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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, 2002
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)
(206) 292-8255
(Registrant telephone number, including area code)
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Securities registered pursuant to Section 12 (b) of the Act: None
Securities 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 whether the registrant is an accelerated filer (as
Defined in Rule 12-b of the Act).
Yes _____ No __X___
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 common equity (Class A Common
Stock, $1.00 par value and Class B Common Stock, $1.00 par value) and,
accordingly, the market value of the 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, 2002
was 539 shares of Class A Common Stock, and 40,600 shares of Class B Common
Stock, $1.00 par value, respectively.
Documents incorporated by reference:
None
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PART I
ITEM 1 BUSINESS 4
ITEM 2 PROPERTIES 6
ITEM 3 LEGAL PROCEEDINGS 7
ITEM 4 SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS 7
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 7
ITEM 6 SELECTED FINANCIAL DATA 7
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 8
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 11
ITEM 8 FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA 12
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 33
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT 33
ITEM 11 EXECUTIVE COMPENSATION 41
ITEM 12 SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS 42
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS 44
ITEM 14 CONTROLS AND PROCEDURES 45
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K 46
SIGNATURES 47
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PART I
ITEM 1. BUSINESS
Company Overview
First Choice Health Network, Incorporated ("the Company") is a physician and
hospital owned company offering preferred provider organization ("PPO") and
insured health plan products through a subsidiary, First Choice Health Plan,
Incorporated ("the Plan"). See Note 6 to the Company's financial statements
appearing elsewhere in this report for revenue and other financial data
regarding the Company's two business segments.
The Company was organized under the laws of the State of Washington in 1984 and
is owned by 538 physicians all of whom own Class A common stock, seven
hospital systems who own Class B common stock and four additional hospital
participants. The Company's web address is www.fchn.com.
PPO Business Segment
The Company's principal business since inception has been the development and
operation of a preferred provider network ("PPO") of hospitals, physicians and
ancillary service providers. Currently, the PPO has approximately 18,500
professional providers and 110 hospitals serving over 1.1 million employees and
dependents through contracts with 125 payors including insurers, third party
administrators ("TPAs"), union trusts and employers. PPO product offerings
include medical and utilization management services for certain PPO clients and
various specialty network services including a complementary and alternative
medicine PPO and Employee Assistance Program (EAP) product and network
services, both of which were new PPO product offerings in 2002. The geographic
focus of the Company's PPO offerings is Washington State but includes
healthcare providers in Alaska, Montana and Idaho to serve employees and
dependents in these areas.
Revenue from PPO network services including utilization management services
takes the form of monthly access fees from participating payors and fees from
payers based on a percentage of the savings generated by PPO provider
contracts. In addition participating hospitals pay fees based on PPO claims
volumes in those hospitals.
Insured Health Plan Business Segment
In 1995 the Company formed a wholly owned subsidiary, First Choice Health Plan,
Incorporated ("the Plan") to operate as a licensed Health Care Services
Contractor under Washington State Law, to offer insured managed care,
point-of-service and PPO products to Washington customers. In 1997, the Plan
was merged with two other Washington insurance programs, Health First Partners,
and Health Washington growing to a total of over 70,000 insured members in
2000. See Note 2 to the Company's financial statements appearing elsewhere
in this report for discussion of how the Company arrived at its current 80%
ownership interest in the Plan.
In late 1998 the U.S. Health Care Financing Administration (now the Centers for
Medicare and Medicaid Services "CMS") approved the Plan's application to offer
a Medicare Plus Choice product called SeniorsFirst. The product was offered in
1999 and through calendar year 2000, growing to 2,973 members by year end 2000
at which time the Plan ceased offering this product, withdrawing completely
from its contractual arrangement with HCFA. The Company still offers a
Medicare Select product to seniors that has approximately 800 members.
In the spring of 2002, the Plan announced that it would undertake an orderly
exit from its commercial insurance product offerings. Its decision was based
on three factors: First, ongoing operating losses; second, a decrease in
global capitation contract (contracts in which providers assume risk for
claims) relationships with providers that resulted in higher capital
requirements under risk-based capital standards; and three, rapid increases in
claims costs that led to associated increases in risk-based capital
requirements.
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As a result of the Plan's actions, its membership has decreased to 27,927
members as of December 31,2002 down from 47,956 as of December 31, 2001. This
exit will be complete by December 31, 2003 based on the non-renewal of all
remaining commercial business during 2003.
As the Plan ceases to offer its commercial insurance products, a new business
strategy of offering benefits administration services to self-funded employers
is being implemented. This strategy allows the Plan to take advantage of its
extensive technological and staff capabilities for health benefits
administration that were developed for the commercial insurance business.
Development of this TPA business will help to mitigate some of the
administrative costs of exiting the commercial insurance business by utilizing
current infrastructure. With certain well defined exceptions, these
self-funded benefits administration services will not be offered to potential
clients that currently obtain such services from benefit administrators that
access the Company's PPO products.
PPO Business Segment Products
Products currently offered within the PPO business segment include:
(1) Access to the PPO or to subsets of the PPO (e.g. Hospital Only access)
(2) Medical management services including utilization management services (pre-
certification, concurrent review, gap analysis, etc.), catastrophic case
management, disease management, consumer decision support tools, etc.
(3) Employee Assistance Program provider network and services.
(4) Complementary and alternative medicine provider network.
Plan Business Segment Products
Products currently provided within the Plan business segment include:
(1) Managed care, point-of-service and PPO insurance products for commercial
clients.
(2) Such products offered to large cases (50 and over lives).
(3) Such products offered to small cases (under 50 lives).
(4) Products designed for Associations including the Costco
Executive Business Member Health Plan and a product offering to the Employees
Health Purchasing Cooperative.
(5) A Medicare Select supplement product for seniors.
Marketing and Sales
PPO products are marketed to payers including insurers, third party
administrators, union trusts, and employers through an internal sales force
that also works closely with the broker and consultant community.
Plan products were also marketed through an internal sales force.
In addition, a telemarketing team marketed the Costco Executive Business Member
programs. Independent insurance agents and brokers working with the Plan are
compensated pursuant to commission arrangements. All new sales activities have
ceased.
TPA products will be marketed through an internal sales force.
Major Customers
The Plan's largest remaining customer is the Boeing Company accounting for
approximately 38% of premium revenue in 2002 and 24% of premium revenue in
2001. Boeing will cease being a customer in 2003 with approximately two-thirds
of this membership ending coverage on June 30, 2003 and the balance ending
coverage as of December 31, 2003.
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Competition
The PPO and Plan operate in a highly competitive market. The PPO network
competes with other managed health care companies primarily in terms of
provider contract reimbursement competitiveness, credentialing quality,
accuracy and timeliness of provider maintenance, claim repricing, utilization
management and other services provided to payer clients as well as the price of
accessing the PPO. Plan products compete on price, plan design and service.
The PPO offers excellent provider contract and service value to payer clients
compared to other independent PPO networks in Washington and the Northwest as
shown by the Company's market position as the largest independent PPO in
Washington. The PPO product also competes well against the PPO networks of the
two dominant regional insurers in the Northwest.
The Plan has competed against a shrinking number of insurers offering insured
products in Washington.
The TPA will compete with numerous other insurance carriers and TPAs operating
in Washington, many of which are significantly larger and have greater
financial resources than the Company. Competition for TPA clients is based
primarily on price and operational performance.
Government Regulation
The PPO and the Plan are subject to significant regulation. The Plan is
regulated by the Washington Office of the Insurance Commissioner (OIC) and must
meet stringent standards of market conduct, capital sufficiency, provider
network adequacy and patient rights among other matters. The Plan and the PPO
are subject to standards regarding privacy and maintenance and transmission of
health information established under the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"). The planned offerings to self-funded
clients and other current offerings are subject to ERISA and Department of
Labor standards and requirements. The Plan's Medicare Select product is
subject to OIC standards and to the requirements of the CMS. The Company has
spent significant funds to assure compliance with these numerous standards
and requirements and believes that it is well prepared to meet all HIPAA and
other regulatory compliance requirements.
The Sarbanes-Oxley Act of 2002 and related rulemaking by the SEC, which effect
sweeping corporate disclosure and financial reporting reform, generally require
public companies to focus on their disclosure controls and procedures. As a
result, public companies such as FCHN now must have disclosure controls and
procedures in place and make certain disclosures about them in their periodic
SEC reports (i.e., Forms 10-K and 10-Q) and their chief executive and chief
financial officers must certify in these filings that they are responsible for
developing and evaluating disclosure controls and procedures and disclose the
results of an evaluation conducted by them within the 90-day period preceding
the filing of the relevant report, among other things.
Employees
As of December 31, 2002, the company had 146 employees. None of the Company's
employees are unionized or subject to collective bargaining agreement.
Company management believes that its relationship with its employees is good.
Item 2. PROPERTIES
The Company leases and occupies two offices in Seattle, Washington. Both
leases expire in the Summer of 2003. The Company has entered into a new five-
year office lease agreement effective June 2003 that will allow the Company to
consolidate its operations at one office at a substantial reduction in lease
costs compared to current costs. The new facility is also located in Seattle,
Washington.
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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, 2002, the Company is not aware
of any such material situations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In June 2002, the Company held its annual meeting at which shareholders were
asked to elect directors for those director positions whose terms were expiring
in 2002 and as provided in the Company's bylaws.
The following directors were elected at the meeting:
Gerald A. Cufley, M.D., Paul M. Elliott, Phillip J. Hass,
Scott F. Knonlund, M.D., and Greg Van Pelt
In addition, the following directors continued in office following the meeting:
Kenneth D. Graham, William F. Johnston, M.D., Garman E. Lutz,
William J. MacDonald, M.D., Barbara L. Mitchell, Richard A. McGee, M.D.,
Richard H. Peterson, Paul G. Ramsey, M.D., Richard E. Rust, M.D.,
Clyde D. Walker, William R. Stubbs, M.D., M.B.A and Diane E. Cecchettini, R.N.
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.
As of December 31, 2002, there were 538 holders of the Company's Class A Common
Stock, seven holders of the Company's Class B Common Stock, three Hospital
Participants and a hospital holder of a redeemable equity participation.
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. Pursuant to the Company's contracts with the Hospital Participants,
if the Company pays any dividends or other distributions with respect to the
Class B Common Stock, it 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
2002 2001 2000 1999 1998
------------ ------------ ----------- ----------- -----------
Operating revenue $ 93,034,185 $122,652,504 $139,144,059 $92,097,975 $56,878,270
Net income(loss) 1,924,891 (1,407,987) (1,349,859) 1,660,238 703,551
Net income(loss)
per common share 32.88 (24.04) (23.04) 28.33 12.00
Total assets 27,092,625 30,415,699 30,412,795 30,667,873 20,712,398
Total liabilities 12,159,483 17,847,673 17,837,813 16,394,980 8,868,805
Redeemable equity participation 2,385,443 1,991,850 1,617,000 1,260,000 -
Total Equity 11,325,169 9,338,690 10,784,920 12,148,644 10,523,508
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's PPO product segment saw significant improvements in
financial performance in 2002 with a 2002 segment profit of $3,563,492 versus a
$1,124,794 segment profit in 2001. This improvement was the result of
continuing pricing actions and technologically driven operational efficiency
gains among other factors. The financial performance of the Plan product
segment improved somewhat in 2002 moving from a loss in 2001 of ($2,705,843) to
a loss in 2002 of ($2,042,728). The key factor in these Plan losses was a
continuing underwriting loss associated with catastrophic cases below
reinsurance attachment points as the Plan pursued an orderly exit from its
commercial insurance business lines. Administrative expenses for the Plan have
been well controlled as premium revenues have rapidly declined. Consolidated
net income was $1,924,890 in 2002 versus consolidated net losses of
($1,407,987) in 2001 and ($1,349,859) in 2000.
Financial results for 2002 showed a significant improvement in the Company's
financial condition. Shareholders' equity increased by $1,986,479 from
$9,338,690 in 2001 to $11,325,169 in 2002. The Company's current ratio
improved from 1.40 in 2001 to 1.84 at year end 2002. The Plan's provider
settlement receivables were reduced from $658,699 in 2001 to zero at year-end
2002. The Company has no debt and management believes that the Plan's
claims liabilities have been conservatively stated at year end 2002.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEARS ENDED DECEMBER 31, 2001 AND 2000
Operating revenue decreased $29.6 million (24.1%) from 2001 to 2002 and
decreased $16.5 million (11.9%) from 2000 to 2001. The decrease in 2002
primarily resulted from the Company's orderly exit from the Plan's commercial
insurance business and the resultant $31.9 million decrease in premium revenue.
The decrease in 2001 was primarily due to the discontinuance of the
SeniorsFirst Medicare Risk product (approximately $19.1 million). Network
Access fees increased $.4 million (5.2%) from 2001 to 2002 and $.8 million
(10.3%) from 2000 to 2001. The increases are primarily due to higher
contractual rates. Hospital administrative fees increased $1.8 million (24.2%)
from 2001 to 2002 and $1.0 million (14.7%) from 2000 to 2001. The increases
are primarily due to a higher volume of services provided by the hospitals and
billed charge inflation at hospitals with administrative fees based on charges.
Operating expenses decreased $33.0 million (26.7%) from 2001 to 2002 and $19.5
million (13.6%)from 2000 to 2001. The decrease in 2002 primarily resulted from
reduced medical expenses ($29.1 million) attributable to the Company's planned
exit from the health insurance market. 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). Payroll and
related expenses decreased $2.0 million (16.2%) from 2001 to 2002 and remained
constant in 2001 compared to 2000. The decrease resulted from a planned
reduction in the workforce (18.9%) during 2002 that coincided with the
implementation of the Company's orderly exit from the health insurance market.
Selling, general and administrative costs decreased $0.8 million (7.2%) from
2001 to 2002 and $0.7 million (5.9%) from 2000 to 2001. The decreases noted in
2002 and 2001 resulted from a reduction in Plan membership and the
discontinuance of the SeniorsFirst program and the ongoing exit from the
health insurance market.
Write-down of investment and other expense in both 2002 and 2001 represent the
Company's write-down of its investment in the Plan to the Plan's estimated net
realizable value. The write-down in 2002 was triggered by an additional
$1,918,000 capital infusion from the Company to the Plan. The 2002 write-down
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represents 20% of this investment, representing the ownership interest of the
Plan's minority interest shareholders.
Amortization
Amortization expense decreased $1.08 million (100%) from 2001 to 2002 and
$93,000 (7.9%) from 2000 to 2001. The decrease was due to the intangible asset
related to the 1998 Sound Health acquisition becoming fully amortized in
November 2001. Therefore, there was no such amortization in 2002.
Related Party Transactions
The Company's related party transactions consist of three components. One
component is the premium revenue that is received from the Company's owner
hospitals for their employee groups that are members of the Plan. The second
component is the Company's payment to the owner hospitals in the form of
claims payments for medical services rendered to any member of the Plan.
These two components are independent of each other and have no relationship
for analytical purposes. A third component, hospital administrative fees from
owner hospitals, is unrelated to the other components.
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 been significantly 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 Plan's operation as most
commercial groups have only annual rate adjustments. The Plan attempts to
mitigate this through a premium rating trend that exceeds the healthcare trend.
Due largely to unexpected high cost trends, the Plan has been significantly
unsuccessful in improving its underwriting results. Costs are managed through
discounted contractual arrangements and medical management activities. The
Plan is winding down its commercial insurance business and will have exited
this business by December 31, 2003.
Market Risk
The Company offers its PPO and Plan products in a highly competitive
environment. The Company has numerous competitors, including for-profit
and not-for-profit HMOs, TPAs, preferred provider organizations ("PPOs"), and
indemnity insurance carriers, some of which have substantially larger
enrollments and greater financial resources than the Company. The Company's
ability to retain existing PPO clients and attract new clients is largely
dependent on its ability to offer competitive provider contract value and
maintain a network of high quality, efficient, fully credentialed providers who
agree to accept competitive reimbursement rates.
As the Plan's business model shifted from capitated contracts to fee for
service contract arrangements over the past 3 years, management and the Board
of Directors have reevaluated the strategic importance of the Plan. As a
result, the Plan's existing commercial insured business will be wound down in
an orderly manner with a complete exit of the commercial insured business by
December 2003. The resulting reduction in membership may subject the Plan to
various risks including adverse selection, claim volatility and administrative
costs that may result in losses. This decision to exit the insured business
required the Company to evaluate the carrying value of its investment in the
Plan and resulted in the write-down noted under Results of Operations.
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LIQUIDITY AND CAPITAL RESOURCES
Since inception in 1984, 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.
The Company's cash flow consists of operating, investing and financing cash
flows. Operating cash flow is generated by operating income, depreciation
and fluctuations in various balance sheet accounts. The Company anticipates
the negative operating cash flow resulting from the Plan wind-down and
resultant reduction in the reserve for unpaid claims and claim adjustment
expense will be offset by operating income and depreciation. In the event of
ongoing negative operating cash flow, the Company's investment portfolio of
marketable securities is available to meet liquidity needs. The Company does
not anticipate significant financing activities in 2003.
At December 31, 2002, the Company had cash and cash equivalents of
approximately $2.8 million as compared to approximately $3.0 million at
December 31, 2001. This decrease in cash is offset by a $.5 million increase
in investment securities available for sale. Investment securities consist of
U.S. Government Agency asset-backed and mortgage-backed adjustable rate
securities that are marketable in the event additional cash is needed.
Following are explanations of significant balance sheet account fluctuations:
The 100% reduction in Provider settlements receivable is due to completion of
negotiated settlements of these receivables. There were no such contracts in
2002. The decrease in Other current assets of 84%, or $1.3 million is
primarily due to the receipt of the Company's expected tax refund and a $.7
million reduction of healthcare receivables as a result of the decrease in Plan
membership and collection of outstanding receivables. The reserve for unpaid
claims and claims adjustment expenses (IBNR) decreased 27%, or $3.2 million
during 2002. Unearned premiums decreased 53%, or $.9 million from 2001 to
2002. Provider settlements payable decreased 84%, or $1.2 million during the
current year due to the settlement of those liabilities. The decrease noted in
IBNR and unearned premiums is primarily attributed to a 42% decline in Plan
membership.
On December 20, 1999, the Company 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 the Company effective January 1, 2000. UWMC paid $1,260,000 of the
affiliation fee upon execution of the Agreement with the remaining $1,260,000
to be paid in three equal payments of $420,000 due annually for three years
plus interest at five percent(5%).
UWMC is not a shareholder or member of the Company. UWMC will
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 stock.
If the Company performs certain actions 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 shares of class B stock, less any
amounts still owed by UWMC. The UWMC ownership interest is classified as
redeemable equity participation.
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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
continued to pay the Plan for claims paid on its behalf. In March of 2000,
Cascade management dissolved the organization. The dissolution of Cascade did
not affect the Company's 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 in 2001 and 2000,
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 Company in 2000 and an
additional $775,000 in 2001. Due to higher healthcare costs than expected in
2002, the Company made a capital contribution of $1,918,000 into the Plan.
This amount represents an estimate of the contractually required capital
contribution for 2002.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
As a result of the decision to exit the insured health care business by
December 31, 2003, the Company's 80% ownership in the Plan was written down at
December 31, 2001 to the expected net realizable value, which is the Plan's
book value. Management believes this measurement of the expected net
realizable value is still valid as of December 31, 2002.
The reserve for unpaid claims and claims adjustment expenses represents
reported and unreported claims which have been incurred but have not been paid
at the date of the financial statements. The reserve for unreported claims is
determined actuarially using prior experience and the nature of current health
insurance contracts and volume. Included in the liability is an estimate of
the future expenses necessary to settle claims. Due to the uncertainties
inherent in the estimation process, actual costs may differ from the estimated
amounts in the near term, and these differences may be significant. As a
result of the decreasing membership in the Plan, management has increased the
level of conservatism in the estimate due to increased risk associated with
potential claim volatility resulting from a lower membership base.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable as of December 31, 2002.
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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 . . . . . . . . . . . . . . . . . . . . . . 13
Consolidated Balance Sheets as of December 31, 2002 and 2001 . . . . . . 15
Consolidated Statements of Income
for the years ended December 31, 2002, 2001, and 2000. . . . . . . 17
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2002, 2001, and 2000. . . . . . . 18
Consolidated Statements of Cash Flows
for the years ended December 31, 2002, 2001, and 2000. . . . . . . 19
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 21
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INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
First Choice Health Network, Inc.
We have audited the accompanying consolidated balance sheet of First Choice
Health Network, Inc., as of December 31, 2002 and 2001, and the related
consolidated statements of income, 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. The
Financial Statements of First Choice Health Network, Inc. for the year ended
December 31, 2000 were audited by other auditors, whose report dated
March 30, 2001 expressed an unqualified opinion on those statements.
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 First Choice Health
Network, Inc., as of December 31, 2002 and 2001, 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
January 29, 2003
Everett, Washington
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INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
First Choice Health Network, Inc.
We have audited the consolidated balance sheet of First Choice Health Network
Inc. and subsidiary (the Company) as of December 31, 2000 (not presented
herein) and the related consolidated statements of operations, shareholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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 misstatements. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2000, and
the results of its operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States
of America.
Deloitte & Touche LLP
March 30, 2001
Seattle, Washington
14
15
FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 and 2001
ASSETS 2002 2001
CURRENT ASSETS:
Cash and cash equivalents $ 2,825,460 $ 2,987,101
Investment securities available for sale 13,807,155 13,348,948
Service fees receivable, net of allowance for doubtful accounts
of $131,840 and $420,497 1,400,693 1,730,763
Service fees and premiums receivable from related parties 506,340 384,274
Premiums receivable, net of allowance for doubtful accounts
of $77,778 and $130,505 2,637,797 2,806,117
Provider settlements receivable - unrelated parties - 476,929
Provider settlements receivable - related parties - 181,770
Prepaid expenses 518,900 777,401
Deferred tax assets (Note 4) 340,467 572,571
Other current assets 244,576 1,506,701
------------ -----------
Total current assets 22,281,388 24,772,575
FURNITURE, EQUIPMENT, AND COMPUTER SOFTWARE:
Furniture and equipment 4,698,123 4,466,461
Computer software 1,290,729 1,187,970
------------ -----------
5,988,852 5,654,431
Less accumulated depreciation and amortization (4,534,736) (3,451,422)
------------ -----------
Furniture, equipment, and computer software, net 1,454,116 2,203,009
DEFERRED TAX ASSETS (Note 4) 945,214 1,363,347
OTHER ASSETS:
Restricted indemnity investments 2,074,507 2,049,242
Investment in Assured Health 337,400 -
Goodwill, net of accumulated amortization of $247,734 - 27,526
in 2001 (Note 1) ------------ -----------
Total other assets 2,411,907 2,076,768
------------ -----------
TOTAL $27,092,625 $30,415,699
============ ===========
See notes to consolidated financial statements.
15
16
FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 and 2001
LIABILITIES AND SHAREHOLDERS' EQUITY 2002 2001
CURRENT LIABILITIES:
Accounts payable $ 487,291 $ 451,771
Accrued expenses 2,046,049 1,833,074
Reserve for unpaid claims and claims adjustment expenses 8,637,313 11,815,058
Provider settlements payable - unrelated parties 225,630 1,416,068
Unearned premiums 763,200 1,633,532
Current portion of note payable - 331,791
----------- -----------
Total current liabilities 12,159,483 17,481,294
NOTE PAYABLE (Note 10) - 366,379
MINORITY INTEREST 1,222,530 1,237,486
REDEEMABLE EQUITY PARTICIPATION 2,385,443 1,991,850
COMMITMENTS (Note 5)
SHAREHOLDERS' EQUITY:
Common stock:
Class A, par value $1 - Authorized, 30,000 shares;
issued and outstanding, 538 and 539 shares 538 539
Class B, par value $1 - Authorized, 70,000 shares;
issued and outstanding, 40,600 shares 40,600 40,600
Additional paid-in capital 4,306,221 4,306,581
Paid-in capital from affiliates 1,472,108 1,472,108
Retained earnings 5,452,362 3,527,471
Accumulated other comprehensive income (loss), net of tax 53,340 (8,609)
----------- -----------
Total shareholders' equity 11,325,169 9,338,690
----------- -----------
TOTAL $27,092,625 $30,415,699
=========== ===========
See notes to consolidated financial statements.
16
17
FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
2002 2001 2000
OPERATING REVENUE:
Premium revenue $ 72,756,358 $ 95,551,521 $ 90,054,697
Premium revenue, related parties 1,403,361 10,532,868 15,162,019
Medicare revenue - - 19,060,419
Network access fees 9,092,039 8,636,915 7,832,119
Hospital administrative fees 5,067,915 4,628,533 4,532,068
Hospital administrative fees, related parties 4,523,692 3,094,633 2,201,602
Other 190,820 208,034 301,135
------------ ------------ ------------
Total operating revenue 93,034,185 122,652,504 139,144,059
OPERATING EXPENSES:
Medical expenses 51,381,444 66,416,394 70,544,946
Medical expenses, related parties 18,434,620 32,534,341 47,089,964
Payroll and related expenses 10,288,719 12,281,740 12,244,679
Selling, general, and administrative expenses 10,669,098 11,466,664 12,190,024
Amortization expense - 1,081,251 1,174,512
------------ ------------ ------------
Total operating expenses 90,773,881 123,780,390 143,244,125
------------ ------------ ------------
Operating income(loss) 2,260,304 (1,127,886) (4,100,066)
OTHER INCOME (EXPENSE):
Interest and dividends 655,153 826,822 780,904
Write-down of investment and other (380,166) (1,237,486) -
------------ ------------ ------------
Total other income (expense), net 274,987 (410,664) 780,904
------------ ------------ ------------
Income (loss) before federal
income taxes and minority
interest 2,535,291 (1,538,550) (3,319,162)
FEDERAL INCOME TAX EXPENSE (BENEFIT) 1,014,526 42,499 (1,278,116)
------------ ------------ ------------
1,520,765 ( 1,581,049) (2,041,046)
MINORITY INTEREST, net of tax 404,126 173,062 691,187
------------ ------------ ------------
NET INCOME (LOSS) $ 1,924,891 $ (1,407,987) $ (1,349,859)
============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE $ 32.88 $ (24.04) $ (23.04)
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 58,538 58,565 58,579
============ ============ ============
See notes to consolidated financial statements.
17
18
FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Common stock
Accumulated
Class A Class B Additional Paid-in Other Total
paid-in capital from Retained Comprehensive Shareholders'
Shares Amt Shares Amt capital affiliates Earnings Income (Loss) Equity
BALANCE, January 1, 2000 585 $585 40,600 $40,600 $4,350,034 $1,472,108 $6,285,317 $12,148,644
Repurchase of Class A common
stock and membership rights (13) (13) (13,852) (13,865)
Net loss (1,349,859) (1,349,859)
---- ---- ------ ------ --------- ---------- ---------- ---------- -----------
BALANCE, December 31, 2000 572 572 40,600 40,600 4,336,182 1,472,108 4,935,458 -0- 10,784,920
Repurchase of Class A common
stock and membership rights (33) (33) (29,601) (29,634)
Unrealized loss on investments,
net of tax (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 3,527,471 (8,609) 9,338,690
Repurchase of Class A common
stock and membership rights (1) (1) (360) (361)
Unrealized gain on investments,
net of tax 61,949 61,949
Net Income 1,924,891 1,924,891
---- ---- ------ ------ --------- ---------- ---------- ---------- -----------
538 $538 40,600 $40,600 $4,306,221 $1,472,108 $5,452,362 $ 53,340 $11,325,169
Balance, December 31, 2002 ==== ==== ====== ====== ========= ========== ========== ========== ===========
See notes to consolidated financial statements.
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19
FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,924,891 $(1,407,987) $(1,349,859)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation 1,083,314 818,428 621,264
Amortization 27,526 1,081,251 1,174,512
Deferred income taxes, net 650,237 42,501 (1,262,279)
Provision for doubtful accounts (341,383) (298,778) 253,914
Minority interest (20,526) 1,064,424 (691,187)
Changes in operating assets and liabilities:
Service fees receivable 496,661 1,196,033 (1,565,527)
Premiums receivable 221,046 377,861 (309,916)
Prepaid expenses 258,501 62,404 (266,870)
Other current assets 1,262,125 (789,742) (546,377)
Accounts payable 35,520 (226,283) 158,008
Accrued expenses 212,975 (1,463,715) 1,021,784
Reserve for unpaid claims and claims
adjustment expenses (3,177,745) 1,633,463 6,970,982
Provider settlements receivable (payable)-
related organizations 181,770 850,848 (769,723)
Provider settlements receivable (payable)-
unrelated organizations (713,509) 257,488 (2,530,799)
Unearned Premiums (870,332) 569,142 (2,040,131)
----------- ----------- -------------
Net cash from operating activities 1,231,071 3,767,338 1,998,850
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) of investment in Assured Health (337,400) - -
Maturities/(Purchase) of short-term investment 499,995 (499,995)
(Purchase) of investments available for sale (8,676,276) (16,524,646) -
Maturities/sale of investments available for sale 8,285,056 3,167,089 -
(Purchase) of furniture, equipment, and computer
software (334,421) (412,808) (1,563,753)
(Increase)in restricted indemnity cash (24,733) (250,543) (51,073)
----------- ------------ -------------
Net cash from investing activities (1,087,774) (13,520,913) (2,114,821)
----------- ------------ -------------
BALANCE, carried forward 143,297 (9,753,575) (115,971)
See notes to consolidated financial statements.
19
20
FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
CONSOLDIATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
2002 2001 2000
BALANCE, brought forward $ 143,297 $ (9,753,575) $ (115,971)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Class A common stock and
membership rights from physicians (361) (29,634) (13,865)
Redeemable equity participation 393,593 374,850 357,000
Proceeds of note issued - - 1,000,000
(Payment) of note payable (698,170) (301,830) (1,612,004)
----------- ----------- ------------
Net cash from financing activities (304,938) 43,386 (268,869)
----------- ----------- ------------
NET (DECREASE) IN CASH AND
CASH EQUIVALENTS (161,641) (9,710,189) (384,840)
CASH AND CASH EQUIVALENTS:
Beginning of year 2,987,101 12,697,290 13,082,130
----------- ----------- ------------
End of year $ 2,825,460 $ 2,987,101 $ 12,697,290
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash received (paid) during the year for:
Federal income taxes $ 303,633 $ - $ (430,000)
Interest $ (32,294) $ (84,540) $ (11,800)
=========== =========== ===========
See notes to consolidated financial statements.
20
21
FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 and 2001
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 initially to organize a network of participating
physicians and hospitals to serve insurers, third party administrators, union
trusts and employers. Subsequently the Company created additional related PPO
services including utilization management services. The Company's business is
conducted primarily in Washington, with some additional business located in
Alaska, Montana and Idaho.
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 products in Washington state.
In 2002, the Plan's Board of Directors authorized management to proceed with an
orderly exit of the insured health care business by no later than December 31,
2003.
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
the Plan. All significant inter-company amounts have been eliminated in
consolidation.
New accounting pronouncements: In June 2002, the Financial Accounting Standards
Board (FASB) issued Statement No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This Statement requires that a liability for
costs associated with an exit or disposal activity be recognized when the
liability is incurred and be measured at fair value and adjusted for changes in
estimated cash flows. Existing generally accepted accounting principles
provide for the recognition of such costs at the date of management's
commitment to an exit plan. Under Statement No. 146, management's commitment
to an exit plan would not be sufficient, by itself, to recognize a liability.
The Statement is effective for exit or disposal activities initiated after
December 31, 2002 and is not expected to have a material impact on the results
Of operations or financial condition of the Company.
In October 2001,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 on its fair value. Pursuant to this
statement, the Plan wrote off its remaining goodwill of $27,526 in 2002.
Cash equivalents: The Company considers all investments purchased with an
original maturity of three months or less to be cash equivalents. At
December 31, 2002 and 2001, cash and cash equivalents consisted of cash
management funds of $2,825,460 and $2,987,101, respectively.
21
22
Investment securities: The Company owns U.S. Government Agency mortgage-backed
adjustable rate securities that are classified as available for sale.
Investment securities categorized as available for sale are generally held for
investment purposes (to maturity), although unanticipated future events may
result in the sale of some securities. Available for sale securities are
recorded at fair value, with the net unrealized gain or loss included
in comprehensive income, net of the related tax effect.
Realized gains or losses on dispositions are based on the net proceeds and the
adjusted carrying amount of securities sold, using the specific identification
method.
Service fees receivable: Service fees receivable consists primarily of
outstanding invoices and 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.
Restricted indemnity investments: Restricted indemnity investments 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 treasury funds recorded at fair
market value. These Securities are recorded at amortized cost, which
approximates fair value.
Goodwill: Goodwill is determined as the difference between the purchase price
and fair value of identifiable net assets purchased. Pursuant to SFAS No. 142,
the Company wrote off its remaining goodwill of $27,526 in 2002.
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 and became fully amortized in 2001.
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 from (to) 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.
22
23
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 Centers for Medicare and Medicaid Services (CMS) based on the
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, 2002, 2001 and 2000, 38%, 24% and 22%
respectively, of the premium revenue is related to one subscriber group.
Premiums receivables, as of December 31, 2002, 2001 and 2000 from that group
represented 88%, 74% and 53%, respectively.
Income taxes: Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to reverse. The effect on the deferred tax
assets and 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, 2002 and 2001, 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 2003, 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. A further write-down of $383,600 was
recorded in 2002 representing 20% of the 2002 capital contribution to the Plan.
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 41,138, 41,139 and
41,172 common shares and 17,400 shares applicable to affiliate common share
equivalents (Note 2) in 2002, 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 amounts in the 2001 financial statements have been
reclassified to conform with the 2002 presentation.
23
24
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 $752, $898 and $1,067 per share
during 2002, 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 non-shareholders 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 non-shareholder
district hospitals that have rights equivalent to those of the Class B
shareholders and the 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 non-shareholder hospitals that have rights
equivalent to those of Class B shareholders.
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 non-shareholders 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.
24
25
UWMC agreed to pay a fee of $2,520,000, $1,260,000 payable upon execution of
the agreement and the remaining $1,260,000 payable in three equal annual
payments of $420,000 consisting of principal and interest at 5%. The final
payment will be adjusted for any outstanding principal and interest.
UWMC did not become a shareholder or a member of the Company. UWMC
will 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 will
be 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:
2002 2001 2000
Current $ 364,289 $ (2) $ (15,837)
Deferred 650,237 42,501 (1,262,279)
------------ ------------ -----------
$ 1,014,526 $ 42,499 $(1,278,116)
============ ============ ===========
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:
2002 2001 2000
Amount Percent Amount Percent Amount Percent
Computed expected tax rate $ 861,999 34.0 $(523,107) (34.0) $(1,128,515) (34.0)
Tax effect of permanent differences:
Write-down of investment
in subsidiary 130,424 5.1 420,745 27.4
Change in valuation allowance (16,727) (0.5)
Adjustment to return filed (26,119) (0.8)
Other 22,103 .9 144,861 9.4 (106,755) (3.2)
----------- ----- ---------- ---- ----------- -----
$1,014,526 40.0 $ 42,499 2.8 $(1,278,116) (38.5)
=========== ===== ========== ==== =========== =====
25
26
The deferred tax assets and liabilities resulting from the tax effects of
temporary differences at December 31 are presented below:
2002 2001
Deferred tax assets:
Net operating losses $2,216,807 $2,679,716
Reduction of shareholders' equity 213,724 213,724
Allowance for doubtful accounts 80,441 187,341
Unearned premium 51,898 111,080
Amortization 731,490 686,714
Vacation 127,714 123,959
Other 80,414 150,191
---------- ----------
Gross deferred tax assets 3,502,488 4,152,725
Valuation allowance (2,216,807) (2,216,807)
---------- ----------
Net deferred tax assets $1,285,681 $1,935,918
========== ==========
Current portion of deferred tax assets $ 340,467 $ 522,571
Long-term portion of deferred tax assets 945,214 1,363,347
---------- ----------
$1,285,681 $1,935,918
========== ==========
The valuation allowance was established in 1997 for the tax benefit of the 1997
net operating losses (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
----------
Total Net Operating Losses 6,520,022
Valuation Allowance (6,520,022)
==========
$ -
NOTE 5: COMMITMENTS
Leases: The Company leases its office facilities and some office equipment
under operating leases expiring through 2005. The leases provide for monthly
minimum rent payments, and some include renewal options for an additional
five years.
26
Rental expense charged to operations under the operating leases for the years
ended December 31, 2002, 2001 and 2000 were $928,093, $923,239 and $876,900,
respectively.
Future minimum lease payments under operating leases for the years ending
December 31 are as follows:
2003 958,741
2004 759,128
2005 744,582
----------
$2,462,451
==========
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 2002
and 2001.
2002 2001
Remaining 2001 Contribution 775,000
2002 Contribution Advance 1,918,000
---------- --------
Total Contributions $1,918,000 $775,000
========== ========
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 PPO and other network products while hospital administrative fees
arise from charges to the network hospitals based on claims incurred by members
or fixed monthly contractual payments. The other reportable segment, the Plan,
offers a variety of fully insured health insurance plans.
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
2002:
Revenues from external customers $ 16,086,796 $ 76,947,388 $ 93,034,185
Revenue from inter-company 286,463 28,125 314,588
Interest revenue 142,324 512,829 655,153
Depreciation/amortization expense 626,397 456,917 1,083,314
Income tax expense (benefit) 2,045,661 (1,031,135) 1,014,526
Expenditures on furniture, equipment,
and computer software 334,421 - 334,421
Segment profit (loss) 3,563,493 (2,042,728) 1,520,765
Assets 17,259,204 16,433,555 33,692,759
Liabilities 3,548,593 10,320,905 13,869,498
2001:
Revenues from external customers $ 13,826,171 $108,826,333 $122,652,504
Revenue from inter-company 383,050 - 383,050
Interest revenue 99,142 807,220 906,362
Depreciation/amortization expense 1,485,580 414,099 1,899,679
Income tax expense (benefit) 1,196,097 (1,153,598) 42,499
Expenditures on furniture, equipment,
and computer software 412,808 - 412,808
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 inter-company 403,860 - 403,860
Interest revenue 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
2002 2001 2000
Revenues:
Total revenues for reportable segments and
consolidated revenues $ 93,034,185 $122,652,504 $139,144,059
============ ============ ============
Profit or loss:
Total profit or loss for reportable segments $ 1,520,765 $ (1,581,049) $(2,041,046)
Adjustment for minority interest in
consolidated statements 404,126 173,062 691,187
------------ ------------ ------------
Consolidated net income (loss) $ 1,924,891 $ (1,407,987) $(1,349,859)
============ ============= =============
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29
2002 2001 2000
Assets:
Total assets for reportable segments $ 33,692,759 $ 36,167,425 $ 48,416,746
Elimination of inter-company investments (4,890,118) (4,949,946) (15,671,522)
Elimination of inter-company balances (1,710,016) (801,780) (2,332,429)
------------ ------------ ------------
Consolidated total assets $ 27,092,625 $ 30,415,699 $ 30,412,795
============ ============ ============
Liabilities:
Total liabilities for reportable segments $ 13,869,499 $ 18,649,453 $ 20,170,242
Elimination of inter-company balances (1,710,016) (801,780) (2,332,429)
------------ ------------ ------------
Consolidated total liabilities $ 12,159,483 $ 17,847,673 $ 17,837,813
============ ============ ============
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 $28.1 million, $25.8 million and $22.7 million
of the Company's consolidated revenues for 2002, 2001 and 2000, respectively.
NOTE 7: FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, short-term investments,
service fees and premiums receivable, restricted indemnity investments,
accounts payable, notes payable, and due to provider organizations approximates
fair value because of the short maturity of these instruments.
NOTE 8: INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale consist of the following:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Market Value
----------------------------------------------------------
December 31, 2002
Government-backed
adjustable rate securities $ 1,886,141 $ 7,112 $ - $ 1,893,253
Mortgage-backed
adjustable rate securities 11,862,642 66,025 (14,765) 11,913,902
----------------------------------------------------------
$ 13,748,783 $ 73,137 $(14,765) $ 13,807,155
===========================================================
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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
===========================================================
Contractual maturities of investment securities as of December 31, 2002 are
shown below. Expected maturities will differ from contractual maturities
because issuers may have the right to call or prepay obligations with or
without prepayment penalties.
Available for Sale
Amortized Fair
Maturity Costs Value
----------------- ----------- -----------
Five to ten years $ 246,355 $ 249,743
Over ten years 13,502,428 13,557,412
----------- -----------
$13,748,783 $13,807,155
=========== ===========
The amortized cost and estimated fair value of debt securities at December 31,
2002 and 2001 based on contractual maturity dates, excluding principal
reductions, are all due after nine and ten years respectively.
Proceeds from sales and maturities of investments in debt securities in 2002
and 2001 were $8,285,055 and $3,167,089, respectively.
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
the maximum established by the Internal Revenue Service. The Company matches
50% of each employee's contribution, up to 6% of the employee's eligible
salary. Employees become fully vested in employee contributions and vest over
two years for employer contributions. 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, 2002 and 2001, amounted to
$139,691 and $180,300, respectively.
NOTE 10: NOTE PAYABLE
The Company had a note payable at December 31, 2001 in the amount of
$698,170 bearing interest at 9.86%. The note was paid in full in 2002.
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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:
2002 2001
Balance, beginning of year $11,815,058 $10,181,595
Incurred related to:
Current year 70,521,415 66,860,450
Prior year (705,351) (359,407)
----------- -----------
Total incurred 69,816,064 66,501,043
Paid related to:
Current year 61,901,253 55,266,141
Prior year 11,092,556 9,601,439
----------- -----------
Total paid 72,993,809 64,867,580
----------- -----------
Balance, end of year $ 8,637,313 $11,815,058
=========== ===========
During 2002 and 2001, the Company had reinsurance stop loss agreements in
place for claims for which the Company is at risk.
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 OIC of 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, 2002, the Plan's RBC was $1,946,110 more than the required
amount.
The primary differences in reporting between SAP and GAAP through December 31,
2002 result from various receivables and excess deferred tax assets beyond
calculated admitted portions.
The Plan's statutory basis shareholders' equity as filed in the OIC statements
was $5,864,930 and $5,754,080 as of December 31, 2002 and 2001, respectively.
Statutory basis net loss as filed in the OIC statements was $1,452,534 and
$2,949,651 for the years ended December 31, 2002 and 2001, respectively.
The Plan is subject to regulations that limit dividend payments and regulate
other inter-company transactions. At December 31, 2002 and 2001, 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 2002 or 2001.
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NOTE 13: UNAUDITED QUARTERLY FINANCIAL DATA - CONDENSED CONSLOLIDATED
STATEMENT OF INCOME
Quarter Quarter Quarter Quarter
12/31/2002 09/30/2002 06/30/2002 03/31/2002
------------ ------------ ------------ ------------
OPERATING REVENUE
Premium revenue $ 16,293,484 $17,883,264 $18,647,724 $19,931,886
Premium revenue, related
parties 357,172 346,715 345,304 354,170
Medicare revenue - - - -
Network access fees 2,385,084 2,361,009 2,303,409 2,042,537
Hospital administrative fees 1,309,631 1,273,188 1,276,551 1,208,545
Hospital administrative fees,
related parties 1,127,049 1,130,497 1,205,290 1,060,856
Other 47,575 41,556 63,535 38,154
------------ ------------ ------------ ------------
Total operating revenue 21,519,995 23,036,229 23,841,813 24,636,148
------------ ------------ ------------ ------------
OPERATING EXPENSES
Medical expenses 11,563,548 10,003,603 14,733,219 15,081,074
Medical expenses, related
Parties 3,190,485 6,669,068 5,274,718 3,300,349
Payroll and related expenses 2,345,780 2,525,222 2,680,327 2,737,390
Selling, general and
administrative expenses 2,647,568 2,557,436 2,770,040 2,694,054
Amortization expense (27,526) - - 27,576
------------ ------------ ------------ ------------
Total operating expenses 19,719,855 21,755,329 25,458,304 23,840,393
Operating income (loss) 1,800,140 1,280,900 (1,616,491) 795,755
OTHER INCOME (EXPENSE)
Interest and dividends, net 126,001 194,137 180,284 154,731
Write-down of investment
and other 26,013 (406,179) - -
------------ ------------ ------------ ------------
Total other income
(expense), net 152,014 (212,042) 180,284 154,731
------------ ------------ ------------ ------------
Income (loss) before
federal income taxes
and minority interest 1,924,154 1,068,858 (1,436,207) 950,486
FEDERAL INOCME TAX EXPENSE
(BENEFIT) 666,494 500,879 (486,075) 333,228
------------ ------------ ------------ ------------
1,258,660 567,979 (950,132) 617,258
MINORITY INTEREST, net of tax (33,347) 12,568 389,802 35,103
------------ ------------ ------------ ------------
NET INOCME (LOSS) $ 1,252,313 $ 580,547 $ (560,330) $ 652,361
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON
SHARE $ 21.39 $ 9.91 $ (9.57) $ 11.14
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING $ 58,538 $ 58,572 $ 58,540 $ 58,540
============ ============ ============ =============
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Quarter Quarter Quarter Quarter
12/31/2001 09/30/2001 06/30/2001 03/31/2001
------------ ------------ ------------ ------------
OPERATING REVENUE
Premium revenue $ 22,534,246 $23,756,167 $24,214,449 $25,046,659
Premium revenue, related
parties 2,292,393 2,223,846 2,280,097 3,736,532
Medicare revenue - - - -
Network access fees 3,430,480 1,890,086 1,602,366 1,713,983
Hospital administrative fees 124,946 1,461,637 1,609,971 1,431,979
Hospital administrative fees,
related parties 882,289 894,140 562,191 756,013
Other 39,947 55,131 60,791 52,165
------------ ------------ ------------ ------------
Total operating revenue 29,304,301 30,281,007 30,329,865 32,737,331
------------ ------------ ------------ ------------
OPERATING EXPENSES
Medical expenses 21,454,031 14,013,264 14,924,244 16,024,855
Medical expenses, related
Parties 2,559,433 9,342,176 9,949,495 10,683,237
Payroll and related expenses 2,790,277 3,031,291 3,205,177 3,254,995
Selling, general and
administrative expenses 2,719,969 2,818,173 2,957,968 2,970,554
Amortization expense 200,157 293,693 293,700 293,701
------------ ------------ ------------ ------------
Total operating expenses 29,723,867 29,498,597 31,330,584 33,227,342
------------ ------------ ------------ ------------
Operating income (loss) (419,566) 782,410 (1,000,719) (490,011)
OTHER INCOME (EXPENSE)
Interest and dividends, net 153,505 213,264 285,167 174,886
Write-down of investment
and other (1,227,661) (10,872) 1,047 -
------------ ------------ ------------ -----------
Total other income
(expense), net (1,074,156) 202,392 286,214 174,886
------------ ------------ ------------ ------------
Income (loss) before
federal income taxes
and minority interest (1,493,722) 984,802 (714,505) (315,125)
FEDERAL INOCME TAX EXPENSE
(BENEFIT) 21,321 349,329 (223,009) (107,142)
------------ ------------ ------------ ------------
(1,517,043) 635,473 (491,496) (207,983)
MINORITY INTEREST, net of tax - - 37,025 136,036
------------ ------------ ------------ ------------
NET INOCME (LOSS) $ (1,517,043) $ 635,473 $ (454,471) $ (71,947)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON
SHARE $ (25.90) $ 10.85 $ (7.76) $ (1.23)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING $ 58,539 $ 58,569 $ 58,572 $ 58,572
============ ============ ============ =============
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34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS, AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of First Choice are as follows:
Name Age Position
Gary R. Gannaway 56 President & Chief Executive Officer
Kenneth Hamm 44 Executive Vice President-Chief Financial Officer
Ross D. Heyl 49 Vice President-Chief Marketing Officer
Julie Keeffe 45 Vice President-Medical Mgmt & Member Services
Ze'ev Young, M.D. 49 Vice President-Chief Medical Officer Services
Greg Van Pelt 51 Director (I)
Paul M. Elliott 62 Director (III)
Kenneth D. Graham 55 Director (I)
Phillip J. Haas 54 Director (III)
William F. Johnston, M.D. 57 Director (III)
Garman E. Lutz 57 Director (II)
William J. MacDonald, M.D. 58 Director (III)
Barbara L. Mitchell 57 Director (I)
Richard A. McGee, M.D. 57 Director (II)
Richard H. Peterson 60 Director (I)
Paul G. Ramsey, M.D. 53 Director (I)
Richard E. Rust, M.D. 76 Director (II)
Clyde D. Walker 47 Director (III)
Diane E. Cecchettini, R.N. 55 Director (II)
Gerald A. Cufley, M.D. 58 Director (I)
Scott F. Kronland, M.D. 45 Director (I)
William R. Stubbs, M.D., M.B.A. 58 Director (I)
__________________
(I) Term Expires in 2003.
(II) Term Expires in 2004.
(III) Term Expires in 2005.
Gary Gannaway
Mr. 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.
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.
34
35
Kenneth A. Hamm
Mr. Hamm, Executive 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 five years as 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 was the interim Chief
Financial Officer at Medica Healthplans in Minnesota, a one million member
regional HMO, beginning in 1999. Mr. Hamm earned a Bachelors degree in Finance
from California State University at Los Angeles in 1985 and is a CPA.
Ross Heyl
Mr. Heyl, Vice President and Chief Marketing Officer, joined First
Choice Health Network 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
Ms. Keeffe, 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, she provided
health care management consulting services from 1996 to 1997 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
Dr. Young joined the Company as the Chief Medical Officer and
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
Network members.
Dr. Young brings significant managed care experience to the Company.
Just prior to joining First Choice, Dr. Young spent nearly three years
as the Northwest Regional Medical Director for United Healthcare. While at
United Healthcare, 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 United Healthcare, Dr. Young spent
five years at Regence Blue Shield serving as the Boeing Division Medical
Director, and was also responsible for corporate medical policy.
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36
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.
Diane E. Cecchettini, Director since 1999
Diane E. Cecchettini was designated President and Chief Executive Officer by
The Multicare Health System Board effective July 1999. Ms. Cecchettini has
been with Multicare Health System since June 1989 in various capacities:
Executive Vice President, 1997-1999, Vice President-Patient Services
1989-1997. Ms. Cecchettini's previous experience includes: Assistant
Administrator, Sutter General Hospital, Sacramento, California, 1985-1989;
Administrative Director of Nursing and other management positions at Sutter
Memorial Hospital, Sacramento, California, 1977-1985 and direct clinical
experience at UCLA Medical Center in Los Angeles, California. Ms.
Cecchettini received a Bachelor's degree in Nursing in 1970 from the
University of California, Los Angeles, and a Master of Science degree in Human
Resources Management in 1976 from the University of Utah.
In 1993, Ms. Cecchettini retired as a Lieutenant Colonel from the Air Force
Reserves, having served 21 years as a Flight Nurse in Aeromedical Evacuation -
serving in the Vietnam era and as a Troop Commander in Desert Storm.
Gerald A. Cufley, M.D., Director since 2001
Gerald A. Cufley, M.D. has been in the private practice of medicine in
Kirkland, Washington since 1977. After completing a degree of B.A. in
Chemistry at the University of Washington in 1966, Dr. Cufley attended the
University of Washington School of Medicine and received his medical degree
in 1970. Internship and residency in internal medicine were completed at the
University of New Mexico Affiliated Hospitals in 1973. Two years of post
graduate training in Gastroenterology was obtained at Letterman Army Medical
Center and the University of California at San Francisco. From 1975 to 1977,
Dr. Cufley served as a medical officer in the U.S. Army at Madigan Army
Medical Center at Fort Lewis, Washington.
Paul M. Elliott, CPA, Director since 1989
Mr. Elliott, recently retired, was formerly Senior Vice President of Finance
and Operations for the Alpac Corporation from 1981 to 1993. 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, Director since 1997
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 such as 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 Doctor
Goodwell; an Internet based virtual clinic service.
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37
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, Director since 1995
Mr. Haas has been Administrator-Managed Care of Valley Medical Center, a
304-bed acute care public district hospital, since November 1993, 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 the Company. 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. 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., Director since 1998
Dr. Johnston had been the Medical Director of Emergency Services at Northwest
Hospital since 1977. 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. Dr. Johnston 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.
Scott F. Kronlund, M.D., M.S., Director since 2002
Scott F. Kronlund has been the Senior Vice President for Ambulatory Services at
Good Samaritan Community Healthcare since 2002. He previously was the Chief
Medical Officer at Good Samaritan for four years, responsible for all
outpatient physician and clinic services and also serves an internal consultant
to several community-based programs.
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38
Dr. Kronlund is also the Chair of the Community Advisory Board, University of
Washington Health Promotions Research Center which focuses on research related
to healthy aging. He also serves on the Auxiliary Faculty and is a Guest
Lecturer at the University of Washington, Tacoma, Graduate School of Nursing.
Dr. Kronlund holds a Bachelor of Science in Chemistry at the Pacific Lutheran
University in Tacoma, a medical degree from the University of Washington
School of Medicine as well as a Master of Science degree in preventative and
Administrative Medicine from the University of Wisconsin. In addition, he is
a board-certified family physician, having received his residency training at
the University of Iowa. Dr. Kronlund is currently professionally affiliated
with the American Academy of Family Physicians, Washington State Medical
Association, Medical Society of Pierce County and is a Certified Physician
Executive through the American College of Physician Executives.
Garman E. Lutz, CPA, Director since 2000
Mr. Lutz has been Senior Vice President of Finance and Chief Financial Officer
for Empire Health Services in Spokane, Washington, since 1990. 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 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., Director since 2000
Dr. 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. 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.
Richard A. McGee, M.D., F.A.C.P., Director since 1995
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, since June 1997. He was previously Chief of Staff and Chief of Medical
Affairs of Stevens Healthcare, a Public Hospital District, from 1987 to 1989 and
1989 to 1996, respectively. In addition, Dr. McGee 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.
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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.
Barbara L. Mitchell, Director since 1986
Ms. Mitchell has been the Director, Human Resources for Valley Medical Center,
Renton, Washington, since November 1999. Previously, she was the Managing
Partner of ClearPoint, an employee benefits brokerage and consulting firm from
1997 to 1999. 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 H. Peterson, Director since 1997
Mr. Peterson has been President and Chief Executive Officer of Swedish Health
Services, a non-profit organization comprised of a 163-bed community hospital
on the Ballard campus, the 436-bed Providence Seattle Medical Center and a
697-bed tertiary care hospital on the First Hill campus, since 1995.
Mr. Peterson previously served as President and Chief Executive Officer of
Fairview Riverside Medical Center in Minneapolis, Minnesota, from 1982 to 1991.
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., Director since 2000
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.
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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., Director since 1985
Dr. Rust is a retired family practitioner. 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.
William R. Stubbs, M.D., M.B.A., Director since 1999
Dr. Stubbs is the Vice President, Medical Affairs and the senior physician
manager in the Multicare Health System since February 1994, with direct
responsibility for medical staff relationships and the departments of Medical
Staff Services, Family Practice Residency Education, Quality Management,
Pharmacy and Materials Management, Chaplains, Risk and Legal Services,
Hospitalists Program, Emergency Planning, 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. He teaches Medical Ethics for
the Tulane University Masters of Medical Management program and the University
of Washington Certificate program of Medical Management.
Greg Van Pelt, Director since 2001
Greg Van Pelt has been the Vice President and Chief Executive of the Providence
Health System, Washington Region, since June 2001. The Washington Region of
the Providence Health System includes hospital, clinic and long-term care
services 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 in Alaska, Washington, Oregon and
California.
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Clyde D. Walker, Director since 1995
Mr. Walker has been the Senior Vice President, Human Resources at Continental
Mills since December 31, 2002. Mr. Walker was the Vice President, Human
Resources of PRIMEX Aerospace and Electronics Division and PRIMEX Aerospace
Company in Redmond, WA, from October 1977 to June 2000. 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.
Classification of Directors. - The management of the Company is
vested in a Board of Directors. The Board of
Directors consists of seventeen individuals: Seven (7) directors (the
"Class A Directors") are physicians representing Class A shareholders.
Seven (7) directors (the "Class B Directors") 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") represent employers other than health care providers and/or
are consumers of health care services.
The Board is divided into three categories as follows:
Category I: Three Class A Directors, two Class B Directors, and one Class C Director.
Category II: Two Class A Directors, three Class B Directors, and one Class C Director.
Category III: Two Class A Directors, two Class B Directors, and one Class C Director.
The categories have staggered three year terms.
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
healthcare 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. No executive officer or director
has filed a report of beneficial ownership under Section 16 of the Securities
Exchange Act of 1934 relating to his or her ownership of Class A common stock,
but such filings will be made in the near future.
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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(1)
Gary Gannaway 2002 $299,091 $ 67,500 $6,000
President and CEO 2001 $270,000 $ - $ 7,735
2000 $268,887 $138,915 $ 8,646
Kenneth Hamm 2002 $211,767 $50,750 $ 1,067
Executive Vice President, Finance 2001 $203,000 $12,019 $ 960
2000 $ 96,154 $ - $15,194
Ross Heyl 2002 $125,135 $30,126 $ 5,000
Vice President 2001 $120,500 $29,243 $ 5,000
2000 $116,970 $25,200 $ 5,000
Julie Keeffe, R.N. 2002 $157,029 $28,125 $ 941
Vice President 2001 $150,000 $18,200 $ 960
2000 $145,600 $33,250 $ 600
Ze'ev Young, M.D. 2002 $193,075 $34,648 $ 2,807
Vice President and
Chief Medical Officer 2001 $181,442 $ - $ 960
____________________
(1) All other compensation includes auto allowances and car fringe benefits
with the exception of $15,194 reported for Ken Hamm in year 2000. Mr.
Hamm worked as a consultant to the Company before being hired as Chief
Financial Officer and the $15,194 represents consulting fees.
Effective June 28, 2001, Class A and C Directors receive $500 per Board meeting
and $125 per hour, for committee meetings attended. Class B Hospital Directors
are not compensated since their positions typically preclude them from keeping
director fee compensation.
EMPLOYMENT AGREEMENTS
Effective January 1, 2003, 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 $302,940 for 2003, subject to a 2% annual increase.
Mr. Gannaway will be eligible to receive an annual 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. In addition, Mr. Gannaway is eligible for a long-term incentive
award based on performance over the three-year term of the employment agreement
and for a Supplemental Executive Retirement program funded at a rate of 7% of
base pay.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 2002, 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 11 Executive Compensation" in 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.
43
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 %
315 Martin Luther King Jr. Way
Tacoma, WA 98415
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 - - - -
Phillip J. Haas - - - -
William F. Johnston, M.D. 1 - * -
Garman Lutz - - - -
Greg Van Pelt - - - -
William J. MacDonald, M.D. 1 - * -
Barbara L. Mitchell - - - -
Richard A. McGee, M.D. 1 - * -
Richard H. Peterson - - - -
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Shares Owned Percent of
Name Class A Class B Class A Class B
- ------- ------- ------- ------- -------
Paul G. Ramsey, M.D. - - - -
Richard E. Rust, M.D. 1 - * -
William R. Stubbs, M.D., M.B.A. - - - -
Clyde D. Walker - - - -
Diane E. Cecchettini, R.N. - - - -
Gerald A. Cufley, M.D. 1 - * -
Scott F. Kronland, M.D. - - - -
Gary Gannaway - - - -
Kenneth Hamm - - - -
Ross Heyl - - - -
Julie Keeffe - - - -
Ze'Ve Young, M.D. - - - -
All directors and executive
officers as a group (21 persons) 5 40,600 * 100%
_________________
* Less than one percent of outstanding shares of
Class A common stock.
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, Note 2,
Shareholders Equity."
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 20, 1999, the Company 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
the Company effective January 1, 2000.
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University of Washington Academic Medical Center has agreed to pay an
affiliation fee of $2,520,000, payable $1,260,000 upon execution of the
Agreement with the remaining $1,260,000 payable in three equal payments of
$420,000 plus interest at five percent (5%). UMWC made the final $420,000
principle payment in 2002, however, they owed $134,557 in interest as of
December 2002. UMWC subsequently paid the outstanding interest in February
2003.
The following table shows with respect to each participating hospital that owns
Class B common stock or participating equity in the Company, the amount of
premiums paid to the Company and the amount of medical expense reimbursement
paid by the Company during 2002.
Premium Medical
Owner Hospital Revenue Expense
- ---------------------------------- ------------ ----------
Empire Health Centers Group, Inc. $ - $ 203,483
Evergreen Hospital Medical Center 1,404,184 1,527,167
Good Samaritan Hospital - 1,064,071
Multicare Medical Center - 2,441,481
Northwest Hospital - 999,301
Overlake Hospital - 1,076,669
Providence Facilities - 2,231,276
Stevens Hospital - 869,289
Swedish Hospital - 3,969,902
UW Medical Center - 2,649,318
Valley Medical Center - 1,402,663
------------ -----------
Grand Total $1,404,184 $18,434,620
In addition, the owner hospitals paid a total of $4,523,692 in administrative
fees to the Company in 2002.
ITEM 14 CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Registrant's disclosure controls and procedures (as defined in rule 13a-14 and
15d-14 adopted under the Securities Exchange Act of 1934 (the "Act")) was
carried out under the supervision and with the participation of the
Registrant's Chief Executive Officer, and Chief Financial Officer, within the
90-day period preceding the filing date of this annual report. The
Registrant's Chief Executive Officer and Chief Financial Officer concluded
That the Registrant's disclosure controls and procedures as currently in
effect are effective in ensuring that the information required to be disclosed
by the Registrant in the reports it files or submits under the Act is (i)
accumulated and communicated to the Registrant's management (including the
Chief Executive Officer and Chief Financial Officer) in a timely manner, and
(ii) recorded, Processed, summarized and reported as required by the Act and
rules thereunder on a timely basis.
(b) Changes in Internal Controls: Since the date of the evaluation of the
Registrant's disclosure control and procedures referred to above, the
Registrant did not make any significant changes in its internal controls or
other factors that could significantly affect those controls, including any
corrective action with regard to significant deficiencies and material
weaknesses.
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PART IV
Item 15. 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.*
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.*
10.3 Form of Agreement between Registrant and Health Care
Provider other than Hospitals and Physicians participating in PPO.*
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.*
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
December 31, 2002.
10.24 Copy of Chief Executive Officer's 2003 Compensation Agreement
10.25 Copy of Chief Executive Officer's Long Term Incentive Contract
* Filed as an Exhibit to 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.
*** Filed as Exhibit 10.23 to Registrant's Current Report on Form 8-K filed
on January 3, 2000.
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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 31st day of March, 2003.
FIRST CHOICE HEALTH NETWORK, INC.
By:
--------------------------------------
KENNETH HAMM
Executive Vice President of Finance
(Principal Financial and Accounting Officer and Duly Authorized Officer)
In accordance with the Securities 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 March 31, 2003.
Signature Title Date
- --------- ----- ----
/s/ President and Chief Executive Officer March 31, 2003
- ---------------------------- (Principal Executive Officer)
GARY R. GANNAWAY
/s/ Executive Vice President of Finance March 31, 2003
- ---------------------------- (Principal Financial and Accounting Officer)
KENNETH HAMM
/s/ Director March 31, 2003
- ----------------------------
DIANE E. CECCHETTINI
/s/ Director March 31, 2003
- ----------------------------
GERALD A. CUFLEY, M.D.
/s/ Chairman of the Board of Directors March 31, 2003
- ----------------------------
PAUL M. ELLIOTT
/s/ Director March 31, 2003
- ----------------------------
KENNETH D. GRAHAM
/s/ Director March 31, 2003
- ----------------------------
PHILLIP J. HAAS
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Signature Title Date
- --------- ----- ----
/s/ Director March 31, 2003
- ----------------------------
WILLIAM F. JOHNSTON, M.D.
/s/ Director March 31, 2003
- ----------------------------
SCOTT F. KRONLUND, M.D.
/s/ Director March 31, 2003
- ----------------------------
GARMAN E. LUTZ
/s/ Director March 31, 2003
- ----------------------------
WILLIAM J. MACDONALD, M.D.
/s/ Director March 31, 2003
- ----------------------------
RICHARD A. MCGEE, M.D.
/s/ Director March 31, 2003
- ----------------------------
BARBARA L. MITCHELL
/s/ Director March 31, 2003
- ----------------------------
RICHARD H. PETERSON
/s/ Director March 31, 2003
- ----------------------------
PAUL G. RAMSEY, M.D.
/s/ Director March 31, 2003
- ----------------------------
RICHARD E. RUST, M.D.
/s/ Director March 31, 2003
- ----------------------------
GREG VAN PELT
/s/ Director March 31, 2003
- ----------------------------
CLYDE D. WALKER
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CERTIFICATIONS
The undersigned certifies, pursuant to 18.U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that to my
knowledge this Report on Form 10-K for the year ended December 31, 2002,
fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, and the information contained in this Report
fairly presents, in all material respects, the financial condition and the
results of operations of First Choice Health Network, Inc. and Subsidiary.
By: / s /Gary Gannaway
-----------------------------
Gary Gannaway,
President and Chief Executive Officer
March 31, 2003
The undersigned certifies, pursuant to 18.U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that to my
knowledge this Report on Form 10-K for the year ended December 31, 2002,
fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, and the information contained in this Report
fairly presents, in all material respects, the financial condition and the
results of operations of First Choice Health Network, Inc. and Subsidiary.
By: / s /Kenneth A. Hamm
-----------------------------
Kenneth A. Hamm,
Executive Vice President of Finance
March 31, 2003
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50
I, Gary Gannaway, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certify that:
(1) I have reviewed this Annual report on Form-10K of First Choice Health
Network, Inc.;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
(4) The registrant's other certifying officer, and I are responsible for
Establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedure as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the Audit
Committee of registrant's Board of Directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
(6) The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weakness.
By: / s /Gary Gannaway
-----------------------------
Gary Gannaway,
President and Chief Executive Officer
March 31, 2003
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I, Kenneth A. Hamm, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certify that:
(1) I have reviewed this Annual report on Form-10K of First Choice Health
Network, Inc.;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
(4) The registrant's other certifying officer, and I are responsible for
Establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedure as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the Audit
Committee of registrant's Board of Directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
(6) The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weakness.
By: / s /Kenneth A. Hamm
-----------------------------
Kenneth A. Hamm,
Executive Vice President of Finance
March 31, 2003
51