were voted as follows:
(c)(2) Approval of amendment to bylaws to increase the Board of
Directors from 15 to 17 individuals, with seven directors being
physicians representing Class A shareholders, seven directors
being participating hospitals representing class B shareholders,
and three directors representing employers and/or consumers of
health care services.
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NOMINEE NUMBER OF SHARES
------------------- --------------------
Amendment to Bylaws for 40,895
Against 9
Withheld 0
Abstentions 20
Richard A. McGee for 40,869
Against 12
Withheld 0
Abstentions 43
Richard E. Rust for 40,852
Against 17
Withheld 0
Abstentions 55
Kenneth D. Graham for 40,853
Against 16
Withheld 0
Abstentions 55
Richard H. Peterson for 40,859
Against 11
Withheld 0
Abstentions 54
Paul G. Ramsey for 40,838
Against 22
Withheld 0
Abstentions 64
Barbara L. Mauk for 35,086
Against 5813
Withheld 0
Abstentions 25
William J. MacDonald for 40,900
Against 5
Withheld 0
Abstentions 19
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Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
27 - Financial Data Schedule
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: August 11, 2000
By: / s /Kenneth A. Hamm
Kenneth A. Hamm
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
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