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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, 2005
[ ] 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)
600 University Street
Suite 1400
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, 2005, was 446 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, 2005 and December 31, 2004 3
Condensed Consolidated Statements of Income (Unaudited)
for the Three Months Ended March 31, 2005 and 2004 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended March 31, 2005 and 2004 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 14
Item 4 Controls and Procedures 14
Part II Other Information
Item 1 Legal Proceedings 14
Item 6 Exhibits 15
Signatures 16
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FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 2005 and DECEMBER 31, 2004
March 31, December 31,
ASSETS 2005 2004
CURRENT ASSETS:
Cash and cash equivalents $ 3,880,166 $ 2,376,158
Investment securities available-for-sale, at fair value 9,770,401 9,904,175
Service fees receivable, net of allowance for doubtful
accounts of $80,636 and $86,606 1,082,960 1,134,320
Service fees receivable from related parties 40,000 31,310
Prepaid expenses 477,868 478,220
Deferred tax assets 250,116 186,931
Federal income tax receivable - 61,304
Other current assets 138,289 236,874
Receivable from subsidiary 2,396,000 38,090
Federal income tax receivable from subsidiary 5,351 17,053
Current assets of discontinued operations 2,827,564 3,128,417
----------- -----------
Total current assets 20,868,715 17,592,852
FURNITURE, EQUIPMENT, AND COMPUTER SOFTWARE:
Furniture and equipment 5,728,104 5,537,067
Computer software 1,633,215 1,582,945
----------- -----------
7,361,319 7,120,012
Less accumulated depreciation (6,284,735) (6,159,001)
----------- -----------
Furniture, equipment, and computer software, net 1,076,584 961,011
DEFERRED TAX ASSETS 1,278,710 1,287,460
OTHER ASSETS:
Investment in One Health Port 147,630 201,184
Other assets 263,925 236,175
Assets of discontinued operations 388,272 385,758
----------- -----------
Total other assets 799,827 823,117
----------- -----------
TOTAL ASSETS $24,023,836 $20,664,440
=========== ===========
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, 2005 and DECEMBER 31, 2004
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2005 2004
CURRENT LIABILITIES:
Accounts payable $ 780,040 $ 693,296
Accrued expenses 2,424,444 2,371,044
Dividends payable 2,396,000 -
Federal income tax payable 374,138 -
Current liabilities of discontinued operations 3,049,625 368,778
----------- -----------
Total current liabilities 9,024,247 3,433,118
MINORITY INTEREST 33,242 670,635
REDEEMABLE EQUITY PARTICIPATION 2,520,000 2,520,000
SHAREHOLDERS' EQUITY:
Common stock:
Class A, par value $1 - Authorized, 30,000 shares;
issued and outstanding, 446 and 447 shares 446 447
Class B, par value $1 - Authorized, 70,000 shares;
issued and outstanding, 40,600 shares 40,600 40,600
Additional paid-in capital 4,077,732 4,080,410
Additional capital from affiliates 1,472,108 1,472,108
Retained earnings 6,981,150 8,484,084
Accumulated other comprehensive income (loss), net of tax (125,689) (36,962)
----------- -----------
Total shareholders' equity 12,446,347 14,040,687
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $24,023,836 $20,664,440
=========== ===========
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, 2005 AND 2004
Three Months Ended
March 31,
2005 2004
OPERATING REVENUE:
Network access fees $ 2,939,459 $ 2,874,629
Hospital administrative fees 871,182 922,642
Hospital administrative fees, related parties 891,965 982,237
Health benefit management fees 898,200 804,297
Other 592,255 366,022
----------- -----------
Total operating revenue 6,193,061 5,949,827
----------- -----------
OPERATING EXPENSES:
Payroll and related expenses 3,172,672 2,533,961
Selling, general, and administrative expenses 1,878,415 1,561,147
----------- -----------
Total operating expenses 5,051,087 4,095,108
----------- -----------
Operating income 1,141,974 1,854,719
----------- -----------
OTHER INCOME (EXPENSE):
Interest 120,059 77,261
Other (14,744) 9,225
----------- -----------
Total other income 105,315 86,486
----------- -----------
Income from continuing operations before
federal income taxes and minority interest 1,247,289 1,941,205
Provision for federal income taxes on
continuing operations 371,191 639,422
----------- -----------
Income from continuing operations before
minority interest 876,098 1,301,783
MINORITY INTEREST, net of tax (4,242) (149,761)
----------- -----------
Income from continuing operations after
minority interest 871,856 1,152,022
Discontinued operations:
Income from discontinuation of First Choice Health Plan
insurance operations (net of applicable income tax
expense of $10,118 and $385,394) 21,210 748,989
---------- -----------
NET INCOME $ 893,066 $ 1,901,011
=========== ===========
NET INCOME FROM CONTINUING OPERATIONS
AFTER MINORITY INTEREST PER COMMON SHARE $ 14.92 $ 19.68
=========== ==========
NET INCOME PER COMMON SHARE $ 15.28 $ 32.47
=========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 58,446 58,537
=========== ==========
DIVIDENDS PER CLASS A SHARE $ 34.43 -
=========== ==========
DIVIDENDS PER CLASS B SHARE $ 446.68 -
=========== ==========
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, 2005 AND 2004
Three Months Ended
March 31,
2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 871,856 $ 1,152,022
Adjustments to reconcile net income to net cash
provided by continuing operating activities:
Depreciation 125,734 227,091
Deferred income taxes, net (54,435) (54,035)
Provision for doubtful accounts (5,970) 3,678
Minority interest (38,393) 149,761
Write-down of investment in One Health Port 53,554 -
Changes in operating assets and liabilities:
Service fees receivable 48,640 (148,468)
Due from subsidiary including tax accrual 49,792 (307,130)
Prepaid expenses 352 77,133
Other current assets 98,585 135,771
Other assets (27,750) (28,785)
Accounts payable 86,744 (25,307)
Accrued expenses 53,400 295,477
Federal income tax receivable/payable 435,442 937,065
------------ -----------
Net cash provided by continuing operating activities 1,697,551 2,414,273
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, equipment, and computer software (241,307) (54,779)
Purchase of investments available for sale (1,056,755) (1,516,625)
Principal paydowns and sales of investments available for sale 1,101,802 295,386
Investment in One Health Port - (100,000)
------------ -----------
Net cash used by investing activities (196,260) (1,376,018)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Class A common stock (2,679) -
------------ -----------
Net cash used by financing activities (2,679) -
CASH FLOWS FROM (TO) DISCONTINUED OPERATIONS 5,396 (271,460)
------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,504,008 766,795
CASH AND CASH EQUIVALENTS:
Beginning of year 2,376,158 1,459,881
------------ -----------
End of period $ 3,880,166 $ 2,226,676
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Federal income taxes $ - $ 115,000
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, 2005 AND 2004
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. (the "Company") and its
subsidiary, First Choice Health Plan, Inc, ("the Plan"), the accompanying
unaudited interim condensed consolidated financial statements include all
normal adjustments considered necessary to present fairly the financial
position as of March 31, 2005 and December 31, 2004, and the results of
operations for the three months ended March 31, 2005 and 2004, and cash flows
for the three months ended March 31, 2005 and 2004. The condensed consolidated
financial statements include the segregation of the discontinued operations of
the insured health plan business. (See Note 4.) The results of interim
operations are not necessarily indicative of operating results for the entire
year.
Certain amounts in the prior period financial statements have been reclassified
to conform with the current period presentation.
NOTE 2 INVESTMENTS
During the three months ended March 31, 2005, the Company purchased $1.1
million and sold $1.1 million of investments available for sale. Principal
paydowns on investments in debt securities during the first three months of
2005 were $48,064. The amortized cost, unrealized gains or losses and fair
values of investments in debt securities as of March 31, 2005 and
December 31, 2004 are as follows:
Gross Gross Gross
Amortized Unrealized Unrealized Unrealized
Cost Gains Losses Losses
Less Than More Than
12 Months 12 Months Fair Value
---------------------------------------------------------------
March 31, 2005
Municipal bonds $ 9,890,924 - $(56,422) $ (64,101) $ 9,770,401
============ ======== ========= ======== ===========
December 31, 2004
Mortgage-backed
adjustable rate securities $ 12,123 $ 21 $( 19) $ - $ 12,125
Municipal bonds 9,929,241 23,842 (61,033) - 9,892,050
----------- -------- --------- -------- -----------
$ 9,941,364 $ 23,863 $(61,052) $ - $ 9,904,175
============ ======== ========= ======== ===========
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.
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Declines in the fair value of individual available-for-sale securities below
their cost that are other than temporary are recognized by write-downs of the
individual securities to their fair value. Such write-downs would be included
in earnings as realized losses. Premiums and discounts are recognized in
interest income using the interest method over the period to call or maturity.
NOTE 3 REPORTABLE OPERATING SEGMENTS
Factors management used to identify the enterprise's reportable segments: The
Company has two reportable segments representing 100% of its revenue. Each
segment requires distinct tracking capabilities in the areas of revenues and
expenses.
As a result of exiting the commercial insurance market, the Plan segment
which offered a variety of fully insured health insurance plans to employer
groups is being reported as a discontinued operation and is not included as
an operating segment (See Note 4).
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 preferred provider organization ("PPO") and other network
products while hospital administrative fees arise from charges to the network
hospitals based on claims incurred by members or fixed monthly contractual
payments. The other reportable segment, Health Benefits Management ("HBM"),
offers benefits management and administration services to employers who are
self-funding their company health benefit plans. This segment offers
management and administration services for health benefit plans, flexible
spending accounts, health savings accounts, health reimbursement accounts and
COBRA benefits.
Measurement of segment profit or loss and 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.
Information about profit or loss and assets of reportable segments:
First Choice Health Benefits
Health Network Management Total
-------------- -------------- -----------
Three months ended March 31, 2005:
Revenues from external customers $ 5,294,861 $ 898,200 $ 6,193,061
Intersegment revenue 19,509 (19,509) -
Net income (loss) 1,155,292 (279,194) 876,098
Minority interest (4,242)
Income from discontinued operations 21,210
Consolidated net income 893,066
Three months ended March 31, 2004:
Revenues from external customers $ 5,145,530 $ 804,297 $ 5,949,827
Intersegment revenue 15,702 (15,702) -
Net income (loss) 1,407,662 (105,879) 1,301,783
Minority interest (149,761)
Income from discontinued operations 748,989
Consolidated net income 1,901,011
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NOTE 4 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 the non-renewal of all commercial
business during 2003 and the run-out of outstanding claim liabilities through
2005.
The discontinuance of the Plan's operation is accounted for pursuant to
SFAS 60, Accounting and Reporting by Insurance Enterprises. This statement
requires recording a liability for all costs expected to be incurred in
connection with the settlement of unpaid claims to be accrued when the
liability for unpaid claims is incurred.
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, 2005 December 31, 2004
Cash and cash equivalents $ 2,205,192 $ 2,503,998
Investment securities available for sale 620,023 622,058
Prepaid expenses and other receivables 2,349 738
Deferred tax asset 1,321 1,623
Restricted indemnity cash and investments 386,951 385,758
----------- -----------
Total assets $ 3,215,836 $ 3,514,175
=========== ===========
Liabilities
Accrued expenses $ 45,775 $ 125,105
Dividends payable to minority interest shareholders 599,000 -
Reserve for unpaid loss and loss adjustment expenses 3,499 188,530
Federal income tax expense payable to parent 5,351 17,053
Amount due to parent 2,396,000 38,090
----------- -----------
Total liabilities $ 3,049,625 $ 368,778
=========== ===========
The following amounts, representing revenue and income and loss from
discontinued operations, are included in the condensed consolidated statement
of income for the three months ended March 31, 2005 and 2004:
Operations
For the Three Months
Ended March 31,
2005 2004
Operating revenue $ - $ 26,353
Income (loss) on discontinued operations
before federal income tax 31,328 1,134,383
Income (loss) on discontinued operations
after federal income tax 21,210 748,989
Net income (loss) from discontinued
operations per common share .36 12.80
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NOTE 5 EARNINGS PER SHARE
Net income per common share (Class A and B) is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding during the period, including 41,046 and 41,137 shares for
the three months ended March 31, 2005 and 2004, respectively, and 17,400 shares
for district hospitals applicable to affiliate common share equivalents for
each period. District hospitals are not shareholders of the Company, but have
contractual agreements with the Company that provide for certain rights and
obligations equivalent, but not identical, to those of Class B shareholders,
including liquidation and dividend rights. The capital contributions of the
non-shareholders are recorded as additional capital from affiliates. These
contractual agreements are considered to be common share equivalents for
purposes of calculating net income per common share.
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
First Choice Health Network, Inc. ("the Company"), is a physician and hospital
owned company offering a preferred provider organization ("PPO") and health
benefits management services ("HBM") to large self-funded plan sponsors. Until
year end 2003, the Company also offered insured health plan products through a
subsidiary, First Choice Health Plan, Inc. ("the Plan"). The Plan no longer
provides insurance services as of January 1, 2004 and is reported as
discontinued operations in the financial statements.
Revenue from PPO network services including utilization management services
takes the form of monthly access fees from participating payers and fees from
payers based on a percentage of the savings generated by PPO provider
contracts. In addition, participating hospitals pay fees based on PPO claims
volumes in those hospitals. Other PPO product offerings include medical and
utilization management services for certain PPO clients and various specialty
network services including a complementary and alternative medicine PPO and
Employee Assistance Program ("EAP") product and network services.
The HBM segment offers benefits management and administration services to
self-funded employers and insurance carriers. The HBM membership was 23,488
at March 31, 2005 compared to 21,570 at December 31, 2004. With certain well
defined exceptions, these self-funded benefits administration services will not
be offered to potential clients that currently obtain such services from
benefit administrators that access the Company's PPO products. The HBM
revenues consist primarily of fees paid to administer health benefit plans,
flexible spending accounts and various forms of consumer directed health plans
such as health savings accounts and health reimbursement accounts.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 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 and the prospects for
the Company's entry into the HBM business. 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 and retain new HBM customers and the
cost of maintaining technological and staff capabilities for health benefits
management and administration. 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.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED
MARCH 31, 2004
The following table summarizes operating revenues for the quarters ended
March 31, 2005 and 2004:
(in millions) Three Months Ended
March 31,
2005 2004
---- ----
Network access fees $2.9 $2.9
Hospital administrative fees 1.8 1.9
Health benefit management fees .9 .8
Other .6 .3
---- ----
Total operating revenues $6.2 $5.9
Operating revenue, net of discontinued operations, increased $.3 million
(5.1%) from 2004 to 2005. The increase in 2005 resulted principally from
an increase of $.3 million from EAP and medical management revenue.
The following table summarizes operating expenses for the quarters ended
March 31, 2005 and 2004:
(in millions) Three Months Ended
March 31,
2005 2004
---- ----
Payroll and related expenses $3.2 $2.5
Selling, general and administrative 1.9 1.6
---- ----
Total operating expenses $5.1 $4.1
Payroll and related expenses of the ongoing business segments increased $.7
million (28.0%) from 2004 to 2005. The increase resulted primarily from the
redirection of costs from the insured business to the HBM business and
additional staffing to support increased medical management activities.
Selling, general and administrative expenses of the ongoing business segments
increased $.3 million (18.8%) from 2004 to 2005 resulting primarily due to
additional costs associated with equipment leasing and license fees.
The Plan's net income as shown on the discontinued operations line on the
condensed consolidated statements of income for the three months ended March
31, 2005 and 2004 is $21,210 and $748,989, respectively. The decrease is due
to the final runout of the activity of the Plan being nearly complete.
RELATED PARTY TRANSACTIONS
The Company's related party transactions consist of two components. One
component is the fees received from the Company's owner hospitals for HBM
services. The other component is hospital administrative fees from owner
hospitals.
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MARKET RISK FROM COMPETITORS
The Company offers its PPO and HBM products in a highly competitive
environment. The Company has numerous competitors, including for-profit and
not-for-profit HMOs, third party administrators ("TPAs"), PPOs and indemnity
insurance carriers, some of which have substantially larger enrollments and
greater financial resources than the Company. The Company's ability to retain
existing PPO clients and attract new PPO and HBM 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.
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 Balance Sheet at
March 31, 2005, the Company had cash and cash equivalents of approximately
$3.9 million compared to approximately $2.4 million at December 31, 2004.
The Company anticipates that the revenue generated by operations, cash and cash
equivalents and investment securities available for sale as of March 31,
2005 will be sufficient to meet its cash requirements throughout 2005.
Following are explanations of significant balance sheet account fluctuations:
Cash and cash equivalents increased $1.5 million from $2.4 million at December
31, 2004 to $3.9 million at March 31, 2005 due to operating cash flow. The
receivable from subsidiary increased from $38,090 at December 31, 2004 to $2.4
million at March 31, 2005 due to the declaration of a dividend by the Plan
during the quarter. Dividends payable increased from $0 at December 31, 2004
to $2.4 million at March 31, 2005 resulting from the Company declaring a
dividend to its shareholders equivalent to the dividend receivable from the
Plan. Federal income tax payable increased from $0 at December 31, 2004 to $.4
million at March 31, 2005. This increase is due to the timing of estimated
federal income tax payments. Other balance sheet account fluctuations
primarily result from normal payment and collection timing differences.
Current assets of discontinued operations decreased by $.3 million from $3.1
million at December 31, 2004 to $2.8 million at March 31, 2005 due to the
orderly exit from the health insurance business and the resulting ongoing
payment of claims run out. Current liabilities of discontinued operations has
increased $2.6 million from $.4 million at December 31, 2004 to $3.0 million
at March 31, 2005. This increase is primarily due to the declaration of the
$3.0 million dividend offset by the reduction in the estimated future claim
run-out liability.
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DIVIDENDS
The balance sheet presents all assets and liabilities of the health plan legal
entity as discontinued. As a result of its exit from the capital intensive
health insurance business, the Company requested and received regulatory
approval to distribute as dividends a significant portion of its assets in
2004. As a result, the Company paid $6.4 million in dividends to shareholders
in 2004. Of this amount, $5.2 million was the result of a nonrecurring special
dividend representing the Company's proceeds from the redemption of the Plan's
preferred stock and the Plan's $2.7 million dividend on its common stock. The
remaining $1.2 million dividend was paid from the Company's operating cash
flows.
During 2005 the Plan requested regulatory approval to dissolve the Plan and
Distribute any remaining assets as dividends. On January 27, 2005, the Company
declared a special dividend of $2.4 million to distribute its share of these
non-recurring cash flows to its shareholders. The $2.4 million was distributed
in April 2005 as $446.68 per share to Class A shareholders and $199,666.67 to
each Class B shareholder and non-shareholder hospital that have equivalent
rights.
In the future, the Company expects to pay annual dividends from available
positive cash flow from continuing operations. Amounts distributed in 2004 and
the first quarter of 2005 in connection with exiting the health insurance
industry are not indicative of the amount of future dividends, which is
dependent on cash flow from continuing operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
As a result of the request for regulatory approval to dissolve the Plan and the
declaration of dividends of $3.0 million on January 27, 2005, the Company's 80%
ownership in the Plan was written down at March 31, 2005 to $132,969.
The reserve for unpaid claims and claims adjustment expenses in discontinued
operations of the Plan 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. As a result of 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.
A valuation allowance was established in 1997 for the tax benefit of net
Operating losses (NOLs) of the Plan which is being reported as discontinued
operations. Because the operation of the Plan is being discontinued, future
income will not be available to utilize the NOLs. Upon the ultimate
liquidation and dissolution of the Plan, these NOLs may be potentially utilized
by the Company. Because the timing and ultimate realization of these NOLs is
uncertain, they are fully reserved.
The development and selection of "critical" accounting estimates and the
associated disclosures in this discussion have been discussed by management
with the audit committee of the Board of Directors.
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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 13a-
15(e) 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 and Chief Financial
Officer and several other members of the registrant's senior management
as of the end of the period covered by this report. Based on that
evaluation, the Registrant's Chief Executive Officer and Executive Vice
President and Chief Financial Officer concluded that the Registrant's
disclosure controls and procedures 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 and Chief Financial Officer) as appropriate to
allow timely decisions regarding required disclosure, and (ii) recorded,
processed, summarized and reported within the time periods specified in
the rules and forms of the Securities and Exchange Commission ("SEC").
(b) Changes in Internal Control over financial reporting: In the quarter
ended March 31, 2005, there has been no change in the Registrant's
internal control over financial reporting that has materially affected,
or is reasonably likely to materially affect, its internal control over
financial reporting.
Disclosure Controls and Internal Controls. Disclosure controls are
procedures that are designed with the objective of ensuring that
information required to be disclosed in the Registrant's reports filed
under the Act is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms. Disclosure controls
are also designed with the objective of ensuring that such information is
accumulated and communicated to our management, as appropriate to allow
timely decisions regarding required disclosure. Internal Controls are
procedures which are designed with the objective of providing reasonable
assurance that (1) transactions are properly authorized; (2) assets are
safeguarded against unauthorized or improper use; and (3) transactions are
properly recorded and reported, all to permit the preparation of financial
statements in conformity with accounting principles generally accepted in
the United States of America.
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, 2005, the
Company is not aware of any such material situations.
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Item 6 Exhibits
The following exhibits are furnished with this report:
31.1 Certification pursuant to Rule 13a-14(a) for Gary R. Gannaway, Chief
Executive Officer.
31.2 Certification pursuant to Rule 13a-14(a) for Kenneth A. Hamm, Executive
Vice President and Chief Financial Officer.
32.1 Section 1350 Certification for Gary R. Gannaway, Chief Executive
Officer.
32.2 Section 1350 Certification for Kenneth A. Hamm, Executive Vice
President and Chief Financial Officer.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 12th day of May, 2005.
FIRST CHOICE HEALTH NETWORK, INC.
By: /s/
--------------------------------------
KENNETH A. HAMM
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer and Duly Authorized Officer)
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