10-K 1 r10k1201.txt 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0-23998 FIRST CHOICE HEALTH NETWORK, INC. (Exact name of Registrant as specified in its charter) Washington 91-1272766 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 601 Union Street Suite 1100 Seattle, Washington 98101-1838 (Address of principal executive offices) Issuer's Telephone Number, Including Area Code (206) 292-8255 (Issuer's telephone number, including area code) 1 2 Securities registered pursuant to Section 12 (b) of the Act: None Securities to be registered under Section 12 (g) of the Act: Class A Common Stock, par value $1.00 per share Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ___X__ No ______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] There is no trading market for the Registrants voting stock (Class A Common Stock, $1.00 par value and Class B Common Stock, $1.00 par value) and, accordingly, the market value of the voting stock held by non-affiliates of the Registrant based on bid and asked prices cannot be determined. The aggregate number of Registrant's shares outstanding on December 31, 2001 was 539 shares of Class A Common Stock, and 40,600 shares of Class B Common Stock, $1.00 par value, respectively. Transitional Small Business Disclosure Format ( check one ): Yes ______ No __X__ Documents incorporated by reference: None 2 3 PART I ITEM 1 BUSINESS 4 ITEM 2 PROPERTIES 9 ITEM 3 LEGAL PROCEEDINGS 9 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9 PART II ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 9 ITEM 6 SELECTED FINANCIAL DATA 10 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 13 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 14 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 31 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF FIRST CHOICE HEALTH NETWORK, INC. 32 ITEM 11 EXECUTIVE COMPENSATION 39 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 40 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 42 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 43 SIGNATURES 47
3 4 PART I DESCRIPTION OF BUSINESS AND PRODUCTS GENERAL ITEM 1. First Choice Health Network, Inc., ("The Network") is a provider-owned, managed health care company which has established a network of physicians, hospitals and other health care providers (a "Preferred Provider Organization" or "PPO") located primarily in the State of Washington for the provision of health care services. A small portion of the PPO is located in each of Alaska, Idaho and Montana. The Network contracts with the health care providers in its PPO for the provision of health care services on a discounted fee basis and contracts with self-insured employers, indemnity insurers, health maintenance organizations, union trusts (collectively, "Health Plans") and third party administrators ("TPAs"), to provide their subscribers (or members) access to the PPO, for which it receives a fee from the Health Plan or the TPA, as applicable, typically on a per subscriber (or member) per month basis. An additional per subscriber (or member) monthly fee is received in the event the Health Plan or TPA elects to receive utilization management services. In addition, the hospitals participating in the PPO pay The Network an administrative fee under their respective participating health care facility service contracts. At December 31, 2001, The Network had arrangements with TPA's and health plans representing approximately 1.2 million members and their dependents (collectively "Covered Persons"). Practically all of the Company's revenues were derived from services performed in the state of Washington during the year ended December 31, 2001. The Network's success depends to a significant degree on its ability to control health care costs for the Health Plans and TPA's utilizing its PPO. An integral part of The Network's PPO is its comprehensive quality assurance program. This program is designed to maintain and improve proper medical care and includes, verification of physicians' credentials and hospital accreditation, medical care evaluations, outcome studies which evaluate hospital admissions and referral patterns and the processing of Covered Persons' grievances. In excess of 85% of the PPO physicians are board certified or board eligible in one or more specialties. First Choice Health Network, a corporation organized under the laws of the state of Washington in 1984, is owned by 539 physicians, all of whom own Class A Common Stock; seven hospitals who own Class B Common Stock, and four hospital participants. During 1995, The Network formed a wholly-owned subsidiary, First Choice Health Plan, Inc.("The Plan"), to operate as a health care service contractor ("HCSC") that permits the Company to assume risk for healthcare services in its operations. An HCSC is an organization that arranges for the provision and delivery of health care services for a fixed periodic premium through a network of providers who generally receive either a capitation fee (a fixed periodic fee per covered member) or a negotiated fee for the health care services rendered. HCSC's may use a "gatekeeper" system of health care delivery where each member is serviced by a primary care physician (generally, a family practitioner, pediatrician or internist). The primary care physician provides medical care related to the general health of the HMO member and refers members to specialists and other health care providers, as appropriate. HCSC's differ from PPO's in that they are permitted to assume the financial risk of the cost of health care services. HCSC's are required to register with the state of 4 5 Washington Office of Insurance Commissioner. Filing requirements include filing copies of organizational documents, financial disclosure, forms of agreements to be issued to members, a schedule of proposed rates of reimbursement to providers, solicitation materials and a description of grievance procedures and a quality assurance program. Risked Based Capital ("RBC") requirements were adopted by the state of Washington and the NAIC effective for 1998 and subsequent years, which established that certain required amounts of capital be maintained. As of December 31, 2000, The Plan's RBC was less than the required amount by $402,987. The Plan subsequently cured this capital deficiency in March, 2001. As of December 31, 2001, The Plan's RBC exceeded the required amount in connection with its statutory filing. During 1998, The Plan filed an application with the Federal Health Care Financing Administration ("HCFA")for a license to offer a Medicare risk product called SeniorsFirst. The medicare application was approved in the third quarter of 1998 and the first sales of the product occurred on January 1, 1999. As of December 31, 1999, 2000 and 2001,there were 2,585, 2,973 and 0 members, respectively, and collected premiums of $6,338,440, $19,060,419 and $0, respectively. The Plan ceased offering this product on January 1, 2001. Redeemable Equity Participation On December 20, 1999, First Choice Health Network, Inc. executed an agreement with University of Washington Academic Medical Center ("UWMC") to become a participant in the administration, operations and any incentives bestowed upon any shareholders in First Choice Health Network effective January 1, 2000. First Choice offers and operates a preferred provider organization and a managed care delivery system for cost-effective, quality health care benefits, and for comprehensive health care claims processing and administration. University of Washington Academic Medical Center has agreed to pay the affiliation fee of $2,520,000, payable $1,260,000 upon execution of the Agreement and the remaining $1,260,000 will be paid in three equal payments of $420,000 due annually for three years plus interest at five percent (5%). UWMC does not become a shareholder or member of the Network. UWMC shall participate in any incentive or reward program established by the Network as if UWMC owned 5,800 shares of class B common stock. Dividends, distributions, and liquidation of the Network are also determined as if UWMC owned 5,800 shares of class B stock. If the Network performs certain actions that substantially change the organization, the Network discontinues the health care facility services contract with UWMC, or if total managed care enrollment falls below 500,000 member months, then UWMC can withdraw from the agreement, but no refunds are given. If the Network merges, is sold, or if the Network takes a material action that proves detrimental to UWMC, then UWMC may redeem their interest for the equivalent of the fair value of 5,800 class B common shares of FC stock, less any amounts still owed by UWMC. PRODUCTS First Choice Health Network's Preferred Provider Organization (PPO) The Network's PPO is comprised of physicians, hospitals and other health care providers in the states of Washington, Alaska, Idaho and Montana who are required to sign preferred physician contracts, health care facility service contracts and provider contracts, respectively, under which the health care 5 6 provider agrees to accept, as payment in full, the discounted fee schedule negotiated by The Network for each covered service; such agreements are terminable on 90 days' notice. Physicians The Network seeks to include within its PPO high-quality, cost-effective physicians who have admitting privileges at a participating PPO hospital. In addition, physicians are recruited in geographic areas in which The Network's PPO does not have a physician presence if a prospective Health Plan has a large number of Covered Persons in such area. Upon receipt of an application by a physician to participate in the PPO, The Network conducts its own credentialing process (separate and distinct from those performed by participating hospitals with respect to physicians with admitting privileges), evaluating relevant information such as malpractice insurance, claims activity and the physician's standing with licensing regulatory authorities. The number of contracted physicians is 11,000 at December 31, 2001. Hospitals The Network has contracts with hospitals in most counties in the State of Washington and in each county in which it conducts business in other states. The PPO offers Covered Persons a full range of hospital services, including tertiary care. The Network seeks to attract hospitals rendering high-quality, cost-effective care. Prior to contracting with a hospital, The Network reviews the hospital's accreditation, federal and state certifications, and internal and external claims data and reports, including data available from regulatory agencies. The number of contracted hospitals is 100 at December 31, 2001. Other Health Care Providers The Network has contracts with many health care providers (other than physicians and hospitals) which, among other services, provide mental health care, diagnostic services, chiropractic services, physical therapy, out-patient surgery, laboratory services and home health care. The number of contracted other health care providers is 5,000 at December 31, 2001. The Network has also developed a pharmacy network in the state of Washington, which provides data with respect to utilization of prescribed drugs by physicians participating in the PPO, which The Network intends to incorporate into its utilization management program. Utilization Management Services In addition to providing Health Plans with access to its PPO, The Network offers a utilization management program for an additional per subscriber (or member) monthly fee to the Health Plan. The goal of the utilization management program is to ensure that high quality health care is consistently delivered to Covered Persons in an efficient and cost-effective manner. The program includes individual case reviews of hospital admissions, outpatient surgery, primary care physician referrals to specialists, management of catastrophic, psychiatric and substance abuse cases, profiling practice patterns of individual physicians and evaluation of hospital utilization patterns. At December 31, 2001, The Network had contractual arrangements through which Health Plans and TPA's representing approximately 1.2 million Covered Persons, utilized the company's PPO. The 6 7 Network receives a fee for providing access to its PPO, typically on a per subscriber per month basis, from the Health Plan or TPA. The per subscriber monthly fee is generally fixed for a twelve-month period under contracts with each Health Plan or TPA, and is based upon the extent of the network utilized (hospitals and/or physicians) and whether utilization management services are requested. First Choice Health Plan Products The Plan offers health care coverage to employer groups, Association Plans as well as a Medicare Supplement product: Association Plan These plans include a plan offered through Costco Wholesale and a plan offered through the Employers Health Purchasing Cooperative which are tailor made to targeted populations of employees. Medicare Risk In 1999 and 2000 The Plan offered a medicare risk product called SeniorsFirst for persons eligible to receive Medicare (parts A and B) at no or minimal cost to the member. SeniorsFirst was a medicare managed care plan that combines health insurance and health services in one organization, a Medicare + Choice HMO. SeniorsFirst offer the same benefits that original medicare offers and additional benefits, which may change from year to year. Under this program, the Health Care Financing Administration of the United States Department of Health and Human Services (HCFA) paid a fixed premium for coverage of each member based on a formula of the projected medical expense of each Medicare member. The Plan ceased offering this program as of January 1, 2001. Medicare Supplement Under the HCSC license, The Plan contracts with Olympic Health Management Systems, Inc., to operate a Medicare Supplement product. The Plan offers four basic types of health care plans to prospective employer groups: Managed Plans, Triple Option Plans, Point of Service Plans and preferred providers open access plans. Managed Plans All health care, except emergency services, under this plan is provided or arranged by a primary care physician (PCP) which is chosen by the member during enrollment. The PCP will refer the member to specialists, as well as arrange hospital and other services with a Community Network of providers. Point of Service Plan This plan offers the same coverage as the Managed Plan but provides another level of benefit coverage. The member is required to choose a PCP during enrollment. The member may choose to have his/her services coordinated through the PCP in order to have the highest level of benefit coverage available. The member also has the choice to self-refer to an Extended PPO Network Provider, which is paid at a lower level. 7 8 Triple Option Health Plan This plan offers three different levels of benefit coverage: the Community Network benefit level, the Extended PPO Network benefit level and an out-of- network benefit level. The member is required to choose a PCP during enrollment. The member may choose to have his/her services coordinated through the PCP in order to receive the highest level of benefit coverage available. However, the member may choose to self-refer to an Extended PPO Network Provider or a non-participating provider, which is covered at a lower reimbursement. This plan is being discontinued. Preferred Provider Open Access Plan During 2001, The Plan introduced an insured Preferred Provider Plan. The plan is an open access plan that does not require PCP referrals to see specialists. MARKETING AND SALES The Network markets its PPO and utilization management services through an internal marketing staff to TPAs and, in conjunction with the TPAs and independent brokers and agents, to the Health Plans. The Network generally does not market directly to subscribers or their dependents, although it does engage in limited direct mailings relating to product development. The Plan distributes its products through it direct sales force and telemarketing representatives and through independent insurance agents and brokers. Direct Sales Force and Telemarketing The Plan maintains a direct sales staff of account executives. The account executives sell to employer groups, primariy through brokers. In addition, they are the principal administrative contact for employers and their benefit managers by conducting on-site employee meetings and various other requests. The Plan employs a staff of telemarketing representatives who sell the Costco Health Insurance product directly to small groups. Independent Insurance Agents and Brokers Independent insurance agents and brokers have been responsible for a significant portion of The Plan's enrollment growth. They are compensated pursuant to commission arrangements that vary depending on the particular company products and services sold. MAJOR CUSTOMER The Company's largest customer, accounted for approximately 24% of the Company's premium revenue and 74% of premiums receivable in fiscal 2001 and approximately 22% of premium revenue and 53% of premiums receivable in fiscal 2000. This customer accounted for approximately $25.8 million and $22.7 million of the Company's consolidated revenues for 2001 and 2000, respectively. COMPETITION The managed health care industry is highly competitive, primarily on the basis of price, the size, quality and geographic location of the network of physicians, hospitals and other health care providers, benefits provided and quality of service. The Network competes with other managed health care companies, such as health maintenance organizations and indemnity health insurance companies, and other PPO's in the state of Washington. 8 9 GOVERNMENTAL REGULATION Patient Bill of Rights The Patient Bill of Rights was effective July 1, 2001, and it encompasses areas related to: (1) health plan disclosure nonpublic personal financial and health information, (2) disclosure of information regarding health benefits, (3) network adequacy, (4) quality in utilization review decisions, (5) grievance procedures, (6) independent review of health care disputes, and (7) health plan liability. This is not expected to have a material impact on operations. HIPPA The Health Insurance Portability and Accountability Act of 1996 ("HIPPA"), requires the United States Department of Health and Human Services ("DHHS") to develop standards and requirements for maintenance and transmission of health information that identifies individual members. The Standards for Electronic Transactions Final Rule was published August 2000 and became effective October 2000 with a compliance date of October 2002. This effective date has now been delayed to October 2003. The Standards for Privacy and Individually Identifiable Health Information Final Rule was published December 2000 and became effective April 2001 with a compliance date of April 2003. It is difficult to assess the costs related to HIPAA compliance because these are sweeping changes for which The Company has no historical experience. Overall,costs of implementation and risk management are expected to be significant as policy and process development is based on extensive assessment, staff training, IS solution purchases and ongoing compliance evaluation. There will be continuing costs to ensure compliance with the law over time. Employees At December 31, 2001, The Network had 180 employees, 178 of which were full-time . None of the company's employees are unionized or subject to collective bargaining agreements with The Network, and The Network believes its relationships with its employees to be good. ITEM 2. DESCRIPTION OF PROPERTY First Choice leases and occupies two offices in separate buildings in Seattle. The leases expire in March and July 2003. ITEM 3. LEGAL PROCEEDINGS In the normal course of business, the Company may encounter claims, assessments, and litigation brought against the Company. If and when these situations arise, the Company assesses the situation and accrues for financial exposure, if appropriate. As of December 31, 2001, the Company is not aware of any such material situations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted in the fourth quarter of 2001. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no public trading market for any of the Company's equity securities. 9 10 As of December 31, 2001, there were 539 holders of the Company's Class A Common Stock, seven holders of the Company's Class B Common Stock, and three Hospital Participants and UWMC. Holders of each class of Common Stock are entitled to share ratably on a share- for-share basis with respect to any dividends on such class of Common Stock, when, as and if declared by the Board of Directors out of funds legally available. Therefore, such dividends may not be paid while an obligation to repurchase shares remains outstanding. Pursuant to the Company's contracts with the Hospital Participants, if First Choice pays any dividends or other distributions with respect to the Class B Common Stock, First Choice must make an equivalent distribution to the Hospital Participants. The Company does not currently anticipate paying cash dividends on its capital stock.
ITEM 6. SELECTED FINANCIAL DATA 2001 2000 1999 1998 1997 ------------ ----------- ----------- ----------- ---------- Operating revenue $122,652,504 $139,144,059 $92,097,975 $56,878,270 $25,581,122 Net income(loss) (1,407,987) (1,349,859) 1,660,238 703,551 380,868 Net income(loss) per common share (24.04) (23.04) 28.33 12.00 6.49 Total assets 30,415,699 30,412,795 30,667,873 20,712,398 17,683,105 Total liabilities 17,847,673 17,837,813 16,394,980 8,868,805 6,769,900 Redeemable equity participation 1,991,850 1,617,000 1,260,000 - - Total Equity 9,338,690 10,784,920 12,148,644 10,523,508 9,600,974
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Network's ability to retain existing clients and attract new clients is largely dependent on its ability to control health care costs by creating and maintaining a network of high quality, efficient, fully credentialed providers who agree to accept competitive reimbursement rates and on its ability to control excess utilization through its utilization management program. During 2001, The Network continued to expand its PPO network. In 2001, The Network continued its system of physician reimbursement which had commenced in July 1993, referred to as the Resource Based Relative Value System, whereby fees to physicians are weighted more toward cognitive services (i.e., overall patient care) as opposed to procedural services (e.g., surgery and diagnostic tests). This system is consistent with the company's belief in the importance of managing the full scope of patient care to provide the most appropriate level of service for each patient. Since its inception, the Company has negotiated reimbursement to its principal hospitals under a Diagnostic Related Group ("DRG") system under which payments are based on the diagnosis of the patient's condition, generally notwithstanding the length of hospitalization. In 1997, The Network negotiated with additional hospitals to change the basis upon which DRG's are determined from an "All Medicare Grouper" to an "All Patient Grouper" and concurrently introduced Washington State-specific hospital weights to more closely match reimbursement payments to actual resource consumption. In anticipation of the proposed Washington State health care reform and to enhance its competitive position in the health care industry, The Plan obtained, on January 13, 1995, a Certificate of Registration to operate as a health care service contractor ("HCSC"), in the state of Washington, which permits The Plan to assume financial risk in its operations. The Plan's revenues consist primarily of commercial premiums resulting from the offering of health insurance products. However, this is supplemented by The Plan's rental of the PPO network beginning January 1, 1998. See the 10 11 "First Choice Health Plan Products" under "Description of Business" for further explanation of products currently being offered by The Plan. In 2001, Medical expenses were comprised of fee-for-service contracted arrangements and capitation arrangements with the physician organizations ("PO") in which the risk for health insurance coverage has been passed to the PO. For the capitation arrangement the Plan passes much of the premium to the POs and keeps a certain percentage for administrative fees which covers services that The Plan provides on behalf of the PO. The Plan assumes the full risk for approximately 88% of commercial members at year-end 2001. For the membership that The Plan is at risk for, the medical expenses are comprised of negotiated payments to physicians, hospitals and other health care providers which includes an estimated amount for incurred but not reported claims ("IBNR"). The Plan had a license with the Federal Health Care Financing Administration ("HCFA") to offer a Medicare risk product. The Medicare application was approved in the third quarter of 1998 with the first sales of the product occurring on January 1, 1999. The Plan ceased offering this product as of January 1, 2001. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEARS ENDED DECEMBER 31, 2000 AND 1999 Operating revenue decreased $16.5 million (11.9%) from 2000 to 2001 and increased $47.0 million (51.1%) from 1999 to 2000. The decrease in 2001 was due to the discontinuance of the SeniorsFirst Medicare Risk product (approximately $19.1 million). The increase in 2000 was primarily due to increased Plan insured membership and rate increases. Commercial member months grew by 29.1% in 2000 and Medicare Risk member months grew by 156.7% during 2000. In addition, commercial premium rates increased by 14% and Medicare Risk premium rates increased by 21% during 2000. Network Access fees increased $.8 million (10.3%) from 2000 to 2001 and were unchanged in 2000 from 1999. The increase is due to higher contractual rates. Hospital administrative fees increased $1.0 million (14.7%) from 2000 to 2001 and increased $.8 million (14.2%) from 1999 to 2000. The increase is primarily due to increased enrollment and a higher volume of services provided to the hospitals. Operating expenses decreased $19.5 million (13.6%)from 2000 to 2001 and increased $72 million (58.0%) from 1999 to 2000. The decrease in 2001 was primarily due to reduced medical expenses as a result of the discontinuance of the SeniorsFirst Medicare Risk product (approximately $16.8 million). The increase in 2000 was primarily due to increased medical costs ($47.9 million) as a result of the increase Plan health insurance membership as well as increased costs per member. Payroll and related expenses were flat in 2001 compared to 2000 and increased $2.2 million (22.3%) from 1999 to 2000. The Network increased the number of employees as a result of the increased Plan membership. Selling, general and administrative costs decreased $.7 million (5.9%) from 2000 to 2001 and increased $2.2 million (29.6%) from 1999 to 2000. The decrease in 2001 was a result of the reduction in Plan membership. The increase in 2000 was a result of the increase in Plan membership. Other expenses increased by $1.3 million in 2001 from zero in 2000. This is primarily due to the Network's write-down of its investment in the Plan to the Plan's estimated net realizable value which consists of the Network's 80% ownership interest in the Plan's book value. See "Market Risk" for a discussion of the reason for the write-down of the investment in the Plan. Inflation Health care costs in the United States have increased more rapidly than the national consumer price index in recent years, and that trend is expected to continue. The Company's operating results have not significantly been affected by general inflation, and the Company does not anticipate that inflation will have a significant impact on its operating results in the near term. However, inflation in healthcare costs does directly impact the Company's operation as most commercial groups have only annual rate adjustments. Prior to 2000, the Company transferred risk to health care providers through capitation arrangements and risk-sharing provisions. In 2000, The Plan began to assume more risk for medical costs as provider groups terminated risk arrangements. At year-end 2001, The Plan was at risk for approximately 88% of commercial members. As a result of this, The Plan is significantly impacted by rising medical costs. Costs are managed through discounted contractual arrangements and medical management activities. 11 12 Market Risk HMOs and health insurance companies operate in a highly competitive environment. The Company has numerous competitors, including for-profit and not-for-profit HMOs, preferred provider organizations ("PPOs"), and indemnity insurance carriers, some of which have substantially larger enrollments and greater financial resources than the Company. The Network's ability to retain existing clients and attract new clients is largely dependent on its ability to control health care costs by creating and maintaining a network of high quality, efficient, fully credentialed providers who agree to accept competitive reimbursement rates and on its ability to control excess utilization through its utilization management program. As The Plan's business model has shifted form capitated contracts to fee for service contract arrangements, management and The Board of Directors has reevaluated the strategic importance of The Plan. As a result, The Plan's existing insured business will be wound down in an orderly manner with a complete exit of the commercial insured business by December 2004. The resulting reduction in membership may subject The Plan to various risks including adverse selection, claim volatility and administrative cost that may result in losses. This decision to exit the insured business required The Network to evaluate the carrying value of its investment in The Plan and resulted in the write-down noted under Results of Operations. LIQUIDITY AND CAPITAL RESOURCES Since inception in 1986, the Company has financed its operations from equity investments from over 870 physicians, from the seven hospitals constituting the Company's Class B shareholders, non-equity capital contributions from four additional hospitals pursuant to their respective participation agreements, and funds from operations. At December 31, 2001, the Company had cash and cash equivalents of approximately $3.2 million as compared to approximately $13.1 million at December 31, 2001. The decrease in cash and cash equivalents is primarily due to the purchase of $13.3 million in bonds available for sale. The bonds consist of U. S. Government Agency loan-backed adjustable rate securities. The Company anticipates that the revenues generated by operations, cash and cash equivalents and bonds available for sale as of December 31, 2001 will be sufficient to meet its cash requirements throughout 2002. The expected reduction in The Plan's insured membership is expected to be funded by a corresponding reduction in The Plan's reserve for unpaid claims and claim adjustment expenses. In the event the above sources of funds are not adequate to meet the liquidity needs of The Plan, additional funds estimated to be in the $1.5 million to $2.0 million range will be available from The Network pursuant to the Contribution Agreement referred to in Note 5 to the financial statements. On July 1, 1997, First Choice Health Network, Inc. (The Network), First Choice Health Plan, Inc. (The Plan), Health First Partners, Inc. (Health First) and Health Washington, L.L.C. (Health WA) entered into a merger and asset purchase agreement. The agreement between the four companies consisted of three transactions as described in the paragraphs below. First, The Plan purchased substantially all of the assets of Health WA in exchange for 34,523 shares of The Plan's Common Stock. These shares were issued to the former shareholders of Health WA. The assets of Health WA consisted primarily of Health WA's rights to various provider contracts, a large group ontract, as well as other intangible property including trademarks. Estimated growth in membership was 12,500 as a result of this merger. These shares represent approximately 12.6% ownership in FC Health Plan. Secondly, Health First merged with and into The Plan with Health First ceasing operations and The Plan as the surviving corporation. FC Health Plan issued 33,572 shares of stock to the former shareholders of Health First for the net assets of Health First as well as the rights to various provider and group contracts. The net assets purchased included those assets and liabilities that existed as of July 1, 1997, which had a book value of approximately $1.0 million. Estimated growth in membership was 5,500 as a result of this merger. These shares represent approximately 12.3% ownership stake in The Plan. Third, The Network, formerly the sole shareholder of The Plan, became obligated to contribute cash to The Plan in exchange for 55,436 shares of FC Health Plan stock. This is facilitated by a Contribution Agreement that states that The Network shall contribute a certain percentage of revenues over the next ten years in exchange for those shares. The Network's ownership in the subsidiary, The Plan, was approximately 75.1%. In January 1998, the owners of The Plan signed an agreement, which gave the Company an 80% ownership in the common stock of The Plan. The purpose of the increase in common stock ownership was to allow for consolidation of Plan income or losses in the Company's filing of consolidated tax return, which includes The Plan. This transaction by Health Washington exchanging 8,613 shares of common stock for the same number of preferred shares. Two other owners made a similar exchange of 4,187 shares each. In order to facilitate this transaction, The Plan amended their Articles of Incorporation 12 13 to authorize 1,000,000 shares of preferred stock. This stock has a par value of $29.10 and is nonvoting and noncumulative, but has a dividend preference rate of 8.75% of the par value per share. Effective February 1, 1998, the Network and Plan entered into a tax sharing agreement, which provides for the sharing of Federal income tax liabilities and benefits in the filing of consolidated tax returns. In July, 1998, The Plan amended the Articles of Incorporation to increase the authorization of preferred shares to 1,000,000. The Network then increased its investment in The Plan by purchasing $3,000,000 in The Plan's preferred stock. On December 20, 1999, First Choice Health Network, Inc. executed an agreement with University of Washington Academic Medical Center to become a participant in the administration, operations and any incentives bestowed upon any shareholders in First Choice Health Network effective January 1, 2000. University of Washington Academic Medical Center shall pay the affiliation fee of $2,520,000, payable $1,260,000 upon execution of this Agreement and the remaining $1,260,000 will be paid in three equal payments of $420,000 due annually for three years plus interest at five percent (5%). As of December 31, 2000, $1,617,000 in principal had been paid. UWMC does not become a shareholder or member of the Network. UWMC shall participate in any incentive or reward program established by the Network as if UWMC owned 5,800 shares of class B common stock. Dividends, distributions, and liquidation of the Network are also determined as if UWMC owned 5,800 shares of class B stock. If the Network performs certain actions that substantially change the organization, the Network discontinues the health care facility services contract with UWMC, or if total managed care enrollment falls below 500,000 member months, then UWMC can withdraw from the agreement, but no refunds are given. If the Network merges, is sold, or if the Network takes a material action that proves detrimental to UWMC, then UWMC may redeem their interest for the equivalent of the fair value of 5,800 class B common shares of FC stock, less any amounts still owed by UWMC. Throughout 1999 and early 2000, The Plan contracted with Cascade Medical Group (Cascade) for capitated health care services. The Plan did not have insurance risk for the covered individuals to the extent that Cascade could continue to pay The Plan for claims paid on their behalf. In March of 2000, Cascade management dissolved the organization. The dissolution of Cascade does not affect the financial position or results of operations in 1999 because The Plan had a payable to Cascade as of December 31, 1999. The ultimate financial impact of this event approximated $970,000, which was recorded as medical expenses during 2000. During 2001 and 2000 several other provider organizations experienced financial difficulties. As a result of this, The Plan recorded additional medical expense of approximately $2.0 million and $4.4 million respectively. These amounts represent write-offs of provider settlement receivables and reserves for unpaid claims for estimated claim run out liabilities. As a result of these additional medical expenses, The Plan received approximately $4.2 million in capital infusions from The Network in 2000. and an additional $775,000 in 2001. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable as of December 31, 2001. 13 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . 14 Consolidated Balance Sheets as of December 31, 2001 and 2000 . . . . . . 15 Consolidated Statements of Income for the years ended December 31, 2001, 2000, and 1999. . . . . . . 17 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000, and 1999. . . . . . . 18 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999. . . . . . . 19 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 21 INDEPENDENT AUDITORS' REPORT Shareholders and Board of Directors First Choice Health Network, Inc. We have audited the accompanying consolidated balance sheets of First Choice Health Network, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the First Choice Health Network, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the years then ended,in conformity with accounting principles generally accepted in the United States of America. Moss Adams LLP March 30, 2002 Everett, Washington 14 15 FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 and 2000
ASSETS 2001 2000 CURRENT ASSETS: Cash and cash equivalents $ 3,207,241 $12,697,290 Short term investments 499,995 Service fees receivable, net of allowance for doubtful accounts of $420,497 and $650,024 1,592,263 2,131,111 Service fees and premiums receivable from related parties 384,274 1,326,448 Premiums receivable, net of allowance for doubtful accounts of $130,505 and $199,756 2,806,117 2,738,711 Provider settlements receivable - unrelated parties 476,929 848,202 Provider settlements receivable - related parties 181,770 1,032,618 Prepaid expenses 777,401 839,805 Deferred tax assets (Note 4) 786,295 1,140,386 Other current assets 1,645,201 716,959 ------------ ----------- Total current assets 11,857,491 23,971,525 FURNITURE, EQUIPMENT, AND COMPUTER SOFTWARE: Furniture and equipment 4,466,461 4,354,690 Computer software 1,187,970 886,933 ------------ ----------- 5,654,431 5,241,623 Less accumulated depreciation and amortization (3,451,422) (2,632,994) ------------ ----------- Furniture, equipment, and computer software, net 2,203,009 2,608,629 Investments Available for Sale 13,348,948 - DEFERRED TAX ASSETS (Note 4) 1,149,623 925,165 OTHER ASSETS: Restricted indemnity cash 1,829,102 1,798,699 Goodwill, net of accumulated amortization of $247,734 and $192,658 27,526 82,602 Other intangible assets, net of accumulated amortization of $3,358,400 and $2,332,225 1,026,175 ------------ ----------- Total other assets 1,856,628 2,907,476 ------------ ----------- TOTAL $30,415,699 $30,412,795 ============ ===========
See notes to consolidated financial statements. 15 16 FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 and 2000
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000 CURRENT LIABILITIES: Accounts payable $ 451,771 $ 678,054 Accrued expenses 1,833,074 3,296,789 Reserve for unpaid claims and claims adjustment expenses 11,815,058 10,181,595 Provider settlements payable - unrelated organizations 1,416,068 1,529,853 Provider settlements payable - related organizations - - Unearned premiums 1,633,532 1,064,390 Deferred income taxes - 87,132 Current portion of note payable 331,791 301,829 ----------- ----------- Total current liabilities 17,481,294 17,139,642 NOTE PAYABLE (Note 10) 366,379 698,171 MINORITY INTEREST 1,237,486 173,062 REDEEMABLE EQUITY PARTICIPATION 1,991,850 1,617,000 COMMITMENTS (Note 5) SHAREHOLDERS' EQUITY: Common stock: Class A, par value $1 - Authorized, 30,000 shares; issued and outstanding, 539 and 585 shares 539 572 Class B, par value $1 - Authorized, 70,000 shares; issued and outstanding, 40,600 shares 40,600 40,600 Additional paid-in capital 4,306,581 4,336,182 Paid-in capital from affiliates 1,472,108 1,472,108 Retained earnings 3,518,862 4,935,458 ----------- ----------- Total shareholders' equity 9,338,690 10,784,920 ----------- ----------- TOTAL $30,415,699 $30,412,795 =========== ===========
See notes to consolidated financial statements. 16 17 FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
2001 2000 1999 OPERATING REVENUE: Premium revenue $ 95,551,521 $ 90,054,697 $ 64,496,942 Premium revenue, related parties 10,532,868 15,162,019 7,204,129 Medicare revenue - 19,060,419 6,338,440 Network access fees 8,636,915 7,832,119 7,838,999 Hospital administrative fees 4,628,533 4,532,068 4,289,828 Hospital administrative fees, related parties 3,094,633 2,201,602 1,609,000 Other 208,034 301,135 320,637 ------------ ------------ ------------ Total operating revenue 122,652,504 139,144,059 92,097,975 OPERATING EXPENSES: Medical expenses 66,416,394 70,544,946 41,812,940 Medical expenses, related parties 32,534,341 47,089,964 27,875,293 Payroll and related expenses 12,281,740 12,244,679 10,012,045 Selling, general, and administrative expenses 11,466,664 12,190,024 9,741,831 Amortization expense 1,081,251 1,174,512 1,191,012 ------------ ------------ ------------ Total operating expenses 123,780,390 143,244,125 90,633,121 ------------ ------------ ------------ Operating income(loss) (1,127,886) (4,100,066) 1,464,854 OTHER INCOME (EXPENSE): Interest and dividends 826,822 780,904 361,200 Other (1,237,486) - 46,000 ------------ ------------ ------------ Total other income (410,664) 780,904 407,200 ------------ ------------ ------------ Income (loss) before federal income taxes and minority interest (1,538,550) (3,319,162) 1,872,054 FEDERAL INCOME TAX EXPENSE (BENEFIT) 42,499 (1,278,116) 279,143 ------------ ------------ ------------ (1,581,049) (2,041,046) 1,592,911 MINORITY INTEREST 173,062 691,187 67,327 ------------ ------------ ------------ NET INCOME (LOSS) $ (1,407,989) $ (1,349,859) $ 1,660,238 ============ ============ ============ NET INCOME (LOSS) PER COMMON SHARE $ (24.04) $ (23.04) $ 28.33 ============ ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING 58,565 58,579 58,601 ============ ============ ============
See notes to consolidated financial statements. 17 18 FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Common stock Class A Class B Additional Paid-in Total paid-in capital from Retained shareholders' Shares Amt Shares Amt capital affiliates earnings equity BALANCE, January 1, 1999 619 $619 40,600 $40,600 $4,385,102 $1,472,108 $4,625,079 $10,523,508 Cash received from shareholder receivable Repurchase of Class A common stock and membership rights (34) (34) (35,068) (35,102) Net income 1,660,238 1,660,238 BALANCE, December 31, 1999 585 585 40,600 40,600 4,350,034 1,472,108 6,285,317 12,148,644 Repurchase of Class A common stock and membership rights (13) (13) (13,852) (13,852) Net income (130,985)(1,349,859) ---------- --------- -------- --------- ---------- ---------- ---------- BALANCE, December 31, 2000 572 572 40,600 40,600 4,336,182 1,472,108 4,935,458 10,784,920 Repurchase of Class A common stock and membership rights (33) (33) (29,601) (29,634) Unrealized Gain/(Loss) on Investments (8,609) (8,609) Net loss (1,407,987)(1,407,987) BALANCE, December 31, 2001 539 $ 539 40,600 40,600 $4,306,581 $1,472,108 $3,518,862 $9,338,690 === ===== ====== ====== ========== =========== ========== ===========
See notes to consolidated financial statements. 18 19 FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
2001 2000 1999 OPERATING ACTIVITIES: Net income (loss) $(1,407,987) (1,349,859) $1,660,238 Adjustments to reconcile net income to net cash provided (used) by operating activities: Gain on sale of Dental Network - (44,500) Depreciation 818,428 621,264 523,372 Amortization 1,081,251 1,174,512 1,191,012 Deferred income taxes, net 42,500 (1,262,279) (813,161) Provision for doubtful accounts (298,778) 253,914 207,356 Minority interest 1,064,424 (691,187) ( 67,327) Cash provided (used) by changes in operating assets and liabilities: Service fees receivable 1,710,549 (1,565,527) (1,631,435) Premiums receivable 1,845 (309,916) (544,285) Prepaid expenses 62,404 (266,870) (182,187) Other current assets (928,241) (546,377) ( 89,403) Other assets - (390,009) Accounts payable (226,283) 158,008 142,196 Accrued expenses (1,463,715) 1,021,784 665,803 Reserve for unpaid claims and claims adjustment expenses 1,633,463 6,970,982 1,108,249 Provider settlements receivable - related organizations 850,848 (769,723) 462,535 Provider settlements receivable - unrelated organizations 257,488 (2,530,799) 3,569,500 Federal income tax payable - - (28,417) Unearned Premiums 569,142 (2,040,131) 2,967,241 ----------- ----------- ------------- Net cash provided (used) by operating activities 3,767,338 1,998,850 8,706,778 INVESTING ACTIVITIES: Sale of Dental Network - - 90,000 (Purchase) of Investments Available for Sale (13,348,948) - - (Purchase)/Maturity of short-term investment 499,995 (499,995) - (Purchase) of furniture, equipment, and computer software (412,808) (1,563,753) (769,630) Unrealized Gain/(Loss) on Investments (8,609) - - (Increase)in restricted indemnity cash (30,403) (51,073) ( 41,671) ----------- ----------- ------------- Net cash from investing activities (13,300,773) (2,114,821) (721,301) ----------- ----------- ------------- BALANCE, carried forward ( 9,533,435) (115,971) 7,985,477
See notes to consolidated financial statements. 19 20 FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY CONSOLDIATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
2001 2000 1999 BALANCE, brought forward $(9,533,435) (115,971) $ 7,985,477 FINANCING ACTIVITIES: Repurchase of Class A common stock and membership rights from physicians (29,634) (13,865) (35,102) Redeemable equity participation 374,850 357,000 1,260,000 Receipt of shareholder receivable - - - Proceeds of note issued 1,000,000 - (Payment) of note payable (301,830) (1,612,004) (1,887,996) ----------- ----------- ------------ Net cash provided (used) by financing acivities 43,386 (268,869) (663,098) ----------- ----------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,490,049) (384,840) 7,322,379 CASH AND CASH EQUIVALENTS: Beginning of year 12,697,290 13,082,130 5,759,751 ----------- ----------- ------------ End of year $ 3,207,241 $12,697,290 $ 13,082,130 =========== =========== ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Federal income taxes $ - $ 430,000 $ 1,350,000 Interest 84,540 11,800 94,174 SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING AND INVESTING ACTIVITIES: Business acquired for note payable - - 612,333
See notes to consolidated financial statements. 20 21 FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 and 2000 NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of business: First Choice Health Network, Inc. (the Company) was incorporated under the laws of the state of Washington on September 28, 1984. The Company was formed to organize a network of independent participating physicians and hospitals to provide a comprehensive, managed health care delivery system for group plans established by employers and benefit groups. The Company's business is conducted primarily in Washington, Oregon, and Alaska. The Company's majority owned subsidiary, First Choice Health Plan, Inc. (The Plan), is a health care services contractor which was formed on January 31, 1995, to offer fully insured health care services to an enrolled population in Washington state. The Plan's Board of Directors have authorized management to proceed with an orderly exit of the insured health care business by no later than December 2004. Principles of consolidation: The consolidated financial statements include the accounts of the Company and The Plan. All significant intercompany amounts have been eliminated in consolidation. New accounting pronouncements: In October 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, which is effective for business combinations initiated after June 30, 2001. This statement establishes the purchase method as the only acceptable method of accounting for business combinations and eliminates the pooling-of-interest method. The Company did not participate in a business combination in 2001. Also, in October 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, which is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 establishes new accounting and reporting standards for goodwill and other intangible assets. Under this statement, goodwill will no longer be amortized, but will be recognized and measured based in its fair value. Management does not believe that adoption of these statements will have a material effect on the financial statements. Cash equivalents: The Company considers all investments purchased with an original maturity of three months or less to be cash equivalents. At December 31, 2001 and 2000, cash and cash equivalents consisted of cash management funds of $3,207,241 and $12,697,290, respectively. Investments: The company owns U.S. Government Agency loan-backed adjustable rate securities that are classified as available for sale. These investments are recorded at market value. Service fees receivable: Service fees receivable consists primarily of estimates for administrative fees receivable related to claims incurred on or before the balance sheet date but not reported. The Company evaluates the reasonableness of administrative fees receivable based on claims reported in subsequent periods. These estimates are subject to the effects of trends in claims. Although considerable variability is inherent in such estimates, management believes that the administrative fees receivable is reasonable. The estimates are continually reviewed and adjusted as necessary in the period new information becomes known. Allowance for doubtful accounts: The Company performs periodic credit evaluations of its customers and maintains an allowance for potential credit losses related to receivables. Premiums receivable: Premiums receivable represents monthly group health insurance premiums billed and outstanding. Furniture, equipment, and computer software: Furniture, equipment, and computer software are recorded at cost. Depreciation and amortization are computed using the straight-line method over the lesser of the estimated useful lives of the assets or lease term ranging from three to five years. 21 22 Restricted indemnity cash: Restricted indemnity cash consists of amounts required to be restricted for potential claims from enrollees as required by the Office of the Insurance Commissioner of the State of Washington. The balance consists of short-term asset backed securities that are classified as held to maturity. These assets are recorded at amortized cost, which approximates fair value. Other intangible assets: Intangible assets assumed in the Sound Health PPO network acquisition were trademarks, contracts, and a noncompetition agreement. Intangible assets are amortized using the straight-line method over three years. Goodwill: Goodwill is determined as the difference between the purchase price and fair value of identifiable net assets purchased. Goodwill is amortized using the straight-line method over three to five years. Events or changes in circumstances have not occurred that indicate the value of goodwill has been impaired as of December 31, 2001 and 2000 . Reserve for unpaid claims and claims adjustment expenses: This liability represents reported and unreported claims, which have been incurred but have not been paid at the date of the financial statements. The reserve for unreported claims is determined actuarially using prior experience and the nature of current health insurance contracts and volume. Included in the liability is an estimate of the future expenses necessary to settle claims. Due to the uncertainties inherent in the estimation process, actual costs may differ from the estimated amounts in the near term, and these differences may be significant. Provider settlement receivable (payable): This liability or asset is the amount due to (from) health care providers in conjunction with capitation arrangements, which is computed by subtracting the claims payments made on behalf of the provider from the capitated amounts contractually allocated to them. The ultimate payout or receipt of these amounts is subject to a settlement process subsequent to the contract year-end. The Company believes the amounts recorded appropriately reflect the settlement amounts. Unearned premiums: Unearned premiums consist of insurance premiums received prior to fiscal year end for health insurance coverage subsequent to year end. Operating revenue: Operating revenue consists primarily of premium revenue, Medicare revenue, network access fees, and hospital administrative fees. Premium revenue represents amounts charged for health care services and is recognized as revenue in the period for which enrollees are entitled to medical care. Medicare revenue is paid at a fixed per member per month capitation amount by the Health Care Financing Administration (HCFA) based on the projected medical cost for each Medicare member and is recognized as revenue over the coverage period. The Plan ceased offering the Medicare plan effective January 1, 2001. Network access fees are recognized as earned during the period of coverage and are recorded at contractual rates. Hospital administrative fees are recognized as earned in the period hospital claims are incurred by a subscriber and are recorded at a contractual percentage of the claims. For the years ended December 31, 2001 and 2000 and 1999, 24%, 22% and 34% respectively, of the premium revenue related to one subscriber group. Premiums receivables, as of December 31, 2001, 2000 and 1999 from that group represented 73%, 53% and 68%, respetively. Income taxes: Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. The effect on the deferred tax assets and 22 23 liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established to the extent that it is more likely than not that deferred tax assets will not be realized. Valuation of long-lived assets: Using its best estimates, based on reasonable and supportable assumptions and projections, the Company reviews its long- lived assets for impairment whenever events or changes in circumstances have indicated that the carrying amounts of its assets might not be recoverable. At December 31, 2001 and 2000, no write-downs were required. Write-down of Investment in Plan - As a result of the decision to exit the insured health care business by December 2004, the Company's 80% ownership interest in The Plan was written down to the expected net realizable value which is The Plan's book value at December 31, 2001. The write-down of $1,237,486 is included in Other Expense. Earnings per share: Net income per common share (Class A and B) is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period, including 41,139, 41,172 common shares and 17,400 shares applicable to affiliate common share equivalents (Note 2) in 2001 and 2000, respectively. Shares issued and reacquired during each period were weighted for the portion of the period that they were outstanding. There are no dilutive securities. Use of estimates: Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications: Certain prior year amounts have been reclassified to conform to the current year presentation. NOTE 2: SHAREHOLDERS' EQUITY Ownership of stock: Class A voting common stock may be held solely by physicians licensed in the state of Washington who contract with the Company to provide health care services and who hold active, associate, or provisional medical staff privileges at one or more of the hospitals that contract with the Company to provide health care services. Class B voting common stock may be held by hospitals in the state of Washington that contract with the Company to provide health care services. Voting rights: Holders of each outstanding share of Class A or Class B common stock are entitled to one vote on each matter submitted to a vote at meetings of shareholders, and each class of common stock votes as a separate class. Transfer of stock: Shareholders may only transfer their stock in the Company to the Company for repurchase. The repurchase price is established by the Board of Directors each fiscal year as set forth in the bylaws. Class A shares were repurchased at $898.00 and $1,144.26 per share during 2001 and 2000 respectively. Dividends: The Board of Directors may declare and pay dividends on one or more classes of common stock at such times and in such amounts as it designates, but in no event may dividends be paid while there is an outstanding obligation to repurchase shares. Dividends are allocated among shareholders of each class of stock according to the number of shares outstanding to each Class A or Class B shareholder. Any dividends paid to the Class B shareholders must be shared with the nonshareholders that have rights equivalent to those of the other shareholders. Liquidation rights: Upon liquidation or dissolution, the Board of Directors, at its discretion, will allocate the value of assets among the classes of its outstanding stock in proportion to the capital contributions of shareholders of each class. For these purposes, the contributions by the nonshareholder district hospitals that have rights equivalent to those of the Class B shareholders andthe membership fees paid by Class A shareholders are considered capital contributions. The allocation to Class A shareholders will be shared among all Class A shareholders in accordance with the number of shares outstanding to each Class A shareholder. The allocation of the Class B shareholders must be shared with the nonshareholder hospitals that have rights equivalent to those of Class B shareholders. 23 24 Paid-in capital from affiliates: District hospitals are not shareholders of the Company, but have contractual agreements with the Company that provide for certain rights and obligations equivalent, but not identical, to those of Class B shareholders, including liquidation and dividend rights. The capital contributions of the nonshareholders are recorded as paid-in capital from affiliates. These contractual agreements are considered to be common share equivalents for purposes of calculating net income per common share. Common stock: In January 1998, the owners of The Plan entered into an agreement which increased the Company's ownership in the common stock of The Plan from 75.1% to 80%. The purpose of the increase in common stock ownership was to allow for the consolidation of tax returns between the Company and The Plan. This transaction included exchanging common stock held by the minority owners of The Plan, who are also stockholders in the Company, for the same number of preferred shares. This preferred stock is nonvoting and noncumulative, and has a dividend rate of 8.75%. NOTE 3: REDEEMABLE EQUITY PARTICIPATION On December 20, 1999, the Company executed a participation agreement with the University of Washington Academic Medical Center (UWMC) to become a participant in the administration, operations, and any incentives bestowed upon any shareholders in the Company effective January 1, 2000. UWMC will pay a fee of $2,520,000, $1,260,000 payable upon execution of this agreement and the remaining $1,260,000 payable in three equal payments of $420,000 consisting of principal and interest at 5%. The final payment will be adjusted for any outstanding principal and interest. UWMC does not become a shareholder or a member of the Company. UWMC shall participate in any incentive or reward program established by the Company as if UWMC owned 5,800 shares of Class B common stock. Dividends, distributions, and liquidation of the Company are also determined as if UWMC owned 5,800 shares of Class B common stock. If the Company performs certain activities that substantially change the organization, the Company discontinues the health care facility services contract with UWMC, or if total managed care enrollment falls below 500,000 member months, then UWMC can withdraw from the agreement, but no refunds are given. If the Company merges, is sold, or if the Company takes a material action that proves detrimental to UWMC, then UWMC may redeem its interest for the equivalent of the fair value of 5,800 Class B common shares of Company stock, less any amounts still owed by UWMC. Since redemption, under certain terms, is outside the control of the Company, the amounts received are recorded as a redeemable equity participation. NOTE 4: FEDERAL INCOME TAXES Federal income taxes consist of the following components:
2001 2000 1999 Current $ (79,367) $ (15,837) $1,092,304 Deferred 121,886 (1,262,279) (813,161) ------------ ------------ --------- $ 42,499 $ (1,278,116) $ 279,143 ============ ============ =========
24 25 Federal income taxes differ from the amount computed by applying the expected U.S. corporate income tax rate to income before federal income taxes for the years ended December 31 as follows:
2000 2000 1999 Amount Percent Amount Percent Amount Percent Computed expected tax rate $ (523,107) (34.0)% $ (1,128,515) (34.0) % $ 636,498 34.0 % Tax effect of permanent differences: Valuation allowance on Plan NOLs Political contributions Write-down of investment in subsidiary 420,745 27.4 Change in valuation allowance (16,727) (0.5) (73,608) (3.9) Adjustment to return filed (26,119) (0.8) (283,747) (15.2) Other 144,861 9.4 (106,755) (3.2) ----------- ---- ----------- ---- ---------- ---- $ 42,499 2.8% $(1,278,116) (38.5)% 279,143 14.9%
The deferred tax assets and liabilities resulting from the tax effects of temporary differences at December 31 are presented below:
2000 2000 Deferred tax assets: Net operating losses $2,679,716 $2,351,733 Reduction of shareholders' equity 213,724 213,724 Allowance for doubtful accounts 187,341 759,219 Unearned premium 111,080 72,379 Amortization 686,714 441,297 Vacation 123,959 114,748 Other 150,191 329,258 ---------- ---------- Gross deferred tax assets 4,152,725 4,282,358 Valuation allowance (2,216,807) (2,216,807) ---------- ---------- Net deferred tax assets 1,935,918 2,065,551 Deferred tax liabilities: Cash to accrual adjustment - - Furniture, equipment, and computer software - 87,132 ---------- ---------- Total deferred tax liabilities (current) - 87,132 ---------- ---------- Deferred income tax asset, net $1,935,918 $1,978,419 ========== ========== Current portion of deferred tax assets $ 786,295 $1,140,386 Long-term portion of deferred tax assets 1,149,623 925,165 ---------- ---------- $1,935,918 $2,065,551 ========== ==========
25 26 The valuation allowance was established in 1997 for the tax benefit of the 1997 NOL's of the Company since the Company filed a separate federal income tax return for the final six months of 1997 and the first three weeks of 1998, and the realization of the tax benefit is unlikely. The allowance also provides for NOL's acquired in acquisition of a business in 1997. The following schedule represents the amounts of The Plan's NOL's and their expiration date: 2007 $ 150,754 2008 53,781 2009 20,754 2010 1,584,667 2011 2,075,894 2012 2,353,449 2018 280,723 2020 396,839 2021 964,657 Total Net Operating Losses 7,881,518 Valuation Allowance (6,520,022) ========== $ 1,361,496
The Company has $1,361,496 in NOL's which expire in 2020 and 2021, as a result of taxable losses in 2000 and 2001. There is no valuation allowance on these NOL's. NOTE 5: COMMITMENTS Leases: The Company leases its office facilities and some office equipment under operating leases expiring through 2003. The leases provide for monthly minimum rent payments, and some include renewal options for an additional five years. Rental expense charged to operations under the operating leases for the years ended December 31, 2001, 2000 was $923,239, $876,900, respectively. Future minimum lease payments under operating leases for the years ending December 31 are as follows: 2002 915,927 2003 359,084 2004 - ---------- $1,275,011 ==========
In connection with the acquisition of a business in 1997, The Company is required to contribute to the capital of The Plan based on a percentage of the Company's administrative fee revenue for the 10 years following July 1, 1997, if any. No minimum amounts of contributions are required. The following contributions were made pursuant to this agreement in 2001 and 2000. 2001 2000 1999 Contribution $ 1,714,515 2000 Contribution 1,503,152 2001 Contribution 996,848 Remaining 2001 Contribution 775,000 __________________________ Total Contributions $ 775,000 $ 4,214,515 --------------------------
26 27 NOTE 6: REPORTABLE OPERATING SEGMENTS Factors management used to identify the enterprise's reportable segments: The Company has two reportable segments which correspond to the organization of the Company and its majority-owned subsidiary, The Plan. Each segment requires distinct tracking capabilities in the areas of revenues, claims processing, marketing strategies, and reporting to regulatory organizations. Description of the types of products and services from which each reportable segment derives its revenue: The Company has two primary products which have been aggregated into one reportable segment: network access fees and hospital administration fees. Network access fees arise from the rental of the Company's large PPO network while hospital administrative fees arise from charges to the network hospitals based on claims incurred by members. The other reportable segment, The Plan, offers a variety of fully insured health insurance plans to employer groups. Measurement of segment profit or loss and segment assets: The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit and loss from operations before income taxes not including nonrecurring gains and losses. The Company accounts for intersegment revenues by assigning a management fee to The Plan that is an estimate of resources expended on The Plan's behalf. 27 28 Information about profit or loss and assets of reportable segments:
First Choice First Choice Health Network Health Plan Total 2001: Revenues from external customers $ 13,826,171 $108,826,333 $122,652,504 Revenue from intercompany 383,050 - 383,050 Interest revenue (expense) 99,142 807,220 906,362 Depreciation/amortization expense 1,429,457 414,099 1,843,556 Income tax expense (benefit) 1,196,097 (1,153,598) 42,499 Expenditures on furniture, equipment, and computer software 386,024 - 386,024 Segment profit (loss) 1,124,794 (2,705,843) (1,581,049) Assets 14,306,068 21,861,357 36,167,425 Liabilities 2,975,528 15,673,925 18,649,453 2000: Revenues from external customers $ 12,077,869 $127,066,190 $139,144,059 Revenue from intercompany 403,860 - 403,860 Interest revenue (expense) 95,602 685,302 780,904 Depreciation/amortization expense 1,616,473 179,303 1,795,776 Income tax expense (benefit) 562,064 (1,840,180) (1,278,116) Expenditures on furniture, equipment, and computer software 1,563,753 - 1,563,753 Segment profit (loss) 1,376,066 (3,417,112) (2,041,046) Assets 25,011,867 23,404,879 48,416,746 Liabilities 4,892,138 15,278,104 20,170,242 1999: Revenues from external customers 11,850,166 80,247,809 92,097,975 Revenue from intercompany 337,226 - 337,226 Interest revenue (44,726) 405,926 361,200 Depreciation/amortization expense 1,497,695 216,689 1,714,384 Income tax expense (benefit) 640,470 (361,327) 279,143 Expenditures on furniture, equipment, and computer software 769,630 - 769,630 Segment profit (loss) 1,748,182 (155,271) 1,592,911 Assets 23,515,062 20,555,995 44,071,057 Liabilities 6,213,590 10,413,052 16,626,642
28 29
2001 2000 1999 Revenues: Total revenues for reportable segments and consolidated revenues $122,652,504 $139,144,059 $92,097,975 ============ ============ ============ Profit or loss: Total profit or loss for reportable segments $ (1,581,049) $ (2,041,046) $ 1,592,911 Adjustment for minority interest in consolidated statements 173,062 691,187 67,327 ------------ ------------ ------------ Consolidated net income $(1,407,987) $ (1,349,859) $ 1,660,238 =========== ============ ============= Assets: Total assets for reportable segments $ 36,167,425 $ 48,416,746 $ 44,017,057 Elimination of intercompany investments (4,949,946) (15,671,522) (13,171,522) Elimination of intercompany balances (801,780) (2,332,429) (231,662) ------------ ------------ ------------ Consolidated total assets $ 30,415,699 $ 30,412,795 $ 30,667,873 ============ ============ ============ Liabilities: Total liabilities for reportable segments $ 18,649,453 $ 20,170,242 $ 16,626,642 Elimination of intercompany balances ( 801,780) (2,332,429) (231,662) ------------ ------------ ------------ Consolidated total liabilities $ 17,847,673 $ 17,837,813 $ 16,394,980 ============ ============ ============
Substantially all of the revenues from external customers are derived from within the state of Washington. Revenues from one customer of The Plan represent approximately $25.8 million and $22.7 million and $24.5 million of the Company's consolidated revenues for 2001, 2000 and 1999 respectively. NOTE 7: FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and cash equivalents, short-term investments, service fees and premiums receivable, accounts payable, notes payable, and due to provider organizations approximates fair value because of the short maturity of these instruments. NOTE 8: Invstments in Securities Available for Sale Investments in securities available for sale consist of the following: Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Market Value ___________________________________________________________ December 31, 2001 Government-backed adjustable rate securities $ 2,096,826 $ 3,651 $ - $ 2,100,477 Mortgage-backed adjustable rate securities 11,260,732 - (12,261) 11,248,471 ___________________________________________________________ $ 13,357,558 $ 3,651 $(12,261) $ 13,348,948 ===========================================================
The amortized cost and estimated fair value of debt securities at December 31, 2001 based on contractual maturity dates, excluding principal paydowns, are all due after ten years. Proceeds from sales and maturities of investments in debt securities in 2001 were $3,167,089. NOTE 9: RETIREMENT PLAN The Company has a qualified 401(k) Employee Savings and Profit Sharing Plan covering all full-time employees. Under The Plan, employees can defer up to 12% of their eligible compensation. The Company matches 50% of each employee's contribution, up to 6% of the employee's eligible salary. Employees become fully vested in employee and employer contributions when the contributions are made. The Company also has the option to make an additional profit sharing contribution to The Plan. Employer contributions to The Plan for the years ended December 31, 2001 and 2000, amounted to $180,300 and $161,110, respectively. 29 30 NOTE 10: ACQUISITION OF SOUND HEALTH On December 1, 1998, the Company purchased all of the assets of Sound Health PPO business for a purchase price of $3,500,000 in the form of a note payable to be paid with interest at a rate of 6% over 18 months. The assets acquired consist of provider contracts $(1,680,000), trade name $(140,000), a noncompetition agreement $(840,000), computer equipment and software licenses $(140,000). A contingent payment of $668,000 based on the revenues received by the Company from the acquired business during the 12 months after the closing date has been paid as the revenue targets were met. This acquisition was accounted for using the purchase method. Results of operations are included in the financial statements of the Company from the effective date of the acquisition December 1, 1998. NOTE 11: NOTE PAYABLE The Company has a note payable at December 31, 2001 in the amount of $698,170 bearing interest at 9.86%. Principal payments for the years 2002, and 2003 are $331,791, and $366,380, respectively. NOTE 11: RESERVE FOR UNPAID CLAIMS AND ADJUSTMENT EXPENSES Activity in the reserve for unpaid claims and unpaid claims processing expenses is summarized as follows for the years ended December 31:
2001 2000 Balance, beginning of year $10,181,595 $ 3,210,613 Incurred related to: Current year 66,860,450 32,350,518 Prior year (359,407) 416,921 ----------- ----------- Total incurred 76,682,638 35,978,052 Paid related to: Current year 55,266,141 22,231,079 Prior year 9,601,439 3,565,378 ----------- ----------- Total paid 64,867,580 25,796,457 ----------- ----------- Balance, end of year $11,815,058 $10,181,595 =========== ===========
During 2001 and 2000, the Company had reinsurance stop loss agreements in place for claims for which the Company is at risk. 30 31 NOTE 12: REGULATORY MATTERS The Plan is subject to regulation by the Office of the Insurance Commissioner (OIC) in the State of Washington including the requirement to follow statutory accounting principles (SAP), which differ from accounting principles generally accepted in the United States of America (GAAP). The OIC also requires that certain levels of capital be maintained. The State of Washington adopted a risk-based capital (RBC) calculation for determining statutory capital requirements, effective for the year ended December 31, 1998. As of December 31, 2001, The Plan's RBC was $1,302,954 more than the required amount. The primary differences in reporting between SAP and GAAP through December 31, 2001 result from goodwill, accounts receivables over 90 days past due, provider settlement receivables, and prepaid expenses being treated as non-admitted assets under SAP. The Plan's statutory basis shareholders' equity as filed in the OIC statements was $5,754,080 and $5,355,208 as of December 31, 2001 and 2000, respectively. Statutory basis net loss as filed in the OIC statements was $2,949,648 and $3,417,113 for the years ended December 31, 2001 and 2000, respectively. The Plan is subject to regulations that limit dividend payments and regulate other intercompany transactions. At December 31, 2000 and 1999, the Plan had negative statutory basis earned surplus and therefore must seek regulatory approval prior to any such payment. No dividends were paid by the Plan during 2001 or 2000. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements with accountants on accounting and financial disclosure. 31 32 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT. The executive officers and directors of First Choice are as follows:
Name Age Position Gary R. Gannaway 55 President & Chief Executive Officer Kenneth Hamm 43 Sr. Vice President -Chief Financial Officer Ross D. Heyl 48 Sr. Vice President & Chief Marketing Officer Julie Keeffe 44 Sr. Vice President-Medical Mgmt & Member Services Ze'ev Young, M.D. 57 Sr. Vice President-Chief Medical Officer Services Greg Van Pelt 50 Director (II) Paul M. Elliott 61 Director (I) Kenneth D. Graham 54 Director (II) Phillip J. Haas 53 Director (I) William F. Johnston, M.D. 56 Director (III) Garman E. Lutz 56 Director (III) William J. MacDonald, M.D. 57 Director (III) R. Dean Martz, M.D. 44 Director (I) Barbara L. Mauk 56 Director (II) Richard A. McGee, M.D. 56 Director (II) Richard H. Peterson 59 Director (II) Paul G. Ramsey, M.D. 52 Director (II) Richard E. Rust, M.D. 75 Director (II) Richard Stubbs, M.D., M.B.A. 56 Director (I) Clyde D. Walker 46 Director (III) __________________ (I) Term Expires in 2002. (II) Term Expires in 2003. (III) Term Expires in 2004.
Gary Gannaway joined First Choice Health Network as President and CEO in January 1996. He has over 25 years of experience in managing and marketing HMOs, PPO's, and other managed care programs across the country. He has worked as a Health Plan General Manager, and as a Regional Vice President for national carriers, including Aetna and CIGNA, and as CEO and COO for physician and hospital-sponsored managed care programs at the regional and national level. Mr. Gannaway is very active on community boards and serves professionally on the Boards of both the American Association of Health Plans and the Association of Washington Health Plans. 32 33 Mr. Gannaway earned his Bachelor's degree in both Political Science and German at the University of California at Santa Barbara. As an undergraduate, he also studied at Georg August University in Gottingen, Germany. He earned his master's of Education degree from the State University of New York where he also completed his course work and comprehensive examinations for a Ph.D. in Management. Kenneth A. Hamm, Senior Vice President and Chief Financial Officer, joined First Choice Health Network in July, 2000. He has spent most of his career in the Managed Care industry. Mr. Hamm was Director of Finance in the Group Market segment at Wellpoint Health Networks in Southern California from 1991-1994. Mr. Hamm served in various roles at Premera Blue Cross and Subsidiaries from 1994 to 1999 including Vice President of Finance and Healthcare Economics, as well as a stint in Network Development. Until starting with The Company in July 2000 Mr. Hamm had been the interim Chief Financial Officer at Medica Healthplans in Minnesota, a one million member regional HMO. Mr. Hamm earned a Bachelors degree in Finance from California State University at Los Angeles in 1985 and is a CPA. Ross Heyl, Senior Vice President and Chief Marketing Officer, joined First Choice Health in 1985. Mr. Heyl is a licensed health insurance agent in the state of Washington. From 1980 to 1982, he was with Penn Mutual Life Insurance Company in San Francisco and Seattle. From 1982 to 1985, he was an account executive for Rollins Burdick Hunter of Washington. Julie A. Keeffe, Senior Vice President of Medical Management and Member Services, joined First Choice Health in May 1997. Ms. Keeffe has worked in health care since 1979. Prior to coming to First Choice Health, she provided health care management consulting services for Milliman and Robertson, Inc, where she implemented successful strategies for the medical management systems of health plans and delivery systems. Earlier, Ms. Keeffe was Director of Utilization and Quality Management for the Virginia Mason Health Plan for nine years. Her background includes indemnity, PPO, and HMO utilization management and analysis. Her clinical experience includes several years of inpatient, outpatient, and emergency care nursing. Ms. Keeffe expertise is in designing medical management that meets the needs of the provider as well as the payer. Her areas of interest include utilization and quality management, referral management, medical claims review and medical coverage policy development. Julie received her nursing degree from Yakima Valley School of Nursing in 1979. Dr. Ze'ev Young joined First Choice Health as the Chief Medical Officer and Senior Vice President in January 2001. He is responsible for the oversight of medical management and quality improvement. He also participates actively in strategic planning, network development, and public relations. Dr. Young interfaces with the local practitioner community to ensure that high-quality, cost-effective health care services are available to First Choice Health members. Dr. Young brings significant managed care experience to First Choice Health. Just prior to joining First Choice Health, Dr. Young spent nearly three years as the Northwest Regional Medical Director for UnitedHealthcare. While at UnitedHealthcare, Dr. Young was instrumental in successfully introducing local providers to an innovative, practitioner-friendly, and member-centric approach to health care delivery. Prior to joining UnitedHealthcare, Dr. Young spent five years at Regence Blue Shield serving as the Boeing Division Medical Director, and was also responsible for corporate medical policy. Dr. Young's undergraduate degree is from the University of California and he is a graduate of the Albert Einstein College of Medicine in New York. In 1978, he was elected to the Alpha Omega Alpha Honor Medical Society. Dr. Young completed his Family Practice Residency at Providence Medical Center in Seattle and is a Board Certified family physician. He has over 20 years practice experience and continues to maintain a small private practice. Dr. Young is also a Clinical Assistant Professor of Family Medicine at the University of Washington School of Medicine. 33 34 Greg Van Pelt Greg Van Pelt is the Vice President and Chief Executive of the Providence Health System, Washington Region. The Washington Region of the Providence Health System includes hospital, clinic and long-term care service with more than 9,000 colleagues throughout the state. Mr. Van Pelt has been with Providence Health System for over 25 years. He has served in management roles both as Chief Executive, Providence Health Plan and Chief Executive, Providence-St. Vincent Hospital and Medical Center, both in Portland, Oregon. Providence has been serving the West for over 140 years through its hospitals and health services Alaska, Washington, Oregon and California. Paul M. Elliott, CPA Mr. Elliott, recently retired, was formerly Senior Vice President of Finance and Operations for the Alpac Corporation. From August 1969 to August 1981, he was Vice President-Controller for Airborne Freight Corporation in Seattle. He is a member of the Board of Visitors for Central Washington University, on the Board of the Boys & Girls Clubs of South Snohomish County and a member of Rotary Club International. Kenneth D. Graham, FACHE Mr. Graham has served as President and CEO at Overlake Hospital Medical Center since 1994, and has overseen significant changes in the organization. The hospital has: developed a new facilities master plan; introduced operational controls that have significantly improved hospital efficiency; established contracts with more than 25 managed care companies and implemented new programs like an adolescent psychiatric care program; a Multiple Sclerosis Center; a Level III Emergency Center and a Women's Hospital. He serves as Chair of the Overlake Venture Center and also the Chair of Dr. Goodwell.com; an Internet based virtual clinic service. 34 35 Mr. Graham also currently serves as the voluntary Executive Director of RotaCare International; an organization dedicated to providing free clinics in association with local Rotary clubs. RotaCare serves homeless, migrant workers, new immigrants and the uninsured or underinsured. Mr. Graham is committed to community involvement in local, regional and national organizations including the Bellevue Chamber of Commerce and the Rotary Club of Bellevue. He previously served as a member or advisor of more than a dozen hospitals or health care organization boards. He earned a B.S. degree in Public Health and a Masters degree in Public Health Hospital Administration, both from UCLA. He is a Fellow in the American College of Health Care Executives and is the College's Regent for the State of Washington. Phillip J. Haas Mr. Haas is Administrator-Managed Care of Valley Medical Center, a 304-bed acute care public district hospital, with responsibility for negotiating, implementing, and administering contracts and joint ventures linking payers with the hospital, its clinic network, individual practice associations, and medical staff. Since joining Valley Medical Center in November 1993, he managed the development of a clinic network including seven primary care clinics, a family practice residency clinic, a behavioral health clinic, and two occupational health clinics. From 1988 through 1993, Mr. Haas was Executive Director of Virginia Mason Health Plan, an HMO serving over 40,000 members. From 1985 to 1988, he was President of First Choice Health Network, a preferred provider organization. His prior experiences include serving as Senior Vice President of the Illinois Hospital Association, president of a hospital shared services organization, and administrative director of a medical school-based prepaid group practice plan. He is a Fellow of the American College of Healthcare Executives and a Director of First Choice Health Network, Inc. He received a M.B.A. degree from the University of Chicago and a B.A. degree from Northwestern University in Evanston, Illinois. William F. Johnston, M.D., F.A.C.E.P. Dr. Johnston is the Medical Director of Emergency Services at Northwest Hospital. Besides the supervision of the physicians who deliver emergency medical care at the hospital, his position provides an interface between administration, nursing, the medical staff and other hospital departments to help support the smooth delivery of emergency medical services at the hospital. He serves on the Executive Committee of the hospital as Chairman of the Department of Emergency Medicine. Bill also practices as an emergency physician and helps teach Advanced Cardiac Life Support and Advanced Trauma Life Support Courses. He received his M.D., M.B.A. and M.S.E.E. (Bioengineering) degrees from the University of Washington. Garman E. Lutz, CPA Mr. Lutz is Senior Vice President of Finance and Chief Financial Officer for Empire Health Services in Spokane, Washington. Empire operates Deaconess Medical Center, Valley Hospital and Medical Center, St. Luke's Extended Care Center, Family Home Care and First Care Urgent Care Centers. He also serves in various positions for EHS' joint venture projects including Inland Northwest Health Services, Inland Empire Hospital Shares Services and the Spokane PHCO. Mr. Lutz, prior to his appointment at Empire Health Services, was a partner in a local Spokane CPA firm for over eighteen years. His practice experience concentrated in a management advisory service, audit and financial planning. Mr. Lutz served as Chairman of the Valley Hospital & Medical Center Advisory Board from its inception in 1985 until August of 1990. Prior to his appointment as an officer of EHS, Mr. Lutz served on the EHS Board of 35 36 Directors from 1988 through 1990. Mr. Lutz is active in many community organizations and currently is a board member of the Spokane Area Chamber of Commerce, Eastern Washington Museum Foundation, Inland Empire Genetics Clinic, Leadership Spokane and the Rockwood Retirement Committee. He is a member of the AICPA, Washington Society of CPA's , and Healthcare Financial Management Association. William J. MacDonald, M.D. Dr. Bill MacDonald attended Brown University, received his medical degree from the University of Vermont, and completed his residency at the University of Pennsylvania. He earned a Fellowship at the University of California, San Diego, and is board certified in Internal Medicine and Cardiovascular Disease. He joined The Everett Clinic in 1976, and was elected to the Board of Directors in 1987. Dr. MacDonald's interest in health care administration has been furthered by the American College of Physician Executives, and by pleasant association with Mr. Richard Cooper, CEO of The Everett Clinic. Dr. MacDonald has served as Board Chair and President of The Everett Clinic for the last five years. He has a half-time cardiology practice, providing reality testing in both the hospital and office environments. Special interests include learning about the future of American medicine, and effective organizational governance. R. Dean Martz, M.D. Dr. Martz is a practicing neurosurgeon in Spokane since 1990. He is an active staff member of both Sacred Heart Medical and Deaconess Medical Centers in Spokane. He is a member of the American Medical Association, American Association of Neurological Surgeons, and was certified by the American Board of Neurological Surgeons in 1993. He received his medical degree from Case Western Reserve University in Cleveland, Ohio. He trained neurological surgery at the University of Michigan Hospitals in Ann Arbor. Barbara L. Mauk Ms. Mauk is the Director, Human Resources for Valley Medical Center, Renton, Washington. Previously, she was the Managing Partner of ClearPoint, an employee benefits brokerage and consulting firm. She has previously served as the Chief Operating Officer of The Reppond Company; Vice President Human Resources for KIRO Broadcasting, Inc.; and Personnel Director for Northwest Hospital. She is active with Bellevue Rotary, the American Compensation Association, Society of Human Resource Management, and the Employee Benefits Planning Association. Richard A. McGee, M.D., F.A.C.P. Dr. McGee has a full-time private medical oncology practice and is President of Washington Cancer Centers, the largest medical oncology group in Washington State. He was previously the Medical Director of Stevens Healthcare, a Public Hospital District, and is a consultant in Medical Staff Affairs to other area hospitals. He is a diplomat of the American Board of Internal Medicine as well as the specialty Boards of both the American Board of Hematology and the American Board of Medical Oncology. He is President of the Washington State Medical Oncology Society. He is Chairman of the Quality Assurance Committee of Stevens Health Network, a local PHO. He is a Clinical Professor of Medicine at the University of Washington and is a Fellow of the American College of Physicians. He is a member of the Clinical Practice Committee of the American Society of Clinical Oncology and Assistant Editor for Clinical Practice on their Web site. In the past, he has served as Chief of the Medical Staff and Chairman of several hospital committees. He was Vice-Chairman of the Board of Directors of Snohomish County Physicians Corporation, a Blue Shield company. His undergraduate studies were at John Carroll University, his graduate studies at Johns Hopkins University Medical School and his post graduate work was done at the University of Washington Hospital and the National Institutes of Health in Bethesda, Maryland. 36 37 Richard H. Peterson Mr. Peterson is President and Chief Executive Officer of Swedish Health Services, a non-profit organization comprised of a 163-bed community hospital on the Ballard campus and a 697-bed tertiary care hospital on the First Hill campus. Mr. Peterson previously served as President and Chief Executive Officer of Fairview Riverside Medical Center in Minneapolis, Minnesota. In all, his career in health system administration has spanned more than 25 years. A native of Minnesota, Mr. Peterson holds a master's degree in hospital and health care administration from the University of Minnesota and a B.A. from Macalester College in St. Paul, Minnesota. Paul G. Ramsey, M.D. Dr. Paul G. Ramsey is the Vice President for Medical Affairs and Dean of the School of Medicine at the University of Washington. Dr. Ramsey also practices part-time and maintains his hospital staff privileges. Dr. Ramsey graduated from Harvard College in 1971 with honors in Biochemistry and received his M.D. from Harvard Medical School in 1975. Following completion of residency training in Internal Medicine at Massachusetts General Hospital, he came to the University of Washington as a Senior Fellow in Infectious Disease in 1978. Dr. Ramsey served as Chief Medical Resident at the then University Hospital (now University of Washington Medical Center) in 1980-1981. He joined the faculty in the Department of Medicine in 1980 as an Acting Instructor and was appointed as an Assistant Professor in 1982. Dr. Ramsey was promoted to Associate Professor in 1986 and to Professor of Medicine in 1991. He served as Coordinator of Student Teaching for the Department of Medicine from 1982-1990 and was Associate Chair of the Department from 1988-1990. He was appointed as Chair of the Department of Medicine in 1992 and became the first holder of the Robert G. Petersdorf Endowed Chair in Medicine in 1995. He served as Chair of the Department of Medicine until June 1997 when he was appointed Vice President for Medical Affairs and Dean of the School of Medicine. Dr. Ramsey has received the Distinguished Teacher Award from the University of Washington School of Medicine's graduating class three times (in 1984, 1986, and 1987) and the Margaret Anderson Award from the University of Washington graduating class of 1989. The latter Award recognizes exceptional support of medical students. Dr. Ramsey's research has focused on the development of methods to assess physicians' clinical competence. From 1983-1986, he conducted the first large- scale study of the relationship of certification of physicians by the American Board of Internal Medicine to performance in practice. He has been the Principal Investigator on multiple research grants related to assessment of physicians' clinical skills and served as a Henry J. Kaiser Family Foundation Faculty Scholar in General Internal Medicine for five years. Dr. Ramsey received the John P. Hubbard Award from the National Board of Medical Examiners in 1999 in recognition of his research contributions in the field of evaluation. He has served on multiple national committees and is a member of multiple organizations, including the American Association for the Advancement of Science, the American Federation for Medical Research and the Association of American Physicians. Richard E. Rust, M.D. Dr. Rust is a retired family practitioner. Dr. Rust has served on the First Choice Health Network Board of Directors since 1985. Additional activities have included serving as Trustee of the Washington Academy of Family Physicians; Trustee, King County Medical Society; Trustee and Vice Chairman of King County Medical Blue Shield; and President of King County Academy of Family Physicians. He was Chief of Medical Staff of Northwest Hospital in 1965. Richard Stubbs, M.D., M.B.A Dr. Stubbs is the Vice President, Medical Affairs and the senior physician manager in the MultiCare Health System with direct responsibility for medical staff relationships and the departments of Medical Staff Services, Family 37 38 Practice Residency Education, Quality Management, Medical Records, Transcription, Pharmacy, Cancer Services, Perinatal and Neonatal Services. Dr. Stubbs' position represents the key link between MultiCare Health Systems and the physician community in the Pierce and South King County areas. Dr. Stubbs previously served as Medical Director, McKay-Dee Hospital Center in Ogden, Utah, Medical Director for Blue Cross and Blue Shield of Virginia, in Richmond, Virginia, and Medical Director, IPA and Group Plans, FHP in Southern California. Dr. Stubbs received his undergraduate and medical degrees from the University of Arkansas and his M.B.A. from the University of Phoenix. He is Fellow of the American Board of Family Practice and a Fellow of the American College of Physician Executives where he currently serves on the Council of Fellows. He teaches Medical Ethics for the Tulane University Masters of Medical Management program. Clyde D. Walker Mr. Walker recently was the Vice President, Human Resources of PRIMEX Aerospace and Electronics Division and PRIMEX Aerospace Company in Redmond, WA. Mr. Walker has over ten years experience in the human resources field and over twenty years of business administration and management experience. Since 1977, Mr. Walker has held positions of increasing levels of responsibility in areas including subcontract administration, contract administration, pricing and human resources. He received an M.B.A. degree from City University in Seattle and a B.A. degree in business administration from the University of Washington. Mr. Walker recently served as Chairman of the Board of Directors of both Big Brothers and Big Sisters of King County and led both boards through the combination of the two independent agencies. He remains on the resultant combined Board and also serves on the Board of Directors of First Choice Health Network. The Company's Board of Directors proposed an amendment of the Bylaws to modify the membership of the Board, and on June 22, 2000, the shareholders approved the changes unanimously. Classification of Directors. - The management of this corporation shall be vested in a Board of Directors. Effective from June 22, 2000, the Board of Directors shall consist of seventeen individuals: Seven (7) directors (the "Class A Directors") shall be physicians representing Class A shareholders. Seven (7) directors (the "Class B Directors") shall represent Class B shareholders and any public hospitals that have made capital contributions to the corporation ("participating hospitals"). Three (3) directors (the "Class C Directors") shall represent employers other than health care providers and/or be consumers of health care services. The Board shall be divided into three categories as follows: Category I: Two Class A Directors, two Class B Directors, and one Class C Director. Category II: Two Class A Directors, two Class B Directors, and one Class C Director. Category III: Two Class A Directors, two Class B Directors, and one Class C Director.
Directors may be removed, with or without cause, by an affirmative vote of the holders of at least 75% of the outstanding shares of each class of Common Stock, and the number, classification, qualifications and terms of directors may not be altered except by such class voting. A quorum of nine (9) directors is generally required to transact business at a meeting of the Board, except that a quorum of thirteen (13) directors is required for determination of the admission and expulsion of shareholders and "members" (i.e., PPO physicians), the fees charged for and/or paid to health care providers, any issues reviewed by the Board regarding the limitation or termination of health care provider contracts, and any merger or sale of the corporation or any subsidiary. 38 39 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth a summary of the compensation earned by the Company's President and Chief Executive Officer and each other executive officer who earned in excess of $100,000 in each of the last three fiscal years:
Annual Compensation All other Name and Principal Position Year Salary Bonus Compensation Gary Gannaway (1) 01 $270,000 $ 0 $ 7,735 President and CEO 00 $268,887 $138,915 $ 7,484 99 $238,218 $100,000 - Kenneth Hamm 01 $203,000 12,019 $ 960 Senior Vice President, Finance 00 96,154 0 15,194 Ross Heyl 01 $120,500 $29,243 $ 5,000 Senior Vice President, Marketing 00 $116,970 $25,200 $ 5,000 99 $112,879 $15,930 5,208 Julie Keeffe, R.N. 01 $150,000 $18,200 $ 960 Senior Vice President, Medical 00 $145,600 $33,250 $ 600 Management & Member Services 99 $117,500 $11,820 475 Ze've Yount, M.D. 01 $181,442 $ 0 $ 960 Chief Medical Officer David Peel 99 $143,637 $22,250 $ 6,250 Senior Vice President, Finance
Barbara L. Mauk, the Chairman of the Board, has been compensated $500 per month (inclusive of attendance at regular Board meeting) and an additional $150 per hour for committee meetings since July 1, 1994. All other directors have received $75 per hour for attendance at Board and committee meetings since February 1, 1995. The Chairman and directors compensation remained the same through December 31, 2000. EMPLOYMENT AGREEMENTS Effective January 1, 2000, Gary R. Gannaway entered into a three year employment agreement as the Company's President and Chief Executive Officer. Under his employment agreement with First Choice, Mr. Gannaway will receive an annual base salary of $270,000 for 2000, subject to a 5% annual increase. Mr. Gannaway will be eligible to receive a bonus of up to 50% of base pay according to performance achieved against mutually determined targets. The amount of the annual bonus shall be determined and awarded by the Board of Directors following acceptance each year by the Board of the independent auditor's report on the financial statements. 39 40 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of December 31, 2000, information with respect to the beneficial ownership of the Company's Class A Common Stock and Class B Common Stock by (i) each person known by the Company to own beneficially more than five percent of either the Class A Common Stock or Class B Common Stock, (ii) each of the persons named in the Summary Compensation Table set forth in "Item 10. Executive Compensation" of this Part I of this Annual Report, (iii) each director, and (iv) all directors and executive officers as a group, together with their percentage ownership of each such class of Common Stock.
Shares Owned Percent of Name Class A Class B Class A Class B ------- ------- ------- ------- ------- Northwest Hospital - 5,800 - 14.3 % 1550 North 155th Seattle, WA 98133 Providence-General - 5,800 - 14.3 % 14th and Colby Everett, WA 98201 Good Samaritan - 5,800 - 14.3 % Community Healthcare 407-14th Avenue SE Puyallup, WA 98371 MultiCare Medical Center - 5,800 - 14.3 % 409 South J Tacoma, WA 98405 Empire Health Services - 5,800 - 14.3 % 80 Fifth Avenue Spokane, WA 99210 Swedish Medical Center - 5,800 - 14.3 % 747 Broadway Seattle, WA 98114 Overlake Hospital Medical Center - 5,800 - 14.3 % 1035 116th Avenue NE Bellevue, WA 98004 Paul M. Elliott - - - - Kenneth D. Graham - - - -
40 41
Shares Owned Percent of Name Class A Class B Class A Class B ------- ------- ------- ------- ------- Phillip J. Haas - - - - William F. Johnston, M.D. 1 - * - Garman Lutz Greg Van Pelt - - - - William J. MacDonald, M.D. - - - - R. Dean Martz, M.D 1 - * - Barbara L. Mauk - - - - Richard A. McGee, M.D. 1 - * - Richard H. Peterson - - - - Paul G. Ramsey, M.D. - - - - Richard E. Rust, M.D. 1 - * - Richard Stubbs, M.D., M.B.A. - - - - Clyde D. Walker - - - - All directors and executive officers as a group (4 persons) 4 40,600 * 100%
Four additional hospitals in the state of Washington (Evergreen Hospital Medical Center, 12040 Northeast 128th Street, Kirkland, WA 98034, Valley Medical Center, 400 S. 43rd Street, Renton WA 98055, Stevens Memorial Hospital, 21601 76th Avenue, Edmonds, WA 98026, and University of Washington Medical Center, 1959 Northeast Pacific Street, Seattle, WA 98195) are not shareholders of the Company, but have made capital contributions to the Company in consideration of contractual rights substantially similar to the rights to which each holder of Class B Common Stock is entitled, including liquidation and dividend rights, but excluding voting rights. See "Item 8. Description of Securities." 41 42 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On December 20, 1999, First Choice Health Network, Inc. executed an agreement with University of Washington Academic Medical Center (UWMC) to become a participant in the administration, operations and any incentives bestowed upon any shareholders in First Choice Health Network effective January 1, 2000. First Choice offers and operates a preferred provider organization and a managed care delivery system for cost-effective, quality health care benefits, and for comprehensive health care claims processing and administration. University of Washington Academic Medical Center has agreed to pay the affiliation fee of $2,520,000, payable $1,260,000 upon execution of the Agreement and the remaining $1,260,000 will be paid in three equal payments of $420,000 due annually for three years plus interest at five percent (5%). UWMC does not become a shareholder or member of the Network. UWMC shall participate in any incentive or reward program established by the Network as if UWMC owned 5,800 shares of class B common stock. Dividends, distributions, and liquidation of the Network are also determined as if UWMC owned 5,800 shares of class B stock. In December 1996, Overlake Hospital Medical Center, a Washington non-profit corporation, purchased 5,800 shares of the Company's Class B Common Stock at a purchase price of $258.62 per share, or an aggregate of $1,500,000. On December 19, 1996, $1,000,000 was received by the Company and accordance with the terms of the contract $250,000 is to be paid in December 1997 and $250,000 in December 1998. The Company received the final payment in December 1998. Pursuant to their respective health care facility service contracts with The Network, the holders of the Class B Common Stock and the Hospital Participants paid the following aggregate fee to First Choice in 1984: Northwest Hospital: $81,159; Providence-General: $150,174; Good Samaritan Community Healthcare: $136,808; MultiCare Medical Center: $207,271; Empire Health Services: $138,525; Evergreen General Hospital: $100,997; Valley Medical Center: $134,144; and Stevens Memorial Hospital: $88,093; Swedish Hospital: $265,861. 42 43 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K. (a) Exhibits 2.1 Copy of Registrant's Restated Articles of Incorporation.* 2.2 Copy of Registrant's By-Laws.* 2.3 Copy of Contribution, Merger and Asset Purchase Agreement dated June 2, 1997 2.4 Purchase agreement dated as November 12, 1998, among First Choice Health Network, Inc. And Providence Plan Partners. 10.1 Form of Agreement between Registrant and Physician participating in PPO. ** 10.2 Form of Health Care Facility Service Contract between Registrant and Hospital participating in PPO.* 10.2a Copy of Agreements dated May 1, 1985, and May 17, 1993, respectively, with Northwest Hospital.* 10.2b Copy of Agreement dated May 1, 1985, with Providence-General (formerly General Hospital of Everett).* 10.2c Copy of Agreement dated May 1, 1985, and amendment dated July 1, 1993, with Good Samaritan Community Hospital.* 10.2d Copy of Agreement dated March 10, 1986, with MultiCare Medical Center.* 10.2e Copy of Addendum to Agreement dated April 30, 1992, with Empire Health Services.* 10.2f Copy of Agreement dated September 6, 1985, and addendum dated June 17, 1992, with Evergreen General Hospital .* 10.2g Copy of Agreement dated November 19, 1993, with General Hospital of Everett.* 10.2h Copy of Agreement dated December 9, 1991, and addendum dated November 1, 1992 with Stevens Memorial Hospital .* 10.3 Form of Agreement between Registrant and Health Care Provider other than Hospitals and Physicians participating in PPO.* 43 44 10.4 Form of Agreement between Registrant and Third Party Administrator.* 10.5 Form of Agreement between Registrant and Insurance Company .* 10.6 Copy of Participation Agreement dated March 27, 1985, between Registrant and King County Public Hospital District No.2 (Evergreen General Hospital).* 10.7 Copy of Participation Agreement dated March 26, 1985, between Registrant and Valley Medical Center.* 10.8 Copy of Participation Agreement dated December 19, 1991, between Registrant and Public Hospital District No.2 of Snohomish County (Stevens Memorial Hospital) and related Promissory Note in the aggregate principal amount of $ 566,000.* Promissory Note in the aggregate principal amount of $ 1,260,000.* 16 Letter of change in certifying accountant (b) * Filed as same numbered Exhibit in Registrant's Registration Statement on Form 10-SB. ** Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10K-SB. (b) Reports on Form 8-K. 16 Report dated December 30, 1999. Participation Agreement of University of Washington Medical Center. 45 46 SIGNATURES In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 2nd day of April 2001. FIRST CHOICE HEALTH NETWORK, INC. By: /s/KENNETH HAMM -------------------------------------- KENNETH HAMM Chief Financial Officer In accordance with the Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated on April 2, 2001.
Signature Title Date --------- ----- ---- / s / GARY R. GANNAWAY Principal Executive Officer April 2, 2001 ---------------------------- GARY R. GANNAWAY / s / KENNETH HAMM Principal Financial Officer April 2, 2001 ---------------------------- KENNETH HAMM / s / FORREST EHLINGER Controller April 2, 2001 ---------------------------- FORREST EHLINGER / s / PAUL M. ELLIOTT Director April 2, 2001 ---------------------------- PAUL M. ELLIOTT / s / KENNETH D. GRAHAM Director April 2, 2001 ---------------------------- KENNETH D. GRAHAM / s / PHILLIP J. HAAS Director April 2, 2001 ---------------------------- PHILLIP J. HAAS / s / WILLIAM F. JOHNSTON, M.D. Director April 2, 2001 ---------------------------- WILLIAM F. JOHNSTON, M.D. / s / GARMAN E. LUTZ Director April 2, 2001 ---------------------------- GARMAN E. LUTZ / s / WILLIAM J. MACDONALD, M.D. Director April 2, 2001 ---------------------------- WILLIAM J. MACDONALD, M.D. / s / R. DEAN MARTZ, M.D. Director April 2, 2001 ---------------------------- R. DEAN MARTZ, M.D. / s / BARBARA L. MAUK Director April 2, 2001 ---------------------------- BARBARA L. MAUK / s / RICHARD A. MCGEE, M.D. Director April 2, 2001 ---------------------------- RICHARD A. MCGEE, M.D. / s / RICHARD H. PETERSON Director April 2, 2001 ---------------------------- RICHARD H. PETERSON / s / PAUL G. RAMSEY, M.D. Director April 2, 2001 ---------------------------- PAUL G. RAMSEY, M.D. / s / RICHARD E. RUST, M.D. Director April 2, 2001 ---------------------------- RICHARD E. RUST, M.D. / s / RICHARD STUBBS, M.D., M.B.A. Director April 2, 2001 ---------------------------- RICHARD STUBBS, M.D., M.B.A. / s / CLYDE D. WALKER Director April 2, 2001 ---------------------------- CLYDE D. WALKER
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