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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
[ ] 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
(Registrant's telephone number, including area code)
Indicate by checkmark whether the Registrant (1)has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 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 ______
Indicate by checkmark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes ______ No __X___
The aggregate number of Registrant's shares of Class A Common Stock and
Class B Common Stock outstanding on March 31, 2003, was 538 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
Condensed Consolidated Balance Sheets (Unaudited)
at March 31, 2003 and December 31, 2002 3
Condensed Consolidated Statements of Income (Unaudited)
for the Three Months Ended March 31, 2003 and 2002 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended March 31, 2003 and 2002 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 12
Item 4 Controls and Procedures 13
Part II Other Information
Item 1 Legal Proceedings 13
Item 6 Exhibits and Reports on Form 8-K 13
Signatures and Certifications 14
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FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 2003 AND DECEMBER 31, 2002
March 31, December 31,
ASSETS 2003 2002
CURRENT ASSETS:
Cash and cash equivalents $ 619,067 $ 2,324,382
Investment securities available for sale 6,407,495 4,712,815
Service fees receivable, net of allowance
for doubtful accounts of $104,568 and $131,840 1,623,228 1,400,693
Service fees and premiums receivable from related parties 387,661 502,000
Prepaid expenses 405,483 508,900
Deferred tax assets 163,267 181,711
Other current assets 67,040 39,165
Receivable from subsidiary 102,273
Current assets of discontinued operations 13,499,783 14,219,465
----------- -----------
Total current assets 23,173,024 23,991,404
FURNITURE, EQUIPMENT, AND COMPUTER SOFTWARE:
Furniture and equipment 4,568,398 4,538,941
Computer software 1,378,838 1,277,375
----------- -----------
5,947,236 5,816,316
Less accumulated depreciation and amortization (4,608,823) (4,362,200)
----------- -----------
Furniture, equipment, and computer software, net 1,338,413 1,454,116
DEFERRED TAX ASSETS 967,996 945,214
OTHER ASSETS:
Investment in Assured Health 337,400 337,400
Assets of discontinued operations 2,075,499 2,074,507
----------- -----------
Total other assets 2,412,899 2,411,907
----------- -----------
TOTAL $27,892,332 $28,802,641
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
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FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 2003 AND DECEMBER 31, 2002
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2003 2002
CURRENT LIABILITIES:
Accounts payable $ 404,187 $ 487,291
Accrued expenses 1,022,560 1,342,978
Federal income tax payable 438,262 110,582
Federal income tax payable due to affiliate 218,179 1,607,743
Current liabilities of discontinued operations 9,607,087 10,320,905
----------- -----------
Total current liabilities 11,690,275 13,869,499
MINORITY INTEREST 1,282,070 1,222,530
REDEEMABLE EQUITY PARTICIPATION 2,520,000 2,385,443
SHAREHOLDERS' EQUITY:
Common stock:
Class A, par value $1 - Authorized, 30,000 shares;
issued and outstanding, 538 and 538 shares 538 538
Class B, par value $1 - Authorized, 70,000 shares;
issued and outstanding, 40,600 shares 40,600 40,600
Additional paid-in capital 4,306,221 4,306,221
Paid-in capital from affiliates 1,472,108 1,472,108
Retained earnings 6,527,852 5,452,362
Accumulated other comprehensive income, net of tax 52,668 53,340
----------- -----------
Total shareholders' equity 12,399,987 11,325,169
----------- -----------
TOTAL $27,892,332 $28,802,641
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
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FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Three Months Ended
March 31,
`
2003 2002
OPERATING REVENUE:
Network access fees $ 2,406,299 $ 2,042,537
Hospital administrative fees 1,295,979 1,208,545
Hospital administrative fees, related parties 983,967 1,060,856
Third party administration fees 418,289 -
Other 103,873 37,880
------------ -----------
Total Operating Revenue 5,208,407 4,349,818
------------ -----------
OPERATING EXPENSES:
Payroll and related expenses 1,890,955 1,502,436
Selling, general, and administrative expenses 1,428,718 1,025,438
------------ ------------
Total operating expenses 3,319,673 2,527,874
------------ ------------
Operating income 1,888,734 1,821,944
------------ ------------
OTHER INCOME:
Interest 54,551 11,743
Other 60,044 77,910
------------ ------------
Total other income 114,595 89,653
------------ ------------
Income from continuing operations before
federal income taxes and minority interest 2,003,329 1,911,597
Provision for federal income taxes on
continuing operations 683,002 650,647
------------ ------------
Income from continuing operations before
minority interest 1,320,327 1,260,950
MINORITY INTEREST (59,540) 35,103
------------ ------------
Income from continuing operations after
minority interest 1,260,787 1,296,053
Discontinued operations:
(Loss) from discontinuation of First Choice
Health Plan Insurance operations (net of applicable
income tax benefit of ($96,302) and ($317,419)) (185,297) (643,692)
------------ ------------
NET INCOME $ 1,075,490 $ 652,361
============ ============
NET INCOME PER COMMON SHARE 18.37 11.14
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 58,538 58,540
============ ============
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 THREE MONTHS ENDED MARCH 31, 2003 AND 2002
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 1,260,787 $ 1,296,053
Adjustments to reconcile net income to net cash
provided/(used) by continuing operating activities:
Depreciation 246,624 261,688
Deferred income taxes, net (4,338) 274,849
Provision for doubtful accounts (27,272) -
Minority interest 59,540 (35,103)
Changes in operating assets and liabilities
Service fees receivable (80,924) 93,923
Amount due from subsidiary 102,273 -
Prepaid expenses 103,417 63,315
Other current assets (27,875) -
Accounts payable (83,104) 95,650
Accrued expenses (320,418) (151,850)
Federal income tax payable (1,061,884) (169,927)
------------ ------------
Net cash provided by continuing operating activities 166,826 1,728,598
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, equipment, and computer software (130,920) (60,633)
Purchase of investments available for sale (2,124,531) (1,081,551)
Sale/maturity of investments available for sale 433,633 81,799
--------------- ------------
Net cash (used) by investing activities (1,821,818) (1,060,385)
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of Class A common stock membership
rights from physicians - 1,143
Payment of note payable - (80,088)
Redeemable equity participation 134,557 -
------------ -----------
Net cash provided/(used) by financing activities 134,557 (78,945)
CASH FLOWS FROM DISCONTINUED OPERATIONS (184,880) (212,899)
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,705,315) 376,369
CASH AND CASH EQUIVALENTS:
Beginning of year 2,324,382 1,620,733
------------ -----------
End of period $ 619,067 $ 1,997,102
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Federal income taxes 110,000 -
Interest $ - $ 19,934
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)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
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 March 31, 2003, and the results of operations for the
three months ended March 31, 2003 and 2002, and cash flows for three months
ended March 31, 2003 and 2002. The condensed consolidated financial statements
include the segregation of the discontinued operations of the insured health
plan business which required a restatement of the prior year's financial
statements to be comparative. (See Note 5.) The results of interim operations
are not necessarily indicative of operating results for the entire year.
NOTE 2 INVESTMENTS
In the first quarter of 2003, the Company purchased $2.1 million of bonds
available for sale. The amortized cost, unrealized gains or losses and fair
values of investments in debt securities, as of March 31, 2003, are as follows:
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
AS OF MARCH 31, 2003
Mortgage-backed adjustable
rate securities $ 6,386,246 $ 25,402 $ (4,153) $ 6,407,495
----------- -------- --------- ----------
Total Bonds $ 6,386,246 $ 25,402 $ (4,153) $ 6,407,495
=========== ======== ========= ==========
AS OF DECEMBER 31, 2002
Mortgage-backed adjustable
rate securities $ 4,695,347 $ 20,089 $ (2,621) $ 4,712,815
----------- -------- --------- ----------
Total Bonds $ 4,695,347 $ 20,089 $ (2,621) $ 4,712,815
=========== ======== ========= ==========
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.
Principal paydowns on investments in debt securities during the first quarter
of 2003 were $433,633.
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NOTE 3 RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board (FASB) issued Statement
No. 146, Accounting for Costs Associated with Exit or Disposal Activities.
This Statement requires that a liability for costs associated with an exit or
disposal activity be recognized when the liability is incurred and be measured
at fair value and adjusted for changes in estimated cash flows. Previously,
generally accepted accounting principles provided for the recognition of such
costs at the date of management's commitment to an exit plan. Under Statement
No. 146, management's commitment to an exit plan would not be sufficient, by
itself, to recognize a liability. The Statement is effective for exit or
disposal activities initiated after December 31, 2002.
In 2003 the Plan will undertake an orderly exit from its commercial insurance
product offerings. This exit will be complete by December 31, 2003 by the
non-renewal of all remaining commercial business during 2003. Disclosure
regarding the discontinuance of the insurance segment of the business is
included in Note 5.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (VIE). This interpretation will require VIE to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the VIE's activities or entitled to receive a majority of the
entity's residual return. The provisions of Interpretation No. 46 are required
to be applied immediately to VIEs created after January 31, 2003. The Company
does not have any VIEs and accordingly the implementation of the Interpretation
did not result in an impact on its financial position or results of operations.
NOTE 4 REPORTABLE OPERATING SEGMENTS
Factors management used to identify the enterprise's reportable segments: As
the Company exits the commercial insurance market, the Company will re-direct
these resources to a new line of business that is intended to leverage the
Company's technological and staff capabilities for health benefits
administration. The resulting segments of the Company are defined on the basis
of products and services offered and will require distinct tracking
capabilities in the areas of revenue accumulation, expense reporting, marketing
strategies, and customer service requirements.
As a result of the exit from the commercial insurance market, the segment
reported as of December 31, 2002 as the Plan, which offered a variety of fully
insured health insurance plans to employer groups, is being reported as a
discontinued operation and will no longer be included as an operating segment
for ongoing operations. Disclosures for March 31, 2002 have been restated as
required.
Description of the types of products and services from which each reportable
segment derives its revenue: The Network operations have two primary products
which have been aggregated into one reportable segment: network access fees
and hospital administrative 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, third party administration fees (TPA), is the outcome
of the new business strategy of offering benefits administration services to
employers self-funding their company health insurance plans.
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Measurement of segment profit or loss segment assets: The accounting policies
of the segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performance based on profit and
loss from operations before income taxes not including nonrecurring gains and
losses. The following information has been restated for the quarter ended
March 31, 2002, to exclude the discontinued operations.
Information about profit or loss and assets of reportable segments:
First Choice Third Party
Health Network Administration Total
-------------- ------------ -------------
Three months ended March 31, 2003:
Revenues from external customers $ 4,790,118 $ 418,289 $ 5,208,407
Intersegment revenue 20,268 (20,268) -
Net income (loss) 1,364,827 (44,500) 1,320,327
Minority interest (59,540)
Loss from discontinued operations (185,297)
Consolidated net income 1,075,490
Three months ended March 31, 2002:
Revenues from external customers $ 4,349,818 $ - $ 4,349,818
Net income (loss) 1,260,950 - 1,260,950
Minority interest 35,103
Loss from discontinued operations (643,692)
Consolidated net income 652,361
NOTE 5 DISCONTINUED OPERATIONS
As the Plan's business model shifted from capitated contracts to fee for
service contract arrangements over the past three (3) years, management
and the Board of Directors have reevaluated the strategic importance of the
Plan. As a result, the Plan's existing commercial insured business is being
wound down in an orderly manner with a complete exit of the commercial insured
business. This exit will be complete by December 31, 2003 by the non-renewal
of all remaining commercial business during 2003.
At the Balance Sheet date the following assets included in the condensed
consolidated balance sheet apply to the discontinued operations of the Plan:
Assets March 31, 2003 December 31, 2002
Cash and cash equivalents $ 4,561,351 $ 501,078
Investment securities available for sale 8,255,201 9,094,340
Premiums receivable 13,663 2,642,137
Prepaid expenses and other receivables 332,711 215,411
Deferred tax asset 118,678 158,756
Restricted indemnity cash and investments 2,075,499 2,074,507
Federal income tax recoverable due from parent 218,179 1,607,743
------------ ------------
Total assets $ 15,575,282 $ 16,293,972
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Liabilities March 31, 2003 December 31, 2002
Accrued expenses $ 1,272,714 $ 592,489
Reserve for unpaid loss and loss adjustment expenses 7,752,619 8,637,313
Provider settlements payable 219,574 225,630
Unearned premiums 248,898 763,200
Federal income tax payable 113,282 -
Amount due to parent - 102,273
------------ ------------
Total liabilities $ 9,607,087 $ 10,320,905
============ ============
Operations March 31, 2003 March 31, 2002
Operating revenue $ 12,067,221 $ 20,286,330
(Loss) on discontinued operations before federal
income tax (281,599) (961,111)
(Loss) on discontinued operations after federal
income tax $ (185,297) $ (643,692)
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The Company's operations have historically consisted of two business segments.
The parent company, First Choice Health Network (the "Network), operates a PPO
rental network and the subsidiary company, First Choice Health Plan
(the "Plan"), operates as a health care service contractor that accepts
insurance risk.
As a result of the decision by the Plan's Board of Directors authorizing
management to exit the insured health care business by no later than December
2003, the Plan business is presented as a discontinued segment in the financial
statements. The exit is proceeding in an orderly manner and no business will
be renewed beginning in February 2003. As a result of the exit, the Plan's
insured membership has declined from 28,715 at December 31, 2002 to 16,929 at
March 31, 2003.
As the Plan ceases to offer its commercial insurance products, a new business
strategy of offering benefits administration services to self-funded employers
("TPA" business) is being implemented. This strategy allows the Company to
take advantage of its extensive technological and staff capabilities for health
benefits administration that were developed for the commercial insurance
business. Development of this TPA business will help to mitigate some of the
administrative costs of exiting the commercial insurance business by utilizing
current infrastructure. TPA membership is 9,725 at March 31, 2003. As a
result, the TPA business has now replaced the discontinued insurance business
as a business segment for the Company.
The Network's revenues consist primarily of access fees paid to utilize the PPO
network, but also includes fees generated from medical management services,
Employee Assistance Programs and a complementary and alternative medicine
provider network.
The TPA revenues consist primarily of fees paid for administrative services
provided by the TPA.
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FORWARD-LOOKING STATEMENTS
This quarterly report on 10-Q includes forward-looking statements about the
future operations of the Company, including discussion of the effects of the
Company's exit from the insured health care business, the prospects for the
Company's entry into the TPA business, and the adequacy of the Company's
reserves for claims expenses and unreported claims. These forward-looking
statements involve certain risks and uncertainties that could cause actual
results to differ materially from those in the forward-looking statements.
Such factors include the Company's ability to attract new TPA customers, the
cost of maintaining technological and staff capabilities for health benefits
administration, and the risk associated with potential claim volatility and
adverse selection as a result of the reduced membership in the Plan due to the
Company's decision to exit the insured health care business. Because of these
uncertainties, actual future results, performance or achievements may be
materially different from the results, performance or achievements expressed or
implied by these forward-looking statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Operating revenue, net of discontinued operations, increased $.9 million (19.7%)
from 2002 to 2003. The increase in 2003 resulted from a rate increase on PPO
rental network fees ($.4 million) and the launch of the Company's TPA business
segment ($.4 million). Hospital administration fees experienced nominal
($10,000) growth.
Selling and administrative expenses of the ongoing business segments increased
$.4 million (39.3%) from 2002 to 2003. The increase resulted primarily from
the redirection of costs from the insured business to the new TPA business.
Payroll and related expenses of the ongoing business segments experienced a
similar fluctuation with a $.4 million increase (25.9%) from 2002 to 2003
resulting from the same redirection of costs from the insured business to the
TPA business.
The Plan's net loss as shown on the discontinued operations line on the
statements of income for the three months ended March 31, 2003 and 2002 is
$185,297 and $643,692, respectively. The reduction in loss results from a
combination of the following factors: reduced exposure as member months
decreased by 51% to 57,736 in 2003, reduced operating expenses as a result of
the decreasing membership and corresponding start up of TPA services, and an
improvement in the medical loss ratio from 90.6% in 2002 to 90.0% in 2003.
Related Party Transactions
The Company's related party transactions consist of four 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 second
component is the administrative fee received from the Company's owner hospitals
for TPA services. The third 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 three components are independent of each other and
have no relationship for analytical purposes. A fourth component, hospital
administrative fees from owner hospitals, is unrelated to the other components.
MARKET RISK
The Company offers its PPO, TPA and Plan products in a highly competitive
environment. The Company has numerous competitors, including for-profit
and not-for-profit HMOs, TPAs, preferred provider organizations ("PPOs"), and
indemnity insurance carriers, some of which have substantially larger
enrollments and greater financial resources than the Company.
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The Company's ability to retain existing PPO clients and attract new clients is
largely dependent on its ability to offer competitive provider contract value
and maintain a network of high quality, efficient, fully credentialed providers
who agree to accept competitive reimbursement rates.
The TPA will compete with numerous other insurance carriers and TPAs operating
in Washington, many of which are significantly larger and have greater
financial resources than the Company. Competition for TPA clients is based
primarily on price and operational performance.
As discussed above, the Plan's existing commercial insured business will be
wound down in an orderly manner with a complete exit of the commercial insured
business by December 2003. The resulting reduction in membership may subject
the Plan to various risks including adverse selection, claim volatility and
administrative costs that may result in losses. This decision to exit the
insured business required the Company to evaluate the carrying value of its
investment in the Plan, and as of March 31, 2003 there has been no change in
valuation of the investment in the Plan.
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 March 31, 2003, the Company had cash and cash equivalents of approximately
$.6 million compared to approximately $2.3 million at December 31, 2002. The
decrease in cash resulted from the additional investment in securities
available for sale of $1.7 million (net of repayments) in the first quarter.
The Company anticipates that the revenue generated by operations, cash and cash
equivalents and investment securities available for sale as of March 31, 2003
will be sufficient to meet its cash requirements throughout 2003. The
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.
Following are explanations of significant balance sheet account fluctuations:
Cash and cash equivalents deceased 73%, or $1.7 million, while investment
securities available for sale increased 36%, or $1.7 million. The decrease in
cash resulted from the purchase of investment securities available for sale in
the first quarter. Federal income tax payable due to affiliate decreased 86%,
or $1.4 million, as a result of repayments during the first quarter of 2003.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
As a result of the decision to exit the insured health care business by
December 31, 2003, the Company's 80% ownership in the Plan was written down at
December 31, 2001 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 March 31, 2003.
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.
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As a result of the decreasing membership in the Plan, management has increased
the level of conservatism in the estimate due to increased risk associated with
potential claim volatility resulting from a lower membership base.
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the reported market risks faced by
the Company since the end of its most recent fiscal year.
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
13(a)-14(c) 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, Executive Vice President of Finance
and several other members of the registrant's senior management within the
90-day period preceding the filing date of this quarterly report. The
Registrant's Chief Executive Officer and Executive Vice President of
Finance 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
Executive Vice President) in a timely manner, and (ii) recorded,
processed, summarized and reported within the time periods specified in
the SEC's rules and forms.
(b) Changes in Internal Controls: In the quarter ended March 31, 2003, the
Registrant did not make any significant changes in, or take any
corrective actions regarding, its internal controls or other factors that
could significantly affect these controls.
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 March 31, 2003, the
Company is not aware of any such material situations.
Item 6 Exhibits and Reports on Form 8-K
Exhibit 10.26 Supplemental Executive Retirement Plan
Exhibit 99.1 Sarbanes-Oxley Section 906 Certification for Gary Gannaway,
Chief Executive Officer
Exhibit 99.2 Sarbanes-Oxley Section 906 Certification for Kenneth A.
Hamm, Executive Vice President of Finance
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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: May 15, 2003
By: / s /Kenneth A. Hamm
Kenneth A. Hamm
Executive Vice President of Finance
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
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CERTIFICATIONS
I, Gary Gannaway, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, do
hereby 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 officer, 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 officer 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 functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the 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 officer 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.
By: / s /Gary Gannaway
-----------------------------
Gary Gannaway,
President and Chief Executive Officer
May 15, 2003
15
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I, Kenneth A. Hamm, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
do hereby 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 officer, 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 officer 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 functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the 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 officer 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.
By: / s /Kenneth A. Hamm
-----------------------------
Kenneth A. Hamm,
Executive Vice President of Finance
May 15, 2003
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