SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - KSB
[ X ] ANNUAL REPORT UNDER TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT UNDER 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.
(Name of Small Business Issuer as specified in its Charter)
Washington 91-1272766
(State or Other Jurisdiction of (I.R.S. Eemployer
Incorporation or Organization) Identification No.number)
1100 Olive Way, Suite 1480,
Seattle, Washington 98101-1838
(Address of principal
executive offices) (Zip Code)
Issuer's Telephone Number, Including Area Code
(206) 292-8255
(Issuer's telephone number, including area code)
Securities to be registered under 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 par value per share
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 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 ______
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B and no disclosure will 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-KSB or
any Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year.: $6,199,506.
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 outstanding on March 1, 1997 was 656
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
Page 1 of 38 Pages
Part I
Item 1. Description of Business
General
First Choice Health Network, Inc., ("First Choice Health" or the "Company")
is a provider-owned, managed health care company which has established a
network of physicians, hospitals and other health care providers (a
"Preferred Provider Organization" or "PPO") located almost exclusively in
the State of Washington for the provision of health care services; a small
portion of the PPO is located in each of Alaska, Idaho and Montana.
Subscribers (or members) in Oregon can also access a network of health care
providers (marketed as a separate PPO). First Choice 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 and 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
First Choice an administrative fee under their respective participating
health care facility service contracts.
At December 31, 1996, First Choice had arrangements with in excess of 5,000
Health Plans representing approximately 435,000 subscribers (or members) and
their dependents (collectively "Covered Persons"). At December 31, 1996, the
Company's PPO had 9,770 participating providers, most of whom reside and
practice in Washington State, representing over 65% of the practicing
providers in the state not employed by the federal government, including
in excess of 2,427 primary care physicians and approximately 3,703
specialists. Further, at such date, there were 94 participating hospitals in
the Company's PPO, including 74 in the state of Washington, representing
over 70% of the hospitals in the state. Approximately 98% of the Company's
revenues were derived from services performed in the state of Washington
during the year ended December 31, 1996.
The Company's success depends to a significant degree on its ability to
control health care costs for the Health Plans utilizing its PPO. In
addition to its discounted fee arrangements with the health care providers
participating in its PPO, the Company controls health care costs with respect
to a portion of the subscribers to its PPO through a primary care physician
"gatekeeper" system of health care delivery and utilization management
programs (third-party review of the utilization of health care services), the
latter of which is available to the Health Plan for an additional per
subscriber (or member) monthly fee.
The Company strives to maintain the quality of patient care through its
credentialing and quality assurance programs. In excess of 73% of the
Company's PPO physicians are board certified or board eligible in one or
more specialties.
First Choice, a corporation organized under the laws of the state of
Washington in 1984, is owned by 656 physicians, all of whom own Class A
Common Stock, and by seven hospitals and three hospital participants
participating in its PPO, all of which own Class B Common Stock.
The Company's PPO
The Company'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 provider agrees to accept, as payment in full, the discounted
fee schedule negotiated by First Choice for each covered service; such
agreements are terminable on 90 days' notice. Subscribers (or members) also
have access to a network of providers (marketed as a separate PPO) in the
state of Oregon.
Physicians. At December 31, 1996, First Choice had 6,445 physicians in its
PPO, over 95% of whom were Washington licensed physicians, representing over
65% of the practicing physicians in the state not employed by the federal
government, including primary care physicians and 3,703 specialists. In the
primary care physician "gatekeeper" system of health care delivery, which is
utilized by less than 10 percent of the subscribers in the Company's PPO, a
Covered Person receives care from a participating primary care physician who,
in turn, refers the Covered Person to specialists and hospitals, as required.
Primary care physicians, consisting of family practitioners, pediatricians,
general practitioners and internists, are important to the Company's health
care cost containment as they control utilization of hospitals, specialists
and other health care providers.
First Choice 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 Company'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 Company's PPO, First Choice conducts its
own credentialing process (separate and distinct from those performed by
participating hospitals with respect to physicians with admitting
privileges), evaluating relevant information such as malpractice insurance,
claims activity and the physician's standing with licensing regulatory
authorities.
Hospitals. First Choice has contracts with hospitals in most counties in
the State of Washington and in each county in which it conducts business in
other states. At December 31,1996, First Choice had 94 hospitals in its PPO,
including 74 in the state of Washington, representing over 70% of the
hospitals in such state. The PPO offers Covered Persons a full range of
hospital services, including tertiary care.
First Choice seeks to attract hospitals rendering high-quality, cost-
effective care. Prior to contracting with a hospital, the Company reviews
the hospital's accreditation, federal and state certifications, and internal
and external claims data and reports, including data available from
regulatory agencies.
Other Health Care Providers. At December 31, 1996, First Choice had
contracts with 3,325 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.
First Choice 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 Company intends to
incorporate into its utilization management program.
On February 1, 1995, First Choice purchased all of the issued and
outstanding stock of Pacific Health Systems, Inc. (subsequently renamed
First Choice Dental Systems, Inc.), a PPO network consisting of in excess of
200 dentists, for $90,000, $45,000 of which was paid on such date and the
balance was paid on February 1, 1996. Under the related purchase agreement,
First Choice is required to make additional contingent purchase price
payments equal to 50 percent of the dental PPO's net income in excess of
$295,000 for each of the calendar years 1995 and 1996, with aggregate
additional purchase price payments not to exceed $260,000.
Utilization Management Services
In addition to providing Health Plans with access to its PPO, First Choice
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. The Company hired additional staff experienced in health care
provider risk management and a full time medical director in late 1995.
Quality Assurance
An integral part of the Company's PPO is its comprehensive quality
assurance program, which is designed to maintain and improve proper
medical care and includes, among other things, 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.
Clients
At December 31, 1996, First Choice had over 40 contractual arrangements
(approximately one-quarter with indemnity insurers, one-tenth with self-
funded employers and one-quarter with union trusts), through which in excess
of 5,000 Health Plans in both the public and private sectors representing
approximately 435,000 Covered Persons, utilized the Company's PPO. First
Choice receives a fee for providing access to its PPO, typically on a per
subscriber (or member) per month basis, from the Health Plan, either directly
or indirectly through a TPA. The per subscriber (or member) monthly fee is
generally fixed for a twelve-month period under contracts with each Health
Plan or TPA, and is based upon the extent of the network utilized (hospitals
and/or physicians), whether utilization management services are requested and
the number of Covered Persons.
For the year ended December 31, 1996, Insurers, Union Trusts and TPAs
accounted for more than 21%, 21%, and 10%, respectively, of the Company's
operating revenue, and six other contracting entities each accounted for more
than 5% of such revenue. In 1996, approximately 13% of the Company's revenue
was generated by one customer.
Marketing
First Choice markets its PPO and utilization management services through a
three person internal marketing staff to TPAs and, in conjunction with the
TPAs and independent brokers and agents, to the Health Plans. First Choice
generally does not market directly to subscribers or their dependents,
although it does engage in limited direct mailings relating to product
development.
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. First Choice competes with other managed health care
companies, such as health maintenance organizations and indemnity health
insurance companies, and approximately twelve other PPOs in the state of
Washington and believes, that through its licensure as a HCSC, it can
maintain its PPO base and expand into additional areas of the marketplace.
Government Regulation
State Health Care Reform
A number of new health care reforms became effective for all health plans in
Washington as of January 1, 1996. These reforms include:
Guaranteed portability of coverage for employees, including a waiver of
waiting periods for pre-existing conditions if the employee was continuously
covered for at least three months under the immediately preceding health plan
Guaranteed issue and renewal of coverage provided the insured continues to
pay premiums and complies with published, approved carrier policies
Mandatory offering of benefits included in the Basic Health Plan only to
individuals and small groups of 26-50 employees
Establishment of an adjusted community rating standard for individual and
small group (50 employees or less) plans
Repeal of claim loss ratio formulas previously used as benchmarks for rate
increases
Mandated direct access to women's health care providers
Mandated 48-hour inpatient stays for maternity
State insurers and the Office of Insurance Commissioner (OIC) in Washington
remain sharply divided regarding the intent and the implementation of "every
category of provider" legislation passed in 1995, and a pending lawsuit filed
by every major insurer continues to delay action on this issue. First Choice
Health, which is not a participant in the lawsuit, has complied with the
minimum intent of the law in an effort to avoid potential time-consuming and
costly contract changes at a later date. This compliance is reflected in our
current group rates.
During 1996 the Insurance Commissioner also proposed new rules defining the
guidelines for determining the reasonableness of health plan rates. These
rules, which are supposed to replace the repealed loss ratio calculation
rules, have met heavy criticism from state insurers and the outstanding
issues are not expected to be resolved until some time in 1997. In the
meantime, approval of rate increases continues to be an arbitrary process.
Consequently, some insurers have filed lawsuits against the Insurance
Commissioner for her denial of rate increase requests for both group and
individual products. First Choice should not be effected by the current
actions of the Insurance Commissioner regarding rate increases until 1998
since it is unlikely First Choice will file for an increase before then.
Finally, the OIC also attempted to introduce new "managed care" rules
applicable to both health care services contractors and health maintenance
organizations. The rationale offered by the OIC for the new rules revolved
around the desire to standardize operating and reporting requirements for
all health plans, without regard for the type of license under which the plan
was currently operating. As expected, these new rules have met with
substantial objection from both health care services contractors and health
maintenance organizations, and are currently under revision. In the
meantime, there has been an effort to limit the overall rule and policy
making authority of the OIC through legislative action.
Federal Health Care Reform
Health care reform activity remained relatively low-key at the federal level,
with the passage of the Kennedy-Kassebaum bill, or HIPAA (Health Insurance
Portability and Accountability Act), being the notable exception. Most HIPAA
reforms are not effective until 1998, and even then are not expected to have
much impact on Washington insurers since Washington's current reform laws are
already more substantive than the changes defined in HIPAA. HIPAA reforms
include:
Mandatory maternity length of stay
New definition of emergency room services to incorporate a "prudent lay
person" provision
Mental health parity (still not finalized)
Anti-trust changes
Anti-"gag rule" provisions
Also at the federal level, HCFA is still considering waiving state licensure
requirements for PSNs (Provider Sponsored Networks), a move that the National
Association of Insurance Commissioners (NAIC) continues to oppose since it
allows PSNs to participate in the business of insurance without regulatory
oversight by state Insurance Commissioners. The NAIC is also concerned that
HCFA will define the solvency requirements for PSNs at a level insufficient
to ensure against potential financial failure.
Proposed Changes to First Choice Business Operations
The Company formed created a wholly-owned subsidiary, First Choice Health
Plan, Inc.(FCHP), 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 to a voluntarily enrolled population, either directly
or indirectly as a subcontractor through a Health Plan, 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. HCSCs, like health maintenance
organizations ("HMOs"), may utilize a "gatekeeper" system of health care
delivery whereby each member is serviced by a primary care physician
(generally, a family practitioner, pediatrician or internist) who provides
medical care related to the general health of the HMO member and refers
members to specialists and other health care providers, as appropriate.
HCSCs differ from PPOs in that they are permitted to assume the financial
risk of the cost of health care services exceeding the premiums received from
members, subscribers or Health Plans. HCSCs are required to register with
the state of Washington Department of Insurance which requires, among other
items, 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. HCSCs are required to
have an initial net worth of $1,500,000 and must thereafter maintain a
minimum net worth of $1,000,000. The Commissioner may waive compliance with
the minimum net worth requirements if satisfied with the entity's financial
stability; however, net worth cannot fall below $500,000.
Under the HCSC license the Company contracted with Olympic Health
Management Systems, Inc., to develop and implement a Medicare Supplement
product. The rate schedules for the first phase of this proposed offering
were filed and approved by the state Office of Insurance Commission in the
spring of 1996. Upon acceptance of the proposed rates, the Company and
Olympic Health Management representatives marketed this product to the general
public. Rate schedules for a second phase, a non-agent plan, of this
Medicare supplement as of this time have not been submitted to the OIC.
Employees
At December 31, 1996, the Company had 54 employees, 51 of whom were
full-time employees. None of the Company's employees are covered by
labor unions, and the Company believes its relationships with their
employees to be good.
Item 2. Description of Property
First Choice's offices consist of 11,209 square feet of space in an office
building at 1100 Olive Way, Suite 1480, Seattle, WA 98101-1838; under a lease
expiring 1999 which provides for a monthly rental of approximately $16,0000.
The Company believes the offices are adequate for its current needs and that
suitable additional space will be available as required.
Item 3. Legal Proceedings.
In conjunction with Overlake Hospital becoming a shareholder, it is
possible that the Company could incur contract exclusivity damages with
another hospital shareholder up to $600,000. Since the amount of the
damages is not reasonably estimable and the new shareholder transaction
occurred at year end, no basis for the calculation of this possible
contingency amount has been agreed upon by the parties involved at this
writing.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted in the fourth quarter of 1996.
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.
On March 1, 1997, there were 656 holders of the Company's Class A Common
Stock, seven holders of the Company's Class B Common Stock, and three
Hospital Participants.
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. Management's Discussion and Analysis
or Plan of Operation.
Overview
During 1996 the number of Covered Persons under the Company's PPO
increased by 1.4% from 429,000 at December 31, 1995, to 435,000 at
December 31, 1996, primarily due to an increase in the number of Covered
Persons from indemnity insurers and union trusts.
The Company'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 1996, the Company continued to expand its PPO network and
at December 31, 1996, had contracts with nearly 9,800 health care providers.
In 1996, the Company 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 and its
focus on the primary care "gatekeeper" model for its PPO, whereby a Covered
Person must obtain a referral from a primary care physician prior to
obtaining health care services from specialists and other health care
providers.
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 1996, the Company
negotiated with additional hospitals to change the basis upon which DRGs
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, First Choice
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 First Choice to assume financial risk in its operations. First
Choice also has instituted capitation arrangements with its primary care
physicians, and is providing for risk-sharing arrangements among such
physicians in which First Choice may also participate. See "Business-
Proposed Changes to First Choice Business Operations." These new
reimbursement programs should create stronger incentives to health care
providers to control costs, and will require sophisticated information
systems to monitor the quality of care and provide the necessary information
to budget and manage costs.
The Company will finalize the upgrade and replacement of its computer
systems in 1997 to facilitate the implementation and administration of the
new reimbursement programs and to provide improved physician profiling
information, improved health care provider and Health Plan reporting, and
enhancements to its utilization management program.
Results of Operations
Year Ended December 31, 1996, Compared to
Year Ended December 31, 1995
Operating revenue increased 15.2% to approximately $6.2 million in 1996,
from approximately $5.4 million in 1995, primarily due to the following: a
5.4% increase in network access fees to approximately $3.6 million from
approximately $3.4 million in 1995; a 31.5% increase in hospital
administration fees to approximately $2.6 million from approximately $2
million in 1995; and an additional $10,175 in other income. The increase in
the number of Covered Persons utilizing the Company's PPO network is the
primary basis for these differences.
Total operating expenses increased 10.5% to approximately $4.9 million in
1996, from approximately $4.5 million in 1995, primarily due to overall
increases in staffing and administrative expenses to service the increased
number of Covered Persons; and an increase in network service fees owed to
other PPO networks through reciprocal agreements with the Company.
Payroll and related expenses increased 20.8% to approximately $2.7 million
in 1996, from approximately $2.25 million in 1995, primarily due to
additional staffing required to service the additional Covered Persons and
to assist First Choice in developing products under it's HCSC licensure, and
increased costs for employee benefits. Payroll and related expenses
increased to 43.8% of operating revenue for 1996, compared to 41.8% of
operating revenue in 1995.
Selling, general and administrative costs remained approximately the same
in 1996 as those of 1995.
Other income increased 19.6% to $332,901 in 1996 from $278,260 in 1995,
primarily due to an increase in interest and dividends revenue from
additional investments acquired in 1996, and a gain on the sale of securities
held by the Company, and other income derived from the gains made on bonds
held by the Company.
Income before federal income taxes increased 33.6% to approximately $1.6
million in 1996, from approximately $1.2 million in 1995, primarily due to
increased revenues. Net income increased 1.7% to $1,037,714 in 1996 from
$1,020,050 in 1995. This small increase was due primarily to differences in
the calculation of deferred taxes and a tax refund received in 1995 that was
applied to the Company's provision for federal income taxes resulting in a
decrease in tax expense in 1995.
Year Ended December 31, 1995, Compared to
Year Ended December 31, 1994
Operating revenue increased 8.7% to approximately $5.4 million in 1995,
from approximately $4.9 million in 1994, primarily as a result of an increase
in the number of Covered Persons utilizing the Company's PPO.
Total operating expenses increased 17.1% to approximately $4.5 million in
1995, from approximately $3.8 million in 1994, primarily due to overall
increases in staffing and administrative expenses to service the increased
number of Covered Persons and an increase in consulting expense. The
increase in consulting was primarily due to additional computer programmers
needed to assist in the update of First Choice computer systems, the hiring
of a national search firm to aid the Company in it's search for a new CEO and
full-time Medical Director, and other outside business consultants.
Payroll and related expenses increased 23.1% to approximately $2.25 million
in 1995, from approximately $1.83 million in 1994, primarily due to
additional staffing required to service the additional Covered Persons and
to assist First Choice in developing products under it's HCSC licensure, and
increased costs for employee benefits. Payroll and related expenses
increased to 41.8% of operating revenue for 1995, compared to 36.9% of
operating revenue in 1994.
Selling, general and administrative costs increased 11.6% to approximately
$2.25 million in 1995, from approximately $2.0 million in 1994, primarily
due to an increase in consulting fees for systems programmers, increases in
business and occupation taxes on increased revenues, increased administrative
and rental expense due to additional staffing, and increased depreciation
expense due the additional computer hardware purchased to upgrade the system.
Other income increased 17% to $278,260 in 1995 from $237,920 in 1994,
primarily due to an increase in interest and dividends from investments 1995.
Income before federal income taxes decreased 13.4% to approximately $1.2
million in 1995, from approximately $1.4 million in 1994, due to the
foregoing. The favorable resolution of pending tax matters related to prior
years resulted in a refund of federal income taxes which were applied to the
company's provision for federal income tax resulting in a decrease in tax
expense of approximately $215,000 in 1995.
Inflation
The Company has not been effected by nor does it anticipate that inflation
will have a significant impact on its operating results in the near term.
However, this factor could effect operations if the Company was unable to
submit new rates to the OIC in a timely manner in order to obtain approval of
increased rates necessary to insulated itself from this factor. The Company
obtained licensure as an HCSC in January 1995 and assumes risk for medical
costs. The Company transfers risk to health care providers through
capitation arrangements and risk-sharing provisions and is generally
insulated from significant escalation of health care costs. See "Business-
Proposed Changes to First Choice Business 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
three additional hospitals pursuant to their respective participation
agreements, and funds from operations.
In July 1996, First Choice issued 5,800 shares of its Class B Common Stock
to Swedish Medical Center in exchange for $931,484. This equity investment
increased the number of Class B shareholders to six.
In December, 1996, First Choice issued 5,800 shares of its Class B Common
Stock to Overlake Hospital Medical Center in exchange for $1,000,000 in cash
and two additional payments of $250,000 each due in December of 1997 and
1998. This equity investment increased the number of Class B shareholders to
seven. In conjunction, it is possible that the Company could incur contract
exclusivity damages with another hospital shareholder up to $600,000. Since
the amount of damages is not reasonably estimable, the possible contingency
amount has not been reflected in the financial statements as of
December 31, 1996.
At December 31, 1996, the Company had cash, cash equivalents and
investment securities at fair market value of approximately $7.9 million
as compared to approximately $5.4 million at December 31, 1995.
The Company has a $300,000. unsecured line of credit from Seafirst
Bank. At December 31, 1996, there were no borrowings outstanding
under the line.
Net cash provided by operating activities decreased to approximately $1
million for the year ended December 31,1996, from approximately $1.3 million
for the year ended December 31, 1995, primarily due to a increase in service
fees receivable, accounts payable, and prepaid expenses.
Net cash used in investment activities for the year ended
December 31, 1996, was approximately $ 2.6 million compared to
approximately $1.1 million in 1995. The purchase of additional
investment securities, and furniture, equipment and computer software
was primarily facilitated by increased cash inflow from financing activities.
Net cash provided by financing activities increased in 1996 was
approximately $1.9 million compared to approximately $20,000 in 1995,
primarily due to the issuance of 5,800 shares of Class B stock to each
of two area hospitals.
The Company commenced updating its computer systems when it signed
contracts for software development on March 21, 1994, and commenced
implementation thereafter. The Company has obtained necessary programming
assistance and has purchased additional hardware. A portion of the new
system programmed to handle the Company's shared risk products was put into
production in October, 1996. Additional modules were brought on line in
January, 1997 to serve the product line offered through it's subsidiary
'First Choice Health Plan, Inc.' under it's licensure as an HSCS in the
state of Washington. Portions of the new system relating to the PPO's
business are scheduled to be operational by the end of 1997. The Company
expended an additional $587,000 on related consulting services and computer
equipment in 1996. The Company does not anticipate comparable expenses in
1997, but should it experience substantial market gains through its
subsidiary's new products, the Company would expend the necessary funds to
maintain those gains.
In January 1995, the Company transferred cash and investments of $1.5
million to its subsidiary, "First Choice Health Plan, Inc.," in connection
with its licensure as an HCSC, which may require the transfer of additional
funds when the Company introduces products pursuant to the license. There
can be no assurance the Company will be able to obtain the requisite
financing to expand its operations to introduce such new products.
Subsequent to December 31, 1996, the Company transferred an additional $5
million in cash and investments to it's subsidiary.
In February 1995, the Company purchased all of the issued and outstanding
stock of a dental PPO for $90,000, $45,000 of which was paid at the closing
and the $45,000 balance of which was paid on February 1, 1996. Under the
related purchase agreement, First Choice is required to make additional
contingent purchased price payments equal to 50 percent of the dental PPO's
net income in excess of $295,000 for each of the calendar years 1995 and
1996, with aggregate additional purchase price payments not to exceed
$260,000. No additional aggregate payment was paid in 1995. For the 1996
period, the income of the dental network did not meet the requisite $295,000
minimum; therefore, no contingency payment for 1996 is owed.
In October 1995, the Company entered into an agreement with Olympic Health
Management Systems, Inc. (OHMS), to develop and implement a Medicare
supplement product. The planning phase concluded with the submission of
proposed rates to the Office of Insurance Commission (OIC)for approval in the
first quarter of 1996. Upon final determination from the OIC, the Company
and OHMS offered the agent marketed portion of this product to consumers.
OHMS will act as the Third Party Administrator, thereby handling all
necessary management, accounting and reporting functions for which it will
receive a specified percentage of the premiums. Finalized contracts were in
place on April 21, 1996 prior to the first public offering of Medicare
supplement in May . Anticipated overhead to all parties involved is not
expected to exceed 28%, inclusive of Washington State premium taxes.
In May of 1996 the Company's subsidiary, First Choice Health Plan, Inc.,
introduced into the market place a Medicare Supplement program in conjunction
with two of its owner hospitals, Northwest Hospital and Valley Medical
Center. At December 31, 1996 there were 323 policies enforce and collected
premiums of $41,629. The Company has contracted with Olympic Health
Management Systems to act as the plan administrator. Their primary
responsibilities are to maintain a adequate sales force legally licensed in
Washington state, premium billing and collection, claims processing and
payment, and financial reporting to all applicable parties including the
appropriate reports necessary for compliance with the Office of Insurance
Commissioner of the State of Washington.
In March 1997, the Company's subsidiary 'First Choice Health Plan, Inc.',
signed a letter of intent to consolidate First Choice Health Plan, Inc.,
Health First Partners, and Health Washington health plans. The terms of the
merger agreement have not been formalized and would be subject to approval by
the Office of Insurance Commissioner in the State of Washington.
The Company anticipates that the revenues generated by operations,
investment and financing, plus the capital it currently has in reserves,
will be sufficient to meet its cash requirements throughout 1997.
Item 7. Financial Statements
See Financial Statements beginning on Page F-1
FIRST CHOICE HEALTH
NETWORK, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1996 and 1995
(With Independent Auditors Report Thereon)
INDEPENDENT AUDITORS REPORT
The Shareholders and Board of Directors
First Choice Health Network, Inc.:
We have audited the accompanying consolidated balance sheets of First Choice
Health Network, Inc. and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders equity and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Choice Health Network, Inc. and subsidiary as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
Seattle, Washington
March 11, 1997, except as to note 11 which is as of March 28, 1997
CONSOLIDATED FINANCIAL STATEMENTS
Assets 1996 1995
Current assets:
Cash and cash equivalents $2,407,355 2,129,006
Service fees receivable, net of allowance
for doubtful accounts of approximately
$96,000 in 1996 and 1995 773,337 592,793
Service fees receivable from related parties 668,046 511,371
Investment securities available for sale 3,072,445 1,276,783
Federal income tax receivable 8,854 90,129
Prepaid expenses 207,074 182,469
Other assets 15,625 15,625
Total current assets 7,152,736 4,798,176
Furniture, equipment and computer software:
Furniture and equipment 1,030,286 813,663
Computer software 149,558 149,558
License fees 193,812 191,876
1,373,656 1,155,097
Less accumulated depreciation and amortization 728,819 574,377
Furniture, equipment and computer
software, net 644,837 580,720
Investment securities available for sale 2,434,921 1,940,454
Restricted indemnity cash 150,000 -
Goodwill, net of accumulated amortization of
$11,500 in 1996 and $5,500 in 1995 78,500 84,500
Deferred income taxes 12,159 -
$10,473,153 7,403,850
F-1
Liabilities and Shareholders Equity 1996 1995
Current liabilities:
Note payable $ - 45,000
Accounts payable 88,636 206,606
Accrued expenses 372,326 212,420
Deferred income taxes 441,581 286,451
Call options outstanding - 11,575
Total current liabilities 902,543 762,052
Deferred income taxes - 25,062
Total liabilities 902,543 787,114
Shareholders equity:
Common stock:
Class A, par value $1. Authorized 30,000
shares; issued and outstanding 656 shares
in 1996 and 676 shares in 1995 656 676
Class B, par value $1. Authorized 70,000
shares; issued and outstanding 40,600
shares in 1996 and 29,000 shares in 1995 40,600 29,000
Additional paid-in capital 5,046,417 2,630,268
Shareholder receivable (500,000) -
Paid-in capital from affiliates 1,472,108 1,472,108
Retained earnings 3,540,660 2,502,946
Net unrealized loss on investment securities
available for sale, net of deferred taxes of
$15,368 in 1996 and $9,407 in 1995 (29,831) (18,262)
Total shareholders equity 9,570,610 6,616,736
Commitments and subsequent events - -
$10,473,153 7,403,850
F-2
1996 1995
Operating revenue:
Network access fees $3,589,593 3,406,084
Hospital administrative fees primarily
related parties 2,599,738 1,977,438
Other 10,175 -
Total operating revenue 6,199,506 5,383,522
Operating expenses:
Payroll and related expenses 2,715,630 2,248,443
Selling, general and administrative expenses 2,228,786 2,224,298
Total operating expenses 4,944,416 4,472,741
Operating income 1,255,090 910,781
Other income (expense):
Interest and dividends 292,439 280,050
Other 40,462 (1,790)
332,901 278,260
Income before taxes 1,587,991 1,189,041
Federal income taxes 550,277 168,991
Net income $1,037,714 1,020,050
Net income per common share $20.57 21.66
Weighted average shares outstanding 50,446 47,091
F-3
1996 1995
Cash flows from operating activities:
Net income $1,037,714 1,020,050
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 167,320 126,245
Amortization of goodwill 6,000 5,500
Amortization of premium on debt securities
available for sale (42,138) (8,289)
Deferred income taxes, net 123,870 (112,842)
Loss on disposal of furniture, equipment and
computer software 1,841 803
Realized (gain) loss on sales of securities
available for sale (56,564) 1,790
Realized loss on resell agreements 14,260 11,575
Changes in certain assets and liabilities:
(Increase) decrease in service fees receivable (337,219) 273,550
Decrease (increase) in Federal income tax
receivable 81,275 (90,129)
Increase in prepaid expenses (24,605) (90,870)
Increase in other assets - (15,625)
(Decrease) increase in accounts payable (117,970) 167,118
Increase (decrease) in accrued expenses 159,906 (14,494)
Decrease in Federal income taxes payable - (21,578)
Net cash provided by operating activities 1,013,690 1,252,804
Cash flows from investing activities:
Purchases of investment securities available
for sale (6,837,912) (982,663)
Purchase of call options (25,835) -
Sales of investment securities available
for sale 1,254,184 83,694
Maturities of investment securities available
for sale 3,374,771 61,167
Purchase of furniture, equipment and computer
software (231,342) (168,727)
Proceeds from disposition of furniture,
equipment and computer software - 595
Acquisition of license fees (1,936) (27,174)
Acquisition of Pacific Health Systems, Inc. - (45,000)
Increase in restricted indemnity cash (150,000) -
Net cash used in investing activities (2,618,070) (1,078,108)
Subtotal, carried forward (1,604,380) 174,696
F-4
1996 1995
Subtotal, brought forward $(1,604,380) 174,696
Cash flows from financing activities:
Decrease in note receivable - 18,500
Payment of note payable (45,000) -
Issuance of Class A common stock and
membership rights from physicians - 3,934
Repurchase of Class A common stock and
membership rights from physicians (3,755) (2,900)
Issurance of Class B common stock and
membership rights from physicians 1,931,484 -
Net cash provided by financing activities 1,882,729 19,534
Increase in cash and cash equivalents 278,349 194,230
Cash and cash equivalents at beginning of year 2,129,006 1,934,776
Cash and cash equivalents at end of year $2,407,355 2,129,006
Supplemental disclosures of cash flow information:
Cash received during the year for Federal
income tax refund $ - 214,714
Cash paid during the year for Federal
income taxes 360,000 608,000
$360,000 822,714
Supplemental disclosure of noncash investing
activities -
Shareholder receivable $(500,000) -
F-5
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
First Choice Health Network, Inc. (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.
(b) Principles of Consolidation
The consolidated financial statements include the consolidated accounts of
the Company and its wholly-owned subsidiary, First Choice Health Plan, Inc.,
a health care services contractor which was formed on January 31, 1995. All
significant intercompany balances have been eliminated in consolidation.
(c) Adoption of a New Accounting Principle
Effective January 1, 1996, the Company adopted the provisions of the
Statement of Financial Accounting Standards No. 121 (SFAS 121), Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. There was no cumulative effect of adopting SFAS 121 or impact
on operations for the year ended December 31, 1996.
(d) Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At
December 31, 1996 and 1995, cash equivalents consist of money market funds
amounting to $232,152 and $100,764, and cash management funds of $2,038,291
and $1,880,210, respectively.
(e) Operating Revenue
Operating revenue consists primarily of network access fees and hospital
administrative fees. Network access fees are recognized as earned during
the month of coverage and are recorded at contractual rates. Hospital
administrative fees are recognized as earned in the month hospital claims
are incurred by a subscriber and are recorded at a contractual percentage
of the claims.
In 1996, approximately 13% of the Company's revenues was provided by one
customer. In 1996, Insurers, Union Trusts and third-party administrators
accounted for more than 21%, 21% and 10%, respectively, of the Company's
operating revenue, and six other contracting entities each accounted for
more than 5% of such revenue.
(f) Investment Securities
The Company's investment securities are classified as available-for-sale and
are recorded at fair market value, with unrealized holding gains and losses
recognized as a separate component of shareholders' equity, net of taxes.
Declines in the fair value of investment securities available for sale
determined to be other than temporary are recognized as a component of net
income.
F-6
The cost used in determining the gain or loss on sales of marketable equity
securities and debt securities is average cost and specific identification,
respectively.
(g) Furniture, Equipment, Computer Software and License Fees
Furniture, equipment, computer software and license fees 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, licensing
agreement, or lease term ranging from three to five years.
(h) Restricted Indemnity Cash
Restricted indemnity cash are amounts established to account for potential
claims from enrollees as required by the Office of Insurance Commissioner.
(i) Goodwill
Goodwill is determined as the difference between the purchase price and fair
market value of net assets purchased. Goodwill is amortized using the
straight-line method over fifteen years. Events or changes in circumstances
have not occurred that indicate the value of goodwill has been impaired as of
December 31, 1996.
(j) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing 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 be recovered or settled. The effect
on the deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(k) Advertising
The Company expenses advertising costs as incurred. Advertising expense
amounted to $4,195 and $28,219 in 1996 and 1995, respectively.
(l) Accounts Receivable
Accounts receivable consist primarily of estimates for hospital
administrative fees receivable related to claims incurred on or before
the balance sheet date but not reported. The Company evaluates the
reasonableness of hospital 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 hospital administrative fees
receivable are reasonable. The estimates are continually reviewed and
adjusted as necessary as new information becomes known; such adjustments are
included in the current year operations.
F-7
The Company performs periodic credit evaluations of its customers and
maintains an allowance for potential credit losses.
(m) Use of Estimates
Preparation of consolidated financial statements in conformity with generally
accepted accounting principles 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.
(2) Shareholders Equity
(a) Ownership of Stock
Class A 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 common stock may be held by hospitals in the State of Washington that
contract with the Company to provide health care services.
(b) 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.
(c) 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.
(d) 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 B
shareholder. Any dividends paid to the Class B shareholders must be shared
with the nonshareholder district hospitals that have rights equivalent to
that of the Class B shareholders.
F-8
(e) 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 that of the Class B shareholders
and the membership fees paid by Class A shareholders are considered capital
contributions. The allocation to Class A shareholders will be shared among
all Class A shareholders in accordance with the number of shares outstanding
to each Class A shareholder. The allocation to the Class B shareholders must
be shared with the nonshareholder hospitals that have rights equivalent to
that of Class B shareholders.
(f) 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.
(3) Line of Credit
At December 31, 1996 and 1995, the Company had a $300,000 line of credit,
expiring on June 3, 1997. Borrowings under the line are unsecured and bear
interest at the prime rate plus 1%. There were no borrowings outstanding
under the line of credit at December 31, 1996 and 1995.
(4) Investment Securities
The amortized cost, gross unrealized gains, gross unrealized losses and fair
values of investment securities available for sale at December 31, 1996 are
as follows:
Gross
Amortized unrealized Fair
cost gains losses value
Marketable equity securities $600,336 73,975 11,531 662,780
Mortgage and asset-backed
securities 1,876,587 1,791 125,128 1,753,250
Corporate debt securities 3,075,642 15,999 305 3,091,336
$5,552,565 91,765 136,964 5,507,366
The amortized cost, gross unrealized gains, gross unrealized losses and fair
values of investment securities available for sale at December 31, 1995 are
as follows:
F-9
Gross
Amortized unrealized Fair
cost gains losses value
Marketable equity securities $545,101 59,911 31,134 573,878
Mortgage and asset-backed
securities 1,997,823 7,063 64,432 1,940,454
Corporate debt securities 701,982 923 - 702,905
$3,244,906 67,897 95,566 3,217,237
Realized gains and realized losses were $56,564 and $11,790 in 1996 and 1995,
respectively.
The amortized cost and fair values of mortgage and asset-backed securities
and corporate debt securities at December 31, 1996, based on contractual
maturity, are shown below. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Amortized Fair
cost value
Due in one year or less $2,402,989 2,409,665
Due after one year and through five years 700,374 703,296
Due after five years and through ten years 65,117 65,702
Due after ten years 1,783,749 1,665,923
$4,952,229 4,844,586
(5) Income Taxes
Federal income taxes consist of the following components:
1996 1995
Current $426,407 281,833
Deferred 123,870 (112,842)
$550,277 168,991
In 1995, the Company filed amended corporate tax returns to recharacterize
certain equity payments, and received a tax refund of $233,634, including
interest of $18,920 related to these filings.
F-10
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:
1996 1995
Amount Percent Amount Percent
Computed expected rate $539,917 34.0% $404,274 34.0%
Tax effect of permanent differences:
Dividend income received from
domestic corporation (4,684) (.3) (24,021) (2.0)
Meals and entertainment deduction 3,530 .2 4,271 .4
Adjustment to prior year tax returns 11,923 .8 (214,714) (18.1)
Other (409) - (819) (.1)
$550,277 34.7% $168,991 14.2%
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31 are
presented below.
1996 1995
Deferred tax assets:
Accounts payable and accrued expenses $142,395 141,810
Unrealized loss on investment securities 15,368 9,407
Total deferred tax assets 157,763 151,217
Deferred tax liabilities:
Service fees receivable 490,070 375,416
Prepaid expenses 70,405 62,039
Furniture, equipment and computer software 26,710 25,062
Other - 213
Total gross deferred tax liabilities 587,185 462,730
Deferred Federal income taxes, net $429,422 311,513
There was no valuation allowance for deferred tax assets at
December 31, 1996 and 1995.
F-11
(6) Commitments
(a) License Fees
(i) HSD Software License
On March 21, 1994, the Company entered into a software license and beta site
agreement with Health Services Design Corporation (HSD) for the use of a
software application developed and owned by HSD. The agreement calls for a
license fee of $145,000 and additional license fees which are priced in tiers
based upon the total number of users on the system, has no specific term, and
is cancelable by the Company or HSD at any time. Total license fee paid was
$60,000 for 1996 and 1995 related to this agreement.
(ii) VHS Software License
On May 31, 1995, the Company entered into a software licensing agreement with
Value Health Science, Inc. (VHS). The initial license term began on the day
VHS successfully installed the related software, and ends three years later.
The license term will automatically renew for one more year at the third
anniversary of the commencement date and each anniversary thereafter. The
agreement calls for a $30,000 one-time customization fee which was paid in
1995. On an ongoing basis, the agreement calls for minimum monthly fees of
$4,167 plus claim processing fees and out-of-pocket costs with respect to
storage and processing. The maximum annual license fee shall not exceed
$300,000.
(b) Consulting Agreement
On October 20, 1995, the Company entered into a consulting agreement with
Olympic Health Management System, Inc. to develop and implement a Medicare
supplement product. The agreement may be terminated with 90 days notice at
any time by the Company. The agreement called for monthly fees of $11,000
until April 1996 and $2,500 monthly in May 1996 through April 1997. Total
fees related to this agreement amounted to $64,000 and $27,500 in 1996 and
1995, respectively.
(c) Leases
The Company leases its office facilities under terms of an operating lease
expiring in September 1999. The lease provides for monthly minimum rent
payments and includes a renewal option for an additional five years.
Rental expense charged to operations under the operating lease for the years
ended December 31, 1996 and 1995 was $148,500 and $140,608, respectively.
F-12
Future minimum lease payments under the operating lease for the year ended
December 31 are as follows:
1997 $185,266
1998 188,990
1999 132,608
$506,864
(7) Related Party Transactions - Operating Revenue and Service Fees
Receivable
Operating revenue includes $2,063,365 and $1,441,400 for administrative
service fees charged to owner and affiliated hospitals and network access
fees charged to owner and affiliated hospitals through third-party
administrators for the years ended December 31, 1996 and 1995, respectively.
As of December 31, 1996 and 1995, service and access fees receivable of
$668,046 and $511,371, respectively, were outstanding related to these
revenues.
(8) Acquisition
Effective January 31, 1995, the Company acquired 100% of the stock interest
in Pacific Health Systems, Inc., a dental Preferred Provider Organization
(PPO) operating in the state of Washington, by delivering cash of $45,000
and a noninterest-bearing note of $45,000 paid in full on January 31, 1996.
In addition to the fixed purchase price, the Company will make contingent
purchase price payments to be calculated as 50% of the dental PPO net income,
as defined in the purchase agreement, in excess of $295,000 for each of the
calendar years 1995 and 1996 with an aggregate amount not to exceed $260,000.
No contingent purchase price payments were incurred in 1996 and 1995. The
acquisition has been accounted for as a purchase with the entire purchase
price allocated to goodwill. The operation of the PPO was merged into the
Company and the result of operations of the PPO have been included in the
Company's consolidated financial statements from the date of acquisition.
(9) Fair Value of Financial Instruments
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 107, Disclosures About Fair Values of Financial
Instruments, as modified by SFAS No. 119, Disclosure About Derivative
Financial Instruments and Fair Value of Financial Instruments. SFAS No. 107
requires disclosures of fair value for financial instruments, whether or not
they are included in the balance sheet, for which it is practicable to
estimate fair value. SFAS No. 119 requires disclosures about amount, nature
and terms of derivative financial instruments.
The Company's financial instruments included in the December 31, 1996 and
1995 balance sheets consist of investment securities available for sale. The
fair value of the investment securities is based on quoted market prices
(note 4).
F-13
During 1995, the Company entered into call option contracts for the sales of
certain securities available for sale to third parties at specified future
dates for fixed prices. The call options were exercised in 1996 at a net
loss of $14,260. No call option contracts are held by the Company at
December 31, 1996. The cost, call value and fair value of the related
investment securities available for sale at December 31, 1995 was $130,200,
$167,250 and $140,675, respectively.
(10) Retirement Plan
The Company has a qualified 401(k) Employee Savings and Profit Sharing Plan
(Plan) covering substantially all employees that are not already covered by a
collective bargaining agreement. Under the Plan, employees can defer up to
12% of the eligible compensation. The Company matches 50% of the employee
contribution, up to 6% of the participant's eligible salary. 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, 1996 and 1995 amounted to $45,645 and $36,860, respectively.
(11) Subsequent Event
In March 1997, First Choice Health Plan, Inc., a wholly-owned subsidiary of
First Choice Health Network, Inc., signed a letter of intent to consolidate
First Choice Health Plan, Health First Partners and Health Washington health
plans. The terms of the merger agreement have not been formalized and would
be subject to approval by the Office of Insurance Commissioner in the State
of Washington.
In March 1997, the Company transferred an additional $5 million in cash and
investments to its subsidiary First Choice Health Plan, Inc., in connection
with its licensure and product introduction as a health care service
contractor.
(12) Contingency
In connection with Overlake Hospital becoming a shareholder in December 1996,
the Company incurred a contractual contingent liability for exclusivity
damages to another hospital shareholder of up to $600,000. Since the amount
of any damages is not reasonably estimable, no amount has been reflected in
the consolidated financial statements as of December 31, 1996.
F-14
____________
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.
None.
Item 9. 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 48 President & Chief Executive Officer
Randolph R. Barker 41 Vice President-Network Management
Nancy Cortez 49 Vice President-Compliance & Communications
Ross D. Heyl 43 Vice President-Marketing
Barbara J. Morrett, R.N. 50 Vice President-Health Care Management
David Peel 36 Vice President -Finance,
Underwriting/Product Development
Judith A. Sarafin 41 Vice President-Operations
Ricord B. Winstead, M.D. 49 Vice President & Medical Director
William B. Connoley 55 Director (I)
Paul M. Elliott 56 Director (III)
Andrew Fallat 49 Director (II)
John L. Fleming, M.D. 53 Director (II)
Phillip J. Haas 48 Director (III)
Richard Lipsky, M.D. 52 Director (III)
Barbara L. Mauk 51 Director (I)
Richard A. McGee, M.D. 52 Director (I)
Richard E. Rust, M.D. 70 Director (I)
Robert H. Smith 52 Director (II)
Clyde D. Walker 41 Director (II)
__________________
(I) Term Expires in 1997.
(II) Term Expires in 1998.
(III) Term Expires in 1999.
Gary R. Gannaway assumed the position of President and Chief Executive
Officer of First Choice in January 1996. Mr. Gannaway has an extensive
background in the development and marketing of managed health care and
creating innovative partnerships between physicians and hospitals.
Mr. Gannaway has served as Principal and President of Dauner, Gannaway and
Associates, a managed care consulting and management company, with offices
in Phoenix, Arizona and Wichita, Kansas, from 1987 to 1995. During the same
period he has served as President and CEO of Premier healthcare of Arizona,
a statewide HMO; as President of the Arizona Healthcare Alliance of Phoenix,
which developed and marketed seven area PHOs; and Vice President for western
U.S. managed care operations at Aetna Health Plans.
Ricord B. Winstead, M.D., Vice President and Medical Director,
joined First Choice in October 1995 and is responsible for the First Choice's
utilization management program and for relations with First Choice's the
physicians participating in the Company's PPO. Dr. Winstead served as
Associate Regional Chief of Staff for the north district of Group Health
Cooperative of Puget Sound. He has been Medical Director of Puget Sound
Division of QualMed Health Plan and Cigna Health Plan of Washington.
Dr. Winstead is a certified member of the American Board of Family Practice
and is a member of the American College of Physician Executives and of the
national, state and county Academies of Family Physicians. He is the
immediate past president of the King County Academy of Family Physicians.
Dr. Winstead was licensed to practice family medicine in Washington state in
1980 after earning his M.D. degree from the University of Washington School
of Medicine. He received his Bachelor's degree from John Hopkins University
in Baltimore and completed his residency in family practice at Swedish
Hospital in Seattle in 1982.
Randolph R. Barker, Vice President, Finance, and Treasurer, Randy Barker
joined First Choice in 1986. Mr. Barker served as acting Chief Executive
Officer of the Company on three separate occasions, the most recent being
from May 1, 1995 to in January 16, 1996, the interim period between James
Stumpfel's resignation as President and Gary Gannaway's commencement in such
office. Mr. Barker was a consultant and partner in Northwest Management
Associates, specializing in financial analysis and business planning, from
1984 to 1985, an Assistant Vice President at Seafirst Bank from 1982 to 1983,
and a consultant in the Seattle office of Arthur Andersen & Co., from 1979 to
1982, an Assistant Vice President at Seafirst Bank from 1982 to 1983, and
Consultant and Partner in Northwest Management Associates, specializing in
financial analysis and business planning from 1984 to 1985.
Subsequent to December 31, 1996 Mr. Barker assumed the position of Vice
President, Network Management after a realignment of the Company's Finance
and Network Management areas. Mr Barker terminated his employment with the
Company on March 28,1997.
Ross D. Heyl, Vice President, Marketing, Ross Heyl joined First Choice in
1985. From 1982 to 1985, Mr. Heyl was an account executive for Rollins
Burdick Hunter of Washington; and from 1980 to 1982, he was employed by Penn
Mutual Life Insurance Company in San Francisco and Seattle. Mr. Heyl is a
licensed health insurance agent in the state of Washington.
Barbara J. Morrett, R.N., Vice President, Health Care Management, Barbara J.
Morrett joined First Choice in May 1993. From 1989 to 1993, Ms. Morrett
served as Director of Product Services for Mediqual, Inc. in Westborough,
Massachusetts, and prior thereto, she served as the Manager of Product
Development for Intracorp.
Judith A. Sarafin, Vice President, Operations joined First Choice in
November, 1994. Ms. Sarafin served as Information Systems Manager from 1992
to 1994 and as Manager of the Claims Audit Department from 1988 to 1992 at
King County Medical Blue Shield in Seattle. Ms. Sarafin was a health care
consultant with KPMG Peat Marwick, Seattle, and prior to that worked for
Group Health Cooperative as claims systems implementation project manager,
medical technologist and billing supervisor.
David Peel, Vice President, Product Development and Underwriting joined
First Choice in July 1996. Mr. Peel served as Vice President and Chief
Financial Officer for Premier Healthcare of Arizona from 1995 to 1996 and as
Associate Director, Provider Contracting for Samaritan Healthplan in Phoenix,
Arizona from 1987 to 1995.
Subsequent to December 31, 1996, Mr. Peel assumed the position of Vice
President, Finance after a realignment of the Company's Finance and Network
Management areas.
Mr. Connoley has been a director of First Choice since July 1995. Mr.
Connoley is President and Chief Executive Officer of MultiCare Health System.
He is also Chairman of Health Washington, a healthcare partnership which
includes MultiCare Health System, Tacoma, Swedish Health Services, Seattle
and Ballard, Evergreen Hospital Medical Center, Kirkland, and Stevens
Healthcare, Edmonds. He is a member of the American College of Hospital
Administrators and the Washington State Hospital Association.
Paul M. Elliott has been a director of First Choice since September 1989.
Mr. Elliott is President and CFO for Cafe Fonte in Seattle. Mr. Elliott has
served as Director of Plan of Pepsi Cola in Seattle from July 1993 through
1995, and from August 1981 through June 1993, Mr. Elliott served as Senior
Vice President, - Finance Operations, and Treasurer of Al Pac Corporation.
Andrew Fallat has been a director of First Choice since July 1995. He has
been the Chief Executive Officer at Evergreen General Hospital for 14 years.
Mr. Fallat is the Chief Executive Officer of Evergreen Community Health Care,
Puget Sound's largest and most comprehensive hospital based hospice and home
health program, mobile paramedic services and a broad range of other
community based health assistance programs. He is a board member on the
Foundation for Health Care Quality, a Fellow in the American College of
Healthcare Executives and is the College's Regent for the state of Washington.
John L. Fleming, M.D., has been a director of First Choice since July 1995.
Dr. Fleming is a practicing physician in family practice at the Roosevelt
Medical Center where he has been CEO since 1988. He is also a consulting
physician at Seattle Pacific University. He has been a member of the
American Academy of Family Physicians and the King County Medical Society
since 1970. He is currently on the Board of Directors of Northwest Health
Partners, the Board of Directors of Pacific Consolidated Services
Corporation, and Secretary-Treasurer of the Medical Staff of Northwest
Hospital.
Phillip J. Haas has been a director of First Choice since July 1995.
Mr. Haas is Administrator Primary and Managed Care of Valley Medical Center.
From 1988 through 1993, he was Executive Director of Virginia Mason Health
Plan, an HMO serving over 40,000 members. From 1985 to 1988, Mr. Haas was
President of First Choice Health Network. He has previously served 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.
Richard Lipsky, M.D., has been a director of First Choice since September
1989. Since November 1991, Dr. Lipsky served as a physician managed care
advisor for Evergreen Hospital Medical Center, and since January 1993 he has
been in practice with Evergreen Medical Group. Prior thereto, Dr. Lipsky
was in private practice.
Barbara L. Mauk has been a director of First Choice since May 1986.
Ms. Mauk is a vice president with The Reppond Company, a sister corporation
of Benefits-Trust Administrators Inc. and Group Data Administrators, one of
the communities leading companies offering employee benefits planning. Since
1990, Ms. Mauk hads previously been a Managing Partner of Mauk, Lanbar &
Bailey, Inc., a business consulting firm in operation since 1990. Prior
thereto, she served as Vice President, Human Resources and Corporate Services
for KIRO Broadcasting, Inc.
Richard A. McGee, M.D., has been a director of First Choice since July 1995.
Dr. McGee has a full-time medical oncology practice and is the president of
the Puget Sound Cancer Center. He is 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 member of the Board of Directors of
the Washington State Medical Oncology Society and is Chairman of the Quality
Assurance Committee of Stevens Health Network, a local PHO. He is a Clinical
Associate Professor of medicine at the University of Washington and is a
Fellow of the American College of Physicians. He has served in the past as
Chief of the Medical Staff, chairman of several medical staff committees, and
as Vice-Chairman of the board of Directors of Snohomish County Physicians
Corporation, a Blue Shield company.
Richard E. Rust, M.D., has been a director of First Choice since May 1986.
Dr. Rust is a retired family physician. His past activities include 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.
Robert Smith has been a director of First Choice since January 1995.
Mr. Smith has been Executive Vice President and Chief Financial Officer of
Good Samaritan Community Hospital since 1985. Mr. Smith is a certified
public accountant (CPA) and a certified healthcare executive (CHE).
Previously, Mr. Smith served as Chief Financial Officer for Roseville
Community Hospital near Sacramento from 1983 to 1985, and Merle West Medical
Center in Klamath Falls, Oregon from 1974 to 1983. and a senior accountant
with Ernst & Young in San Diego from 1972 to 1974. Mr. Smith served
actively with the Healthcare Financial Management Association in various
posts, including chapter president, and has recently served as treasurer of
the Board of Directors of the Puyallup branch of the YMCA. Mr. Smith is
currently on the Washington State Hospital Association DRG Advisory Board
and has served as an advisory Board member for healthcare reimbursement
issues for the State of Washington.
Clyde D. Walker has been director of First Choice since April 1995.
Mr. Walker is Vice President, Human Resources of Olin Aerospace Division
and Olin Aerospace Company in Redmond, Washington, where it has been his
responsibility to design and manage the company's medical benefits plan
covering over 700 employees and their dependents. Mr. Walker previously
served as Director, Contracts and Pricing. He is actively involved in
community efforts including the Guiding Light organization which provides
positive role models for young African-American males. Mr. Walker serves
on the board of directors of Big Sisters of King County and mentors athletes
at the University of Washington. He received an M.B.A. degree from City
University and a B.A. Degree in Business from the University of Washington.
______________________________
The Company's Board of Directors proposed an amendment of the Bylaws to
modify the membership of the Board, and on June 29, 1995, 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 29, 1995, the Board of
Directors shall consist of eleven individuals: Four (4) directors (the
"Class A Directors") shall be physicians representing Class A shareholders.
Four (4) 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: One Class A Director, one Class B Director, and one
Class C Director.
Category II: Two Class A Directors, one Class B Director, and one
Class C Director.
Category III: One Class A Director, 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 six directors is generally required to transact business at a
meeting of the Board, except that a quorum of eight 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, and any issues reviewed by the Board regarding the limitation or
termination of health care provider contracts.
____________________________________________
Item 10. 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:
Name and Principal Annual Compensation All Other
Position Year Salary Bonus Compensation
Gary Gannaway (1) 96 $185,153 $100,000 $75,000 (5)
President and 96 $ 4,500 (2)
Chief Executive Officer
Randolph Barker 96 $107,923 $ 15,000 $ 4,016 (2)(5)
Vice President, Finance 95 $ 97,959 $ 19,500 $ 3,801 (2)(5)
and Acting CEO 96 $ 3,500 (3)
95 $ 26,250 (3)
94 $ 92,944 $ 17,400 $ 3,401 (2)(5)
Ross Heyl 96 $ 90,252 $ 15,000 $ 3,215 (2)(5)
Vice President ,
Marketing
Ricord Winstead 96 $141,197 $ 15,000 $ 4,248 (2)(5)
Vice President,
Medical Director
James G. Stumpfel (4) 96 $ 19,999 (4b)
President and 95 $ 56,934 0 $ 0 (5)
Chief Executive Officer 95 $108,040 (4b) 0 $ 0 (5)
94 $124,139 $ 79,200 $63,361 (4a)(5)
__________
1) Mr. Gannaway commenced serving as Chief Executive Officer on
January 15,1996.
1a) Consists of $35,000 relocation expenses and $40,000 sign-on bonus.
(2) Consists of employer contributions to the Company's 401(k) plan.
3) Pursuant to Mr. Stumpfel's resignation, Mr. Barker served as interim
Chief Executive Officer from May 1, 1995 through January 14, 1996.
Additional compensation for these duties was approved by the Board of
Directors.
4) Mr. Stumpfel commenced serving as Chief Executive Officer on
February 1, 1994.
4a) Consists of $3,361 in employer contributions to the Company's 401 (k)
plan and $60,000 in relocation expenses.
4b) Mr. Stumpfel resigned on April 27, 1995 and per contractual agreement
received compensation for a period of nine months.
5) The Company does not offer long term incentive plans to any of it's
executive officers.
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
were compensated $50 per hour prior to February 1, 1995 and 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, 1996.
Employment Agreements
On October 19, 1995, Gary R. Gannaway entered into a five year employment
agreement as the Company's President and Chief Executive Officer, filling
the vacancy created by the resignation in April 1995 of James G. Stumpfel.
Mr. Gannaway commenced employment on January 16, 1996. Under his employment
agreement with First Choice, Mr. Gannaway will be employed for a five-year
term expiring January 15, 2001 and will receive an annual base salary of
$200,000 for 1996, subject to a minimum 5% annual increase, and will be
allowed $6,000 per annum for automobile expenses. The Company has also
agreed to provide Mr. Gannaway with group life insurance coverage in a dollar
amount equal to twice his annual base salary as well as comprehensive
medical, dental and disability insurance coverage.
On January 26, 1996, First Choice paid Mr. Gannaway $35,000 to cover
expenses related to relocating to the Seattle, Washington area and to
subsidize any down payment obligation relating to the purchase of a
home, and $20,000 of a $40,000 sign-on bonus. The balance of the
sign-on bonus was paid out on March 20, 1996.
In each of the years of the employment agreement subsequent to the initial
year, Mr. Gannaway will be eligible to receive a bonus of up to 60% of his
annual base salary, based on achieving performance criteria established by
the Board of Directors.
On February 1, 1994, James G. Stumpfel commenced employment as the
Company's President and Chief Executive Officer, filling the vacancy
created by the resignation in December 1993 of Clayton S. Field. Under
his employment agreement with First Choice, Mr. Stumpfel is employed for
a five-year term expiring January 31, 1999 and receiveds an annual base
salary of $140,000 ($160,000 for 1995), subject to a minimum 5% annual
increase, and was allowed $7,200 per annum for automobile expenses. The
Company has also agreed to provide Mr. Stumpfel with group life insurance
coverage in a dollar amount equal to twice his annual base salary as well
as comprehensive medical, dental and disability insurance coverage.
In February 1994, First Choice paid Mr. Stumpfel $60,000 to cover expenses
related to relocating to the Seattle, Washington area and to subsidize any
downpayment obligation relating to the purchase of a home. To further
assist Mr. Stumpfel with respect to his relocation, on March 18, 1994, First
Choice made a loan to Mr. Stumpfel in the principal amount of $18,500,
payable on April 1, 1996, with interest at the rate of 4.5% per annum,
compounded annually, and subject to prepayment in whole or in part with any
bonus payable to Mr. Stumpfel prior thereto. Mr. Stumpfel fully paid such
note in February 1995, with interest thereon forgiven by the Company's Board
of Directors.
In each of the years of the employment agreement subsequent to the initial
year, Mr. Stumpfel will be eligible to receive a bonus of up to 60% of his
annual base salary, based on achieving performance criteria established by
the Board of Directors.
The Company entered into a three-year employment agreement with Randolph
Barker on March 1, 1994, pursuant to which Mr. Barker is serving as Vice
President, Finance and Treasurer, and received an annual base salary of
$101,530, in 1996, subject to a minimum 3% annual increase. In addition,
Mr. Barker is eligible to receive a bonus of up to 20% of his base salary,
based upon achieving pre-determined performance criteria, and is allowed
approximately $2,500 per annum for automobile expenses. The Company has
also agreed to provide Mr. Barker with group life insurance coverage in a
dollar amount equal to twice his annual base salary as well as comprehensive
medical, dental and disability insurance coverage.
The Company entered into a three-year employment agreement with Ross
D. Heyl on March 1, 1994, pursuant to which Mr. Heyl is serving as Vice
President, Marketing, and received an annual base salary of $86,500 in
1996, subject to a minimum 3% annual increase. In addition, Mr. Heyl
is eligible to receive a bonus of up to 20% of his base salary, based
upon achieving pre-determined performance criteria, and is allowed
approximately $5,000 per annum for automobile expenses. The Company has
also agreed to provide Mr. Heyl with group life insurance coverage in a
dollar amount equal to twice his annual base salary as well as
comprehensive medical, dental and disability insurance coverage.
At December 31, 1996, the respective employment agreements of Messrs.
Gannaway, Barker and Heyl provided that in the event of termination of their
respective employment by the Company, Mr. Gannaway, Mr. Barker or Mr. Heyl,
as the case may be, would be entitled to receive, as severance, (a) his
respective base salary for a period of twenty-four months, but reduced for
each day of service not to go below twelve months (with respect to Mr.
Gannaway) or six months (with respect to Mr. Barker and Mr. Heyl) or until
such person secures other employment, whichever occurs first, and (b) life,
health and disability insurance coverage during such period, subject to the
terms of the Company's related insurance policies, unless such termination
arises for any of the following reasons: theft, conviction of a felony,
illegal substance abuse, alcohol addiction, gross neglect of duty, or conduct
unbefitting a person employed as the senior executive officer of a company.
On April 27, 1995, the Company's Board of Directors requested and received
the resignation of Mr. Stumpfel and has paid the specified amounts in
accordance with the terms of his employment agreement.
At December 31, 1996, the respective employment agreements of Messrs.
Gannaway, Barker and Heyl provided that in the event the Company merges with,
acquires or is sold to another entity or business and it can reasonably be
determined that Mr. Gannaway, Mr. Barker or Mr. Heyl, as the case may be, is
no longer being authorized to perform substantially the duties of President
and Chief Executive Officer (with respect to Mr. Gannaway), Vice President,
Finance and Treasurer (with respect to Mr. Barker), or Vice President,
Marketing (with respect to Mr. Heyl), Mr. Gannaway, Mr. Barker or Mr. Heyl,
as the case may be, may elect to terminate his respective employment, in
which event he shall be entitled to the same severance pay and benefits that
he would otherwise have been entitled to following a termination without
cause, for a period of 12 months (with respect to Mr. Gannaway) or six months
(with respect to Mr. Barker and Mr. Heyl) or until the applicable person
secures other employment, whichever occurs first. On March 28, 1997,
Mr. Barker terminated his employment and under the terms of the agreement the
Company will record a charge to operations in 1997 in accordance with the
afore mentioned terms.
At December 31, 1996, the respective employment agreements provided that
Mr. Gannaway may terminate his employment on 90 days' prior written notice,
and Mr. Barker and Mr. Heyl on 30 days' prior written notice, and that
Mr. Gannaway, Mr. Barker and Mr. Heyl will keep information about the
Company confidential and will not compete with the Company by accepting
employment or otherwise becoming associated with any other managed care
organization owned or operated in any geographic areas served by the Company,
for a period of 12 months ( with respect to Mr. Gannaway) and nine months
(with respect to Mr. Barker and Mr. Heyl) following their respective
voluntary termination's of employment. Mr. Barker's and Mr. Heyl's
employment agreements at December 31, 1996 also provided that if, at the
expiration of the term of their respective contracts, the Company offers a
new contracts to Mr. Barker and Mr. Heyl the terms of which are no less
favorable than the terms of their present contracts, and Mr. Barker and
Mr. Heyl do not accept such offer, then Mr. Barker and Mr. Heyl will not
accept employment by or be associated with any other managed care
organization owned and operated in geographic areas served by the Company
for a period of 12 months following the expiration of his present contract.
At December 31, 1996, the respective employment agreements of Messrs.
Barker and Heyl also provided that the Company will indemnify Mr. Barker and
Mr. Heyl against any liabilities incurred by either in the conduct of their
individual employment other than those as to which they are adjudged to have
been liable for misconduct in the performance of their respective duties, as
such standards of conduct are set forth in the Company's Restated Articles of
Incorporation and Bylaws. The Company has also agreed to obtain officers'
and directors' liability insurance, subject to its reasonable availability,
providing coverage for Mr. Barker and Mr. Heyl for any liability incurred by
either arising out of their respective positions, whether or not the Company
would otherwise be required to indemnify them.
Item 11. Security Ownership of Certain Beneficial Owners
and Management.
The following table sets forth as of March 31, 1996, 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
1550 North 155th
Seattle, WA 98133 - 5,800 - 14.3%
Providence-General
14th and Colby
Everett, WA 98201 - 5,800 (1) - 14.3%
Good Samaritan
Community Healthcare
407-14th Avenue S.E.
Puyallup, WA 98371 - 5,800 - 14.3%
Multicare Medical Center
409 South J
Tacoma, WA 98405 - 5,800 - 14.3%
Empire Health Services
80 Fifth Avenue
Spokane, WA 99210 - 5,800 - 14.3%
Swedish Medical Center
747 Broadway
Seattle, WA 98114 - 5,800 - 14.3%
Overlake Hospital Medical Center
1035 116th Avenue N.E.
Bellevue, WA 98004 - 5,800 - 14.3%
William B. Connoley - * -
Paul M. Elliott - * -
Andrew Fallat - * -
John L. Fleming, M.D. 1 - * -
Phillip J. Haas - * -
Richard Lipsky, M.D. 1 - * -
Barbara L. Mauk - * -
Richard A. McGee, M.D. 1 - * -
Richard E. Rust, M.D. 1 - * -
Robert H. Smith - * -
Clyde D. Walker - * -
All directors and executive officers
officers as a group (4 persons)
4 40,600 * 100%
(1) Pursuant to a settlement agreement with the Attorney General of the
State of Washington, Providence-General (i) is permitted to exercise its
voting rights with respect to such shares only when requested to do so by
the Board of Directors of First Choice, (ii) is prohibited from attempting
to direct, control or influence the business operations of First Choice
through its status as shareholder, (iii) is permitted access as a
shareholder only to documents and information approved by the Board of
Directors of First Choice, and (iv) is required to divest itself of such
shares if a commercially reasonable offer is initiated by First Choice to
repurchase such shares at fair market value.
Three additional hospitals in the state of Washington (Evergreen Hospital
Medical Center, 12040 N.E. 128th Street, Kirkland, WA 98034, Valley Medical
Center, 400 S. 43rd Street, Renton WA 98055, and Stevens Memorial Hospital,
21601 76th Avenue, Edmonds, WA 98026) 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."
Item 12. Certain Relationships and Related Transactions.
In July 1996, Swedish Medical Center, a Washington non-profit corporation,
purchased 5,800 shares of the Company's Class B Common Stock at a purchase
price of $160.60 per share, or an aggregate of $931,848. On July 16, 1996
the purchase price was paid in full.
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.
Pursuant to their respective health care facility service contracts with
First Choice, the holders of the Class B Common Stock and the Hospital
Participants paid the following aggregate fee to First Choice in 19964:
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; and Overlake Hospital Medical Center:
$ 0..
Item 13. Exhibits, List and Reports on Form 8-K.
(a) Exhibits
2.1 Copy of Registrant's Restated Articles of
Incorporation.*
2.2 Copy of Registrant's By-Laws.*
10.1 Form of Agreement between Registrant and
Physician participating in PPO. **
10.2 Form of Health Care Facility Service Contract
between Registrant and Hospital participating in PPO.*
10.2a 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.*
10.4 Form of Agreement between Registrant and Third Party Administrator.*
10.5 Form of Agreement between Registrant and Insurance Company .*
10.6 Copy of Participation Agreement dated March 27, 1985, between
Registrant and King County Public Hospital District No.2 ( Evergreen
General Hospital ).*
10.7 Copy of Participation Agreement dated March 26, 1985, between
Registrant and Valley Medical Center.*
10.8 Copy of Participation Agreement dated December 19, 1991, between
Registrant and Public Hospital District No.2 of Snohomish County
(Stevens Memorial Hospital) and related Promissory Note in the
aggregate principal amount of $ 566,000.*
10.9a Copy of Promissory Note dated June 10, 1991, in aggregate principal
amount of $453,000 issued by Empire Health Services.*
10.9b Copy of Subscription Agreement dated July 25, 1991, between
Registrant and Empire Health Services.*
10.9c Copy of Stock Pledge Agreement dated July 25, 1991, between
Registrant and Empire Health Services.*
10.10 Copy of Settlement Agreement effective December 16, 1993, among
the Attorney General of the State of Washington, the Sisters of
Providence in Washington and General Hospital Medical Center .*
10.11 Copy of Employment Agreement dated September 1, 1993, as amended,
between Registrant and Clayton S. Field.*
10.12 Copy of Employment Agreement dated January 17, 1994, between
Registrant and James G. Stumpfel, and related Promissory Note dated
March 18, 1994, in the aggregate principal amount of $18,500.*
10.13a Copy of Lease dated December 5, 1988, between Registrant and
Martin Selig.*
10.13b Copy of Lease Amendments date April 5, 1990, May 29, 1992,
December 2, 1992, and December 20, 1993, respectively, each
between Registrant and Martin Selig.*
10.14 Copy of $300,000 Line of Credit dated June 13, 1991, from
Seafirst Bank.*
10.15 Copy of acquisition agreement dated February 1, 1995, between
Registrant and Pacific Health Systems, Inc.
10.16 Copy of Employment Agreement dated March 1, 1994, between
Registrant and Randolph R. Barker.**
10.17 Copy of Employment Agreement dated October 19, 1995 between
Registrant and Gary R. Gannaway.**
10.18 Copy of Registrant's Amended By-Laws dated June 29, 1995.
10.19 Copy of Subscription Agreement dated July 16, 1996, between
Registrant and Swedish Medical Center.
10.20 Copy of Agreement dated April 22, 1996 between Registrant and
Olympic Health Management Systems, Inc. Production Line
Management - Medicare Select.
10.20a Copy of Agreement dated April 22, 1996 between Registrant and
Olympic Health Management Systems, Inc. for Administrative
Agreement.
10.20b Copy of Agreement dated April 22, 1996 between Registrant and
Olympic Health Management Systems, Inc. for Independent Agent
Agreement.
10.20c Copy of Agreement dated April 22, 1996 between Registrant and
Olympic Health Management Systems, Inc. for Supervising Agent
Addendum to Independent Agent Agreement.
10.21 Copy of Subscription Agreement dated July 16,1996, between
Registrant and Overlake Hospital Medical Center.
10.22 Copy of Employment Agreement dated March 1, 1994 between
Registrant and Mr. Ross D. Heyl.**
______________________
* 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.
10.19 Copy of Subscription Agreement dated July 16,1996, between
Registrant and Swedish Medical Center.
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 17th day of April, 1997.
FIRST CHOICE HEALTH NETWORK, INC.
By:__/s/Gary R. Gannaway________________
Gary R. Gannaway
President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
Name Title Date
President & Chief Executive April 24, 1997
/ s / Gary R. Gannaway (Principal Executive
Gary R. Gannaway Officer)
Vice President-Finance April 24, 1997
/ s / David Peel ( Principal Executive
David Peel and Accounting Officer )
/ s / William B. Connoley
William B. Connoley Director April 24, 1997
/ s / Paul M. Elliott
Paul M. Elliott Director April 24, 1997
/ s /Andrew Fallat
Andrew Fallat Director April 24, 1997
/ s / John L. Fleming, M.D.
John L. Fleming, M.D Director April 24, 1997
/ s / Phillip J. Haas
Phillip J. Haas Director April 24, 1997
/ s / Richard Lipsky, M.D.
Richard Lipsky, M.D. Director April 24, 1997
/ s / Barbara L. Mauk
Barbara L. Mauk Director April 24, 1997
/ s / Richard A. McGee, M.D.
Richard A. McGee, M.D Director April 24, 1997
/ s / Richard E. Rust, M.D.
Richard E. Rust, M.D. Director April 24, 1997
/ s / Robert Smith
Robert Smith Director April 24, 1997
/ s / Clyde D. Walker
Clyde D. Walker Director April 24, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
EXHIBITS
TO
FORM 10K-SB
ANNUAL REPORT
UNDER
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
______________________
FIRST CHOICE HEALTH NETWORK, INC.
(Name of small business issuer in its charter)
SUBSCRIPTION AGREEMENT
First Choice Health Network, Inc.
1100 Olive Way, Suite 1480
Seattle, WA 98101-1838
Gentlemen:
1.Subscription. Overlake Hospital Medical Center, a Washington nonprofit
corporation ("Overlake") hereby subscribes for and agrees to acquire
Fifty-Eight Hundred (5,800) shares of Class B common stock (the "Stock") of
First Choice Health Network, Inc., a Washington corporation (the "Company"),
and the Company hereby accepts such subscription, upon approval of a
majority of the Directors of the Company, all pursuant to the terms set
forth herein.
2. Purchase Price. In consideration for such Stock, Overlake shall pay a
total purchase price of $1,500,000, approximately $258.62 per share, payable
in cash, $1,000,000 upon tender of this Subscription Agreement to the
Company, $250,000 on December 15, 1997 and $250,000 on December 15, 1998.
3. Stockholder Restrictions. Except as otherwise specifically set forth in
this Subscription Agreement, Overlake hereby acknowledges, adopts, accepts
and agrees to be bound by all the terms and provisions of the Company's
Articles of Incorporation, Bylaws, the Agreement Among Class B Shareholders
and Affiliates(when executed), and all other corporate documents binding upon
or affecting Overlake or the Company's stockholders, which currently are the
Company's Articles of Incorporation and Bylaws, this Subscription Agreement,
and the Health Care Facility Services Agreement which Overlake will enter
into as a provider of services to the Company.
4. Overlake's Representations and Warranties. Overlake hereby represents
and warrants that:
(a) Overlake is a Washington non-profit corporation in good standing in the
state of Washington which has been granted tax exempt status as a charitable
organization under Section 501(c)(3) of the Internal Revenue Code, is not
formed for the specific purpose of acquiring the Stock, and has total assets
in excess of $5,000,000.00;
(b) The Stock is being acquired by Overlake for investment purposes only,
for the account of Overlake and not with the view to any resale or
distribution thereof, and Overlake is not participating, directly or
indirectly, in an underwriting of such Stock and will not take, or cause
to be taken, any action that would cause Overlake to be deemed an
"underwriter" of such Stock as defined in Section 2(11) of the Securities
Act of 1933, as amended;
(c) Overlake has received and has carefully read a copy of the Company's
Articles of Incorporation, its Bylaws, its most recent audited financial
statements, its 1996 10-Q report, and, in connection therewith, to the
best of Overlake's knowledge has not been denied access to any other
materials, books, records, documents, and information relating to the
Company, which has been requested, and has no reason to question the
accuracy of and supplement the information contained therein;
(d) Overlake acknowledges that Overlake has been offered an opportunity to
ask questions of, and receive answers from the Company, its President and
Chief Executive Officer, Gary R. Gannaway, and its Chief Financial Officer,
Randy Barker, concerning the Company and its business, and that to the best
of Overlake's knowledge all requests for such information has been fully
complied with by them;
(e) Overlake has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of an
investment in the Company, or Overlake has, together with its legal and
financial advisors, such knowledge and experience in financial and business
matters that Overlake and its legal and financial advisors are capable of
evaluating the merits and risks of this investment;
(f) Overlake has adequate means of providing for the current needs of its
business and operations and possible contingencies, and Overlake has no
need for liquidity with respect to its investment in the Company;
(g) Overlake has been advised that an investment in the Company involves
substantial risk and Overlake is able to bear the economic risk of its
investment in the Company and can withstand a complete loss of such
investment; that there is no public market for the Company's Stock; and
that it may not be possible to liquidate the investment in the Stock in
case of an emergency;
(h) Overlake is authorized and otherwise duly qualified to acquire the Stock;
(i) Other than as specifically provided in this Agreement, the Company has
made no representations or warranties in connection with Overlake's purchase
of the Stock; and
(j) Prior to the time Overlake becomes committed to purchase the Stock,
Overlake knew of the restrictions on the Stock as described herein.
5. Company's Representations and Warranties. The Company hereby represents
that:
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Washington.
(b) The execution and delivery of this Subscription Agreement and
consummation of the transaction contemplated hereby have been or will be
presented for approval of the Board of Directors of the Company and, when
approved by the Board of Directors, the Subscription Agreement constitutes
a valid and legally binding obligation of the Company, and the Stock when
delivered will be duly authorized and issued.
(c) The Company has provided true and accurate copies of the following
documents to Overlake: current Articles of Incorporation and Bylaws of
the Company; a list of Class A shareholders of the Company (substantially
correct but because of the large number of physicians and frequent physician
changes is not representative as totally accurate); a list of Class B
shareholders of the Company; shareholder agreements with Class B
shareholders; form shareholder agreement with physicians; affiliation and
participation contracts with public hospital districts; tax returns for
the past three (3) years; audited financial statements for the past three
(3) year including the management representation letters; and unaudited
financial statements for the period ending October 31, 1996. To the
knowledge of the Chief Financial Officer, as of the execution date of this
Agreement, the documents show what each purports to show and substantially
correct; the unaudited financial position of the Company through the date
of this Agreement is signed by the Company is not materially adversely
different that the financial position of the Company as reflected in the
October 31, 1996 unaudited financial statements. To the knowledge of the
Chief Financial Officer the Company has substantially complied with and is
not in default in any material respect under any laws or agreements to which
the Company is a party.
(d) To the knowledge of the Chief Financial Officer, no lawsuits or
governmental investigations are currently pending against the Company and
there are nor lawsuits threatened against the Company but not yet filed
that are not covered by insurance.
6. Restrictions on Transferability of Interests. Although the Company is
a reporting company under Section 12 of the 1934 Securities and Exchange
Act, Overlake realizes that the Stock in the Company is not, and will not
be, registered under the Securities Act of 1933, as amended (the "Act") or
under the securities laws of any state. Overlake also understands that
the Company has not agreed to register the Stock in the Company for
distribution in accordance with the provisions of the Act or any applicable
state securities laws, and that the Company has not agreed to comply with
any exemption under the Act or any such laws for the resale of the Stock in
the Company. Hence, Overlake understands that by virtue of the provisions
of certain rules relating to "restricted securities" promulgated under the
Act, the interest in the Company which Overlake has subscribed for hereby
must be held indefinitely, unless and until subsequently registered under
the Act and applicable state securities laws or unless an exemption from
registration is available, in which case Overlake may still be limited with
respect to the extent to which such interest may be transferred.
7. Payment of Subscription. Enclosed herewith is a cashier's or certified
check payable to the order of the Company for the full amount currently due
on this subscription. If this subscription is rejected by Company's Board of
Directors, the funds delivered herewith shall be returned to Overlake,
without interest or discount, as soon as practicable. Until the Company's
Board of Directors approves this Subscription Agreement Overlake shall have
the right, by written notice to the Company, to terminate this Agreement and
obtain prompt repayment of the funds.
8. Withdrawal. Overlake may at any time, voluntarily withdraw from the
Company, as a shareholder, effective upon giving notice of its intent to
do so to the Company. In such event, Company shall repurchase Overlake's
Stock on the same terms and conditions as established pursuant to the Bylaws
of the Company then in effect. If Overlake withdraws before making all of
the subscription payments as provided in Section 2 above, all payments due
after the date of withdrawal shall be forgiven by the Company, and Overlake
shall have no obligation to make such payments. In the event Overlake
withdraws after agreeing to a capital call, but prior to the payment thereof,
Overlake shall not be required to pay such capital call payment.
9. Change of Control. Upon (a) transfer of fifty percent (50%) or more
ownership interest in Overlake; (b) change of fifty percent (50%) or more
control of Overlake (new directors or trustees selected for Overlake's
governing board, in the ordinary course of governance shall not be
considered a change of Control); or (c) transfer of the operations of
Overlake through the transfer of a substantial portion of Overlake's
assets to a person or entity who or which in not a Company shareholder,
the Company may elect to repurchase Overlake's Stock in Company. The
repurchase price shall be one-million dollars ($1,000,000) if the election
is made within three years of the date that the Stock is originally issued
to Overlake. If the election is made after such date, the repurchase price
for Overlake's Stock in the Company shall be the greater of the following
two amounts:
(a) The per share paid by the last Class B shareholder to acquire stock
in the Company or participating public hospital district to join the Company
prior to Overlake notifying the Company in writing of the transfer or change
of control; or
(b) Overlake's proportionate share of the Company's "net shareholder
equity" as calculated in the manner agreed to by the shareholders in the
Shareholders' Agreement, when executed.
If Overlake notifies Company in writing of a transfer described in this
paragraph 8, the Company shall have sixty (60) days from the date of such
notice to elect to repurchase Overlake's Stock in the Company. Article XVI
of the Bylaws states and Overlake agrees that, notwithstanding the exercise
of the Company's election under this paragraph 8, the Company may withhold
payment for the repurchase of shares until such time as the Board of the
Company determines that the Company is financially capable of making payment,
in which case, Overlake shall retain control of such shares until repurchase
payment is tendered.
As an alternative to exercising its election to repurchase under this
paragraph 8, the Company may allow admission of the new entity as a
shareholder; see Article XVI of the Bylaws.
10. Commitment of Competitiveness. Overlake warrants that the facility
rates and prices for other services offered to or in effect for the Company
and its subsidiaries for its various products are competitive with the rates
offered to other payors for the same or similar products.
This commitment is effective on the date of this Subscription Agreement
and will remain in effect so long as Overlake remains a Company shareholder
unless the commitment otherwise expires pursuant to paragraph 12 of this
Agreement.
11. Contract Negotiation and Administration. Overlake agrees that for
three (3) years after the date that the Stock is originally issued under
the terms of this Subscription Agreement, Overlake will act on its behalf
in any contract negotiations and in all contract administration relating
to agreements between Overlake and the Company or its subsidiaries and
Overlake further agrees that it will not assign, delegate, or otherwise
transfer such responsibility to any other person or entity without the
Company's express written consent.
12. Shareholder Agreement. Overlake agrees to execute an Agreement Among
Class B Shareholders and Affiliates, containing terms applicable in the
same manner to all such shareholders and affiliates, in substantially the
same form attached hereto as Exhibit A, on the condition that all other
Class B shareholders and affiliated or participating District hospitals
have executed the same agreement. If such an agreement is not executed by
and between all Class B shareholder and affiliated or participating District
hospitals within one-hundred and eighty (180) days of the issuance of the
Stock to Overlake under this Subscription Agreement, then the rights and
obligations of paragraph 10 of the Subscription Agreement shall automatically
expire and shall no longer be enforceable between the parties. Overlake
acknowledges and agrees that the repurchase price terms in paragraph 9 and
the contract negotiation and administration terms of paragraph 11 of this
Subscription Agreement shall supersede any inconsistent terms in the
Shareholder Agreement for three (3) years after the date the Stock is
originally issued under the terms of this Subscription Agreement.
13. Notice. Any notices or other communications in connection herewith
shall be sufficiently given if sent by registered or certified mail,
postage prepaid, and (i) if to the Company, at the address at the head of
this Subscription Agreement, and (ii) if to Overlake, at the address set
forth below, or (iii) at such other address as either Overlake or the
Company shall designate to the other by notice in writing.
14. Successors and Assigns. This Subscription Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and to the
successors and assigns of the Company and to the personal and legal
representatives, heirs, guardians, successors, and permitted assignees of
Overlake. Overlake shall not assign its interest or any rights or
obligations hereunder without prior written consent of the Company.
15. Applicable Law. This Subscription Agreement shall be governed by and
construed in accordance with the laws of the State of Washington and, to
the extent it involves any United States statute, in accordance with the
laws of the United States.
16. Survival. Company and Overlake agree that the rights, obligations
and remedies set forth in this Agreement are intended to and shall
survive the closing of the Stock acquisition contemplated hereunder and
shall remain fully binding and enforceable against the parties.
IN WITNESS WHEREOF, Overlake has executed this Subscription Agreement, this
___ 19th __ day of __December________, 1996.
91-0652651
Tax Identification Number
Address:
Overlake Hospital Medical Center
1035 116th Avenue N.E.
Bellevue, WA 98004
Attention: President and CEO
OVERLAKE HOSPITAL MEDICAL CENTER,
a Washington non-profit corporation
By /s/ Kenneth D. Graham
Its President & CEO
By /s/ T. D.
Its Vice President & CFO
Accepted:
FIRST CHOICE HEALTH NETWORK, INC.
By /s/ Gary R. Gannaway
Gary R. Gannaway,
President and CEO
EXHIBIT A
Proposed Elements of an Agreement Among Class B Shareholders (Hospitals)
and Contracting Public Hospital Districts
1. Contract Participation
All Class B shareholders and contracting public hospital districts
(hereafter collectively "Hospitals") shall have a right to participate,
on a fair, reasonable and equitable basis, in all Hospital provider
contracts with First Choice Health.
2. Change of Control
Upon (a) transfer of fifty percent (50% or more ownership interest in a
Hospital, (b) change of fifty percent (50%) or more control of a Hospital
(new directors, trustees, or commissioners selected for governing boards
in the ordinary course of governance shall not be considered a change of
control), or (c) transfer of the operations of the Hospital through the
transfer of a substantial portion of a Hospital's assets, to a person or
entity who or which is not a Company shareholder, the Company may, at its
election, repurchase the Hospital's Stock in the Company for a price equal
to the greater of the following two amounts:
(a) The per share price paid by the last Class B shareholder to acquire
stock in the Company or participating public hospital district to join
the Company prior to the Hospital notifying the Company in writing of the
transfer or change of control; or
(b) The Hospital's proportionate share of the Company's "net shareholder
equity" as calculated in the manner agreed to by the shareholders in the
Shareholders' Agreement, when executed.
When a Hospital notifies the Company in writing of a transfer or change of
control described in this paragraph 2, the Company shall have sixty (60)
days from the date of such notice to elect to repurchase Hospital's Stock
or participating interest in the Company. Article XVI of the Bylaws states
and Hospital agrees that, notwithstanding the exercise of the Company's;
election under this paragraph 2, the Company may withhold payment for the
repurchase of shares until such time as the Board of the Company determines
that the Company is financially capable of making payment, in which case,
the Hospital shall retain control of such shares and all rights under this
Agreement until the repurchase payment is tendered.
As an alternative to exercising its election to repurchase under this
paragraph 2, the Company may allow admission of the new entity as a
shareholder, which shall be the case if the Company does not elect to
purchase the shares as provided above; see Article XIV of the Bylaws.
Initial Here - /s/ GG Initial Here - /s/ KG
Gary Gannaway Kenneth Graham
3. Merger of Two or More First Choice Health Owner Hospitals
In the event two (2) or more First Choice Health Hospitals merge or
consolidate, the capital account of the surviving entity will reflect
the combined capital contributions of the merging Hospitals. The
surviving entity will hold the number of votes equal to those held by
the merged hospitals. Public hospital districts do not vote given they
do not hold stock in First Choice Health as a result of state law. To
assure minority Class B shareholder rights, an eighty percent (80%)
super-majority requirement will be required for liquidation, sale, merger
and similar transactions.
4. First Choice Health Hospital Acquires Non-First Choice Health Hospital
In the event a First Choice Health Hospital acquires a non-First Choice
Health Hospital, the new hospital will be extended a hospital provider
contract only following unanimous approval of the First Choice Health
Hospitals. If unanimous consent is received, the terms and conditions
of adding the new hospital will be as the Board of Directors determines.
5. Commitment of Competitiveness
Hospital warrants that the facility rates and prices for other services
offered to or in effect for First Choice Health Network, Inc., and its
subsidiaries for its various products are competitive with the rates
offered to other payors for the same or similar products.
This Commitment is effective on the date of this Agreement and will remain
in effect so long as Hospital remains a First Choice Health Network, Inc.,
shareholder or affiliated Hospital. Hospital agrees to renew this
Commitment at the request of First Choice Health Network, Inc., from time
to time.
6. Contract Negotiation and Administration
Hospital agrees that it will act on its own behalf in any contract
negotiation and in all contract administration relating to agreements
between the Hospital and First Choice Health Network, Inc., or its
subsidiaries and the Hospital further agrees that it will not assign,
delegate or otherwise transfer such responsibility to any other person
or entity without First Choice Health Network's express written consent.
Initial Here - /s/ GG Initial Here - /s/ KG
Gary Gannaway Kenneth Graham
FIRST CHOICE HEALTH NETWORK, INC.
EMPLOYMENT AGREEMENT
This agreement is made by and between First Choice Health Network, Inc.
(hereinafter referred to as "Employer"), and Ross D. Heyl (hereinafter
referred to as "Heyl"), this 1st day of March, 1994.
WHEREAS, Employer desires to secure the services of Heyl for three (3)
years as an employee of First Choice Health Network, Inc., and whereas Heyl
desires to accept such employment;
NOW, THEREFORE, in consideration of the material advantages accruing
to the parties herein and the mutual covenants contained herein, the
parties agree as follows:
1. CAPACITY OF EMPLOYMENT AND GENERAL DUTIES,
Heyl will render full-time professional services to Employer in the
capacity of Vice President, Marketing of Employer's corporation for the
three (3) year term of this contract beginning March 1, 1994.
He will, at all times, faithfully, industriously, and to the best of his
ability, perform all duties that may be required of him by virtue of his
position as Vice President, Marketing and all duties set forth by Employer
and to the reasonable satisfaction of the President & CEO.
Heyl is hereby vested with authority to act on behalf of First Choice in
keeping with corporate policies, as amended from time to time. In addition,
he shall perform in the same manner any special duties assigned or delegated
to him by the President & CEO.
2. COMPENSATION. In consideration for these services as Vice
President, Marketing, Employer agrees to pay Heyl Eighty Thousand Dollars
($80,000) per annum as base salary (Payable in twenty-four (24)
equal installments) for the initial term under this contract.
Heyl's base compensation for the duration of this contract will be
increased annually, a minimum of 3% per year. Increases to base salary will
be effective on Heyl's adjusted anniversay date of employment (January 1).
Actual increase amount will be determined and authorized by the President.
In addition, Heyl will be eligible for an incentive compensation bonus,
the terms and criteria of which will be determined by the President & CEO.
Potential bonus award will be structured to provide a maximum of 20% of
base pay according to performance achieved against pre-determined targets.
3. LEAVE DAYS, HOLIDAY AND OTHER BENEFITS.
(a) Heyl shall be entitled to twenty-four (24) days of compensated
leave time (personal leave days) in each of the contract years. At the end
of the first calendar quarter of Heyl's tenth (10th) year of employment
(June 30, 1995) he will receive one additional leave day, giving Heyl
twenty-five (25) vacation days per year. A maximum of fifteen (15) leave
days can be carried over from one year to the next; any additional days
must either be used in the current calendar year or lost.
(b) Heyl shall be entitled to nine (9) paid holidays per year, which
include those holidays observed by other employees of Employer, and two (2)
floating holidays which must be used in the year in which they are received and
may not be carried over into the next calendar year.
(c) Heyl will be permitted to be absent from Employer during working
days to attend professional meetings in the United States and to attend to
such outside professional duties in the health care and/or insurance fields
as have been mutually agreed upon between him and the President & CEO.
Attendance at such approved meetings and accomplishment of approved
professional duties shall be fully compensated service time and shall not
be considered vacation time.
(d) Employer shall reimburse Heyl for all expenses incurred by him
incident to attendance at approved professional meetings, and reimburse him
for such business and entertainment expenses incurred by Heyl in furtherance
of Employer's interests, provided, however, that such reimbursement is
consistent with policies of Employer and approved by the President & CEO.
(e) Pay Heyl Four Hundred Sixteen Dollars and Sixty-Seven
Cents ($416.67) per month as an allowance for business use of a personal
automobile, reviewing for annual adjustment.
(f) Provide Heyl with an employer-paid parking space in the office
building.
4. 401K RETIREMENT PLAN. Heyl shall be entitled to participate in the
Employer-sponsored 401K tax-deferred retirement savings plan. The Employer-
matching provision will be effective immediately upon Heyl's enrollment in
the plan.
5. PROFESSIONAL AFFILIATIONS. Employer agrees to pay dues to professional
associations and societies and to such service organizations and clubs of
which Heyl is a member, approved by the President & CEO as being in the best
interests of the Employer.
6. INSURANCE BENEFITS AND MISCELLANEOUS BENEFITS.
Employer also agrees to:
(a) provide throughout the term of this contract, a group life insurance
policy for Heyl in an amount equivalent to two times his annual salary,
payable to the beneficiary of his choice. This coverage shall be provided
through the carrier which provides group coverage for Employer.
(b) provide comprehensive health/major medical, long-term disability,
and dental insurance for Heyl and his dependents through the same Employer
group coverage carrier as provided to other employees.
7. TERMINATION OF EMPLOYMENT. The President & CEO may, in its discretion,
terminate Hey's duties as Vice President, Marketing. After such termination,
all rights, duties, and obligations of both parties shall cease except that
Employer shall continue to pay Heyl, as an agreed-upon termination payment,
his then monthly salary for the month in which his duties were terminated
and for six (6) consecutive months thereafter or until Heyl secures other
employment, whichever occurs first.
No agreed-upon termination payment shall be made if Heyl is terminated
for theft, dishonesty, conviction of a felony, illegal substance use,
alcohol addiction, gross neglect of duty, or conduct unbefitting a person
in this position.
After notification of termination and until Employer's obligations cease
under this agreement or Heyl obtains other employment, whichever occurs
sooner, Heyl shall not be required to perform any duties for Employer or
come to the offices of Employer. During the period in which termination
payments are being made, Employer agrees to keep Heyl's group life,
long-term disability, and medical insurance coverage paid up and in effect
so long as permitted under the applicable contracts of insurance.
In the event Employer terminates Heyl on the basis of gross neglect of
duty or conduct unbefitting a person acting in the capacity of Vice President,
Marketing and the parties are in disagreement whether the conduct complained
of constitutes gross neglect or unbefitting conduct, the parties agree to
submit to binding arbitration the issue of whether or not the conduct
complained of constitutes gross neglect of duty or unbefitting conduct. The
arbitrator shall be a person familiar with health care management and related
issues. The parties shall first attempt to select a mutually acceptable
arbitrator; if the parties are unable to mutually agree upon an arbitrator,
each party shall select an arbitrator of their choice. The arbitrators
selected by each party shall, in turn, select a third arbitrator who shall
arbitrate this issue and this decision shall be binding upon the parties.
8. In the event Employer merges with, acquires, or is sold to another
entity or business and it can reasonably be found the Heyl is no longer
substantially performing the duties of the Vice President, Marketing of
Employer, Heyl shall have the right, in his complete discretion, to
terminate this contract by written notice delivered to the President.
After such termination, all rights, duties and obligations of both shall
cease except that Employer shall continue to pay Heyl his then monthly
salary for the month in which his duties were terminated, and for six (6)
consecutive months thereafter or until Heyl secures other employment,
whichever first occurs, as the agreed-upon termination payment.
During this period, Heyl shall not be required to perform any duties for
Employer or come to the offices of Employer. During the period in which
such termination payments are being made, Employer agrees to keep Heyl's
group life, long-term disability, and medical insurance coverage paid up
and in effect, to the extent permitted under the applicable benefit plan
and contracts.
9. Should Heyl in his discretion elect to terminate this contract for
any other reason than as stated in Paragraph 7 or 8, he shall give the
President & CEO thirty (30) days' written notice of his decision to
terminate. At the end of those thirty (30) days, all rights, duties, and
obligations of both parties of the contract shall cease.
10. Heyl acknowledges that he has been entrusted with confidential
information regarding Employer's operations, management, business strategy,
and marketing, including Employer's financial, operational and marketing
policies and procedures and Employer's Agreements and relationships with
shareholders and other service providers, insurers, claim administrators,
and brokers. Heyl also acknowledges that Employer has developed specialized
techniques, procedures, and computer programs for assessing and assuring the
quality of its operation and service to its constituents and that such
techniques, procedures and programs, together with the information derived
thereby, constitute proprietary trade secrets.
Heyl promises not to disclose or make any private use of such confidential
information and trade secrets during the term of this agreement or at any
time other managed care organization owned or operated in geographical
areas served by Employer, for a period of nine (9) months after voluntary
termination of this agreement by Heyl.
If, at the expiration of the term of this contract, Employer offers a
new contract to Heyl the terms of which are no less favorable than the
terms of this contract, and Heyl does not accept such offer, then Heyl
hereby agrees not to accept employment by or to be associated with any
other managed care organization owned and operated in geographical areas
served by Employer, for a period of twelve (12) months following the
expiration of this contract.
If, at the expiration of the term of this contract, Employer does not
offer Heyl a new contract on terms not less favorable than this contract,
the non-competition provisions of the preceding paragraph shall not apply.
11. INDEMNIFICATION. Employer shall indemnify Heyl against
expenses actually and necessarily incurred by him in connection with
defense or settlement of any action, suit, or proceeding in which he is
made a party by reason of being or having been Vice President, Marketing
of the corporation, except in relation to matters as to which Heyl shall
be adjudged in any such action, suit, or proceeding liable for misconduct
in the performance of duty, all as provided in the Articles of Incorporation
and/or Bylaws of Employer. Employer shall purchase and maintain
comprehensive general, contingent, professional, and directors and officers
liability insurance subject to reasonable availiability on behalf of Heyl
against any liabilities, or settlement based on asserted liability incurred
by Heyl for reason of being or having been Vice President, Marketing of
Employer, whether or not Employer would have the power to indemnify Heyl
against such liability or settlement under the provisions of this section.
12. EXTENSIONS AND RENEWALS. Negotiations for the extension of this
contract, or for agreement on the terms of a new contract, shall be
completed or the decision made not to negotiate a new contract made, not
later than the end of the eleventh (11th) month of the final contract year.
By mutual agreement of the parties, this contract and all its terms and
conditions may be extended from year to year or for a term beyound its
initial term by simple letter exchanged between the parties at any time
during the contract term.
13. ENTIRE AGREEMENT. This contract constitutes the entire agreement
between the parties and contains all the agreements between them with
respect to the subject matter hereof. It also supersedes any and all other
agreements and contracts, either oral or written, between the parties with
respect to the subject matter hereof.
14. MODIFICATION OF TERMS. Except as otherwise specifically provided,
the terms and conditions of this contract may be amended at any time by
mutual agreement of the parties, provided that before any amendment shall be
valid or effective, it shall have been reduced to writing and signed by the
President & CEO and Heyl.
15. SEVERABILITY. The invalidity or unenforceability of any particular
provision of this contract shall not affect its other provisions, and this
contract shall be construed in all respects as if such invalid or
unenforceable provision had been omitted.
16. BINDING EFFECT. This agreement shall be binding upon and inure
to the benefit of Employer, its successors and assigns, and shall be
binding upon Heyl, his administrators, executors, legatees, heirs and assigns.
17. APPLICABLE LAW. This agreement shall be construed and enforced
under and in accordance with the laws of the State of Washington.
18. COSTS OF ENFORCEMENT. Should either party be required to take
action to enforce the terms of the agreement or the rights and oblications
hereunder, the prevailing party shall be entitled to recover its costs of
enforcement, including court costs, reasonable attorney's fees, and
arbitration fees.
DATED this ___1st______day of ___March, 1994__________________.
FIRST CHOICE HEALTH NETWORK, INC.
__/s/ James G. Stumpfel_________
By James G. Stumpfel
President & CEO
/s/ Ross D. Heyl___
ROSS D. HEYL
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIRST
CHOICE HEALTH NETWORK, INC. FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000922622
<NAME> FIRST CHOICE HEALTH NETWORK, INC.
<S> <C> <C>
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<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
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