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, 2001
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, 2001
was 539 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
DESCRIPTION OF BUSINESS AND PRODUCTS
GENERAL
ITEM 1.
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 primarily 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. 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, 2001, The Network had arrangements with TPA's
and health plans representing approximately 1.2 million 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, 2001.
The Network's success depends to a significant degree on its ability to
control health care costs for the Health Plans and TPA's utilizing its
PPO.
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 85% 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 539 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, 2000, The Plan's RBC was less than the required amount
by $402,987. The Plan subsequently cured this capital deficiency in
March, 2001. As of December 31, 2001, The Plan's RBC exceeded the required
amount in connection with its statutory filing.
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, 2000 and 2001,there were 2,585,
2,973 and 0 members, respectively, and collected premiums of $6,338,440,
$19,060,419 and $0, 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.
Physicians
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. The number
of contracted physicians is 11,000 at December 31, 2001.
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.
The number of contracted hospitals is 100 at December 31, 2001.
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 number of contracted
other health care providers is 5,000 at December 31, 2001.
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, 2001, The Network had contractual arrangements through
which Health Plans and TPA's representing approximately 1.2 million
Covered Persons, utilized the company's PPO. The
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Network receives a fee for providing access to its PPO, typically on
a per subscriber per month basis, from the Health Plan or TPA. The per
subscriber 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) and whether
utilization management services are requested.
First Choice Health Plan Products
The Plan offers health care coverage to employer groups, Association Plans as
well as a Medicare Supplement product:
Association Plan
These plans include a plan offered through Costco Wholesale and a plan offered
through the Employers Health Purchasing Cooperative which are tailor made to
targeted populations of employees.
Medicare Risk
In 1999 and 2000 The Plan offered 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 was 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) paid 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 contracts with Olympic Health
Management Systems, Inc., to operate a Medicare Supplement product.
The Plan offers four basic types of health care plans to prospective
employer groups: Managed Plans, Triple Option Plans, Point of Service
Plans and preferred providers open access 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. This plan is being discontinued.
Preferred Provider Open Access Plan
During 2001, The Plan introduced an insured Preferred Provider Plan.
The plan is an open access plan that does not require PCP referrals to see
specialists.
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 to employer groups, primariy through brokers. 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. 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, accounted for approximately 24% of the
Company's premium revenue and 74% of premiums receivable in fiscal 2001
and approximately 22% of premium revenue and 53% of premiums receivable
in fiscal 2000. This customer accounted for approximately $25.8 million and
$22.7 million of the Company's consolidated revenues for 2001 and 2000,
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.
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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.
This effective date has now been delayed to October 2003. The Standards
for Privacy and Individually Identifiable Health Information Final Rule
was published December 2000 and became effective April 2001 with a
compliance date of April 2003.
It is difficult to assess the costs related to HIPAA compliance because these
are sweeping changes for which The Company has 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, 2001, The Network had 180 employees, 178 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
Seattle. The leases expire in March and July 2003.
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, 2001, 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 2001.
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, 2001, there were 539 holders of the Company's Class A
Common Stock, seven holders of the Company's Class B Common Stock, and
three 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
2001 2000 1999 1998 1997
------------ ----------- ----------- ----------- ----------
Operating revenue $122,652,504 $139,144,059 $92,097,975 $56,878,270 $25,581,122
Net income(loss) (1,407,987) (1,349,859) 1,660,238 703,551 380,868
Net income(loss)
per common share (24.04) (23.04) 28.33 12.00 6.49
Total assets 30,415,699 30,412,795 30,667,873 20,712,398 17,683,105
Total liabilities 17,847,673 17,837,813 16,394,980 8,868,805 6,769,900
Redeemable equity participation 1,991,850 1,617,000 1,260,000 - -
Total Equity 9,338,690 10,784,920 12,148,644 10,523,508 9,600,974
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
2001, The Network continued to expand its PPO network. In 2001, 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.
In 2001, Medical expenses were comprised of fee-for-service contracted
arrangements and capitation arrangements with the physician organizations
("PO") in which the risk for health insurance coverage has been passed to
the PO. For the capitation arrangement 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 88% of commercial members at year-end 2001. 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 had 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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO
YEARS ENDED DECEMBER 31, 2000 AND 1999
Operating revenue decreased $16.5 million (11.9%) from 2000 to 2001 and
increased $47.0 million (51.1%) from 1999 to 2000. The decrease in 2001 was
due to the discontinuance of the SeniorsFirst Medicare Risk product
(approximately $19.1 million). The increase in 2000 was primarily due to
increased Plan insured membership and rate increases. Commercial member
months grew by 29.1% in 2000 and Medicare Risk member months grew by 156.7%
during 2000. In addition, commercial premium rates increased by 14% and
Medicare Risk premium rates increased by 21% during 2000. Network Access
fees increased $.8 million (10.3%) from 2000 to 2001 and were unchanged in
2000 from 1999. The increase is due to higher contractual rates. Hospital
administrative fees increased $1.0 million (14.7%) from 2000 to 2001 and
increased $.8 million (14.2%) from 1999 to 2000. The increase is primarily
due to increased enrollment and a higher volume of services provided to the
hospitals.
Operating expenses decreased $19.5 million (13.6%)from 2000 to 2001 and
increased $72 million (58.0%) from 1999 to 2000. The decrease in 2001
was primarily due to reduced medical expenses as a result of the discontinuance
of the SeniorsFirst Medicare Risk product (approximately $16.8 million).
The increase in 2000 was primarily due to increased medical costs
($47.9 million) as a result of the increase Plan health insurance membership
as well as increased costs per member. Payroll and related expenses were flat
in 2001 compared to 2000 and increased $2.2 million (22.3%) from 1999 to 2000.
The Network increased the number of employees as a result of the increased Plan
membership. Selling, general and administrative costs decreased $.7 million
(5.9%) from 2000 to 2001 and increased $2.2 million (29.6%) from 1999 to 2000.
The decrease in 2001 was a result of the reduction in Plan membership.
The increase in 2000 was a result of the increase in Plan membership.
Other expenses increased by $1.3 million in 2001 from zero in 2000. This is
primarily due to the Network's write-down of its investment in the Plan to
the Plan's estimated net realizable value which consists of the Network's
80% ownership interest in the Plan's book value. See "Market Risk" for a
discussion of the reason for the write-down of the investment in the Plan.
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.
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 2001, The Plan was at risk for approximately 88%
of commercial members. 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.
As The Plan's business model has shifted form capitated contracts to fee
for service contract arrangements, management and The Board of Directors
has reevaluated the strategic importance of The Plan. As a result, The
Plan's existing insured business will be wound down in an orderly manner with
a complete exit of the commercial insured business by December 2004. The
resulting reduction in membership may subject The Plan to various risks
including adverse selection, claim volatility and administrative cost that
may result in losses. This decision to exit the insured business required
The Network to evaluate the carrying value of its investment in The Plan and
resulted in the write-down noted under Results of Operations.
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, 2001, the Company had cash and cash equivalents of
approximately $3.2 million as compared to approximately $13.1 million at
December 31, 2001. The decrease in cash and cash equivalents is primarily
due to the purchase of $13.3 million in bonds available for sale.
The bonds consist of U. S. Government Agency loan-backed adjustable rate
securities.
The Company anticipates that the revenues generated by operations, cash and
cash equivalents and bonds available for sale as of December 31, 2001 will be
sufficient to meet its cash requirements throughout 2002. The expected reduction
in The Plan's insured membership is expected to be funded by a corresponding
reduction in The Plan's reserve for unpaid claims and claim adjustment expenses.
In the event the above sources of funds are not adequate to meet the
liquidity needs of The Plan, additional funds estimated to be in the
$1.5 million to $2.0 million range will be available from The Network
pursuant to the Contribution Agreement referred to in Note 5 to the
financial statements.
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.
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.
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 2001 and 2000 several other provider organizations experienced financial
difficulties. As a result of this, The Plan recorded additional medical expense
of approximately $2.0 million and $4.4 million respectively. These amounts
represent 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 received
approximately $4.2 million in capital infusions from The Network in 2000.
and an additional $775,000 in 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable as of December 31, 2001.
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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 . . . . . . . . . . . . . . . . . . . . . . 14
Consolidated Balance Sheets as of December 31, 2001 and 2000 . . . . . . 15
Consolidated Statements of Income
for the years ended December 31, 2001, 2000, and 1999. . . . . . . 17
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2001, 2000, and 1999. . . . . . . 18
Consolidated Statements of Cash Flows
for the years ended December 31, 2001, 2000, and 1999. . . . . . . 19
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 21
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. as of December 31, 2001 and 2000, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for the years then ended. These financial statements are the
responsibility of the First Choice Health Network, Inc.'s management.
Our responsibility is to express an opinion on these 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, 2001 and 2000, and the results of its operations and its cash
flows for the years then ended,in conformity with accounting principles
generally accepted in the United States of America.
Moss Adams LLP
March 30, 2002
Everett, Washington
14
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FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 and 2000
ASSETS 2001 2000
CURRENT ASSETS:
Cash and cash equivalents $ 3,207,241 $12,697,290
Short term investments 499,995
Service fees receivable, net of allowance for doubtful accounts
of $420,497 and $650,024 1,592,263 2,131,111
Service fees and premiums receivable from related parties 384,274 1,326,448
Premiums receivable, net of allowance for doubtful accounts
of $130,505 and $199,756 2,806,117 2,738,711
Provider settlements receivable - unrelated parties 476,929 848,202
Provider settlements receivable - related parties 181,770 1,032,618
Prepaid expenses 777,401 839,805
Deferred tax assets (Note 4) 786,295 1,140,386
Other current assets 1,645,201 716,959
------------ -----------
Total current assets 11,857,491 23,971,525
FURNITURE, EQUIPMENT, AND COMPUTER SOFTWARE:
Furniture and equipment 4,466,461 4,354,690
Computer software 1,187,970 886,933
------------ -----------
5,654,431 5,241,623
Less accumulated depreciation and amortization (3,451,422) (2,632,994)
------------ -----------
Furniture, equipment, and computer software, net 2,203,009 2,608,629
Investments Available for Sale 13,348,948 -
DEFERRED TAX ASSETS (Note 4) 1,149,623 925,165
OTHER ASSETS:
Restricted indemnity cash 1,829,102 1,798,699
Goodwill, net of accumulated amortization of $247,734 and $192,658 27,526 82,602
Other intangible assets, net of accumulated amortization
of $3,358,400 and $2,332,225 1,026,175
------------ -----------
Total other assets 1,856,628 2,907,476
------------ -----------
TOTAL $30,415,699 $30,412,795
============ ===========
See notes to consolidated financial statements.
15
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FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 and 2000
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
CURRENT LIABILITIES:
Accounts payable $ 451,771 $ 678,054
Accrued expenses 1,833,074 3,296,789
Reserve for unpaid claims and claims adjustment expenses 11,815,058 10,181,595
Provider settlements payable - unrelated organizations 1,416,068 1,529,853
Provider settlements payable - related organizations - -
Unearned premiums 1,633,532 1,064,390
Deferred income taxes - 87,132
Current portion of note payable 331,791 301,829
----------- -----------
Total current liabilities 17,481,294 17,139,642
NOTE PAYABLE (Note 10) 366,379 698,171
MINORITY INTEREST 1,237,486 173,062
REDEEMABLE EQUITY PARTICIPATION 1,991,850 1,617,000
COMMITMENTS (Note 5)
SHAREHOLDERS' EQUITY:
Common stock:
Class A, par value $1 - Authorized, 30,000 shares;
issued and outstanding, 539 and 585 shares 539 572
Class B, par value $1 - Authorized, 70,000 shares;
issued and outstanding, 40,600 shares 40,600 40,600
Additional paid-in capital 4,306,581 4,336,182
Paid-in capital from affiliates 1,472,108 1,472,108
Retained earnings 3,518,862 4,935,458
----------- -----------
Total shareholders' equity 9,338,690 10,784,920
----------- -----------
TOTAL $30,415,699 $30,412,795
=========== ===========
See notes to consolidated financial statements.
16
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FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
2001 2000 1999
OPERATING REVENUE:
Premium revenue $ 95,551,521 $ 90,054,697 $ 64,496,942
Premium revenue, related parties 10,532,868 15,162,019 7,204,129
Medicare revenue - 19,060,419 6,338,440
Network access fees 8,636,915 7,832,119 7,838,999
Hospital administrative fees 4,628,533 4,532,068 4,289,828
Hospital administrative fees, related parties 3,094,633 2,201,602 1,609,000
Other 208,034 301,135 320,637
------------ ------------ ------------
Total operating revenue 122,652,504 139,144,059 92,097,975
OPERATING EXPENSES:
Medical expenses 66,416,394 70,544,946 41,812,940
Medical expenses, related parties 32,534,341 47,089,964 27,875,293
Payroll and related expenses 12,281,740 12,244,679 10,012,045
Selling, general, and administrative expenses 11,466,664 12,190,024 9,741,831
Amortization expense 1,081,251 1,174,512 1,191,012
------------ ------------ ------------
Total operating expenses 123,780,390 143,244,125 90,633,121
------------ ------------ ------------
Operating income(loss) (1,127,886) (4,100,066) 1,464,854
OTHER INCOME (EXPENSE):
Interest and dividends 826,822 780,904 361,200
Other (1,237,486) - 46,000
------------ ------------ ------------
Total other income (410,664) 780,904 407,200
------------ ------------ ------------
Income (loss) before federal
income taxes and minority
interest (1,538,550) (3,319,162) 1,872,054
FEDERAL INCOME TAX EXPENSE (BENEFIT) 42,499 (1,278,116) 279,143
------------ ------------ ------------
(1,581,049) (2,041,046) 1,592,911
MINORITY INTEREST 173,062 691,187 67,327
------------ ------------ ------------
NET INCOME (LOSS) $ (1,407,989) $ (1,349,859) $ 1,660,238
============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE $ (24.04) $ (23.04) $ 28.33
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 58,565 58,579 58,601
============ ============ ============
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, 2001, 2000 AND 1999
Common stock
Class A Class B Additional Paid-in Total
paid-in capital from Retained shareholders'
Shares Amt Shares Amt capital affiliates earnings equity
BALANCE, January 1, 1999 619 $619 40,600 $40,600 $4,385,102 $1,472,108 $4,625,079 $10,523,508
Cash received from shareholder
receivable
Repurchase of Class A common stock
and membership rights (34) (34) (35,068) (35,102)
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) (13,852)
Net income (130,985)(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
Repurchase of Class A common
stock and membership rights (33) (33) (29,601) (29,634)
Unrealized Gain/(Loss) on Investments (8,609) (8,609)
Net loss (1,407,987)(1,407,987)
BALANCE, December 31, 2001 539 $ 539 40,600 40,600 $4,306,581 $1,472,108 $3,518,862 $9,338,690
=== ===== ====== ====== ========== =========== ========== ===========
See notes to consolidated financial statements.
18
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FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
2001 2000 1999
OPERATING ACTIVITIES:
Net income (loss) $(1,407,987) (1,349,859) $1,660,238
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Gain on sale of Dental Network - (44,500)
Depreciation 818,428 621,264 523,372
Amortization 1,081,251 1,174,512 1,191,012
Deferred income taxes, net 42,500 (1,262,279) (813,161)
Provision for doubtful accounts (298,778) 253,914 207,356
Minority interest 1,064,424 (691,187) ( 67,327)
Cash provided (used) by changes in operating
assets and liabilities:
Service fees receivable 1,710,549 (1,565,527) (1,631,435)
Premiums receivable 1,845 (309,916) (544,285)
Prepaid expenses 62,404 (266,870) (182,187)
Other current assets (928,241) (546,377) ( 89,403)
Other assets - (390,009)
Accounts payable (226,283) 158,008 142,196
Accrued expenses (1,463,715) 1,021,784 665,803
Reserve for unpaid claims and claims
adjustment expenses 1,633,463 6,970,982 1,108,249
Provider settlements receivable -
related organizations 850,848 (769,723) 462,535
Provider settlements receivable -
unrelated organizations 257,488 (2,530,799) 3,569,500
Federal income tax payable - - (28,417)
Unearned Premiums 569,142 (2,040,131) 2,967,241
----------- ----------- -------------
Net cash provided (used) by operating activities 3,767,338 1,998,850 8,706,778
INVESTING ACTIVITIES:
Sale of Dental Network - - 90,000
(Purchase) of Investments Available for Sale (13,348,948) - -
(Purchase)/Maturity of short-term investment 499,995 (499,995) -
(Purchase) of furniture, equipment, and computer
software (412,808) (1,563,753) (769,630)
Unrealized Gain/(Loss) on Investments (8,609) - -
(Increase)in restricted indemnity cash (30,403) (51,073) ( 41,671)
----------- ----------- -------------
Net cash from investing activities (13,300,773) (2,114,821) (721,301)
----------- ----------- -------------
BALANCE, carried forward ( 9,533,435) (115,971) 7,985,477
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, 2001, 2000, AND 1999
2001 2000 1999
BALANCE, brought forward $(9,533,435) (115,971) $ 7,985,477
FINANCING ACTIVITIES:
Repurchase of Class A common stock and
membership rights from physicians (29,634) (13,865) (35,102)
Redeemable equity participation 374,850 357,000 1,260,000
Receipt of shareholder receivable - - -
Proceeds of note issued 1,000,000 -
(Payment) of note payable (301,830) (1,612,004) (1,887,996)
----------- ----------- ------------
Net cash provided (used) by financing acivities 43,386 (268,869) (663,098)
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (9,490,049) (384,840) 7,322,379
CASH AND CASH EQUIVALENTS:
Beginning of year 12,697,290 13,082,130 5,759,751
----------- ----------- ------------
End of year $ 3,207,241 $12,697,290 $ 13,082,130
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Federal income taxes $ - $ 430,000 $ 1,350,000
Interest 84,540 11,800 94,174
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING AND INVESTING ACTIVITIES:
Business acquired for note payable - - 612,333
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, 2001 and 2000
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.
The Plan's Board of Directors have authorized management to proceed with an
orderly exit of the insured health care business by no later than December 2004.
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: In October 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations, which is effective for business
combinations initiated after June 30, 2001. This statement establishes the
purchase method as the only acceptable method of accounting for business
combinations and eliminates the pooling-of-interest method. The
Company did not participate in a business combination in 2001.
Also, in October 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets, which is effective for fiscal years beginning after
December 15, 2001. SFAS No. 142 establishes new accounting and reporting
standards for goodwill and other intangible assets. Under this statement,
goodwill will no longer be amortized, but will be recognized and measured
based in its fair value. Management does not believe that adoption of these
statements 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, 2001 and 2000, cash and cash equivalents consisted of cash
management funds of $3,207,241 and $12,697,290, respectively.
Investments: The company owns U.S. Government Agency loan-backed adjustable
rate securities that are classified as available for sale. These investments
are recorded at market value.
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
22
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, 2001 and 2000 .
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.
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 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, 2001 and 2000 and 1999, 24%, 22% and 34%
respectively, of the premium revenue related to one subscriber group.
Premiums receivables, as of December 31, 2001, 2000 and 1999 from that group
represented 73%, 53% and 68%, respetively.
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, 2001 and 2000, no write-downs were required.
Write-down of Investment in Plan - As a result of the decision to exit the
insured health care business by December 2004, the Company's 80% ownership
interest in The Plan was written down to the expected net realizable value
which is The Plan's book value at December 31, 2001. The write-down of
$1,237,486 is included in Other Expense.
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 41,139, 41,172 common shares and 17,400 shares applicable to
affiliate common share equivalents (Note 2) in 2001 and 2000, 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 $898.00 and $1,144.26 per share during 2001 and 2000
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:
2001 2000 1999
Current $ (79,367) $ (15,837) $1,092,304
Deferred 121,886 (1,262,279) (813,161)
------------ ------------ ---------
$ 42,499 $ (1,278,116) $ 279,143
============ ============ =========
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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 2000 1999
Amount Percent Amount Percent Amount Percent
Computed expected tax rate $ (523,107) (34.0)% $ (1,128,515) (34.0) % $ 636,498 34.0 %
Tax effect of permanent differences:
Valuation allowance on Plan NOLs
Political contributions
Write-down of investment in subsidiary 420,745 27.4
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 144,861 9.4 (106,755) (3.2)
----------- ---- ----------- ---- ---------- ----
$ 42,499 2.8% $(1,278,116) (38.5)% 279,143 14.9%
The deferred tax assets and liabilities resulting from the tax effects of
temporary differences at December 31 are presented below:
2000 2000
Deferred tax assets:
Net operating losses $2,679,716 $2,351,733
Reduction of shareholders' equity 213,724 213,724
Allowance for doubtful accounts 187,341 759,219
Unearned premium 111,080 72,379
Amortization 686,714 441,297
Vacation 123,959 114,748
Other 150,191 329,258
---------- ----------
Gross deferred tax assets 4,152,725 4,282,358
Valuation allowance (2,216,807) (2,216,807)
---------- ----------
Net deferred tax assets 1,935,918 2,065,551
Deferred tax liabilities:
Cash to accrual adjustment - -
Furniture, equipment, and computer software - 87,132
---------- ----------
Total deferred tax liabilities (current) - 87,132
---------- ----------
Deferred income tax asset, net $1,935,918 $1,978,419
========== ==========
Current portion of deferred tax assets $ 786,295 $1,140,386
Long-term portion of deferred tax assets 1,149,623 925,165
---------- ----------
$1,935,918 $2,065,551
========== ==========
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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
2020 396,839
2021 964,657
Total Net Operating Losses 7,881,518
Valuation Allowance (6,520,022)
==========
$ 1,361,496
The Company has $1,361,496 in NOL's which expire in 2020 and 2021, as a result
of taxable losses in 2000 and 2001. 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, 2001, 2000 was $923,239, $876,900, respectively.
Future minimum lease payments under operating leases for the years ending
December 31 are as follows:
2002 915,927
2003 359,084
2004 -
----------
$1,275,011
==========
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 following contributions were made pursuant to this agreement in 2001
and 2000.
2001 2000
1999 Contribution $ 1,714,515
2000 Contribution 1,503,152
2001 Contribution 996,848
Remaining 2001 Contribution 775,000
__________________________
Total Contributions $ 775,000 $ 4,214,515
--------------------------
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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
2001:
Revenues from external customers $ 13,826,171 $108,826,333 $122,652,504
Revenue from intercompany 383,050 - 383,050
Interest revenue (expense) 99,142 807,220 906,362
Depreciation/amortization expense 1,429,457 414,099 1,843,556
Income tax expense (benefit) 1,196,097 (1,153,598) 42,499
Expenditures on furniture, equipment,
and computer software 386,024 - 386,024
Segment profit (loss) 1,124,794 (2,705,843) (1,581,049)
Assets 14,306,068 21,861,357 36,167,425
Liabilities 2,975,528 15,673,925 18,649,453
2000:
Revenues from external customers $ 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 (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
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2001 2000 1999
Revenues:
Total revenues for reportable segments and
consolidated revenues $122,652,504 $139,144,059 $92,097,975
============ ============ ============
Profit or loss:
Total profit or loss for reportable segments $ (1,581,049) $ (2,041,046) $ 1,592,911
Adjustment for minority interest in
consolidated statements 173,062 691,187 67,327
------------ ------------ ------------
Consolidated net income $(1,407,987) $ (1,349,859) $ 1,660,238
=========== ============ =============
Assets:
Total assets for reportable segments $ 36,167,425 $ 48,416,746 $ 44,017,057
Elimination of intercompany investments (4,949,946) (15,671,522) (13,171,522)
Elimination of intercompany balances (801,780) (2,332,429) (231,662)
------------ ------------ ------------
Consolidated total assets $ 30,415,699 $ 30,412,795 $ 30,667,873
============ ============ ============
Liabilities:
Total liabilities for reportable segments $ 18,649,453 $ 20,170,242 $ 16,626,642
Elimination of intercompany balances ( 801,780) (2,332,429) (231,662)
------------ ------------ ------------
Consolidated total liabilities $ 17,847,673 $ 17,837,813 $ 16,394,980
============ ============ ============
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 $25.8 million and $22.7 million and $24.5 million
of the Company's consolidated revenues for 2001, 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: Invstments in Securities Available for Sale
Investments in securities available for sale consist of the following:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Market Value
___________________________________________________________
December 31, 2001
Government-backed
adjustable rate securities $ 2,096,826 $ 3,651 $ - $ 2,100,477
Mortgage-backed
adjustable rate securities 11,260,732 - (12,261) 11,248,471
___________________________________________________________
$ 13,357,558 $ 3,651 $(12,261) $ 13,348,948
===========================================================
The amortized cost and estimated fair value of debt securities at December 31,
2001 based on contractual maturity dates, excluding principal paydowns, are all
due after ten years.
Proceeds from sales and maturities of investments in debt securities in 2001
were $3,167,089.
NOTE 9: 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, 2001 and 2000, amounted to $180,300 and
$161,110, respectively.
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NOTE 10: 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 11: NOTE PAYABLE
The Company has a note payable at December 31, 2001 in the amount of
$698,170 bearing interest at 9.86%. Principal payments for the years
2002, and 2003 are $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:
2001 2000
Balance, beginning of year $10,181,595 $ 3,210,613
Incurred related to:
Current year 66,860,450 32,350,518
Prior year (359,407) 416,921
----------- -----------
Total incurred 76,682,638 35,978,052
Paid related to:
Current year 55,266,141 22,231,079
Prior year 9,601,439 3,565,378
----------- -----------
Total paid 64,867,580 25,796,457
----------- -----------
Balance, end of year $11,815,058 $10,181,595
=========== ===========
During 2001 and 2000, the Company had reinsurance stop loss agreements in
place for claims for which the Company is at risk.
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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, 2001, The Plan's RBC was $1,302,954 more than the required amount.
The primary differences in reporting between SAP and GAAP through
December 31, 2001 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 $5,754,080 and $5,355,208 as of December 31, 2001 and 2000, respectively.
Statutory basis net loss as filed in the OIC statements was $2,949,648 and
$3,417,113 for the years ended December 31, 2001 and 2000, 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 2001 or 2000.
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 55 President & Chief Executive
Officer
Kenneth Hamm 43 Sr. Vice President -Chief Financial Officer
Ross D. Heyl 48 Sr. Vice President & Chief Marketing Officer
Julie Keeffe 44 Sr. Vice President-Medical Mgmt & Member Services
Ze'ev Young, M.D. 57 Sr. Vice President-Chief Medical Officer Services
Greg Van Pelt 50 Director (II)
Paul M. Elliott 61 Director (I)
Kenneth D. Graham 54 Director (II)
Phillip J. Haas 53 Director (I)
William F. Johnston, M.D. 56 Director (III)
Garman E. Lutz 56 Director (III)
William J. MacDonald, M.D. 57 Director (III)
R. Dean Martz, M.D. 44 Director (I)
Barbara L. Mauk 56 Director (II)
Richard A. McGee, M.D. 56 Director (II)
Richard H. Peterson 59 Director (II)
Paul G. Ramsey, M.D. 52 Director (II)
Richard E. Rust, M.D. 75 Director (II)
Richard Stubbs, M.D., M.B.A. 56 Director (I)
Clyde D. Walker 46 Director (III)
__________________
(I) Term Expires in 2002.
(II) Term Expires in 2003.
(III) Term Expires in 2004.
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.
Mr. Gannaway 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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Mr. Gannaway 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.
Kenneth A. 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. Mr. Hamm was Director of Finance in the Group
Market segment at Wellpoint Health Networks in Southern California from
1991-1994. Mr. Hamm 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. Until
starting with The Company in July 2000 Mr. Hamm had been the interim Chief
Financial Officer at Medica Healthplans in Minnesota, a one million member
regional HMO. Mr. Hamm 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. Ms. Keeffe 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, Ms. Keeffe 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. Ms. Keeffe 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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Greg Van Pelt
Greg Van Pelt is the Vice President and Chief Executive of the Providence
Health System, Washington Region. The Washington Region of the Providence
Health System includes hospital, clinic and long-term care service with more
than 9,000 colleagues throughout the state. Mr. Van Pelt has been with
Providence Health System for over 25 years. He has served in management roles
both as Chief Executive, Providence Health Plan and Chief Executive,
Providence-St. Vincent Hospital and Medical Center, both in Portland, Oregon.
Providence has been serving the West for over 140 years through its hospitals
and health services Alaska, Washington, Oregon and California.
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.
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) 01 $270,000 $ 0 $ 7,735
President and CEO 00 $268,887 $138,915 $ 7,484
99 $238,218 $100,000 -
Kenneth Hamm 01 $203,000 12,019 $ 960
Senior Vice President, Finance 00 96,154 0 15,194
Ross Heyl 01 $120,500 $29,243 $ 5,000
Senior Vice President, Marketing 00 $116,970 $25,200 $ 5,000
99 $112,879 $15,930 5,208
Julie Keeffe, R.N. 01 $150,000 $18,200 $ 960
Senior Vice President, Medical 00 $145,600 $33,250 $ 600
Management & Member Services 99 $117,500 $11,820 475
Ze've Yount, M.D. 01 $181,442 $ 0 $ 960
Chief Medical Officer
David Peel 99 $143,637 $22,250 $ 6,250
Senior Vice President, Finance
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 - - - -
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 - * -
Garman Lutz
Greg Van Pelt - - - -
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.*
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 / 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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