1
UNITED STATES
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, 2002
[ ] 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.
(Exact name of Registrant 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, 2002, was 538 shares and
40,600 shares, respectively.
Holders of each class of Common Stock are entitled to share ratably on a
share-for-share basis with respect to any dividends on such class of
Common Stock, when, as and if declared by the Board of Directors out of
funds legally available. Therefore, such dividends may not be paid while
an obligation to repurchase shares remains outstanding. Pursuant to the
Company's contracts with the Hospital Participants, if First Choice pays
any dividends or other distributions with respect to the Class B Common
Stock, First Choice must make an equivalent distribution to the Hospital
Participants. The Company does not currently anticipate paying cash
dividends on its capital stock.
1
2
FIRST CHOICE HEALTH NETWORK, INC.
INDEX TO FORM 10-Q
Page
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
at June 30, 2002 and December 31, 2001 . . . . . . . . . . 3
Condensed Consolidated Statements of Operations
(Unaudited)for the Three Months and Six Months Ended
June 30, 2002 and 2001 . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Six Months Ended June 30, 2002
and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements
(Unaudited). . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 10
Item 3 Quantitative and Qualitative Disclosures
About Market Risk . . . . . . . . . . . . . . . . . . . 11
Part II Other Information
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . . 12
Item 2 Changes in Securities and Use of Proceeds . . . . . . . . 12
Item 3 Defaults Upon Senior Securities . . . . . . . . . . . . . 12
Item 4 Submission of Matters to a Vote of Security Holders . . . 12
Item 5 Other Information . . . . . . . . . . . . . . . . . . . . 12
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 12
Item 7 Forward-Looking Statements . . . . . . . . . . . . . . . . 12
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2
3
FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
UNAUDITED
June 30, December 31,
ASSETS 2002 2001
CURRENT ASSETS:
Cash and cash equivalents $ 3,388,402 $ 3,207,241
Investment securities available for sale 12,003,736 13,348,948
Service fees receivable, net of allowance
for doubtful accounts of $413,528 and $420,497 1,428,097 1,592,263
Service fees and premiums receivable from related parties 1,109,293 384,274
Premiums receivable, net of allowance for doubtful accounts of
$90,381 and $130,779 278,370 2,806,117
Provider settlements receivable - unrelated parties 482,503 476,929
Provider settlements receivable - related parties 131,770 181,770
Prepaid expenses 614,204 777,401
Deferred tax assets 491,573 572,571
Other current assets 733,289 1,645,201
----------- -----------
Total current assets 20,661,237 24,992,715
FURNITURE, EQUIPMENT, AND COMPUTER SOFTWARE:
Furniture and equipment 4,547,683 4,466,461
Computer software 1,254,909 1,187,970
----------- -----------
5,802,592 5,654,431
Less accumulated depreciation and amortization (3,974,324) (3,451,422)
----------- -----------
Furniture, equipment, and computer software, net 1,828,268 2,203,009
DEFERRED TAX ASSETS 1,597,193 1,363,347
OTHER ASSETS:
Restricted indemnity cash 1,840,370 1,829,102
Other 179,133 27,526
----------- -----------
Total other assets 2,019,503 1,856,628
----------- -----------
TOTAL $26,106,201 $30,415,699
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
3
4
FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
UNAUDITED
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2002 2001
CURRENT LIABILITIES:
Accounts payable $ 463,183 $ 451,771
Accrued expenses 2,242,960 1,833,074
Reserve for unpaid claims and claims adjustment expenses 9,702,524 11,815,058
Provider settlements payable - unrelated parties 568,599 1,416,068
Unearned premiums 888,746 1,633,532
Current portion of note payable - 331,791
----------- -----------
Total current liabilities 13,866,012 17,481,294
NOTE PAYABLE - 366,379
MINORITY INTEREST 812,581 1,237,486
REDEEMABLE EQUITY PARTICIPATION 1,991,850 1,991,850
SHAREHOLDERS' EQUITY:
Common stock:
Class A, par value $1 - Authorized, 30,000 shares;
issued and outstanding, 538 and 539 shares 538 539
Class B, par value $1 - Authorized, 70,000 shares;
issued and outstanding, 40,600 shares 40,600 40,600
Additional paid-in capital 4,308,350 4,306,581
Paid-in capital from affiliates 1,472,108 1,472,108
Retained earnings 3,619,502 3,527,471
Accumulated other comprehensive loss, net of tax (5,340) (8,609)
----------- -----------
Total shareholders' equity 9,435,758 9,338,690
----------- -----------
TOTAL $26,106,201 $30,415,699
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
4
5
FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
UNAUDITED
Three Months Ended Six Months Ended
June 30, June 30,
`
2002 2001 2002 2001
OPERATING REVENUE:
Premium revenue $ 18,647,724 $ 24,214,449 $ 38,579,610 $ 49,261,108
Premium revenue, related parties 345,304 2,280,097 699,474 6,016,629
Network access fees 2,303,409 1,980,366 4,345,946 4,088,349
Hospital administrative fees 1,276,551 1,231,971 2,485,096 2,269,950
Hospital administrative fees, related parties 1,205,290 562,191 2,266,146 1,318,204
Other 63,535 60,791 101,689 112,956
------------ ---------- ---------- -----------
Total Operating Revenue 23,841,813 30,329,865 48,477,961 63,067,196
------------ ---------- ---------- -----------
OPERATING EXPENSES:
Medical expenses 14,733,219 17,290,523 28,191,981 38,335,309
Medical expenses - related parties 5,274,718 7,583,216 10,197,379 13,246,521
Payroll and related expenses 2,680,327 3,205,177 5,417,717 6,460,173
Selling, general, and administrative expenses 2,770,040 2,957,968 5,464,094 5,928,522
Amortization and other expense - 293,700 27,526 587,401
------------ ----------- ---------- -----------
Total operating expenses 25,458,304 31,330,584 49,298,697 64,557,926
------------ ----------- ---------- -----------
Operating loss (1,616,491) (1,000,719) (820,736) (1,490,730)
OTHER INCOME (EXPENSE):
Interest and dividends 180,284 286,214 335,015 461,100
Other - - - -
------------ ----------- ---------- -----------
Total other income 180,284 286,214 335,015 461,100
------------ ----------- ---------- -----------
Loss before federal income taxes
and minority interest (1,436,207) (714,505) (485,721) (1,029,630)
FEDERAL INCOME TAX (486,075) (223,009) (152,847) (330,151)
------------ ----------- ---------- ----------
(950,132) (491,496) (332,874) (699,479)
MINORITY INTEREST 389,802 37,025 424,905 173,061
------------ ----------- ---------- ----------
NET INCOME (LOSS) $ (560,330) $ (454,471) $ 92,031 $ (526,418)
NET INCOME (LOSS) PER COMMON SHARE-basic and diluted (9.57) (7.76) 1.57 (8.99)
============ ========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 58,540 58,572 58,540 58,572
============ ========== ========== ==========
See Notes to Condensed Consolidated Financial Statements.
5
6
FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
UNAUDITED
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 92,031 $ (526,418)
Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Depreciation 522,902 398,520
Amortization and other expense 27,526 587,401
Deferred income taxes, net (152,848) (420,706)
Provision for doubtful accounts (47,367) (51,272)
Minority interest (424,905) (173,062)
Service fees receivable (553,884) 1,127,443
Premiums receivable 2,568,145 (11,100)
Prepaid expenses 163,197 147,896
Other current assets 911,912 142,793
Accounts payable 11,412 (232,288)
Accrued expenses 409,886 (714,902)
Reserve for unpaid claims and claims adjustment expenses (2,112,534) (369,365)
Provider settlements receivable/payable - Related party 50,000 (1,629,597)
Provider settlements receivable/payable - Unrelated party (853,043) (476,084)
Unearned premiums (744,786) 529,713
------------ -------------
Net cash provided/(used) by operating activities (132,356) (1,671,028)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, equipment, and computer software (148,161) (380,076)
Increase in restricted indemnity cash (11,268) (5,775)
Investment in Assured Health (179,133) -
Purchase of investments available for sale (897,955) (8,729,492)
Sale of investments available for sale 2,246,436 -
------------- -------------
Net cash provided/(used) by investing activities 1,009,919 (9,115,343)
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of Class A common stock membership
rights from physicians 1,768 -
Payment of note payable (698,170) (147,991)
------------- ------------
Net cash provided/(used) by financing activities (696,402) (147,991)
------------- ------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 181,161 (10,934,362)
CASH AND CASH EQUIVALENTS:
Beginning of year 3,207,241 12,697,290
------------- ------------
End of period $ 3,388,402 $ 1,762,928
============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Federal income taxes $ 255,751 -
Interest 37,738 $ 45,218
See Notes to Condensed Consolidated Financial Statements.
6
7
FIRST CHOICE HEALTH NETWORK, INC AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
NOTE 1 PRESENTATION OF INTERIM INFORMATION
The accompanying unaudited interim condensed consolidated financial statements
and related notes have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission and in accordance with accounting
principles generally accepted in the United States of America. In the opinion
of the management of First Choice Health Network, Inc. and Subsidiary, the
accompanying unaudited interim condensed consolidated financial statements
include all normal adjustments considered necessary to present fairly the
financial position as of June 30, 2002, and the results of operations for the
three months and six months ended June 30, 2002 and 2001, and cash flows for
the six months ended June 30, 2002 and 2001. The condensed consolidated
financial statements were prepared on the same basis as the annual 2001
consolidated financial statements. The results of interim operations are not
necessarily indicative of operating results for the entire year.
NOTE 2 INVESTMENTS
The amortized cost, unrealized gains or losses and fair values of investments
in debt securities, as of June 30, 2002, are as follows:
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
AS OF JUNE 30, 2002
Government-backed adjustable
Rate securities $ 1,967,280 $ 4,422 $ (1,198) $ 1,970,504
Mortgage-backed adjustable
Rate securities 10,041,797 21,056 (29,620) 10,033,233
----------- --------- -------- ----------
Total Bonds $ 12,009,077 $ 25,478 $ (30,818) $ 12,003,737
AS OF DECEMBER 31, 2001
Government-backed adjustable
Rate securities $ 2,096,826 $ 5,131 $ (1,480) $ 2,100,477
Mortgage-backed adjustable
Rate securities 11,260,732 8,026 (20,287) 11,248,471
----------- --------- -------- ----------
Total Bonds $ 13,357,558 $ 13,157 $ (21,767) $ 13,348,948
7
8
In determining fair value, management obtains quotations from independent
sources who make markets in similar securities, generally broker dealers.
These quotes are generally estimates of fair value based on an evaluation of
appropriate facts such as trading in similar securities, yields, credit
quality, coupon rate, maturity, type of issue, and other market data.
Sales of investments available for sale totaled $2,246,436 and principal
buydowns on these investments during the second quarter of 2002 were
$1,364,191.
NOTE 3 RECENTLY ISSUED ACCOUNTING STANDARDS
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, which is effective for business combinations initiated after
June 30, 2001. This statement establishes the purchase method as the only
acceptable method of accounting for business combinations and eliminates the
pooling-of-interest method. Also, in October 2001, the FASB issued SFAS
No. 142, Goodwill and Other Intangible Assets, which is effective for fiscal
years beginning after December 15, 2001. SFAS No. 142 establishes new
accounting and reporting standards for goodwill and other intangible assets.
Under this statement, goodwill will no longer be amortized, but will be
recognized and measured based on its fair value. Management performed an
impairment test in January 2002 upon adoption of SFAS No. 142 and determined
there was impairment of the remaining portion of goodwill resulting in a charge
to amortization and other expense of $27,526. The value of goodwill was
determined to be impaired as a result of the decision to proceed with an
orderly exit from the insured health care business. Management does not
believe that adoption of these statements will have a further, material
effect on the Company's financial condition or results of operations.
The following table reflects the pro forma effect on goodwill and net income of
the Company if SFAS No. 142 was in effect for the six months ended June 30,
2002 and June 30, 2001.
For the six months ended June 30,
2002 2001
------ ------
Goodwill amortization - 27,538
Net Income/(Loss) 92,031 (498,880)
The remaining portion of amortization for the six months ended June 30, 2001
relates to the intangible asset acquired in the Sound Health purchase in 1998,
which was fully amortized in November 2001.
NOTE 4 REPORTABLE OPERATING SEGMENTS
Factors management used to identify the enterprise's reportable segments: The
Company has two reportable segments which correspond to the organization of the
Company and its majority-owned subsidiary, First Choice Health Plan, Inc. (the
"Plan"). Each segment requires distinct tracking capabilities in the areas of
revenues, claims processing, marketing strategies, and reporting to regulatory
organizations.
Description of the types of products and services from which each
reportable segment derives its revenue: The Company has two primary
products which have been aggregated into one reportable segment: network
access fees and hospital administration fees. Network access fees arise from
the rental of the Company's large PPO network while hospital administrative
8
9
fees arise from charges to the network hospitals based on claims incurred by
members. The other reportable segment, the Plan, offers a variety of fully
insured health insurance plans to employer groups.
The Plan's Board of Directors have authorized management to proceed with an
orderly exit of the insured health care business by no later than December
2003. This exit strategy is currently being implemented through rating actions
and by ceasing new sales activities, except in selected offerings. Insured
membership has decreased by 26% from 47,956 members at December 2001 to 35,376
members at June 2002. The exit will be completed by the non-renewal of all
business beginning in February 2003.
Measurement of segment profit or loss and segment assets: The accounting
policies of the segments are the same as those used by the consolidated
company. The Company evaluates performance based on profit and loss from
operations before income taxes not including nonrecurring gains and losses.
The Company accounts for intersegment revenues by assigning a management fee
to the Plan that is an estimate of resources expended on the Plan's behalf.
Information about profit or loss and assets of reportable segments:
First Choice First Choice
Health Network Health Plan Total
-------------- ------------ -------------
Three months ended June 30, 2002:
Revenues from external customers $ 4,110,056 $ 19,731,757 $ 23,841,813
Intercompany revenue 72,292 (72,292) -0-
Net income (loss) 998,879 (1,949,011) (950,132)
Minority interest 389,802 389,802
Consolidated net income (loss) (560,330)
Three months ended June 30, 2001:
Revenues from external customers $ 3,156,628 $ 27,173,237 $ 30,329,865
Intercompany revenue 105,548 (105,548) -0-
Net income (loss) 418,837 (910,333) (491,496)
Minority interest 37,025 37,025
Consolidated net income (loss) (454,471)
Six months ended June 30, 2002:
Revenues from external customers $ 7,792,218 $ 40,685,743 $ 48,477,961
Intercompany revenue 151,769 (151,769) -0-
Net income (loss) 1,791,650 (2,124,524) (332,874)
Minority interest 424,905 424,905
Consolidated net income (loss) 92,031
Six months ended June 30, 2001:
Revenues from external customers $ 6,414,908 $ 56,652,288 $ 63,067,196
Intercompany revenue 211,771 (211,771) -0-
Net income (loss) 901,502 (1,600,981) (699,479)
Minority interest 173,061 173,061
Consolidated net income (loss) (526,418)
9
10
FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The Company's operations consist of two business segments. The parent company,
First Choice Health Network (the "Network"), operates a PPO rental network.
The subsidiary company, First Choice Health Plan (the "Plan"), operates as a
health care service contractor that accepts insurance risk.
The Network's revenues consist of access fees arising from the rental of the
PPO network. The Plan's revenues consist primarily of commercial premiums
resulting from the offering of health insurance products. Medical expenses are
largely comprised of a negotiated fee for the health care services rendered.
The company's related party transactions consist of two components. One
component is the premium revenue that is received from the Company's owner
hospitals for their employee groups that are members of the Plan. The other
component is the Company's payment to the owner hospitals in the form of claims
payments for medical services rendered to any member of the Plan. These two
components are independent of each other and have no relationship for
analytical purposes.
The Plan's Board of Directors have authorized management to proceed with an
orderly exit of the insured health care business by no later than December
2003.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Operating revenue decreased $6.5 million (21.4%) from the quarter ended June
2002 as compared to the quarter ended June 2001. The decrease was due to the
decreased membership for the Plan and a resultant decrease in premium revenue.
Commercial member months decreased by 34.7% during the quarter ended June 2002
as compared to the quarter ended June 2001, while the average commercial
premium rates increased by 10.0% during the same period. Premium revenue
decreased $7.5 million, or 28.3% from the second quarter 2002 compared to the
second quarter 2001. This has been the result of a sharp decrease in the
membership that is covered by the Plan.
Operating expenses decreased $5.9 million (18.7%) from the quarter ended June
2002 compared to the same period in 2001. The decrease during this period was
primarily due to reduced medical expenses of $4.9 million as a result of
decrease in the Plan membership. Medical claims expenses have increased 23.2%
on a per member per month basis during the three months ended June 2002 as
compared to the three months ended June 2001. This is due to both increased
utilization of healthcare services and increased healthcare unit costs. The
remaining $1.0 million decrease in operating expenses is the result of cost
savings from payroll and administrative expenses due to employee reductions as
the Company transitions away from the insured health care business.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS JUNE 30, 2001
Operating revenue decreased $14.6 million (23.1%) from 2001 to 2002. This
Decrease was due to the decreased membership for the Plan and a resultant
decrease in premium revenue. Commercial member months decreased by 35.2% in
2002 while the average commercial premium rates increased by 10.0% during the
same period. Premium revenue decreased $16.0 million or 28.9%, year to date
2002 versus year to date 2001. This has been the result of a sharp decrease
in the membership that is covered by the Plan.
10
11
Operating expenses decreased $15.3 million (23.6%) from 2001 to 2002. The
decrease during this period was primarily due to reduced medical expenses of
$13.2 million as a result of decrease in the Plan membership. Medical claims
expenses have increased 14.8% on a per member per month basis during the six
months ended June 2002 as compared to the six months ended June 2001. This is
due to both increased utilization of healthcare services and increased
healthcare unit costs. The remaining $2.1 million decrease in operating
expenses is the result of cost savings from payroll and administrative expenses
due to employee reductions as the Company transitions away from the insured
health care business.
MARKET RISK
HMOs and health insurance companies operate in a highly
competitive environment. The Company has numerous competitors,
including; for-profit and not-for-profit HMOs, preferred provider
organizations ("PPOs"), and indemnity insurance carriers, some
of which have substantially larger enrollments and greater financial
resources than the Company. The Network's ability to retain existing
clients and attract new clients is largely dependent on its ability to
control health care costs by creating and maintaining a network of
high quality, efficient, fully credentialed providers who agree to accept
competitive reimbursement rates and on its ability to control excess
utilization through its utilization management program.
Pursuant to the Plan's decision to exit the insured healthcare market by the
end of 2003, it is likely to experience greater volatility in claims costs than
it has historically. As the insured membership base decreases, the effect of
large claims are absorbed over fewer members, causing this increased
volatility. Although the Plan does purchase reinsurance for catastrophic
claims, it is anticipated that claims costs will experience greater volatility
than historically.
LIQUIDITY AND CAPITAL RESOURCES
Since inception in 1986, the Company has financed its operations from
equity investments from over 870 physicians, from the seven hospitals
comprising the Company's Class B shareholders, non-equity capital
contributions from four additional hospitals pursuant to their respective
participation agreements, and funds from operations.
As indicated on the Company's Condensed Consolidated Statement of Cash Flows
at June 30, 2002, the Company had cash and cash equivalents of approximately
$3.4 million compared to approximately $3.2 million at December 31, 2001. The
cash has remained static as the Company has used the sale of investment
securities available for sale to fund our cash flow needs. These investment
securities consist of U.S. Government Agency asset-backed and mortgage-backed
adjustable rate securities that are marketable in the event additional cash is
needed.
Following are explanations of significant balance sheet account fluctuations:
The decrease in premium receivable of 90%, or $2,527,747, is primarily due to
faster payment from a large customer. The decrease in Other Current Assets of
55%, or $911,912, is primarily due to the receipt of the Company's expected tax
refund and the reduction of pharmacy rebates receivable and claims adjustments
as a result of the decrease in Plan membership. The decrease in provider
settlements payable of 60%, or $847,469, resulted from additional claims run
out paid in 2002 related to 2001 provider contracts. The decrease in unearned
premium of 46%, or $744,786, is due to the Plan's 26% decrease in membership
and timing of receipts.
11
12
The Company anticipates that the revenue generated by operations, cash and cash
equivalents and investment securities available for sale as of June 30, 2002
will be sufficient to meet its cash requirements throughout 2002. The expected
reduction in the Plan's insured membership is expected to be funded by a
corresponding reduction in the Plan's reserve for unpaid claims and claim
adjustment expenses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
As a result of the decision to exit the insured health care business by
December 2003, at December 31, 2001 the Company's 80% ownership in the Plan was
written down to the expected net realizable value, which is the Plan's book
value. Management believes this measurement of the expected net realizable
value is still valid as of June 30, 2002.
The reserve for unpaid claims and claims adjustment expenses 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.
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable as of June 30, 2002
Part II Other Information
Item 1 Legal Proceedings
In the normal course of business, the Company may encounter claims,
assessments, and litigation brought against the Company. If and when
these situations arise, the Company assesses the situation and accrues
for financial exposure, if appropriate. As of June 30, 2002, the
Company is not aware of any such material situations.
Item 2 Changes in Securities and use of Proceeds
No changes in the Company's securities occurred during 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
12
13
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Title
------- ---------------------------------------------------
99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF
FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION
1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
(b) Reports on Form 8-K
None were filed during quarter ended June 30, 2002.
Item 7 Forward-Looking Statements
This quarterly report on From 10-Q includes forward-looking statements
about the future operations of the Company. These forward-looking
statements involve certain risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements. Because of these uncertainties, actual future results may
be materially different from the results indicated by these
forward-looking statements. In addition, the Company's past results
do not necessarily indicate its future results.
13
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: August 14, 2002
By: / s /Kenneth A. Hamm
-----------------------------
Kenneth A. Hamm
Sr. Vice President of Finance
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
14
15
Exhibit 99.1
- ------------
Certification
To my knowledge, this Report on Form 10-Q for the quarter ended June 30,
2002, fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, and the information contained in this Report
fairly presents, in all material respects, the financial condition and the
results of operations of First Choice Health Network, Inc. and Subsidiary.
By: / s /Gary Gannaway
-----------------------------
Gary Gannaway,
President and Chief Executive Officer
By: / s /Kenneth A. Hamm
-----------------------------
Kenneth A. Hamm,
Senior Vice President and Chief Financial Officer
15