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 September 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 ______
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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 September 30, 2002 and December 31, 2001 . . . . . . . . 3
Condensed Consolidated Statements of Operations
(Unaudited)for the Three Months and Nine Months Ended
September 30, 2002 and 2001 . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Nine Months Ended September 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 . . . . . . . . . . . . . . . . . . . 13
Item 4 Controls and Procedures. . . . . . . . . . . . . . . . . . 13
Part II Other Information
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . . 14
Item 5 Other Information . . . . . . . . . . . . . . . . . . . . 14
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 14
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
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FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
UNAUDITED
September 30, December 31,
ASSETS 2002 2001
CURRENT ASSETS:
Cash and cash equivalents $ 5,108,371 $ 3,207,241
Investment securities available for sale 12,585,908 13,348,948
Service fees receivable, net of allowance
for doubtful accounts of $99,124 and $420,497 1,371,312 1,592,263
Service fees and premiums receivable from related parties 465,977 384,274
Premiums receivable, net of allowance for doubtful accounts of
$53,449 and $130,779 228,339 2,806,117
Provider settlements receivable - unrelated parties 0 476,929
Provider settlements receivable - related parties 0 181,770
Prepaid expenses 756,084 777,401
Deferred tax assets 367,580 572,571
Other current assets 592,119 1,645,201
----------- -----------
Total current assets 21,475,690 24,992,715
FURNITURE, EQUIPMENT, AND COMPUTER SOFTWARE:
Furniture and equipment 4,659,990 4,466,461
Computer software 1,270,117 1,187,970
----------- -----------
5,930,107 5,654,431
Less accumulated depreciation and amortization (4,235,161) (3,451,422)
----------- -----------
Furniture, equipment, and computer software, net 1,694,946 2,203,009
DEFERRED TAX ASSETS 1,220,307 1,363,347
OTHER ASSETS:
Restricted indemnity cash 2,071,050 1,829,102
Other 258,266 27,526
----------- -----------
Total other assets 2,329,316 1,856,628
----------- -----------
TOTAL $26,720,259 $30,415,699
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
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FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
UNAUDITED
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2002 2001
CURRENT LIABILITIES:
Accounts payable $ 403,342 $ 451,771
Accrued expenses 1,647,249 1,833,074
Reserve for unpaid claims and claims adjustment expenses 10,164,324 11,815,058
Provider settlements payable - unrelated parties 361,244 1,416,068
Unearned premiums 921,294 1,633,532
Current portion of note payable 0 331,791
----------- -----------
Total current liabilities 13,497,453 17,481,294
NOTE PAYABLE 0 366,379
MINORITY INTEREST 1,183,613 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 4,200,048 3,527,471
Accumulated other comprehensive income (loss), net of tax 25,699 (8,609)
----------- -----------
Total shareholders' equity 10,047,343 9,338,690
----------- -----------
TOTAL $26,720,259 $30,415,699
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
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FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
UNAUDITED
Three Months Ended Nine Months Ended
September 30, September 30,
`
2002 2001 2002 2001
OPERATING REVENUE:
Premium revenue $ 17,883,264 $ 23,756,167 $ 56,462,874 $ 73,017,275
Premium revenue, related parties 346,715 2,223,846 1,046,189 8,240,475
Network access fees 2,361,009 1,890,086 6,706,955 5,206,435
Hospital administrative fees 1,273,188 1,461,637 3,758,284 4,503,587
Hospital administrative fees, related parties 1,130,497 894,140 3,396,642 2,212,344
Other 41,556 55,131 143,245 168,087
------------ ---------- ---------- ----------
Total Operating Revenue 23,036,229 30,281,007 71,514,189 93,348,203
------------ ---------- ---------- ----------
OPERATING EXPENSES:
Medical expenses 10,003,603 14,013,264 33,037,219 44,962,362
Medical expenses - related parties 6,669,068 9,342,176 22,024,812 29,974,908
Payroll and related expenses 2,525,222 3,031,291 7,942,944 9,491,464
Selling, general, and administrative expenses 2,557,436 2,818,173 8,021,528 8,746,695
Amortization and other expense 0 293,693 27,526 881,094
------------ ----------- ---------- ----------
Total operating expenses 21,755,329 29,498,597 71,054,029 94,056,523
------------ ----------- ---------- ----------
Operating Income/(loss) 1,280,900 782,410 460,160 (708,320)
OTHER INCOME (EXPENSE):
Interest and dividends 194,137 213,264 627,568 673,317
Other (406,179) (10,872) (504,595) (9,826)
------------ ----------- ---------- ----------
Total other income (Loss) (212,042) 202,392 122,973 663,491
------------ ----------- ---------- ----------
Income (Loss) before federal income taxes
and minority interest 1,068,858 984,802 583,133 (44,829)
FEDERAL INCOME TAX 500,879 349,329 348,032 19,178
------------ ----------- ---------- ---------
567,979 635,473 235,101 (64,007)
MINORITY INTEREST 12,568 0 437,473 173,062
------------ ----------- ---------- ---------
NET INCOME $ 580,547 $ 635,473 $ 672,574 $ 109,055
============ =========== ========== ==========
NET INCOME PER COMMON SHARE-basic and diluted $ 9.91 $ 10.85 $ 11.48 $ 1.86
============ ========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 58,572 58,571 58,572 58,571
============ ========== ========== ==========
See Notes to Condensed Consolidated Financial Statements.
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FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
UNAUDITED
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 672,574 $ 109,055
Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Depreciation 783,739 610,499
Amortization and other expense 27,526 881,094
Deferred income taxes, net 348,031 (155,041)
Provision for doubtful accounts (398,703) (54,719)
Minority interest (53,873) (173,062)
Service fees receivable 460,621 1,182,352
Premiums receivable 2,655,108 (58,960)
Prepaid expenses 21,317 (36,440)
Other current assets 1,053,082 200,262
Accounts payable (48,429) (208,093)
Accrued expenses (185,825) (910,051)
Reserve for unpaid claims and claims adjustment expenses (1,650,734) 1,599,086
Provider settlements receivable/payable - Related party 181,770 527,908
Provider settlements receivable/payable - Unrelated party (577,895) (1,853,461)
Unearned premiums (712,238) 314,326
------------ -------------
Net cash provided/(used) by operating activities 2,576,071 1,974,755
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, equipment, and computer software (275,676) (405,689)
Increase in restricted indemnity cash (241,948) (5,775)
Investment in Assured Health (258,266)
Purchase of investments available for sale (5,892,883) (9,815,948)
Sale of investments available for sale 6,690,234
------------- -------------
Net cash provided/(used) by investing activities 21,461 (10,227,412)
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of Class A common stock membership
rights from physicians 1,768 (8,198)
Payment of note payable (698,170) (223,851)
------------- ------------
Net cash provided/(used) by financing activities (696,402) (232,049)
------------- ------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 1,901,133 (8,484,706)
CASH AND CASH EQUIVALENTS:
Beginning of year 3,207,241 12,697,290
------------- ------------
End of period $ 5,108,371 $ 4,212,584
============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Federal income taxes $ 0 0
Interest 39,303 $ 69,138
See Notes to Condensed Consolidated Financial Statements.
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FIRST CHOICE HEALTH NETWORK, INC AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 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 September 30, 2002, and the results of operations for
the three months and nine months ended September 30, 2002 and 2001, and cash
flows for the nine months ended September 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 September 30, 2002, are as follows:
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
AS OF SEPTEMBER 30, 2002
Government-backed adjustable
Rate securities $ 1,731,198 $ 15,322 $ (1,916) $ 1,744,604
Mortgage-backed adjustable
Rate securities 10,829,011 39,730 (27,437) 10,841,304
----------- --------- -------- ----------
Total Bonds $ 12,560,209 $ 55,052 $ (29,353) $ 12,585,908
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
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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.
There were no securities sold during the third quarter. Principal
buydowns received during the third quarter of 2002 totaled $1,052,902.
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 nine months ended
September 30, 2002 and September 30, 2001.
For the nine months ended September 30,
2002 2001
------ ------
Goodwill amortization 0 41,307
Net Income/(Loss) 672,574 150,362
The remaining portion of amortization for the nine months ended September 30,
2001 relates to the intangible asset acquired in the Sound Health purchase in
1998, which was fully amortized in November 2001.
Statement of Financial Accounting Standard (SFAS) No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, addresses financial accounting and
reporting for the treatment of costs associated with exit or disposal
activities. This Statement improves financial reporting by requiring that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. The
provisions of this Statement are to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The Company does not
expect the Statement will result in a material impact on its financial position
or results of operations.
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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
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 34% from 47,956 members at December 2001 to 31,597
members at September 2002. The exit will be completed by the non-renewal of
all business beginning in February 2003 and the completion of all current
contracts in December 2003.
The Company has developed a new strategy to utilize the Plan administrative and
operational expertise to offer administrative services to self-insured groups
or other payers. The Company currently has no self-insured business but
expects to add such business in 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.
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Information about profit or loss and assets of reportable segments:
First Choice First Choice
Health Network Health Plan Total
-------------- ------------ -------------
Three months ended September 30, 2002:
Revenues from external customers $ 4,116,385 $ 18,919,844 $ 23,036,229
Intercompany revenue 60,279 (60,279) 0
Net income (loss) 637,569 (69,590) 567,979
Minority interest 12,568 12,568
Consolidated net income 580,547
Three months ended September 30, 2001:
Revenues from external customers $ 3,620,342 $ 26,660,665 $ 30,281,007
Intercompany revenue 94,720 (94,720) 0
Net income (loss) 707,801 (72,328) 635,473
Minority interest 0
Consolidated net income 635,473
Nine months ended September 30, 2002:
Revenues from external customers $ 11,908,602 $ 59,605,587 $ 71,514,189
Intercompany revenue 212,047 (212,047) 0
Net income (loss) 2,429,219 (2,194,118) 235,101
Minority interest 437,473 437,473
Consolidated net income 672,574
Nine months ended September 30, 2001:
Revenues from external customers $ 10,035,520 $ 83,312,683 $ 93,348,203
Intercompany revenue 306,491 (306,491) 0
Net income (loss) 1,609,303 (1,673,310) (64,007)
Minority interest 173,062 173,062
Consolidated net income 109,055
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.
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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 SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
Operating revenue decreased $7.2 million (23.9%) in the quarter ended September
2002 as compared to the same period in 2001. The decrease was due to the
decreased membership for the Plan and a resultant decrease in premium revenue.
Commercial member months decreased by 36.2% during the quarter ended
September 2002 as compared to the quarter ended September 2001, while the
Average commercial premium rates increased by 10.0% during the same period.
Premium revenue decreased $7.8 million, or 29.8% from the third quarter 2002
compared to the third quarter 2001. This has been the result of a sharp
decrease in the membership that is covered by the Plan.
Operating expenses decreased $7.7 million (26.3%) in the quarter ended
September 2002 compared to the same period in 2001. The decrease during this
period was primarily due to reduced medical expenses of $6.7 million as a
result of decrease in the Plan membership. Medical claims expenses have
increased 11.9% on a per member per month basis during the three months ended
September 2002 as compared to the three months ended September 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 largely a result of cost savings from payroll and administrative
expenses due to employee reductions as the Company transitions away from the
insured health care business.
Other expense increased by $395,307 in the quarter ended September 2002
compared to the same period in 2001. The increase during this period was
primarily the result of a $1.9 million capital infusion by the Company into
the Plan during this quarter and the resulting write-down to the expected net
realizable value.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS SEPTEMBER 30, 2001
Operating revenue decreased $21.8 million (23.4%) 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 35.5% in
2002 while the average commercial premium rates increased by 10.0% during the
same period. Premium revenue decreased $23.7 million or 29.2%, 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.
Operating expenses decreased $23.0 million (24.4%) from 2001 to 2002. The
decrease during this period was primarily due to reduced medical expenses of
$19.9 million as a result of decrease in the Plan membership. Medical claims
expenses have increased 13.9% on a per member per month basis during the nine
months ended September 2002 as compared to the nine months ended September.
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This is due to both increased utilization of healthcare services and
increased healthcare unit costs. The remaining $3.1 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.
Other expense increased by $494,769 from 2001 to 2002. The increase during
this period was primarily the result of a $1.9 million capital infusion by the
Company into the Plan during this quarter and the resulting write-down to the
expected net realizable value.
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 September 30, 2002, the Company had cash and cash equivalents of
approximately $5.1 million compared to approximately $3.2 million at
December 31, 2001. This represents a temporary increase pending normal
disbursement activity. 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 92%, or $2,557,778, is primarily due to
faster payment from a large customer. The 100% reduction in Provider
Settlements Receivable is due to completion of negotiated settlement of these
receivables. The decrease in Other Current Assets of 64%, or $1,053,082, 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 74%, or $1,054,824, is due to completion of negotiated settlement of these
payables. The decrease in unearned premium of 44%, or $712,238, is due to the
Plan's 35.5% decrease in membership and timing of receipts.
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The Company anticipates that the revenue generated by operations, cash and cash
equivalents and investment securities available for sale as of September 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 September 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.
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.
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable as of September 30, 2002
Item 4 Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Registrant's disclosure controls and procedures (as defined in rule 13a-14 and
15d-14 adopted under the Securities Exchange Act of 1934 (the "Act")) was
carried out under the Supervision and with the participation of the
Registrant's Chief Executive Officer, and Chief Financial Officer, within the
90-day period preceding the filing date of this quarterly report. The
Registrant's Chief Executive Officer and Chief Financial Officer concluded that
the Registrant's disclosure controls and procedures as currently in effect are
effective in ensuring that the information required to be disclosed by the
Registrant in the reports it files or submits under the Act is (i) accumulated
and communicated to the Registrant's management (including the Chief Executive
Officer and Chief Financial Officer) in a timely manner, and (ii) recorded,
processed summarized and reported as required by the Act and rules thereunder
on a timely basis.
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(b) Changes in Internal Controls: Since the date of the evaluation of the
Registrant's disclosure control and procedures referred to above, the
Registrant did not make any significant changes in its internal controls or
other factors that could significantly affect those controls, including any
corrective action with regard to significant deficiencies and material
weaknesses.
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 September 30, 2002, the
Company is not aware of any such material situations.
Item 5 Other Information
The aggregate number of Registrant's shares of Class A Common Stock and
Class B Common Stock outstanding on September 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.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None were filed during quarter ended September 30, 2002.
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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, 2002
By: / s /Kenneth A. Hamm
-----------------------------
Kenneth A. Hamm
Sr. Vice President of Finance
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
CERTIFICATIONS
The undersigned certify, pursuant to 18.U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that to my
knowledge this Report on Form 10-Q for the quarter ended September 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.
/ s /Gary Gannaway
-----------------------------
Gary Gannaway,
President and Chief Executive Officer
November 14, 2002
The undersigned certify, pursuant to 18.U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that to my
knowledge this Report on Form 10-Q for the quarter ended September 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.
/ s /Kenneth A. Hamm
-----------------------------
Kenneth A. Hamm,
Senior Vice President and Chief Financial Officer
November 14, 2002
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16
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kenneth A. Hamm, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certify that:
(1) I have reviewed this quarterly report on Form 10-Q of First Choice Health
Network, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
(4) The registrant's other certifying officers, and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedure as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the Audit
Committee of registrant's Board of Directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect t he registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
(6) The registrant's other certifying officers and I have indicated in this
Quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weakness.
/ s /Kenneth A. Hamm
-----------------------------
Kenneth A. Hamm,
Senior Vice President and Chief Financial Officer
November 14, 2002
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I, Gary Gannaway, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certify that:
(1) I have reviewed this quarterly report on Form 10-Q of First Choice Health
Network, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officers, and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(d) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(e) evaluated the effectiveness of the registrant's disclosure controls and
procedure as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(f) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the Audit
Committee of registrant's Board of Directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect t he registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officers and I have indicated in this
Quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weakness.
/ s /Gary Gannaway
-----------------------------
Gary Gannaway,
President and Chief Executive Officer
November 14 2002
17