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1 SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT 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 No.)
601 Union Street
Suite 1100
Seattle, Washington 98101-1838
(Address of principal
executive offices)
Issuer's Telephone Number, Including Area Code
(206) 292-8255
(Issuer's telephone number, including area code)
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Securities registered pursuant to Section 12 (b) of the Act: None
Securities to be registered under Section 12 (g) of the Act:
Class A Common Stock, par value $1.00 per share
Indicate by check mark 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 check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
There is no trading market for the Registrants voting stock (Class A Common
Stock, $1.00 par value and Class B Common Stock, $1.00 par value) and,
accordingly, the market value of the voting stock held by non-affiliates of
the Registrant based on bid and asked prices cannot be determined.
The aggregate number of Registrant's shares outstanding on December 31, 2000
was 572 shares of Class A Common Stock, and 40,600 shares of Class B Common
Stock, $1.00 par value, respectively.
Transitional Small Business Disclosure Format ( check one ):
Yes ______ No __X__
Documents incorporated by reference:
None
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PART I
ITEM 1 BUSINESS 4
ITEM 2 PROPERTIES 9
ITEM 3 LEGAL PROCEEDINGS 9
ITEM 4 SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS 9
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 9
ITEM 6 SELECTED FINANCIAL DATA 10
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 10
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK 13
ITEM 8 FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA 14
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 31
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF
FIRST CHOICE HEALTH NETWORK, INC. 32
ITEM 11 EXECUTIVE COMPENSATION 39
ITEM 12 SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT 40
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS 42
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K 43
SIGNATURES 47
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4 PART I
ITEM 1. DESCRIPTION OF BUSINESS AND PRODUCTS
GENERAL
First Choice Health Network, Inc., ("The Network") is a provider-owned,
managed health care company which has established a network of physicians,
hospitals and other health care providers (a "Preferred Provider
Organization" or "PPO") located almost exclusively in the State of Washington
for the provision of health care services. A small portion of the PPO is
located in each of Alaska, Idaho and Montana. Subscribers (or members) in
Oregon can also access a network of health care providers (marketed as a
separate PPO). The Network contracts with the health care providers in its
PPO for the provision of health care services on a discounted fee basis and
contracts with self-insured employers, indemnity insurers, health maintenance
organizations, union trusts (collectively, "Health Plans") and third party
administrators ("TPAs"), to provide their subscribers (or members) access to
the PPO, for which it receives a fee from the Health Plan or the TPA, as
applicable, typically on a per subscriber (or member) per month basis. An
additional per subscriber (or member) monthly fee is received in the event the
Health Plan or TPA elects to receive utilization management services. In
addition, the hospitals participating in the PPO pay The Network an
administrative fee under their respective participating health care facility
service contracts.
At December 31, 2000, The Network had arrangements with third party
administrators and health plans representing approximately 1,200,000 members
and their dependents (collectively "Covered Persons"). Practically all of
the Company's revenues were derived from services performed in the state of
Washington during the year ended December 31, 2000.
The Network's success depends to a significant degree on its ability to
control health care costs for the Health Plans and employers utilizing its
PPO. In addition to its discounted fee arrangements with the health care
providers participating in its PPO, The Network controls health care costs
with respect to a portion of the subscribers to its PPO through a primary
care physician "gatekeeper" system of health care delivery and utilization
management programs.
An integral part of The Network's PPO is its comprehensive quality assurance
program. This program is designed to maintain and improve proper medical
care and includes, verification of physicians' credentials and hospital
accreditation, medical care evaluations, outcome studies which evaluate
hospital admissions and referral patterns and the processing of Covered
Persons' grievances. In excess of 73% of the PPO physicians are board
certified or board eligible in one or more specialties.
First Choice Health Network, a corporation organized under the laws of the
state of Washington in 1984, is owned by 572 physicians, all of whom own
Class A Common Stock; seven hospitals who own Class B Common Stock, and four
hospital participants.
During 1995, The Network formed a wholly-owned subsidiary, First Choice
Health Plan, Inc.("The Plan"), to operate as a health care service contractor
("HCSC") that permits the Company to assume risk for healthcare services in
its operations.
An HCSC is an organization that arranges for the provision and delivery of
health care services for a fixed periodic premium through a network of
providers who generally receive either a capitation fee (a fixed periodic fee
per covered member) or a negotiated fee for the health care services rendered.
HCSC's may use a "gatekeeper" system of health care delivery where each member
is serviced by a primary care physician (generally, a family practitioner,
pediatrician or internist). The primary care physician provides medical care
related to the general health of the HMO member and refers members to
specialists and other health care providers, as appropriate. HCSC's differ
from PPO's in that they are permitted to assume the financial risk of the cost
of health care services. HCSC's are required to register with the state of
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Washington Office of Insurance Commissioner. Filing requirements include
filing copies of organizational documents, financial disclosure, forms of
agreements to be issued to members, a schedule of proposed rates of
reimbursement to providers, solicitation materials and a description of
grievance procedures and a quality assurance program.
Risked Based Capital ("RBC") requirements were adopted by the state of
Washington and the NAIC effective for 1998 and subsequent years, which
established that certain required amounts of capital be maintained. As of
December 31, 1998, and 1999, The Plan's RBC exceeded the required amount in
connection with its statutory filing. As of December 31, 2000, The Plan's RBC
was less than the required amount by $402,987. The Plan has subsequently
cured this capital deficiency in March, 2001.
Effective December 1, 1998, First Choice Health Network, Inc. acquired the
Sound Health Network preferred provider organization, or PPO Business. The
acquired business consists of approximately 1,000 physicians, which serves
about 125,000 subscribers with an annual revenue stream of approximately
$4.0 million. Under the terms of the purchase First Choice Health Network, Inc.
purchased substantially all of the assets for Providence Plan Partners PPO
Business for a minimum price of $2.8 million to be paid with interest of six
percent over 18 months. A contingent payment of $668,000 determined based on
the revenues received by First Choice Health Network from the PPO Business
during the twelve months after the closing date has been paid. This transaction
was accounted for using the purchase method.
During 1998, The Plan filed an application with the Federal Health Care
Financing Administration ("HCFA")for a license to offer a Medicare risk
product called SeniorsFirst. The medicare application was approved in the
third quarter of 1998 and the first sales of the product occurred on
January 1, 1999. As of December 31, 1999 and 2000, there were 2,585 and
2,973 members, respectively, and collected premiums of $5,990,985 and
$17,172,220, respectively. The Plan ceased offering this product on
January 1, 2001.
Redeemable Equity Participation
On December 20, 1999, First Choice Health Network, Inc. executed an agreement
with University of Washington Academic Medical Center ("UWMC") to become a
participant in the administration, operations and any incentives bestowed upon
any shareholders in First Choice Health Network effective January 1, 2000.
First Choice offers and operates a preferred provider organization and a
managed care delivery system for cost-effective, quality health care benefits,
and for comprehensive health care claims processing and administration.
University of Washington Academic Medical Center has agreed to pay the
affiliation fee of $2,520,000, payable $1,260,000 upon execution of the
Agreement and the remaining $1,260,000 will be paid in three equal payments of
$420,000 due annually for three years plus interest at five percent (5%).
UWMC does not become a shareholder or member of the Network. UWMC shall
participate in any incentive or reward program established by the Network as
if UWMC owned 5,800 shares of class B common stock. Dividends, distributions,
and liquidation of the Network are also determined as if UWMC owned 5,800
shares of class B stock.
If the Network performs certain actions that substantially change the
organization, the Network discontinues the health care facility services
contract with UWMC, or if total managed care enrollment falls below 500,000
member months, then UWMC can withdraw from the agreement, but no refunds are
given. If the Network merges, is sold, or if the Network takes a material
action that proves detrimental to UWMC, then UWMC may redeem their interest
for the equivalent of the fair value of 5,800 class B common shares of FC
stock, less any amounts still owed by UWMC.
PRODUCTS
First Choice Health Network's Preferred Provider Organization (PPO)
The Network's PPO is comprised of physicians, hospitals and other health care
providers in the states of Washington, Alaska, Idaho and Montana who are
required to sign preferred physician contracts, health care facility service
contracts and provider contracts, respectively, under which the health care
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provider agrees to accept, as payment in full, the discounted fee schedule
negotiated by The Network for each covered service; such agreements are
terminable on 90 days' notice. Subscribers (or members) also have access to
a network of providers (marketed as a separate PPO) in the state of Oregon.
Physicians
In the primary care physician "gatekeeper" system of health care delivery, a
Covered Person receives care from a participating primary care physician who,
in turn, refers the Covered Person to specialists and hospitals, as required.
Primary care physicians, consisting of family practitioners, pediatricians,
general practitioners and internists, are important to The Network's health
care cost containment as they control utilization of hospitals, specialists
and other health care providers.
The Network seeks to include within its PPO high-quality, cost-effective
physicians who have admitting privileges at a participating PPO hospital. In
addition, physicians are recruited in geographic areas in which The Network's
PPO does not have a physician presence if a prospective Health Plan has a
large number of Covered Persons in such area. Upon receipt of an application
by a physician to participate in the PPO, The Network conducts its own
credentialing process (separate and distinct from those performed by
participating hospitals with respect to physicians with admitting privileges),
evaluating relevant information such as malpractice insurance, claims activity
and the physician's standing with licensing regulatory authorities.
Hospitals
The Network has contracts with hospitals in most counties in the State of
Washington and in each county in which it conducts business in other states. The
PPO offers Covered Persons a full range of hospital services, including tertiary
care.
The Network seeks to attract hospitals rendering high-quality, cost-effective
care. Prior to contracting with a hospital, The Network reviews the hospital's
accreditation, federal and state certifications, and internal and external
claims data and reports, including data available from regulatory agencies.
Other Health Care Providers
The Network has contracts with many health care providers (other than
physicians and hospitals) which, among other services, provide mental health
care, diagnostic services, chiropractic services, physical therapy, out-patient
surgery, laboratory services and home health care.
The Network has also developed a pharmacy network in the state of
Washington, which provides data with respect to utilization of prescribed
drugs by physicians participating in the PPO, which The Network intends to
incorporate into its utilization management program.
Utilization Management Services
In addition to providing Health Plans with access to its PPO, The Network
offers a utilization management program for an additional per subscriber (or
member) monthly fee to the Health Plan. The goal of the utilization
management program is to ensure that high quality health care is consistently
delivered to Covered Persons in an efficient and cost-effective manner. The
program includes individual case reviews of hospital admissions, outpatient
surgery, primary care physician referrals to specialists, management of
catastrophic, psychiatric and substance abuse cases, profiling practice
patterns of individual physicians and evaluation of hospital utilization
patterns.
At December 31, 2000, The Network had contractual arrangements through
which Health Plans in both the public and private sectors representing
approximately 1,220,000 Covered Persons, utilized the company's PPO. The
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Network receives a fee for providing access to its PPO, this was typically on
a per subscriber (or member) per month basis, from the Health Plan, either
directly or indirectly through a Third Party Administrator (TPA). The per
subscriber (or member) monthly fee is generally fixed for a twelve-month
period under contracts with each Health Plan or TPA, and is based upon the
extent of the network utilized (hospitals and/or physicians), whether
utilization management services are requested and the number of Covered
Persons.
First Choice Health Plan Products
The Plan offers health care coverage to individual groups, Association Plans as
well as a Medicare Risk and Medicare Supplement product:
Association Plan
These plans include a plan offered through Costco Wholesale, a plan offered
through the Employers Health Purchasing Cooperative, and a plan offered
through the Bellevue Chamber of Commerce which are tailor made to targeted
populations of employees.
Medicare Risk
The Plan offers a medicare risk product called SeniorsFirst for persons
eligible to receive Medicare (parts A and B) at no or minimal cost to the
member. SeniorsFirst is a medicare managed care plan that combines health
insurance and health services in one organization, a Medicare + Choice HMO.
SeniorsFirst offer the same benefits that original medicare offers and
additional benefits, which may change from year to year. Under this program,
the Health Care Financing Administration of the United States Department of
Health and Human Services (HCFA) pays a fixed premium for coverage of each
member based on a formula of the projected medical expense of each Medicare
member. The Plan ceased offering this program as of January 1, 2001.
Medicare Supplement
Under the HCSC license, The Plan contracted with Olympic Health
Management Systems, Inc., to develop and implement a Medicare Supplement
product. The rate schedules for the first phase of this proposed offering were
filed and approved by the state Office of Insurance Commissioner in the spring
of 1996. Upon acceptance of the proposed rates, The Plan and Olympic Health
Management representatives marketed this product to the general public.
The Plan offers three basic types of health care plans to prospective employer
groups: Managed Plans, Triple Option Plans and Point of Service Plans.
Managed Plans
All health care, except emergency services, under this plan is provided or
arranged by a primary care physician (PCP) which is chosen by the member
during enrollment. The PCP will refer the member to specialists, as well as
arrange hospital and other services with a Community Network of providers.
Point of Service Plan
This plan offers the same coverage as the Managed Plan but provides another
level of benefit coverage. The member is required to choose a PCP during
enrollment. The member may choose to have his/her services coordinated
through the PCP in order to have the highest level of benefit coverage
available. The member also has the choice to self-refer to an Extended PPO
Network Provider, which is paid at a lower level.
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Triple Option Health Plan
This plan offers three different levels of benefit coverage: the Community
Network benefit level, the Extended PPO Network benefit level and an out-of-
network benefit level. The member is required to choose a PCP during
enrollment. The member may choose to have his/her services coordinated
through the PCP in order to receive the highest level of benefit coverage
available. However, the member may choose to self-refer to an Extended PPO
Network Provider or a non-participating provider, which is covered at a lower
reimbursement.
MARKETING AND SALES
The Network markets its PPO and utilization management services through an
internal marketing staff to TPAs and, in conjunction with the TPAs and
independent brokers and agents, to the Health Plans. The Network generally
does not market directly to subscribers or their dependents, although it does
engage in limited direct mailings relating to product development.
The Plan distributes its products through it direct sales force and
telemarketing representatives and through independent insurance agents and
brokers.
Direct Sales Force and Telemarketing
The Plan maintains a direct sales staff of account executives. The account
executives sell the managed care and point of service to employer groups. In
addition, they are the principal administrative contact for employers and their
benefit managers by conducting on-site employee meetings and various other
requests.
The Plan employs a staff of telemarketing representatives who sell the Costco
Health Insurance product directly to small groups.
Independent Insurance Agents and Brokers
Independent insurance agents and brokers have been responsible for a
significant portion of The Plan's enrollment growth of the managed care
products. They are compensated pursuant to commission arrangements that
vary depending on the particular company products and services sold.
MAJOR CUSTOMER
The Company's largest customer, the Boeing Company, accounted for
approximately 22% of the Company's premium revenue and 53% of premiums
receivable in fiscal 2000 and approximately 34% of premium revenue and 68%
of premiums receivable in fiscal 1999. Boeing accounted for approximately
$22,700,000 and $24,500,000 of the Company's consolidated revenues for
2000 and 1999, respectively.
COMPETITION
The managed health care industry is highly competitive, primarily on the basis
of price, the size, quality and geographic location of the network of
physicians, hospitals and other health care providers, benefits provided and
quality of service. The Network competes with other managed health care
companies, such as health maintenance organizations and indemnity health
insurance companies, and other PPO's in the state of Washington and believes,
that through its licensure as a HCSC, it can maintain its PPO base and expand
into additional areas of the marketplace.
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GOVERNMENTAL REGULATION
Patient Bill of Rights
The Patient Bill of Rights was effective July 1, 2001, and it encompasses areas
related to: (1) health plan disclosure nonpublic personal financial and health
information, (2) disclosure of information regarding health benefits, (3)
network adequacy, (4) quality in utilization review decisions, (5) grievance
procedures, (6) independent review of health care disputes, and (7) health plan
liability. This is not expected to have a material impact on operations.
HIPPA
The Health Insurance Portability and Accountability Act of 1996 ("HIPPA"),
requires the United States Department of Health and Human Services
("DHHS") to develop standards and requirements for maintenance and
transmission of health information that identifies individual members. The
Standards for Electronic Transactions Final Rule was published August 2000
and became effective October 2000 with a compliance date of October 2002.
The Standards for Privacy and Individually Identifiable Health Information
Final Rule was published December 2000 and will become effective April
2001 with a compliance date of April 2003. Security Regulation will most
likely be passed in 2001.
It is difficult to assess the costs related to HIPAA compliance because these
are sweeping changes for which we have no historical experience. Overall,
costs of implementation and risk management are expected to be significant as
policy and process development is based on extensive assessment, staff
training, IS solution purchases and ongoing compliance evaluation. There will
be continuing costs to ensure compliance with the law over time.
Employees
At December 31, 2000, The Network had 217 employees, 213 of which were
full-time . None of the company's employees are unionized or subject to
collective bargaining agreements with The Network, and The Network believes
its relationships with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
First Choice leases and occupies two offices in separate buildings in downtown
Seattle. The administrative, finance and marketing departments occupy an
office consisting of approximately 20,675 square feet of space in an office
building at 601 Union Street, Suite 1100, Seattle, Washington expiring March
2003.
Pursuant to the purchase of Sound Health Washington Preferred Provider
Organization described on page 5, The company renewed the lease at the office
building at 1100 Olive way, Suite 1480, Seattle, Washington expiring July
2003. This location consists of 11,209 square feet.
ITEM 3. 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 December 31, 2000, the Company is not aware
of any such material situations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted in the fourth quarter of 2000.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public trading market for any of the Company's equity securities.
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As of December 31, 2000, there were 572 holders of the Company's Class A
Common Stock, seven holders of the Company's Class B Common Stock, and
four Hospital Participants and UWMC.
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. SELECTED FINANCIAL DATA
2000 1999 1998 1997 1996
------------ ----------- ----------- ----------- ----------
Operating revenue $139,144,059 $92,097,975 $56,878,270 $25,581,122 $6,199,506
Net income(loss) (1,349,859) 1,660,238 703,551 380,868 1,037,714
Net income(loss)
per common share (23.04) 28.33 12.00 6.49 20.57
Total assets 30,412,795 30,667,873 20,712,398 19,262,806 10,473,153
Total liabilities 17,837,813 16,394,980 8,868,805 8,349,601 902,543
Redeemable equity participation 1,617,000 1,260,000 - - -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
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. During
2000, The Network continued to expand its PPO network. In 2000, The Network
continued its system of physician reimbursement which had commenced in
July 1993, referred to as the Resource Based Relative Value System, whereby
fees to physicians are weighted more toward cognitive services (i.e., overall
patient care) as opposed to procedural services (e.g., surgery and diagnostic
tests). This system is consistent with the company's belief in the importance
of managing the full scope of patient care to provide the most appropriate level
of service for each patient.
Since its inception, the Company has negotiated reimbursement to its principal
hospitals under a Diagnostic Related Group ("DRG") system under which
payments are based on the diagnosis of the patient's condition, generally
notwithstanding the length of hospitalization. In 1997, The Network
negotiated with additional hospitals to change the basis upon which DRG's are
determined from an "All Medicare Grouper" to an "All Patient Grouper" and
concurrently introduced Washington State-specific hospital weights to more
closely match reimbursement payments to actual resource consumption.
In anticipation of the proposed Washington State health care reform and to
enhance its competitive position in the health care industry, The Plan obtained,
on January 13, 1995, a Certificate of Registration to operate as a health care
service contractor ("HCSC"), in the state of Washington, which permits The
Plan to assume financial risk in its operations.
The Plan's revenues consist primarily of commercial premiums resulting from
the offering of health insurance products. However, this is supplemented by
The Plan's rental of the PPO network beginning January 1, 1998. See the
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"First Choice Health Plan Products" under "Description of Business" for
further explanation of products currently being offered by The Plan.
Medical expenses are largely comprised of capitation arrangements with the
physician organizations ("PO") in which the risk for health insurance coverage
has been passed to the PO. The Plan passes much of the premium to the POs
and keeps a certain percentage for administrative fees which covers services
that The Plan provides on behalf of the PO. The Plan assumes the full risk for
approximately 50% of commercial members at year-end 2000. For the
membership that The Plan is at risk for, the medical expenses are comprised of
negotiated payments to physicians, hospitals and other health care providers
which includes an estimated amount for incurred but not reported claims
("IBNR").
The Plan has a license with the Federal Health Care Financing Administration
("HCFA") to offer a Medicare risk product. The Medicare application was
approved in the third quarter of 1998 with the first sales of the product
occurring on January 1, 1999. The Plan ceased offering this product as of
January 1, 2001.
The Plan transferred an additional $1 million on February 19, 1998 and
$400,000 on March 31, 1998 to its restricted depository account in order to
satisfy statutory requirements for additional restricted deposits related to
the Medicare business.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO
YEARS ENDED DECEMBER 31, 1999 AND 1998
Operating revenue for the year ended December 31, 2000, increased to
approximately $139.1 million in 2000 from approximately $92.1 million in
1999 and $56.9 million in 1998. The increase in 2000 was primarily due to
increased Plan insured membership and rate increases. Commercial member
months grew by 29% in 2000 and Medicare Risk member months grew by
157% during 2000. In addition, commercial premium rates increased by 14%
and Medicare Risk premium rates increased by 21% during 2000. The
company's network access fees increased from $5.6 million in 1998 to $7.8
million in 1999 and remained at $7.8 million in 2000. The increase in 1999
was a result of growth in The Network's rental of the PPO network as well as
the purchase of the Sound Health network and related membership in
December 1998. Hospital administrative fees increased from $4.8 million in
1998, $5.9 million in 1999, to $6.7 million in 2000. The growth in this line
item was primarily due to the Sound Health acquisition in December 1998.
Total operating expenses increased 58% to approximately $143.2 million in
2000 versus approximately $90.6 million in 1999, and $56.6 million in 1998.
Medical expenses drove the majority of the increase as a direct result of the
increase in Plan health insurance membership as well as increased costs per
member. Selling, general and administrative costs increased to approximately
$12.2 million from approximately $9.7 million in 1999 and $7.5 million in
1998 as a result of increased operating expenditures related to the increased
Plan membership as well as the premium and business taxes associated with
The Plan's business. Payroll and related expenses increased 22% from
approximately $6.6 million in 1998, $10.0 million in 1999, compared to
approximately $12.2 million in 2000. The Network increased the number of
employees as a result of the increased Plan membership.
Inflation
Health care costs in the United States have increased more rapidly than the
national consumer price index in recent years, and that trend is expected to
continue. The Company's operating results have not significantly been
affected by general inflation, and the Company does not anticipate that
inflation will have a significant impact on its operating results in the near
term. However, inflation in healthcare costs does directly impact the Company's
operation as most commercial groups have only annual rate adjustments. The
Company obtained licensure as an HCSC in January 1995 and assumes risk for
medical costs. Prior to 2000, the Company transferred risk to health care
providers through capitation arrangements and risk-sharing provisions. In
2000, The Plan began to assume more risk for medical costs as provider groups
terminated risk arrangements. At year-end 2000, The Plan was at risk for
approximately 50% of commercial members. It is anticipated that this will
increase to 75 - 80% in 2001. As a result of this, The Plan is significantly
impacted by rising medical costs. Costs are managed through discounted
contractual arrangements and medical management activities.
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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.
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 constituting
the Company's Class B shareholders, non-equity capital contributions from
four additional hospitals pursuant to their respective participation
agreements, and funds from operations.
At December 31, 2000, the Company had cash and cash equivalents of
approximately $12.7 million as compared to approximately $13.1 million at
December 31, 1999.
On July 1, 1997, First Choice Health Network, Inc. (The Network), First
Choice Health Plan, Inc. (The Plan), Health First Partners, Inc. (Health
First) and Health Washington, L.L.C. (Health WA) entered into a merger and
asset purchase agreement. The agreement between the four companies consisted
of three transactions as described in the paragraphs below.
First, The Plan purchased substantially all of the assets of Health WA in
exchange for 34,523 shares of The Plan's Common Stock. These shares were
issued to the former shareholders of Health WA. The assets of Health WA
consisted primarily of Health WA's rights to various provider contracts,
a large group ontract, as well as other intangible property including
trademarks. Estimated growth in membership was 12,500 as a result of this
merger. These shares represent approximately 12.6% ownership in FC Health
Plan.
Secondly, Health First merged with and into The Plan with Health First ceasing
operations and The Plan as the surviving corporation. FC Health Plan issued
33,572 shares of stock to the former shareholders of Health First for the net
assets of Health First as well as the rights to various provider and group
contracts. The net assets purchased included those assets and liabilities that
existed as of July 1, 1997, which had a book value of approximately $1.0
million. Estimated growth in membership was 5,500 as a result of this merger.
These shares represent approximately 12.3% ownership stake in The Plan.
Third, The Network, formerly the sole shareholder of The Plan, became
obligated to contribute cash to The Plan in exchange for 55,436 shares of FC
Health Plan stock. This is facilitated by a Contribution Agreement that states
that The Network shall contribute a certain percentage of revenues over the
next ten years in exchange for those shares. The Network's ownership in the
subsidiary, The Plan, was approximately 75.1%.
In January 1998, the owners of The Plan signed an agreement, which gave the
Company an 80% ownership in the common stock of The Plan. The purpose
of the increase in common stock ownership was to allow for consolidation of
Plan income or losses in the Company's filing of consolidated tax return,
which includes The Plan. This transaction by Health Washington exchanging
8,613 shares of common stock for the same number of preferred shares. Two
other owners made a similar exchange of 4,187 shares each. In order to
facilitate this transaction, The Plan amended their Articles of Incorporation
12
13
to authorize 1,000,000 shares of preferred stock. This stock has a par value
of $29.10 and is nonvoting and noncumulative, but has a dividend preference
rate of 8.75% of the par value per share.
Effective February 1, 1998, the Network and Plan entered into a tax sharing
agreement, which provides for the sharing of Federal income tax liabilities and
benefits in the filing of consolidated tax returns.
In July, 1998, The Plan amended the Articles of Incorporation to increase the
authorization of preferred shares to 1,000,000. The Network then increased its
investment in The Plan by purchasing $3,000,000 in The Plan's preferred
stock.
Effective December 1, 1998, the Company executed a purchase agreement to
acquire the Sound Health-Washington PPO Business. The acquired business
consists of approximately 125,000 subscribers with an annual revenue stream
of approximately $4.0 million. The purchase was $2.8 million to be paid with
interest at a rate of six percent over 18 months, and a contingent payment of
$668,000 based on revenue received by the Company in the twelve months
after the closing date. The revenue was received and the $668,000 paid before
February 15, 2000.
On December 20, 1999, First Choice Health Network, Inc. executed an
agreement with University of Washington Academic Medical Center to
become a participant in the administration, operations and any incentives
bestowed upon any shareholders in First Choice Health Network effective
January 1, 2000. University of Washington Academic Medical Center shall
pay the affiliation fee of $2,520,000, payable $1,260,000 upon execution of
this Agreement and the remaining $1,260,000 will be paid in three equal
payments of $420,000 due annually for three years plus interest at five percent
(5%). As of December 31, 2000, $1,617,000 in principal had been paid.
UWMC does not become a shareholder or member of the Network. UWMC
shall participate in any incentive or reward program established by the Network
as if UWMC owned 5,800 shares of class B common stock. Dividends,
distributions, and liquidation of the Network are also determined as if UWMC
owned 5,800 shares of class B stock.
If the Network performs certain actions that substantially change the
organization, the Network discontinues the health care facility services
contract with UWMC, or if total managed care enrollment falls below 500,000
member months, then UWMC can withdraw from the agreement, but no refunds are
given. If the Network merges, is sold, or if the Network takes a material
action that proves detrimental to UWMC, then UWMC may redeem their interest
for the equivalent of the fair value of 5,800 class B common shares of FC
stock, less any amounts still owed by UWMC.
The Company anticipates that the revenues generated by operations cash and
cash equivalents as of December 31, 2000 will be sufficient to meet its cash
requirements throughout 2001.
Throughout 1999 and early 2000, The Plan contracted with Cascade Medical
Group (Cascade) for capitated health care services. The Plan did not have
insurance risk for the covered individuals to the extent that Cascade could
continue to pay The Plan for claims paid on their behalf. In March of 2000,
Cascade management dissolved the organization. The dissolution of Cascade
does not affect the financial position or results of operations in 1999 because
The Plan had a payable to Cascade as of December 31, 1999. The ultimate
financial impact of this event approximated $970,000, which was recorded as
medical expenses during 2000.
During 2000 several other provider organizations experienced financial
difficulties. As a result of this, The Plan recorded additional medical expense
of approximately $4.4 million. The $4.4 million represents write-offs of
provider settlement receivables and reserves for unpaid claims for estimated
claim run out liabilities.
As a result of these additional medical expenses, The Plan required
approximately $4.2 million in capital infusions from The Network in 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable as of December 31, 2000.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . 16
Consolidated Balance Sheets as of December 31, 2000 and 1999 . . . . . . 17
Consolidated Statements of Income
for the years ended December 31, 2000, 1999, and 1998. . . . . . . 19
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2000, 1999, and 1998. . . . . . . 20
Consolidated Statements of Cash Flows
for the years ended December 31, 2000, 1999, and 1998. . . . . . . 21
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 23
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
First Choice Health Network, Inc.
We have audited the accompanying consolidated balance sheets of First Choice
Health Network, Inc. and subsidiary (the Company) as of December 31, 2000
and 1999, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years ended in the period
December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States
of America.
Deloitte & Touche LLP
March 30, 2001
Seattle, Washington
14
15
FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 and 1999
ASSETS 2000 1999
CURRENT ASSETS:
Cash and cash equivalents $12,697,290 $13,082,130
Short term investments 499,995 -
Service fees receivable, net of allowance for doubtful accounts
of $650,024 and $252,361 at December 31, 2000 and 1999 2,131,111 3,929,493
Service fees and premiums receivable from related parties 1,326,448 1,213,593
Premiums receivable, net of allowance for doubtful accounts
of $199,756 and $65,427 at December 31, 2000 and 1999 2,738,711 2,562,710
Provider settlements receivable - unrelated parties 848,202 1,891,651
Provider settlements receivable - related parties 1,032,618 684,606
Prepaid expenses 839,805 572,935
Deferred tax assets (Note 4) 1,140,386 548,735
Other current assets 716,959 170,581
------------ -----------
Total current assets 23,971,525 24,656,434
FURNITURE, EQUIPMENT, AND COMPUTER SOFTWARE:
Furniture and equipment 4,354,690 3,353,485
Computer software 886,933 324,385
------------ -----------
5,241,623 3,677,870
Less accumulated depreciation and amortization (2,632,994) (2,011,730)
------------ -----------
Furniture, equipment, and computer software, net 2,608,629 1,666,140
DEFERRED TAX ASSETS (Note 4) 925,165 314,384
OTHER ASSETS:
Restricted indemnity cash 1,798,699 1,747,626
Goodwill, net of accumulated amortization of $192,658 and $137,614 82,602 137,646
Other intangible assets, net of accumulated amortization
of $2,332,225 and $1,212,757 1,026,175 2,145,643
------------ -----------
Total other assets 2,907,476 4,030,915
------------ -----------
TOTAL $30,412,795 $30,667,873
============ ===========
See notes to consolidated financial statements.
15
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FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 and 1999
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
CURRENT LIABILITIES:
Accounts payable $ 678,054 $ 520,046
Accrued expenses 3,296,789 2,275,005
Reserve for unpaid claims and claims adjustment expenses 10,181,595 3,210,613
Provider settlements payable - unrelated organizations 1,529,853 5,104,101
Provider settlements payable - related organizations - 421,711
Unearned premiums 1,064,390 3,104,521
Deferred income taxes 87,132 146,979
Current portion of note payable 301,829 1,612,004
----------- -----------
Total current liabilities 17,139,642 16,394,980
NOTE PAYABLE (Note 10) 698,171 -
MINORITY INTEREST 173,062 864,249
REDEEMABLE EQUITY PARTICIPATION 1,617,000 1,260,000
COMMITMENTS (Note 5)
SHAREHOLDERS' EQUITY:
Common stock:
Class A, par value $1 - Authorized, 30,000 shares;
issued and outstanding, 572 and 585 shares 572 585
Class B, par value $1 - Authorized, 70,000 shares;
issued and outstanding, 40,600 shares 40,600 40,600
Additional paid-in capital 4,336,182 4,350,034
Paid-in capital from affiliates 1,472,108 1,472,108
Retained earnings 4,935,458 6,285,317
----------- -----------
Total shareholders' equity 10,784,920 12,148,644
----------- -----------
TOTAL $30,412,795 $30,667,873
=========== ===========
See notes to consolidated financial statements.
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FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
OPERATING REVENUE:
Premium revenue $ 90,054,697 $ 64,496,942 $ 42,634,121
Premium revenue, related parties 15,162,019 7,204,129 3,720,738
Medicare revenue 19,060,419 6,338,440 -
Network access fees 7,832,119 7,838,999 5,607,173
Hospital administrative fees 4,532,068 4,289,828 2,956,822
Hospital administrative fees, related parties 2,201,602 1,609,000 1,841,789
Other 301,135 320,637 117,627
------------ ------------ ------------
Total operating revenue 139,144,059 92,097,975 56,878,270
OPERATING EXPENSES:
Medical expenses 70,544,946 41,812,940 25,149,892
Medical expenses, related parties 47,089,964 27,875,293 17,125,490
Payroll and related expenses 12,244,679 10,012,045 6,659,224
Selling, general, and administrative expenses 12,190,024 9,741,831 7,517,177
Amortization expense 1,174,512 1,191,012 160,333
------------ ------------ ------------
Total operating expenses 143,244,125 90,633,121 56,612,116
------------ ------------ ------------
Operating income(loss) (4,100,066) 1,464,854 266,154
OTHER INCOME (EXPENSE):
Interest and dividends 780,904 361,200 504,415
Other - 46,000 (155,928)
------------ ------------ ------------
Total other income 780,904 407,200 348,487
------------ ------------ ------------
Income (loss) before federal
income taxes and minority
interest (3,319,162) 1,872,054 614,641
FEDERAL INCOME TAXE EXPENSE (BENEFIT) (1,278,116) 279,143 429,348
------------ ------------ ------------
(2,041,046) 1,592,911 185,293
MINORITY INTEREST 691,187 67,327 518,258
------------ ------------ ------------
NET INCOME (LOSS) $ (1,349,859) $ 1,660,238 $ 703,551
============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE $ (23.04) $ 28.33 $ 12.00
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 58,579 58,601 58,619
============ ============ ============
See notes to consolidated financial statements.
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FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Common stock
Class A Class B Additional Paid-in Total
paid-in Shareholder capital from Retained shareholders'
Shares Amt Shares Amt capital receivable affiliates earnings equity
BALANCE, January 1, 1998 648 $648 40,600 $40,600 $4,416,090 $(250,000) $1,472,108 $3,921,528 $ 9,600,974
Cash received from shareholder receivable 250,000 250,000
Repurchase of Class A common stock and
membership rights (29) (29) (30,988) (31,017)
Net income 703,551 703,551
--- ---- ------ ------- ---------- ---------- ---------- ---------- -----------
BALANCE, December 31, 1998 619 619 40,600 40,600 4,385,102 1,472,108 4,625,079 10,523,508
Repurchase of Class A common stock and
membership rights (34) (34) (35,068) (35,102)
1
Net income 1,660,238 1,660,238
--- ---- ------ ------- ---------- ---------- ---------- ---------- -----------
BALANCE, December 31, 1999 585 585 40,600 40,600 4,350,034 1,472,108 6,285,317 12,148,644
Repurchase of Class A common stock and
membership rights (13) (13) (13,852) (13,865)
Net income (1,349,859) (1,349,859)
--- ---- ------ ------- ---------- ---------- ---------- ---------- -----------
BALANCE, December 31, 2000 572 $572 40,600 $40,600 $4,336,182 $ - $1,472,108 $4,935,458 $10,784,920
=== ==== ====== ======= ========== ========== ========== ========== ===========
See notes to consolidated financial statements.
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FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
OPERATING ACTIVITIES:
Net income $(1,349,859) $ 1,660,238 $ 703,551
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Gain on sale of Dental Network - (44,500) -
Depreciation 621,264 523,372 384,620
Amortization 1,174,512 1,191,012 160,333
Deferred income taxes, net (1,262,279) (813,161) (268,589)
Provision for doubtful accounts 253,914 207,356 307,000
Minority interest (691,187) (67,327) (518,258)
Cash provided (used) by changes in operating
assets and liabilities:
Service fees receivable 1,565,527 (1,631,435) (1,520,090)
Premiums receivable (309,916) (544,285) (405,968)
Prepaid expenses (266,870) (182,187) (98,636)
Other current assets (546,377) (89,403) 316,923
Other assets - (390,009) 353,497
Accounts payable 158,008 142,196 171,648
Accrued expenses 1,021,784 665,803 (193,372)
Reserve for unpaid claims and claims
adjustment expenses 6,970,982 1,108,249 708,257
Provider settlements receivable -
related organizations (769,723) 462,535 (3,057,956)
Provider settlements receivable -
unrelated organizations (2,530,799) 3,569,500 (533,992)
Federal income tax payable - (28,417) 28,417
Unearned premiums (2,040,131) 2,967,241 (198,349)
----------- ----------- -------------
Net cash provided (used) by operating activities 1,998,850 8,706,778 (3,660,964)
INVESTING ACTIVITIES:
Sale of Dental Network - 90,000 -
Purchase of short term investments (499,995) - -
Purchase of furniture, equipment, and computer
software (1,563,753) (769,630) (810,032)
Increase in restricted indemnity cash (51,073) (41,671) (1,344,582)
----------- ----------- -------------
Net cash used by investing activities (2,114,821) (721,301) (2,154,614)
----------- ----------- -------------
BALANCE, carried forward (115,971) 7,985,477 (5,815,578)
See notes to consolidated financial statements.
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FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLDIATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
BALANCE, brought forward $ (115,971) $ 7,985,477 $ (5,815,578)
FINANCING ACTIVITIES:
Repurchase of Class A common stock and
membership rights from physicians (13,865) (35,102) (31,017)
Redeemable equity participation 357,000 1,260,000 -
Receipt of shareholder receivable - - 250,000
Proceeds of note issued 1,000,000 - -
Payment of note payable (1,612,004) (1,887,996) -
----------- ----------- ------------
Net cash provided (used) by financing activities (268,869) (663,098) 218,983
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (384,840) 7,322,379 (5,596,595)
CASH AND CASH EQUIVALENTS:
Beginning of year 13,082,130 5,759,751 11,356,346
----------- ----------- ------------
End of year $12,697,290 $13,082,130 $ 5,759,751
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Federal income taxes $ 430,000 $ 1,350,000 $ 250,000
Interest 11,800 94,174 -
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING AND INVESTING ACTIVITIES:
Business acquired for note payable - 612,333 837,920
See notes to consolidated financial statements.
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21
FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 and 1999
NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Description of business: First Choice Health Network, Inc. (the Company) was
incorporated under the laws of the state of Washington on September 28, 1984.
The Company was formed to organize a network of independent participating
physicians and hospitals to provide a comprehensive, managed health care
delivery system for group plans established by employers and benefit groups.
The Company's business is conducted primarily in Washington, Oregon, and
Alaska.
The Company's majority owned subsidiary, First Choice Health Plan, Inc. (The
Plan), is a health care services contractor which was formed on January 31,
1995, to offer fully insured health care services to an enrolled population in
Washington state.
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
The Plan. All significant intercompany amounts have been eliminated in
consolidation.
New accounting pronouncements: On June 16, 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities,
which is effective for quarters of fiscal years beginning after June 15, 2000.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. Under this statement, certain derivatives
are recognized at fair value and changes in fair market value are recognized
as gains or losses. Management does not believe that adoption of this
statement will have a material effect on the financial statements.
Cash equivalents: The Company considers all investments purchased with an
original maturity of three months or less to be cash equivalents. At
December 31, 2000 and 1999, cash and cash equivalents consisted of cash
management funds of $12,697,290 and $13,082,130, respectively.
Short-term investments: The company owns asset-backed securities that are
classified as held to maturity. These investments are recorded at amortized
cost of which approximates fair value, due to its short-term nature.
Service fees receivable: Service fees receivable consists primarily of
estimates for administrative fees receivable related to claims incurred on or
before the balance sheet date but not reported. The Company evaluates the
reasonableness of administrative fees receivable based on claims reported in
subsequent periods. These estimates are subject to the effects of trends in
claims. Although considerable variability is inherent in such estimates,
management believes that the administrative fees receivable is reasonable. The
estimates are continually reviewed and adjusted as necessary in the period new
information becomes known.
Allowance for doubtful accounts: The Company performs periodic credit
evaluations of its customers and maintains an allowance for potential credit
losses related to receivables.
Premiums receivable: Premiums receivable represents monthly group health
insurance premiums billed and outstanding.
Furniture, equipment, and computer software: Furniture, equipment, and
computer software are recorded at cost. Depreciation and amortization are
computed using the straight-line method over the lesser of the estimated useful
lives of the assets or lease term ranging from three to five years.
21
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Restricted indemnity cash: Restricted indemnity cash consists of amounts
required to be restricted for potential claims from enrollees as required by the
Office of the Insurance Commissioner of the State of Washington. The balance
consists of short-term asset backed securities that are classified as held to
maturity. These assets are recorded at amortized cost, which approximates
fair value.
Other intangible assets: Intangible assets assumed in the Sound Health PPO
network acquisition were trademarks, contracts, and a noncompetition
agreement. Intangible assets are amortized using the straight-line method over
three years.
Goodwill: Goodwill is determined as the difference between the purchase price
and fair value of identifiable net assets purchased. Goodwill is amortized
using the straight-line method over three to five years. Events or changes in
circumstances have not occurred that indicate the value of goodwill has been
impaired as of December 31, 2000 and 1999.
Reserve for unpaid claims and claims adjustment expenses: This liability
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.
A reserve of $1.1 million for insolvent providers has been established and
is included in the reserve for unpaid claims and adjustment expenses in 2000.
This liability represents estimated claim run out for provider organizations
for which recovery of contractual receivables is considered unlikely.
Provider settlement receivable (payable): This liability or asset is the amount
due to (from) health care providers in conjunction with capitation arrangements,
which is computed by subtracting the claims payments made on behalf of the
provider from the capitated amounts contractually allocated to them. The
ultimate payout or receipt of these amounts is subject to a settlement process
subsequent to the contract year-end. The Company believes the amounts
recorded appropriately reflect the ultimate settlement amounts.
Unearned premiums: Unearned premiums consist of insurance premiums
received prior to fiscal year end for health insurance coverage subsequent to
year end.
Operating revenue: Operating revenue consists primarily of premium revenue,
Medicare revenue, network access fees, and hospital administrative fees.
Premium revenue represents amounts charged for health care services and is
recognized as revenue in the period for which enrollees are entitled to medical
care. Medicare revenue is paid at a fixed per member per month capitation
amount by the Health Care Financing Administration (HCFA) based on the
projected medical cost for each Medicare member and is recognized as revenue
over the coverage period. The Plan ceased offering the Medicare plan effective
January 1, 2001. Network access fees are recognized as earned during the
period of coverage and are recorded at contractual rates. Hospital
administrative fees are recognized as earned in the period hospital claims are
incurred by a subscriber and are recorded at a contractual percentage of the
claims.
For the years ended December 31, 2000 and 1999, 22% and 34%, respectively,
of the premium revenue related to one subscriber group. Premiums receivables,
as of December 31, 2000 and 1999, from that group represented 53% and 68%,
respectively.
Income taxes: Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to reverse. The effect on the deferred tax assets and
22
23
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is established to the extent
that it is more likely than not that deferred tax assets will not be realized.
Valuation of long-lived assets: Using its best estimates, based on reasonable
and supportable assumptions and projections, the Company reviews its long-
lived assets for impairment whenever events or changes in circumstances have
indicated that the carrying amounts of its assets might not be recoverable. At
December 31, 2000 and 1999, no write-downs were required.
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 41,179, 41,201, and 41,219 common shares and 17,400, 17,400, and
17,400 shares applicable to affiliate common share equivalents (Note 2) in 2000,
1999, and 1998, respectively. Shares issued and reacquired during each period
were weighted for the portion of the period that they were outstanding. There
are no dilutive securities.
Use of estimates: Preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America (GAAP) requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications: Certain prior year amounts have been reclassified to conform
to the current year presentation.
NOTE 2: SHAREHOLDERS' EQUITY
Ownership of stock: Class A voting common stock may be held solely by
physicians licensed in the state of Washington who contract with the Company
to provide health care services and who hold active, associate, or provisional
medical staff privileges at one or more of the hospitals that contract with
the Company to provide health care services.
Class B voting common stock may be held by hospitals in the state of
Washington that contract with the Company to provide health care services.
Voting rights: Holders of each outstanding share of Class A or Class B
common stock are entitled to one vote on each matter submitted to a vote at
meetings of shareholders, and each class of common stock votes as a separate
class.
Transfer of stock: Shareholders may only transfer their stock in the Company
to the Company for repurchase. The repurchase price is established by the
Board of Directors each fiscal year as set forth in the bylaws. Class A
shares were repurchased at $1,144.26, $1,031.95, and $1,014.91 per share
during 2000, 1999, and 1998, respectively.
Dividends: The Board of Directors may declare and pay dividends on one or
more classes of common stock at such times and in such amounts as it
designates, but in no event may dividends be paid while there is an outstanding
obligation to repurchase shares. Dividends are allocated among shareholders of
each class of stock according to the number of shares outstanding to each Class
A or Class B shareholder. Any dividends paid to the Class B shareholders must
be shared with the nonshareholders that have rights equivalent to those of the
other shareholders.
Liquidation rights: Upon liquidation or dissolution, the Board of Directors, at
its discretion, will allocate the value of assets among the classes of its
outstanding stock in proportion to the capital contributions of shareholders of
each class. For these purposes, the contributions by the nonshareholder
district hospitals that have rights equivalent to those of the Class B
shareholders andthe membership fees paid by Class A shareholders are considered
capital contributions. The allocation to Class A shareholders will be shared
among all Class A shareholders in accordance with the number of shares
outstanding to each Class A shareholder. The allocation of the Class B
shareholders must be shared with the nonshareholder hospitals that have rights
equivalent to those of Class B shareholders.
23
24
Paid-in capital from affiliates: 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 nonshareholders are recorded as paid-in capital from
affiliates. These contractual agreements are considered to be common share
equivalents for purposes of calculating net income per common share.
Common stock: In January 1998, the owners of The Plan entered into an
agreement which increased the Company's ownership in the common stock of
The Plan from 75.1% to 80%. The purpose of the increase in common stock
ownership was to allow for the consolidation of tax returns between the
Company and The Plan. This transaction included exchanging common stock
held by the minority owners of The Plan, who are also stockholders in the
Company, for the same number of preferred shares. This preferred stock is
nonvoting and noncumulative, and has a dividend rate of 8.75%.
NOTE 3: REDEEMABLE EQUITY PARTICIPATION
On December 20, 1999, the Company executed a participation agreement with
the University of Washington Academic Medical Center (UWMC) to become a
participant in the administration, operations, and any incentives bestowed upon
any shareholders in the Company effective January 1, 2000. UWMC will pay a
fee of $2,520,000, $1,260,000 payable upon execution of this agreement and the
remaining $1,260,000 payable in three equal payments of $420,000 consisting of
principal and interest at 5%. The final payment will be adjusted for any
outstanding principal and interest.
UWMC does not become a shareholder or a member of the Company. UWMC
shall participate in any incentive or reward program established by the Company
as if UWMC owned 5,800 shares of Class B common stock. Dividends,
distributions, and liquidation of the Company are also determined as if UWMC
owned 5,800 shares of Class B common stock.
If the Company performs certain activities that substantially change the
organization, the Company discontinues the health care facility services
contract with UWMC, or if total managed care enrollment falls below 500,000
member months, then UWMC can withdraw from the agreement, but no refunds are
given. If the Company merges, is sold, or if the Company takes a material
action that proves detrimental to UWMC, then UWMC may redeem its interest for
the equivalent of the fair value of 5,800 Class B common shares of Company
stock, less any amounts still owed by UWMC. Since redemption, under certain
terms, is outside the control of the Company, the amounts received are recorded
as a redeemable equity participation.
NOTE 4: FEDERAL INCOME TAXES
Federal income taxes consist of the following components:
2000 1999 1998
Current $ (15,837) $ 1,092,304 $ 697,937
Deferred (1,262,279) (813,161) (268,589)
------------ ------------ ---------
$(1,278,116) $ 279,143 $ 429,348
============ ============ =========
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Federal income taxes differ from the amount computed by applying the expected
U.S. corporate income tax rate to income before federal income taxes for the
years ended December 31 as follows:
2000 1999 1998
Amount Percent Amount Percent Amount Percent
Computed expected tax rate $(1,128,515) (34.0)% $ 636,498 34.0 % $ 208,978 34.0 %
Tax effect of permanent differences:
Valuation allowance on Plan NOLs 66,640 10.8
Political contributions 139,328 22.7
Change in valuation allowance (16,727) (0.5) (73,608) (3.9)
Adjustment to return filed (26,119) (0.8) (283,747) (15.2)
Other (106,755) (3.2) 14,402 2.3
----------- ---- ----------- ---- ---------- ----
$(1,278,116) (38.5)% $ 279,143 14.9 % $ 429,348 69.8 %
=========== ==== =========== ==== ========== ====
The deferred tax assets and liabilities resulting from the tax effects of
temporary differences at December 31 are presented below:
2000 1999
Deferred tax assets:
Net operating losses $2,351,733 $2,200,080
Reduction of shareholders' equity 213,724 213,724
Allowance for doubtful accounts 759,219 108,048
Unearned premium 72,379 211,107
Amortization 441,297 209,848
Vacation 114,748 87,506
Other 329,258 32,886
---------- ----------
Gross deferred tax assets 4,282,358 3,063,199
Valuation allowance (2,216,807) (2,200,080)
---------- ----------
Net deferred tax assets 2,065,551 863,119
Deferred tax liabilities:
Cash to accrual adjustment - 112,624
Furniture, equipment, and computer software 87,132 34,355
---------- ----------
Total deferred tax liabilities (current) 87,132 146,979
---------- ----------
Deferred income tax asset, net $1,978,419 $ 716,140
========== ==========
Current portion of deferred tax assets $1,140,386 $ 548,735
Long-term portion of deferred tax assets 925,165 314,384
---------- ----------
$2,065,551 $ 863,119
========== ==========
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The valuation allowance was established in 1997 for the tax benefit of the 1997
NOL's of the Company since the Company filed a separate federal income tax
return for the final six months of 1997 and the first three weeks of 1998, and
the realization of the tax benefit is unlikely. The allowance also provides
for NOL's acquired in acquisition of a business in 1997. The following
schedule represents the amounts of The Plan's NOL's and their expiration date:
2007 $ 150,754
2008 53,781
2009 20,754
2010 1,584,667
2011 2,075,894
2012 2,353,449
2018 280,723
----------
$6,520,022
==========
The Company has $396,839 in NOL's which expire in 2020, as a result of taxable
losses in 2000. There is no valuation allowance on these NOL's.
NOTE 5: COMMITMENTS
Leases: The Company leases its office facilities and some office equipment
under operating leases expiring through 2003. The leases provide for monthly
minimum rent payments, and some include renewal options for an additional
five years.
Rental expense charged to operations under the operating leases for the years
ended December 31, 2000, 1999, and 1998, was $876,900, $749,108, and
$510,316, respectively.
Future minimum lease payments under operating leases for the years ending
December 31 are as follows:
2001 $ 915,829
2002 915,927
2003 359,084
----------
$2,190,840
==========
In connection with the acquisition of a business in 1997, The Company is
required to contribute to the capital of The Plan based on a percentage of
the Company's administrative fee revenue for the 10 years following
July 1, 1997, if any. No minimum amounts of contributions are required.
The Company contributed $1,503,152 and $1,714,515 for common stock and
additional paid-in-capital based on the percentage of the Company's revenues
for the years ended December 31, 2000 and December 31, 1999, respectively.
In addition, $996,848 was contributed as a partial advance contribution for
2001. The investment in The Plan is eliminated in consolidation.
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NOTE 6: 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, 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.
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. 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
2000:
Revenues from external cusotmers $ 12,077,869 $127,066,190 $139,144,059
Revenue from intercompany 403,860 - 403,860
Interest revenue (expense) 95,602 685,302 780,904
Depreciation/amortization expense 1,616,473 179,303 1,795,776
Income tax expense (benefit) 562,064 (1,840,180) (1,278,116)
Expenditures on furniture, equipment,
and computer software 1,563,753 - 1,563,753
Segment profit (loss) 1,376,066 (3,417,112) (2,041,046)
Assets 25,011,867 23,404,879 48,416,746
Liabilities 4,892,138 15,278,104 20,170,242
1999:
Revenues from external customers $ 11,850,166 $ 80,247,809 $ 92,097,975
Revenue from intercompany 337,226 - 337,226
Interest revenue (expense) (44,726) 405,926 361,200
Depreciation/amortization expense 1,497,695 216,689 1,714,384
Income tax expense (benefit) 640,470 (361,327) 279,143
Expenditures on furniture, equipment,
and computer software 769,630 - 769,630
Segment profit (loss) 1,748,182 (155,271) 1,592,911
Assets 23,515,062 20,555,995 44,071,057
Liabilities 6,213,590 10,413,052 16,626,642
1998:
Revenues from external customers 8,711,788 48,166,482 56,878,270
Revenue from intercompany 345,184 - 345,184
Interest revenue 65,587 438,828 504,415
Depreciation/amortization expense 391,902 153,051 544,953
Income tax expense (benefit) 1,639,030 (1,209,682) 429,348
Expenditures on furniture, equipment,
and computer software 181,330 628,702 810,032
Segment profit (loss) 2,837,133 (2,651,840) 185,293
Assets 20,522,701 12,374,475 32,897,176
Liabilities 5,328,643 4,267,933 9,596,576
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2000 1999 1998
Revenues:
Total revenues for reportable segments and
consolidated revenues $139,144,059 $ 92,097,975 $ 56,878,270
============ ============ ============
Profit or loss:
Total profit or loss for reportable segments $ (2,041,046) $ 1,592,911 $ 185,293
Adjustment for minority interest in
consolidated statements 691,187 67,327 518,258
------------ ------------ ------------
Consolidated net income $ (1,349,859) $ 1,660,238 $ 703,551
============ ============ ============
Assets:
Total assets for reportable segments $ 48,416,746 $ 44,071,057 $ 32,897,176
Elimination of intercompany investments (15,671,522) (13,171,522) (11,457,007)
Elimination of intercompany balances (2,332,429) (231,662) (727,771)
------------ ------------ ------------
Consolidated total assets $ 30,412,795 $ 30,667,873 $ 20,712,398
============ ============ ============
Liabilities:
Total liabilities for reportable segments $ 20,170,242 $ 16,626,642 $ 9,596,576
Elimination of intercompany balances (2,332,429) (231,662) (727,771)
------------ ------------ ------------
Consolidated total liabilities $ 17,837,813 $ 16,394,980 $ 8,868,805
============ ============ ============
Substantially all of the revenues from external customers are derived from
within the state of Washington. Revenues from one customer of The Plan
represent approximately $22,700,000 and $24,500,000 of the Company's
consolidated revenues for 2000 and 1999, respectively.
NOTE 7: FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, short-term investments,
service fees and premiums receivable, accounts payable, notes payable, and
due to provider organizations approximates fair value because of the short
maturity of these instruments.
NOTE 8: RETIREMENT PLAN
The Company has a qualified 401(k) Employee Savings and Profit Sharing Plan
covering all full-time employees. Under The Plan, employees can defer up to
12% of their eligible compensation. The Company matches 50% of each
employee's contribution, up to 6% of the employee's eligible salary. Employees
become fully vested in employee and employer contributions when the
contributions are made. The Company also has the option to make an additional
profit sharing contribution to The Plan. Employer contributions to The Plan for
the years ended December 31, 2000 and 1999, amounted to $161,110 and
$141,117, respectively.
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NOTE 9: ACQUISITION OF SOUND HEALTH
On December 1, 1998, the Company purchased all of the assets of Sound Health
PPO business for a purchase price of $3,500,000 in the form of a note payable
to be paid with interest at a rate of 6% over 18 months. The assets acquired
consist of provider contracts $(1,680,000), trade name $(140,000), a
noncompetition agreement $(840,000), computer equipment and software licenses
$(140,000). A contingent payment of $668,000 based on the revenues received
by the Company from the acquired business during the 12 months after the
closing date has been paid as the revenue targets were met. This acquisition
was accounted for using the purchase method. Results of operations are included
in the financial statements of the Company from the effective date of the
acquisition December 1, 1998.
NOTE 10: NOTE PAYABLE
In 2000, the Company paid off a note payable related to the acquisition of Sound
Health PPO business (Note 9). At December 31, 1999, the amount outstanding
on the note was $1,612,004. The note balance was payable in six equal monthly
installments, plus interest at 6%.
The Company has a note payable at December 31, 2000 in the amount of
$1,000,000 bearing interest at 9.86%. Principal payments for the years 2001,
2002, and 2003 are $301,829, $331,791, and $366,380, respectively.
NOTE 11: RESERVE FOR UNPAID CLAIMS AND ADJUSTMENT EXPENSES
Activity in the reserve for unpaid claims and unpaid claims processing expenses
is summarized as follows for the years ended December 31:
2000 1999
Balance, beginning of year $ 3,210,613 $ 2,102,364
Incurred related to:
Current year 32,350,518 12,042,521
Prior year 416,921 (848,750)
----------- -----------
Total incurred 32,767,439 11,193,771
Paid related to:
Current year 22,231,079 8,831,908
Prior year 3,565,378 1,253,614
----------- -----------
Total paid 25,796,457 10,085,522
----------- -----------
Balance, end of year $10,181,595 $ 3,210,613
=========== ===========
As a result of changes in the estimates of insured events in the prior year for
2000, the provision for unpaid claims and claims adjustment expense for
1999 increased because of higher than expected losses. As a result of changes
in the estimates of insured events in 1999, and the recovery of duplicate
claims payments of approximately $700,000 in 1999, the provision for
unpaid claims and claims adjustment expenses decreased.
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During 2000, 1999, and 1998, the Company had reinsurance stop loss agreements in
place for claims which the Company is at risk. The reinsurer pays a majority of
the claim for annual aggregate claims for an individual that have a floor of
$75,000-$100,000 and a ceiling of $2,000,000.
NOTE 12: REGULATORY MATTERS
The Plan is subject to regulation by the Office of the Insurance Commissioner
(OIC) in the State of Washington including the requirement to follow
statutory accounting principles (SAP), which differ from accounting principles
generally accepted in the United States of America (GAAP). The OIC also
requires that certain levels of capital be maintained. The State of Washington
adopted a risk-based capital (RBC) calculation for determining statutory
capital requirements, effective for the year ended December 31, 1998. As of
December 31, 2000, The Plan's RBC was $408,271 less than the required amount.
This deficiency was cured with a $500,000 capital contribution in March, 2001
by the Company.
The primary differences in reporting between SAP and GAAP through
December 31, 2000 result from goodwill, accounts receivables over 90 days
past due, provider settlement receivables, and prepaid expenses being treated
as non-admitted assets under SAP.
The Plan's statutory basis shareholders' equity as filed in the OIC statements
was $5,542,880 and $6,475,262 as of December 31, 2000 and 1999, respectively.
Statutory basis net loss as filed in the OIC statements was $3,572,113 and
$155,271 for the years ended December 31, 2000 and 1999, respectively.
The Plan is subject to regulations that limit dividend payments and regulate
other intercompany transactions. At December 31, 2000 and 1999, the Plan
had negative statutory basis earned surplus and therefore must seek regulatory
approval prior to any such payment. No dividends were paid by the Plan
during 2000 or 1999.
The National Association of Insurance Commissioner's ("NAIC") has developed
the codification of statutory accounting practices which are effective for
health related organizations in January 2001. The state of Washington has
adopted the codification. However, state law supersedes the codification when
differences exist between the two. Management has estimated that the adoption
of the codification on the December 31, 2000 would reduce The Plan's statutory
net worth by approximately $562,000, primarily as a result of the elimination of
amounts receivable from The Company.
The Plan intends to manage the impact of codification in 2001 by minimizing
the amount receivable from The Company. In addition, the NAIC is evaluating
changing the codification to permit provider settlement receivables as
admitted assets, which would increase admitted assets of The Plan on
January 1, 2001 by $2,200,000. If the change is adopted, the Provider
Settlement Receivable of $2,200,000 will be admitted assets under
codification. If the change is not adopted, management has alternate
strategies to address the temporary impact on the Company's statutory surplus.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with accountants on accounting and financial
disclosure.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT.
The executive officers and directors of First Choice are as follows:
Name Age Position
Gary R. Gannaway 54 President & Chief Executive
Officer
Kenneth Hamm 42 Sr. Vice President -Chief Financial Officer
Ross D. Heyl 47 Sr. Vice President & Chief Marketing Officer
Julie Keeffe 43 Sr. Vice President-Medical Mgmt & Member Services
Ze'ev Young, M.D. 56 Sr. Vice President-Chief Medical Officer Services
John Koster, M.D. 51 Director (II)
Paul M. Elliott 60 Director (II)
Andrew Fallat 53 Director (I)
Kenneth D. Graham 53 Director (III)
Phillip J. Haas 52 Director (II)
William F. Johnston, M.D. 55 Director (I)
Garman E. Lutz 55 Director (I)
William J. MacDonald, M.D. 56 Director (I)
R. Dean Martz, M.D. 43 Director (II)
Barbara L. Mauk 55 Director (III)
Richard A. McGee, M.D. 55 Director (III)
Richard H. Peterson 58 Director (III)
Paul G. Ramsey, M.D. 51 Director (III)
Richard E. Rust, M.D. 74 Director (III)
Richard Stubbs, M.D., M.B.A. 55 Director (II)
Clyde D. Walker 45 Director (I)
__________________
(I) Term Expires in 2001.
(II) Term Expires in 2002.
(III) Term Expires in 2003.
Gary Gannaway joined First Choice Health Network as President and CEO in
January 1996. He has over 25 years of experience in managing and marketing
HMOs, PPO's, and other managed care programs across the country.
He has worked as a Health Plan General Manager, and as a Regional Vice
President for national carriers, including Aetna and CIGNA, and as CEO and
COO for physician and hospital-sponsored managed care programs at the
regional and national level.
Gary is very active on community boards and serves professionally on the
Boards of both the American Association of Health Plans and the Association of
Washington Health Plans.
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Gary earned his Bachelor's degree in both Political Science and German at the
University of California at Santa Barbara. As an undergraduate, he also studied
at Georg August University in Gottingen, Germany. He earned his master's of
Education degree from the State University of New York where he also
completed his course work and comprehensive examinations for a Ph.D. in
Management.
Ken Hamm, Senior Vice President and Chief Financial Officer, joined First
Choice Health Network in July, 2000. He has spent most of his career in the
Managed Care industry. Prior to coming to Washington State in 1994, Ken was
Director of Finance in the Group Market segment at Wellpoint Health Networks
in Southern California. In Washington, Ken served in various roles at Premera
Blue Cross and Subsidiaries from 1994 to 1999 including Vice President of
Finance and Healthcare Economics, as well as a stint in Network Development.
For the past year, Ken has been the interim Chief Financial Officer at Medica
Healthplans in Minnesota, a one million member regional HMO. Ken earned a
Bachelors degree in Finance from California State University at Los Angeles in
1985 and is a CPA.
Ross Heyl, Senior Vice President and Chief Marketing Officer, joined First
Choice Health in 1985. Mr. Heyl is a licensed health insurance agent in the
state of Washington. From 1980 to 1982, he was with Penn Mutual Life Insurance
Company in San Francisco and Seattle. From 1982 to 1985, he was an account
executive for Rollins Burdick Hunter of Washington.
Julie A. Keeffe, Senior Vice President of Medical Management and Member
Services, joined First Choice Health in May 1997. Julie has worked in health
care since 1979. Prior to coming to First Choice Health, she provided health
care management consulting services for Milliman and Robertson, Inc, where
she implemented successful strategies for the medical management systems of
health plans and delivery systems. Earlier, Julie was Director of Utilization
and Quality Management for the Virginia Mason Health Plan for nine years. Her
background includes indemnity, PPO, and HMO utilization management and
analysis. Her clinical experience includes several years of inpatient,
outpatient, and emergency care nursing. Julie's expertise is in designing
medical management that meets the needs of the provider as well as the payer.
Her areas of interest include utilization and quality management, referral
management, medical claims review and medical coverage policy development.
Julie received her nursing degree from Yakima Valley School of Nursing in 1979.
Dr. Ze'ev Young joined First Choice Health as the Chief Medical Officer and
Senior Vice President in January 2001. He is responsible for the oversight of
medical management and quality improvement. He also participates actively in
strategic planning, network development, and public relations. Dr. Young
interfaces with the local practitioner community to ensure that high-quality,
cost-effective health care services are available to First Choice Health
members.
Dr. Young brings significant managed care experience to First Choice Health.
Just prior to joining First Choice Health, Dr. Young spent nearly three years as
the Northwest Regional Medical Director for UnitedHealthcare. While at
UnitedHealthcare, Dr. Young was instrumental in successfully introducing local
providers to an innovative, practitioner-friendly, and member-centric approach
to health care delivery. Prior to joining UnitedHealthcare, Dr. Young spent
five years at Regence Blue Shield serving as the Boeing Division Medical
Director, and was also responsible for corporate medical policy.
Dr. Young's undergraduate degree is from the University of California and he is
a graduate of the Albert Einstein College of Medicine in New York. In 1978, he
was elected to the Alpha Omega Alpha Honor Medical Society. Dr. Young
completed his Family Practice Residency at Providence Medical Center in
Seattle and is a Board Certified family physician. He has over 20 years
practice experience and continues to maintain a small private practice.
Dr. Young is also a Clinical Assistant Professor of Family Medicine at the
University of Washington School of Medicine.
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John Koster, M.D.
John Koster, M.D. joined Sisters of Providence Health System in April 1997 as
vice president of Clinical and Physician Services. In May of 1998 he was
promoted to senior vice president in the Office of the CEO and chief executive
of the Washington region. The Sisters of Providence Health System is
comprised of 20 hospitals, 9 freestanding long-term care facilities, physician
practices, managed care plans and other health and social services in the states
of Alaska, Washington, Oregon and California.
Prior to joining Sisters of Providence, Dr. Koster was senior vice president of
Targeted Member Services at VHA, a nationwide network of leading
community-owned healthcare organizations and physicians. He focused on
business development and educational needs of specific segments such as
physician group practices and HMOs. He has served as an advisor to physicians
and management staff in healthcare organizations in every part of the country.
Dr. Koster also served as vice president of Presbyterian Healthcare Services
in Albuquerque, New Mexico, an integrated health care financing and delivery
system serving 14 communities in New Mexico and Colorado. Dr. Koster was
senior vice president of Rocky Mountain Healthcare Corporation, which
managed BCBS plans of Colorado, New Mexico and Nevada. Board certified in
Internal medicine, Dr. Koster was in private practice with a multispecialty
group of primary care physicians from 1980 until 1988.
Dr. Koster graduated from New Mexico Tech with a bachelor's degree in
biology. He earned his medical degree from the University of New Mexico. His
postgraduate studies include Internship at Providence Hospital in Portland,
Oregon and a residency in Internal medicine at the University of New Mexico
Medical School.
Paul M. Elliott, CPA
Mr. Elliott, recently retired, was formerly Senior Vice President of Finance
and Operations for the Alpac Corporation. From August 1969 to August 1981, he
was Vice President-Controller for Airborne Freight Corporation in Seattle. He
is a member of the Board of Visitors for Central Washington University, on the
Board of the Boys & Girls Clubs of South Snohomish County and a member of
Rotary Club International.
Andrew Fallat, FACHE
Mr. Fallat has served as the Chief Executive Officer of Evergreen Healthcare
since 1981. Evergreen Healthcare is a provider of a broad range of services in
King and Snohomish Counties including a 149 bed acute care hospital, 17 bed
skilled nursing facility, a free standing surgical center, Puget Sound's largest
and most comprehensive hospital based hospice and home health program, mobile
paramedic services and a broad range of other community-based health
assistance programs. He is board member on the Foundation for Health Care
Quality and is a Fellow in the American College of Healthcare Executives.
Mr. Fallat holds a Masters degree in Healthcare Administration from George
Washington University and a B.S. in Zoology from Duke University.
Kenneth D. Graham, FACHE
Mr. Graham has served as President and CEO at Overlake Hospital Medical
Center since 1994, and has overseen significant changes in the organization.
The hospital has: developed a new facilities master plan; introduced operational
controls that have significantly improved hospital efficiency; established
contracts with more than 25 managed care companies and implemented new
programs like an adolescent psychiatric care program; a Multiple Sclerosis
Center; a Level III Emergency Center and a Women's Hospital. He serves as
Chair of the Overlake Venture Center and also the Chair of Dr. Goodwell.com;
an Internet based virtual clinic service.
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Mr. Graham also currently serves as the voluntary Executive Director of
RotaCare International; an organization dedicated to providing free clinics in
association with local Rotary clubs. RotaCare serves homeless, migrant
workers, new immigrants and the uninsured or underinsured.
Mr. Graham is committed to community involvement in local, regional and
national organizations including the Bellevue Chamber of Commerce and the
Rotary Club of Bellevue. He previously served as a member or advisor of more
than a dozen hospitals or health care organization boards.
He earned a B.S. degree in Public Health and a Masters degree in Public Health
Hospital Administration, both from UCLA. He is a Fellow in the American
College of Health Care Executives and is the College's Regent for the State of
Washington.
Phillip J. Haas
Mr. Haas is Administrator-Managed Care of Valley Medical Center, a 304-bed
acute care public district hospital, with responsibility for negotiating,
implementing, and administering contracts and joint ventures linking payers
with the hospital, its clinic network, individual practice associations, and
medical staff. Since joining Valley Medical Center in November 1993, he
managed the development of a clinic network including seven primary care
clinics, a family practice residency clinic, a behavioral health clinic, and two
occupational health clinics.
From 1988 through 1993, Mr. Haas was Executive Director of Virginia Mason
Health Plan, an HMO serving over 40,000 members. From 1985 to 1988, he
was President of First Choice Health Network, a preferred provider organization.
His prior experiences include serving as Senior Vice President of the Illinois
Hospital Association, president of a hospital shared services organization, and
administrative director of a medical school-based prepaid group practice plan.
He is a Fellow of the American College of Healthcare Executives and a Director
of First Choice Health Network, Inc. He received a M.B.A. degree from the
University of Chicago and a B.A. degree from Northwestern University in
Evanston, Illinois.
William F. Johnston, M.D., F.A.C.E.P.
Dr. Johnston is the Medical Director of Emergency Services at Northwest
Hospital. Besides the supervision of the physicians who deliver emergency
medical care at the hospital, his position provides an interface between
administration, nursing, the medical staff and other hospital departments to
help support the smooth delivery of emergency medical services at the hospital.
He serves on the Executive Committee of the hospital as Chairman of the
Department of Emergency Medicine. Bill also practices as an emergency
physician and helps teach Advanced Cardiac Life Support and Advanced
Trauma Life Support Courses. He received his M.D., M.B.A. and M.S.E.E.
(Bioengineering) degrees from the University of Washington.
Garman E. Lutz, CPA
Mr. Lutz is Senior Vice President of Finance and Chief Financial Officer for
Empire Health Services in Spokane, Washington. Empire operates Deaconess
Medical Center, Valley Hospital and Medical Center, St. Luke's Extended Care
Center, Family Home Care and First Care Urgent Care Centers. He also serves
in various positions for EHS' joint venture projects including Inland Northwest
Health Services, Inland Empire Hospital Shares Services and the Spokane
PHCO. Mr. Lutz, prior to his appointment at Empire Health Services, was a
partner in a local Spokane CPA firm for over eighteen years. His practice
experience concentrated in a management advisory service, audit and financial
planning. Mr. Lutz served as Chairman of the Valley Hospital & Medical
Center Advisory Board from its inception in 1985 until August of 1990. Prior
to his appointment as an officer of EHS, Mr. Lutz served on the EHS Board of
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Directors from 1988 through 1990. Mr. Lutz is active in many community
organizations and currently is a board member of the Spokane Area Chamber of
Commerce, Eastern Washington Museum Foundation, Inland Empire Genetics
Clinic, Leadership Spokane and the Rockwood Retirement Committee. He is a
member of the AICPA, Washington Society of CPA's , and Healthcare Financial
Management Association.
William J. MacDonald, M.D.
Dr. Bill MacDonald attended Brown University, received his medical degree
from the University of Vermont, and completed his residency at the University
of Pennsylvania. He earned a Fellowship at the University of California, San
Diego, and is board certified in Internal Medicine and Cardiovascular Disease.
He joined The Everett Clinic in 1976, and was elected to the Board of Directors
in 1987. Dr. MacDonald's interest in health care administration has been
furthered by the American College of Physician Executives, and by pleasant
association with Mr. Richard Cooper, CEO of The Everett Clinic. Dr.
MacDonald has served as Board Chair and President of The Everett Clinic for
the last five years. He has a half-time cardiology practice, providing reality
testing in both the hospital and office environments. Special interests include
learning about the future of American medicine, and effective organizational
governance.
R. Dean Martz, M.D.
Dr. Martz is a practicing neurosurgeon in Spokane since 1990. He is an active
staff member of both Sacred Heart Medical and Deaconess Medical Centers in
Spokane. He is a member of the American Medical Association, American
Association of Neurological Surgeons, and was certified by the American Board
of Neurological Surgeons in 1993. He received his medical degree from Case
Western Reserve University in Cleveland, Ohio. He trained neurological
surgery at the University of Michigan Hospitals in Ann Arbor.
Barbara L. Mauk
Ms. Mauk is the Director, Human Resources for Valley Medical Center, Renton,
Washington. Previously, she was the Managing Partner of ClearPoint, an
employee benefits brokerage and consulting firm. She has previously served as
the Chief Operating Officer of The Reppond Company; Vice President Human
Resources for KIRO Broadcasting, Inc.; and Personnel Director for Northwest
Hospital. She is active with Bellevue Rotary, the American Compensation
Association, Society of Human Resource Management, and the Employee
Benefits Planning Association.
Richard A. McGee, M.D., F.A.C.P.
Dr. McGee has a full-time private medical oncology practice and is President of
Washington Cancer Centers, the largest medical oncology group in Washington
State. He was previously the Medical Director of Stevens Healthcare, a Public
Hospital District, and is a consultant in Medical Staff Affairs to other area
hospitals. He is a diplomat of the American Board of Internal Medicine as well
as the specialty Boards of both the American Board of Hematology and the
American Board of Medical Oncology. He is President of the Washington State
Medical Oncology Society. He is Chairman of the Quality Assurance
Committee of Stevens Health Network, a local PHO. He is a Clinical Professor
of Medicine at the University of Washington and is a Fellow of the American
College of Physicians. He is a member of the Clinical Practice Committee of the
American Society of Clinical Oncology and Assistant Editor for Clinical
Practice on their Web site. In the past, he has served as Chief of the Medical
Staff and Chairman of several hospital committees. He was Vice-Chairman of
the Board of Directors of Snohomish County Physicians Corporation, a Blue
Shield company. His undergraduate studies were at John Carroll University, his
graduate studies at Johns Hopkins University Medical School and his post
graduate work was done at the University of Washington Hospital and the
National Institutes of Health in Bethesda, Maryland.
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Richard H. Peterson
Mr. Peterson is President and Chief Executive Officer of Swedish Health
Services, a non-profit organization comprised of a 163-bed community hospital
on the Ballard campus and a 697-bed tertiary care hospital on the First Hill
campus. Mr. Peterson previously served as President and Chief Executive
Officer of Fairview Riverside Medical Center in Minneapolis, Minnesota. In all,
his career in health system administration has spanned more than 25 years. A
native of Minnesota, Mr. Peterson holds a master's degree in hospital and health
care administration from the University of Minnesota and a B.A. from
Macalester College in St. Paul, Minnesota.
Paul G. Ramsey, M.D.
Dr. Paul G. Ramsey is the Vice President for Medical Affairs and Dean of the
School of Medicine at the University of Washington. Dr. Ramsey also practices
part-time and maintains his hospital staff privileges.
Dr. Ramsey graduated from Harvard College in 1971 with honors in
Biochemistry and received his M.D. from Harvard Medical School in 1975.
Following completion of residency training in Internal Medicine at
Massachusetts General Hospital, he came to the University of Washington as a
Senior Fellow in Infectious Disease in 1978. Dr. Ramsey served as Chief
Medical Resident at the then University Hospital (now University of
Washington Medical Center) in 1980-1981. He joined the faculty in the
Department of Medicine in 1980 as an Acting Instructor and was appointed as an
Assistant Professor in 1982. Dr. Ramsey was promoted to Associate Professor in
1986 and to Professor of Medicine in 1991. He served as Coordinator of Student
Teaching for the Department of Medicine from 1982-1990 and was Associate
Chair of the Department from 1988-1990. He was appointed as Chair of the
Department of Medicine in 1992 and became the first holder of the Robert G.
Petersdorf Endowed Chair in Medicine in 1995. He served as Chair of the
Department of Medicine until June 1997 when he was appointed Vice President
for Medical Affairs and Dean of the School of Medicine. Dr. Ramsey has
received the Distinguished Teacher Award from the University of Washington
School of Medicine's graduating class three times (in 1984, 1986, and 1987) and
the Margaret Anderson Award from the University of Washington graduating
class of 1989. The latter Award recognizes exceptional support of medical
students.
Dr. Ramsey's research has focused on the development of methods to assess
physicians' clinical competence. From 1983-1986, he conducted the first large-
scale study of the relationship of certification of physicians by the American
Board of Internal Medicine to performance in practice. He has been the Principal
Investigator on multiple research grants related to assessment of physicians'
clinical skills and served as a Henry J. Kaiser Family Foundation Faculty
Scholar in General Internal Medicine for five years. Dr. Ramsey received the
John P. Hubbard Award from the National Board of Medical Examiners in 1999
in recognition of his research contributions in the field of evaluation. He has
served on multiple national committees and is a member of multiple
organizations, including the American Association for the Advancement of
Science, the American Federation for Medical Research and the Association of
American Physicians.
Richard E. Rust, M.D.
Dr. Rust is a retired family practitioner. Dr. Rust has served on the First
Choice Health Network Board of Directors since 1985. Additional activities
have included serving as Trustee of the Washington Academy of Family
Physicians; Trustee, King County Medical Society; Trustee and Vice Chairman of
King County Medical Blue Shield; and President of King County Academy of
Family Physicians. He was Chief of Medical Staff of Northwest Hospital
in 1965.
Richard Stubbs, M.D., M.B.A
Dr. Stubbs is the Vice President, Medical Affairs and the senior physician
manager in the MultiCare Health System with direct responsibility for medical
staff relationships and the departments of Medical Staff Services, Family
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Practice Residency Education, Quality Management, Medical Records,
Transcription, Pharmacy, Cancer Services, Perinatal and Neonatal Services. Dr.
Stubbs' position represents the key link between MultiCare Health Systems and
the physician community in the Pierce and South King County areas. Dr. Stubbs
previously served as Medical Director, McKay-Dee Hospital Center in Ogden,
Utah, Medical Director for Blue Cross and Blue Shield of Virginia, in
Richmond, Virginia, and Medical Director, IPA and Group Plans, FHP in
Southern California. Dr. Stubbs received his undergraduate and medical degrees
from the University of Arkansas and his M.B.A. from the University of Phoenix.
He is Fellow of the American Board of Family Practice and a Fellow of the
American College of Physician Executives where he currently serves on the
Council of Fellows. He teaches Medical Ethics for the Tulane University
Masters of Medical Management program.
Clyde D. Walker
Mr. Walker recently was the Vice President, Human Resources of PRIMEX
Aerospace and Electronics Division and PRIMEX Aerospace Company in
Redmond, WA. Mr. Walker has over ten years experience in the human
resources field and over twenty years of business administration and
management experience. Since 1977, Mr. Walker has held positions of
increasing levels of responsibility in areas including subcontract
administration, contract administration, pricing and human resources. He
received an M.B.A. degree from City University in Seattle and a B.A. degree in
business administration from the University of Washington.
Mr. Walker recently served as Chairman of the Board of Directors of both Big
Brothers and Big Sisters of King County and led both boards through the
combination of the two independent agencies. He remains on the resultant
combined Board and also serves on the Board of Directors of First Choice
Health Network.
The Company's Board of Directors proposed an amendment of the Bylaws to
modify the membership of the Board, and on June 22, 2000, the shareholders
approved the changes unanimously.
Classification of Directors. - The management of this corporation shall be
vested in a Board of Directors. Effective from June 22, 2000, the Board of
Directors shall consist of seventeen individuals: Seven (7) directors (the
"Class A Directors") shall be physicians representing Class A shareholders.
Seven (7) directors (the "Class B Directors") shall represent Class B
shareholders and any public hospitals that have made capital contributions to
the corporation ("participating hospitals"). Three (3) directors (the "Class
C Directors") shall represent employers other than health care providers and/or
be consumers of health care services.
The Board shall be divided into three categories as follows:
Category I: Two Class A Directors, two Class B Directors, and one Class C Director.
Category II: Two Class A Directors, two Class B Directors, and one Class C Director.
Category III: Two Class A Directors, two Class B Directors, and one Class C Director.
Directors may be removed, with or without cause, by an affirmative vote of the
holders of at least 75% of the outstanding shares of each class of Common
Stock, and the number, classification, qualifications and terms of directors may
not be altered except by such class voting.
A quorum of nine (9) directors is generally required to transact business at a
meeting of the Board, except that a quorum of thirteen (13) directors is
required for determination of the admission and expulsion of shareholders and
"members" (i.e., PPO physicians), the fees charged for and/or paid to health
care providers, any issues reviewed by the Board regarding the limitation or
termination of health care provider contracts, and any merger or sale of the
corporation or any subsidiary.
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ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation earned by the
Company's President and Chief Executive Officer and each other executive
officer who earned in excess of $100,000 in each of the last three fiscal years:
Annual Compensation All other
Name and Principal Position Year Salary Bonus Compensation
Gary Gannaway (1) 00 $268,887 $138,915 $ 8,646
President and CEO 99 $238,218 $100,000 $ 7,484
98 $226,518 $126,000 -
Kenneth Hamm 00 $96,154 $15,194
Senior Vice President, Finance
Ross Heyl 00 $116,970 $25,200 $ 5,000
Senior Vice President, Marketing 99 $112,879 $15,930 $ 5,208
98 $ 95,108 $18,000 -
Julie Keeffe, R.N. 00 $145,600 $33,250 $ 600
Senior Vice President, Medical 99 $143,205 $11,820 $ 475
Management & Member Services 98 $117,500 $ 5,300 -
Joe Leinonen, M.D. 99 $195,539 $12,610 $ 6,250
Chief Medical Officer 98 $139,500 - -
David Peel 99 $143,637 $22,250 $ 6,250
Senior Vice President, Finance 98 $122,497 $22,900 -
Barbara L. Mauk, the Chairman of the Board, has been compensated $500 per
month (inclusive of attendance at regular Board meeting) and an additional $150
per hour for committee meetings since July 1, 1994. All other directors have
received $75 per hour for attendance at Board and committee meetings since
February 1, 1995. The Chairman and directors compensation remained the same
through December 31, 2000.
EMPLOYMENT AGREEMENTS
Effective January 1, 2000, Gary R. Gannaway entered into a three year
employment agreement as the Company's President and Chief Executive Officer.
Under his employment agreement with First Choice, Mr. Gannaway will receive
an annual base salary of $270,000 for 2000, subject to a 5% annual increase.
Mr. Gannaway will be eligible to receive a bonus of up to 50% of base pay
according to performance achieved against mutually determined targets. The
amount of the annual bonus shall be determined and awarded by the Board of
Directors following acceptance each year by the Board of the independent
auditor's report on the financial statements.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 2000, information with respect
to the beneficial ownership of the Company's Class A Common Stock and Class
B Common Stock by (i) each person known by the Company to own beneficially
more than five percent of either the Class A Common Stock or Class B Common
Stock, (ii) each of the persons named in the Summary Compensation Table set
forth in "Item 10. Executive Compensation" of this Part I of this Annual
Report, (iii) each director, and (iv) all directors and executive officers as a
group, together with their percentage ownership of each such class of Common
Stock.
Shares Owned Percent of
Name Class A Class B Class A Class B
- ------- ------- ------- ------- -------
Northwest Hospital - 5,800 - 14.3 %
1550 North 155th
Seattle, WA 98133
Providence-General - 5,800 - 14.3 %
14th and Colby
Everett, WA 98201
Good Samaritan - 5,800 - 14.3 %
Community Healthcare
407-14th Avenue SE
Puyallup, WA 98371
MultiCare Medical Center - 5,800 - 14.3 %
409 South J
Tacoma, WA 98405
Empire Health Services - 5,800 - 14.3 %
80 Fifth Avenue
Spokane, WA 99210
Swedish Medical Center - 5,800 - 14.3 %
747 Broadway
Seattle, WA 98114
Overlake Hospital Medical Center - 5,800 - 14.3 %
1035 116th Avenue NE
Bellevue, WA 98004
Paul M. Elliott - - - -
Andrew Fallat - - - -
Kenneth D. Graham - - - -
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Shares Owned Percent of
Name Class A Class B Class A Class B
- ------- ------- ------- ------- -------
Phillip J. Haas - - - -
William F. Johnston, M.D. 1 - * -
John Koster, M.D. - - - -
Garman Lutz - - - -
William J. MacDonald, M.D. - - - -
R. Dean Martz, M.D 1 - * -
Barbara L. Mauk - - - -
Richard A. McGee, M.D. 1 - * -
Richard H. Peterson - - - -
Paul G. Ramsey, M.D. - - - -
Richard E. Rust, M.D. 1 - * -
Richard Stubbs, M.D., M.B.A. - - - -
Clyde D. Walker - - - -
All directors and executive
officers as a group (4 persons) 4 40,600 * 100%
Four additional hospitals in the state of Washington (Evergreen Hospital
Medical Center, 12040 Northeast 128th Street, Kirkland, WA 98034, Valley
Medical Center, 400 S. 43rd Street, Renton WA 98055, Stevens Memorial
Hospital, 21601 76th Avenue, Edmonds, WA 98026, and University of
Washington Medical Center, 1959 Northeast Pacific Street, Seattle, WA 98195)
are not shareholders of the Company, but have made capital contributions to the
Company in consideration of contractual rights substantially similar to the
rights to which each holder of Class B Common Stock is entitled, including
liquidation and dividend rights, but excluding voting rights. See "Item 8.
Description of Securities."
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 20, 1999, First Choice Health Network, Inc. executed an
agreement with University of Washington Academic Medical Center (UWMC)
to become a participant in the administration, operations and any incentives
bestowed upon any shareholders in First Choice Health Network effective
January 1, 2000. First Choice offers and operates a preferred provider
organization and a managed care delivery system for cost-effective, quality
health care benefits, and for comprehensive health care claims processing and
administration. University of Washington Academic Medical Center has agreed
to pay the affiliation fee of $2,520,000, payable $1,260,000 upon execution of
the Agreement and the remaining $1,260,000 will be paid in three equal
payments of $420,000 due annually for three years plus interest at five percent
(5%). UWMC does not become a shareholder or member of the Network.
UWMC shall participate in any incentive or reward program established by the
Network as if UWMC owned 5,800 shares of class B common stock.
Dividends, distributions, and liquidation of the Network are also determined as
if UWMC owned 5,800 shares of class B stock.
In December 1996, Overlake Hospital Medical Center, a Washington non-profit
corporation, purchased 5,800 shares of the Company's Class B Common Stock
at a purchase price of $258.62 per share, or an aggregate of $1,500,000. On
December 19, 1996, $1,000,000 was received by the Company and accordance
with the terms of the contract $250,000 is to be paid in December 1997 and
$250,000 in December 1998. The Company received the final payment in
December 1998.
Pursuant to their respective health care facility service contracts with The
Network, the holders of the Class B Common Stock and the Hospital
Participants paid the following aggregate fee to First Choice in 1984:
Northwest Hospital: $81,159; Providence-General: $150,174; Good Samaritan
Community Healthcare: $136,808; MultiCare Medical Center: $207,271;
Empire Health Services: $138,525; Evergreen General Hospital: $100,997;
Valley Medical Center: $134,144; and Stevens Memorial Hospital: $88,093;
Swedish Hospital: $265,861.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits
2.1 Copy of Registrant's Restated Articles of Incorporation.*
2.2 Copy of Registrant's By-Laws.*
2.3 Copy of Contribution, Merger and Asset Purchase Agreement
dated June 2, 1997
2.4 Purchase agreement dated as November 12, 1998, among First Choice
Health Network, Inc. And Providence Plan Partners.
10.1 Form of Agreement between Registrant and Physician participating
in PPO. **
10.2 Form of Health Care Facility Service Contract between Registrant and
Hospital participating in PPO.*
10.2a Copy of Agreements dated May 1, 1985, and May 17, 1993, respectively,
with Northwest Hospital.*
10.2b Copy of Agreement dated May 1, 1985, with Providence-General (formerly
General Hospital of Everett).*
10.2c Copy of Agreement dated May 1, 1985, and amendment dated July 1, 1993,
with Good Samaritan Community Hospital.*
10.2d Copy of Agreement dated March 10, 1986, with MultiCare Medical Center.*
10.2e Copy of Addendum to Agreement dated April 30, 1992, with
Empire Health Services.*
10.2f Copy of Agreement dated September 6, 1985, and addendum
dated June 17, 1992, with Evergreen General Hospital .*
10.2g Copy of Agreement dated November 19, 1993, with General
Hospital of Everett.*
10.2h Copy of Agreement dated December 9, 1991, and addendum dated
November 1, 1992 with Stevens Memorial Hospital .*
10.3 Form of Agreement between Registrant and Health Care
Provider other than Hospitals and Physicians participating in PPO.*
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10.4 Form of Agreement between Registrant and Third Party Administrator.*
10.5 Form of Agreement between Registrant and Insurance Company .*
10.6 Copy of Participation Agreement dated March 27, 1985, between
Registrant and King County Public Hospital District No.2
(Evergreen General Hospital).*
10.7 Copy of Participation Agreement dated March 26, 1985, between
Registrant and Valley Medical Center.*
10.8 Copy of Participation Agreement dated December 19, 1991, between
Registrant and Public Hospital District No.2 of Snohomish County
(Stevens Memorial Hospital) and related Promissory Note in the
aggregate principal amount of $ 566,000.*
10.9a Copy of Promissory Note dated June 10, 1991, in aggregate principal
amount of $453,000 issued by Empire Health Services.*
10.9b Copy of Subscription Agreement dated July 25, 1991, between
Registrant and Empire Health Services.*
10.9c Copy of Stock Pledge Agreement dated July 25, 1991, between
Registrant and Empire Health Services.*
10.10 Copy of Settlement Agreement effective December 16, 1993, among
the Attorney General of the State of Washington, the Sisters of
Providence in Washington and General Hospital Medical Center .*
10.11 Copy of Employment Agreement dated September 1, 1993, as amended,
between Registrant and Clayton S. Field.*
10.12 Copy of Employment Agreement dated January 17, 1994, between
Registrant and James G. Stumpfel, and related Promissory Note dated
March 18, 1994, in the aggregate principal amount of $18,500.*
10.13a Copy of Lease dated December 5, 1988, between Registrant and
Martin Selig.*
10.13b Copy of Lease Amendments date April 5, 1990, May 29, 1992,
December 2, 1992, and December 20, 1993, respectively, each
between Registrant and Martin Selig.*
10.14 Copy of $300,000 Line of Credit dated June 13, 1991, from
Seafirst Bank.*
10.15 Copy of acquisition agreement dated February 1, 1995, between
Registrant and Pacific Health Systems, Inc.
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10.16 Copy of Employment Agreement dated March 1, 1994, between
Registrant and Randolph R. Barker.**
10.17 Copy of Employment Agreement dated October 19, 1995 between
Registrant and Gary R. Gannaway.**
10.18 Copy of Registrant's Amended By-Laws dated June 29, 1995.
10.19 Copy of Subscription Agreement dated July 16, 1996, between
Registrant and Swedish Medical Center.
10.20 Copy of Agreement dated April 22, 1996 between Registrant and
Olympic Health Management Systems, Inc. Production Line
Management - Medicare Select.
10.20a Copy of Agreement dated April 22, 1996 between Registrant and
Olympic Health Management Systems, Inc. for Administrative
Agreement.
10.20b Copy of Agreement dated April 22, 1996 between Registrant and
Olympic Health Management Systems, Inc. for Independent Agent
Agreement.
10.20c Copy of Agreement dated April 22, 1996 between Registrant and
Olympic Health Management Systems, Inc. for Supervising Agent
Addendum to Independent Agent Agreement.
10.21 Copy of Subscription Agreement dated July 16,1996, between
Registrant and Overlake Hospital Medical Center.
10.22 Copy of Employment Agreement dated March 1, 1994 between
Registrant and Mr. Ross D. Heyl.**
10.23 Copy of Participation Agreement dated December 20, 1999, between
Registrant and University of Washington Medical Center and related
Promissory Note in the aggregate principal amount of $ 1,260,000.*
16 Letter of change in certifying accountant (b)
* Filed as same numbered Exhibit in Registrant's Registration Statement
on Form 10-SB.
** Denotes a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Annual Report on Form 10K-SB.
(b) Reports on Form 8-K.
16 Report dated December 30, 1999. Participation Agreement of University
of Washington Medical Center.
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SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on the 2nd day of April 2001.
FIRST CHOICE HEALTH NETWORK, INC.
By: /s/KENNETH HAMM
--------------------------------------
KENNETH HAMM
Chief Financial Officer
In accordance with the Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated on April 2, 2001.
Signature Title Date
- --------- ----- ----
/ s / GARY R. GANNAWAY Principal Executive Officer April 2, 2001
- ----------------------------
GARY R. GANNAWAY
/ s / KENNETH HAMM Principal Financial Officer April 2, 2001
- ----------------------------
KENNETH HAMM
/ s / FORREST EHLINGER Controller April 2, 2001
- ----------------------------
FORREST EHLINGER
/ s / PAUL M. ELLIOTT Director April 2, 2001
- ----------------------------
PAUL M. ELLIOTT
/ s / ANDREW FALLAT Director April 2, 2001
- ----------------------------
ANDREW FALLAT
/ s / KENNETH D. GRAHAM Director April 2, 2001
- ----------------------------
KENNETH D. GRAHAM
/ s / PHILLIP J. HAAS Director April 2, 2001
- ----------------------------
PHILLIP J. HAAS
/ s / WILLIAM F. JOHNSTON, M.D. Director April 2, 2001
- ----------------------------
WILLIAM F. JOHNSTON, M.D.
/ s / GARMAN E. LUTZ Director April 2, 2001
- ----------------------------
GARMAN E. LUTZ
/ s / WILLIAM J. MACDONALD, M.D. Director April 2, 2001
- ----------------------------
WILLIAM J. MACDONALD, M.D.
/ s / R. DEAN MARTZ, M.D. Director April 2, 2001
- ----------------------------
R. DEAN MARTZ, M.D.
/ s / BARBARA L. MAUK Director April 2, 2001
- ----------------------------
BARBARA L. MAUK
/ s / RICHARD A. MCGEE, M.D. Director April 2, 2001
- ----------------------------
RICHARD A. MCGEE, M.D.
/ s / RICHARD H. PETERSON Director April 2, 2001
- ----------------------------
RICHARD H. PETERSON
/ s / PAUL G. RAMSEY, M.D. Director April 2, 2001
- ----------------------------
PAUL G. RAMSEY, M.D.
/ s / RICHARD E. RUST, M.D. Director April 2, 2001
- ----------------------------
RICHARD E. RUST, M.D.
/ s / RICHARD STUBBS, M.D., M.B.A. Director April 2, 2001
- ----------------------------
RICHARD STUBBS, M.D., M.B.A.
/ s / CLYDE D. WALKER Director April 2, 2001
- ----------------------------
CLYDE D. WALKER
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