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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 September 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 September 30, 2000, was 571 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 September 30, 2000 and
December 31, 1999 . . . . . . . . . . . 3
Consolidated Statements of Income
for the Three Months and Nine Months Ended
September 30, 2000 and 1999 . . . . . . . . . . . . .. . 4
Consolidated Statements of Cash Flows
for the Nine Months Ended
September 30, 2000 and 1999. . . . . . . . . . . . . . . 5
Notes to Condensed 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. . . . . . . . . . . . . . . . . . . . 8
Item 2 Changes in Securities . . . . . . . . . . . . . . . . 8
Item 3 Defaults Upon Senior Securities . . . . . . . . . . . 8
Item 4 Other Information . . . . . . . . . . . . . . . . . . 8
Item 5 Exhibits and Reports on Form 8-K . . . . . . . . . . . 8
Signatures . . . . . . . . . . . . . . . . . . . . . . . 8
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FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,332,968 $ 13,082,130
Premiums and service fees receivable, net of allowance
for doubtful accounts of $1,111,211 at September 30, 2000
and $317,789 at December 31, 1999 6,259,244 7,705,796
Due from unrelated provider organizations 6,273,828 1,891,651
Due from related provider organizations 2,283,811 684,606
Prepaid expenses 708,669 572,935
Deferred tax assets 1,290,734 548,735
Other current assets 94,205 170,581
----------- -----------
Total current assets 23,243,459 24,656,434
FURNITURE, EQUIPMENT, AND COMPUTER SOFTWARE, NET 2,217,321 1,666,140
OTHER ASSETS:
Other assets 2,055,074 2,062,010
Other intangible assets, net of accumulated
amortization of $2,231,255 and $1,350,371 1,402,405 2,283,289
------------ ------------
Total other assets 3,457,479 4,345,299
------------- -------------
TOTAL ASSETS 28,918,259 30,667,873
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued expenses and accounts payable 3,428,343 2,795,051
Reserve for unpaid claims and adjustment expenses 6,368,162 3,210,613
Due to unrelated provider organizations 3,373,300 5,104,101
Due to related provider organizations 47,801 421,711
Unearned premiums 1,730,266 3,104,521
Deferred income taxes 94,705 146,979
Current portion of note payable 1,612,004
----------- ----------
Total current liabilities 15,042,577 16,394,980
MINORITY INTEREST 692,945 864,249
COMMITMENTS (Note 2)
REDEEMABLE EQUITY PARTICIPATION 1,260,000 1,260,000
SHAREHOLDERS' EQUITY:
Common stock 41,171 41,185
Additional paid-in capital 5,807,147 5,822,142
Retained Earnings 6,074,419 6,285,317
------------ -----------
Total shareholders' equity 11,922,737 12,148,644
------------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $28,918,259 $30,667,873
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
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FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
OPERATING REVENUE:
Premium revenue $ 23,494,003 $16,675,962 $65,871,742 $47,183,608
Premium revenue, related parties 3,897,453 1,861,821 11,124,543 4,999,852
Medicare revenue 5,039,811 1,581,631 14,583,420 3,657,425
Network access fee 2,160,869 2,122,953 5,613,011 6,134,357
Hospital administrative fees 947,292 1,089,000 3,159,130 3,083,932
Hospital administrative fees, related parties 503,171 421,000 1,390,171 1,168,000
Other 60,202 52,628 227,367
---------- ----------- ------------ -----------
Total Operating Revenue 36,102,801 23,804,995 101,969,384 66,227,174
-------------- ------------- -------------- -------------
OPERATING EXPENSES:
Medical expenses 18,113,788 10,851,457 50,277,686 29,806,159
Medical expenses, related parties 12,075,860 7,234,305 33,518,458 19,870,772
Payroll and related expenses 3,116,865 2,502,770 9,386,835 7,297,423
Selling, general and
administrative costs 3,179,304 2,316,522 9,066,122 7,003,574
Amortization expense 293,628 298,128 880,884 894,384
------------ ---------- ----------- ------------
Total Operating Expenses 36,779,445 23,203,182 103,129,985 64,872,312
-------------- ------------- ------------- ------------
Operating income (loss) (676,644) 601,813 (1,160,601) 1,354,862
OTHER INCOME (EXPENSE):
Interest 177,703 128,624 604,315 329,649
Other (23,600) (11,800) (117,040)
------------ ---------- ----------- ---------
Total Other Income 177,703 105,024 592,515 212,609
------------- ---------- ----------- ----------
Income (loss) before taxes federal income taxes(498,941) 706,837 (568,086) 1,567,472
FEDERAL INCOME TAXES (163,284) 1,318 (185,882) 419,723
------------ ---------- ----------- ----------
Income (loss) before minority interest (335,657) 705,518 (382,204) 1,147,748
MINORITY INTEREST 115,426 (438) 171,305 55,445
------------- ------------ ------------ ----------
NET INCOME (LOSS) $(220,231) $705,080 $(210,899) $1,203,193
========== =========== ========== =========
NET INCOME (LOSS) PER COMMON SHARE $ (3.76) $ 12.03 $ (3.60) $ 20.53
=========== ========== =========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 58,571 58,592 58,580 58,605
=========== ========= ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
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FIRST CHOICE HEALTH NETWORK, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS SEPTEMBER 30, 2000, AND 1999
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (210,899) 1,203,193
Adjustments to reconcile net income to net cash
cash provided (used) by operating activities:
Depreciation 441,961 390,723
Amortization 880,884 393,380
Deferred income taxes, net (736,265) (554,432)
Provision for bad debts 793,422 177,458
Minority interest (171,305) (443,954)
Cash provided (used) by changed in operating assets and liabilities:
Premium and service fees receivable 653,129 (2,135,426)
Prepaid expenses (135,734) (116,208)
Other current assets 76,377 (69,253)
Federal income tax payable 226,859
Accrued expenses and accounts payable 633,293 503,587
Reserve for unpaid claims and claims adjustment expenses 3,157,549 (50,791)
Due to (from) related provider organizations (4,721,573) 1,489,054
Due to (from) unrelated provider organizations (3,364,520) 1,545,089
Unearned premiums (1,374,257) 1,146,757
------------ ----------
Net cash provided (used) by operating activities (4,077,938) 3,706,036
INVESTING ACTIVITIES:
Purchase of furniture, equipment, and computer software (993,137) (474,156)
Increase in restricted indemnity cash (51,073) (41,671)
------------ ------------
Net cash provided (used) by investing activities (1,044,210) (515,827)
FINANCING ACTIVITIES:
Repurchase of Class A common stock and membership rights
from physicians (15,009) (27,879)
Payment of note payable (1,612,004) (914,994)
------------ ------------
Net cash provided (used) by financing activities (1,627,013) (942,873)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,749,161) 2,247,336
CASH AND CASH EQUIVALENTS:
Beginning of period 13,082,129 5,759,751
--------------- ----------------
End of period $6,332,968 $8,007,087
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $11,800 $117,040
Cash paid during the year for federal income taxes 430,000 800,000
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
AND INVESTING ACTIVITIES:
Business acquired for note payable 167,001
</TABLE>
See notes to condensed consolidated financial statements.
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FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
NOTES TO CONDENSED 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 September, 30 2000 and
December 31, 1999, and the results of operations for the three
months and nine months ended September 30, 2000 and 1999, and cash
flows for the nine months ended September 30, 2000 and 1999. The
consolidated financial statements were prepared on the same basis
as the annual 1999 consolidated financial statements.
New accounting pronouncements: On June 16, 1998, the Financial
Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards(SFAS) No. 133, Accounting for Derivative
Financial Instruments and Hedging Activities, which is effective
for quarters of 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.
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 November
2000.
The company is currently involved in arbitration with a provider
organization regarding contractual settlements receivable
exceeding $900,000. The outcome of such arbitration is unknown
at this time.
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
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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 September 30, 2000 Compared to Three Months Ended
September 30, 1999
Operating revenue increased 52% to approximately $36.1 million for
the third quarter of 2000, from approximately $23.8 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 219%
from $1.6 million to $5.0 million which was driven by membership
growth of 10,680 member months versus 4,076. Commercial premium
revenue increased from $18.5 million to $27.4 million, an increase
of 48%, consisting of an increase in membership of 28% and an
increase in rates of 13%. The mix of Medicare Risk is 16% of Plan
revenues versus 8% for the previous year's comparative quarter.
Total operating expenses increased 59% to approximately $36.8
million for the third quarter of 2000, from approximately $23.2
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 25% resulting from the hiring of additional
employees needed to administrate the membership growth.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
Operating revenue increased 54% to approximately $102.0 million for
the nine months of 2000, from approximately $66.2 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 299% from $3.7
million to $14.6 million. This was driven by membership growth of
31,449 member months versus 9,112 and a 15% increase in rates over
the previous period. Commercial premium revenue increased from $52.1
million to $77.0 million, an increase of 48%, consisting of an
increase in membership of 30% and an increase in rates of 12%.
Medicare Risk revenue is now 14% of Plan revenues versus 6% for the
previous year.
Total operating expenses increased 59.0% to approximately $103.1
million for the third quarter of 2000, from approximately $64.9
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 28.6% resulting from the hiring of additional
employees needed to administrate the membership growth.
Federal income taxes decreased from $419,723 expense in 1999 to a
$185,882 tax benefit resulting from recognition of the tax benefit
for losses.
Liquidity and Capital Resources
At September 30, 2000, the Company had cash and cash equivalents of
approximately $6.3 million compared to approximately $8.0 million at
September 30, 1999. The Company anticipates that the revenues
generated by operations will be sufficient to meet its cash
requirements throughout 2000.
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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 Other Information
None
Item 5 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: November 14, 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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