To: Subscribers, Providers, and All Interested Persons

From: James T. Odiorne, Deputy Insurance Commissioner Receiver of KPS, in Rehabilitation

RE: Summary of Rehabilitation Plan for KPS

DATE: November 19, 1999

I. Rehabilitation Process and Standards

KPS HealthPlans ("KPS") was placed into receivership for rehabilitation purposes on August 2, 1999, pursuant to Washington's insurer insolvency statutes. The receivership proceedings are pending before the Thurston County Superior Court. Insurance Commissioner Senn is the statutory Receiver, and Deputy Insurance Commissioner James Odiorne is the Court-appointed Receiver. John Woodall, Assistant Deputy Insurance Commissioner, and John Hamje, Special Deputy Insurance Commissioner, are the Court-appointed Deputy Receivers.

The Order of Rehabilitation directs the Receiver to operate the business, manage the assets and liabilities, determine and remove the causes and conditions which created the need for receivership, and develop and implement a plan for the rehabilitation of KPS, subject to approval by the receivership Court.

Rehabilitation of KPS is to be accomplished for the benefit of the subscribers, creditors, and the public. Resort to the final remedy of liquidation is only when the Receiver determines that rehabilitation is not feasible. The process of rehabilitation is similar to a workout or reorganization in bankruptcy. The fundamental consideration for any rehabilitation plan is whether it provides a better outcome for creditors than liquidation.

Rehabilitation is an on-going process and may include alternative approaches, depending upon their successful completion. Consequently, modifications based upon changing financial conditions and other factors or future events may occur during the implementation of the rehabilitation plan.

KPS was originally incorporated in 1948, and when the receivership commenced, it was operating as a nonstock, mutual nonprofit corporation under Chapter 24.06 RCW. In order for KPS to be successfully rehabilitated, it must modify its business, restructure debt, and generate capital to bring it into compliance with state statutory financial requirements.

II. Recapitalization and Rehabilitation Plan

The basic concept of the reorganization of KPS is to convert certain existing liability of KPS to Surplus Notes in the approximate amount of $6,200,000.00; and to reorganize KPS into a Washington mutual nonprofit stock corporation under Chapter 24.06 RCW.

The following outline sets forth in general terms the Receiver's program for the reorganization of KPS and the overall rehabilitation plan.

Amend the Articles and Bylaws of KPS

Convert to a mutual, nonprofit stock corporation.

Change the qualifications of sharehol ders (formerly called "members") to: persons who are licensed health care professionals as defined by RCW 18.120.010(4), and who contract directly with KPS as a provider or who provide health care services through a contracted provider of KPS, and who practice primarily in Kitsap, Mason, Grays Harbor, Thurston, Clallam, King, Pierce and/or Jefferson counties.

Require 2/3rds majority vote of shareholders to change the shareholder qualifications.

Provide for shareholder limitation of liability to the value of the shares in accordance with statute.

Establish two categories of stock: preferred and common stock.

Provide for issuance of preferred stock for cash investments, if any, with preferential dividend treatment, a "call" provision, and a higher interest rate than provided in the surplus notes.

Limit directors to two consecutive three-year terms, with staggered terms. Provide for one director to be elected only by preferred stockholders, if any. Limit the number of health care professionals (including those related to a health care provider or professional) on the Board of Directors to no more than a simple majority at any one time.

Establish Standing Board Committees: Nominating, Audit, and Investment.

Permit amendment to the Bylaws only by a 2/3rds majority vote of the Board of Directors.

Source of Funds

To manage liabilities during rehabilitation, claims payments to direct contract participating providers have been reduced through a prorated allocation deduction method, commonly referred to as "PAD." These amounts will continue to be deducted from periodic claims payments at a maximum of 50% per payment until approximately $4.6 million has been withheld. An additional approximately $1.6 million in claims payments is being withheld from payments to three area hospitals.

KPS will issue surplus notes to evidence the PAD debt in the amount of claims payments deducted plus interest as allowed by law. The surplus notes are long-term subordinated debt of KPS, payable from surplus funds at such time as there is adequate surplus to maintain compliance with statutory requirements, and upon approval of the Insurance Commissioner.

Persons who were "members" of KPS at the time the receivership commenced who meet the qualifications of shareholders, and others who meet the qualifications of shareholders will be eligible to become shareholders of the reorganized KPS through the issuance of a share of common stock. The stock will actually be issued upon termination of the receivership, at which time ownership of KPS will be transferred to its stockholders.

Any person who makes a cash investment in KPS separate from the claims payment deductions as evidenced by a surplus note will be issued preferred stock.

Sale of real properties and certain business operations, including the completed sale of NorthwestOne and the potential sale of the Warren Avenue Professional Building may be accomplished in order to improve liquidity.

Revenues generated from business operations during the course of the rehabilitation period through changes in operations, elimination of state plan contracts, reduction of staff and expenses, and other measures. This requires ongoing marketing, good customer service, and stabilization of the provider network and subscriber base.

Management

The Receiver remains in ownership and control throughout rehabilitation, and until the receivership is terminated by Court Order. An Advisory Board, or Interim Board of Directors, has been established by the Receiver to provide input and advice during the rehabilitation of KPS.

The Articles and Bylaws will be amended early during the rehabilitation period, but the Receiver will not issue the stock until termination of the receivership. However, those who are eligible to be shareholders and to receive stock will have the opportunity to vote on the nominees for appointment by the Receiver to the Advisory Board during the rehabilitation period.

The Receiver will hire executive manager(s), similar to corporate officers, to conduct the business operations under the direction and supervision of the Receiver. When termination of the receivership occurs, the Receiver will issue stock certificates to shareholders, who will elect the Board of Directors. Management of KPS will then be transferred to the Board, which will appoint the KPS officers, and KPS will continue in business in accordance with its Articles and of Bylaws and state law.

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