-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FLrdC+fZUt0943uBVzKtm9/e4vbNrZuVeWOJ9tu2vs7uILjX8pvRZcOoHpr33JQI pByNeneHhxgGCTHh+/dlRw== 0000922622-96-000009.txt : 19960819 0000922622-96-000009.hdr.sgml : 19960819 ACCESSION NUMBER: 0000922622-96-000009 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960816 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST CHOICE HEALTH NETWORK INC CENTRAL INDEX KEY: 0000922622 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HEALTH SERVICES [8000] IRS NUMBER: 911272766 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-23998 FILM NUMBER: 96616964 BUSINESS ADDRESS: STREET 1: 1100 OLIVE WAY STREET 2: STE 1480 CITY: SEATTLE STATE: WA ZIP: 98101-1838 BUSINESS PHONE: 2062928255 MAIL ADDRESS: STREET 1: 1100 OLIVE WAY STREET 2: SUITE 1480 CITY: SEATTLE STATE: WA ZIP: 98101-1838 10QSB 1 August 15, 1996 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: First Choice Health Network, Inc. File No. 0-23998 Ladies and Gentlemen : Kindly accept the following transmission of the above-referenced corporation's second quarter report on Form 10-QSB and Financial Data Schedule for the period ended June 30, 1996. The Company maintains one manually sign copy on file. Kindly acknowledge acceptance of this transmission via our CompuServe E-mail address - 72731,3025. Very truly yours, Randolph R. Barker kk:RB Enclosures SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - QSB [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 [ ] TRANSITION REPORT PURSUANT TO 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. employer incorporation or organization) identification number) 1100 Olive Way, Suite 1480 Seattle, Washington 98101 (Address of principal executive offices) (206)292-8255 (Issuer's telephone number, including area code) 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 ______ The aggregate number of Registrant's shares of Class A Common Stock and Class B Common Stock outstanding on August 13, 1996 was 658 shares and 34,800 shares, respectively. Transitional Small Business Disclosure Format ( check one ): Yes ______ No __X__ Page 1 of 24 Pages FIRST CHOICE HEALTH NETWORK, INC. INDEX TO FORM 10-Q Page Part I Financial Information Item I Financial Statements Consolidated Balance Sheets at June 30, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . 5 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1995. . . . . . . . . . . . . . . . . . . 6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . 8 Item 2 Management's Discussion and Analysis or Plan of Operation . . . . . . . . . . . . . . . . . 20 Part II Other Information Item 1 Legal Proceedings . . . . . . . . . . . . . 23 Item 2 Changes in Securities . . . . . . . . . . . 23 Item 3 Defaults Upon Senior Securities . . . . . 23 Item 4 Submission of Matters to a Vote of Security Holders . . . . . . . . . . 23 Item 5 Other Information . . . . . . . . . . . . . 24 Item 6 Exhibits and Reports on Form 8-K . . . . . . 24 Signatures . . . . . . . . . . . . . . . . . 25 FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY Consolidated Balance Sheets (Unaudited) June 30, 1996 and December 31, 1995 June 30, December 31, Assets 1996 1995 (Unaudited) Current assets: Cash and cash equivalents $1,886,166 2,129,006 Service fees receivable, net of allowance for doubtful accounts of $96,187 in 1996 and 1995 983,439 1,104,164 Investment securities available for sale (note 4) 2,062,204 1,276,783 Federal income tax receivable 90,129 Prepaid expenses 83,272 182,469 Other assets 15,000 15,625 Total current assets 5,030,081 4,798,176 Furniture, equipment and computer software: Furniture and equipment 856,148 813,663 Computer software 149,558 149,558 License fees (note 6) 193,557 191,876 1,199,263 1,155,097 Less accumulated depreciation and amortization 630,635 574,377 Net furniture, equipment and computer software 568,628 580,720 Investment securities available for sale (note 4) 1,999,695 1,940,454 Deferred Federal income taxes, net (note 5) 33,472 - Goodwill, net of accumulated amortization of $7,000 in 1996 and $5,500 in 1995 (note 1) 81,500 84,500 $7,713,376 7,403,850 See accompanying notes to consolidated financial statements (unaudited). FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY Consolidated Balance Sheets (Unaudited) June 30, 1996 and December 31, 1995 June 30, December 31, Liabilities and Shareholders' Equity 1996 1995 (unaudited) Current liabilities: Note payable $ - 45,000 Accounts payable 91,510 206,606 Accrued expenses 199,895 212,420 Federal income tax payable 147,034 - Deferred Federal income taxes, net (note 5) 283,310 286,451 Other liabilities 15,863 11,575 Total current liabilities 737,612 762,052 Deferred Federal income taxes, net (note 5) - 25,062 Total liabilities 737,612 787,114 Shareholders' equity (note 2): Common stock: Class A, par value $1. Authorized 30,000 shares; issued and outstanding 658 shares in 1996 and 676 shares in 1995 658 676 Class B, par value $1. Authorized 70,000 shares; issued and outstanding 29,000 shares in 1996 and 1995 29,000 29,000 Additional paid-in capital 2,626,965 2,630,268 Paid-in capital from affiliates 1,472,108 1,472,108 Retained earnings 2,918,469 2,502,946 Net unrealized loss on investment securities available for sale, net of deferred taxes of $36,801 in 1996 and $9,407 in 1995 (notes 4 and 5) ( 71,436) ( 18,262) Total shareholders' equity 6,975,764 6,616,736 Commitments and subsequent events (notes 3, 6, and 8) $7,713,376 7,403,850 See accompanying notes to consolidated financial statements (unaudited). FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY Consolidated Statements of Income (Unaudited) For the Three Months and For the Six Months Ended June 30, 1996 and 1995 Three Months Ended Six Months Ended June 30, June 30, 1996 1995 1996 1995 Operating revenue (Note 7) $1,464,143 1,255,431 $2,754,248 2,476,134 Operating expenses: Payroll and related 591,989 563,921 1,314,258 1,093,533 Selling, general and administrative costs 469,509 673,034 993,979 1,221,546 Total operating expenses 1,061,498 1,236,955 2,308,237 2,315,079 Operating income 402,645 18,476 446,011 161,055 Other income: Interest and dividends 75,730 67,775 144,266 126,700 Other income (loss) 16,453 287 13,064 ( 3,869) 92,183 68,062 157,330 122,831 Income before Federal income taxes 494,828 86,538 603,341 283,886 Federal income taxes (Note 5) 168,296 31,443 187,818 99,130 Net income $ 326,532 55,095 $ 415,523 184,756 Net income per common share $ 6.94 $ 1.17 $ 8.83 $ 3.92 See accompanying notes to consolidated financial statements (unaudited). FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 1996 and 1995 1996 1995 Cash flows from operating activities: Net income $ 415,523 184,756 Adjustments to reconcile net income to net cash provided by (used in ) operating activities: Depreciation and amortization 51,846 62,720 Deferred Federal income taxes, net ( 34,281) ( 143,460) (Gains) losses realized on sales of investment securities ( 14,905) 3,869 (Gain) loss realized on sale of equipment and furnishings 1,841 ( 595) Change in certain assets and liabilities: Decrease in service fees receivable 120,725 308,130 Decrease in prepaid expenses 99,197 36,905 Increase (decrease) in prepaid Federal income tax 90,129 ( 173,869) Increase (decrease) in accounts payable ( 120,913) 90,551 Decrease in accrued expenses ( 12,966) ( 38,946) Increase (decrease) in Federal income taxes payable 147,034 ( 21,640) Total adjustments 327,707 123,665 Net cash provided by operating activities 743,230 308,421 Cash flows from investing activities: Purchase of investment securities available for sale (1,970,661) ( 41,306) Sales of investment securities available for sale 844,672 47,208 Maturities of investment securities 200,000 Assignment of call option ( 60) Purchase of furniture, equipment and computer software ( 52,528) ( 146,318) Sale of equipment and furnishings 595 Principal received, bonds 40,928 21,429 Note receivable 18,500 Acquisition of goodwill ( 45,000) Acquisition of loan fees ( 1,500) Net cash used in investing activities ( 937,649) ( 146,392) Cash flows from financing activities: Reduction of note payable ( 45,000) Issuance of Class A common stock and membership rights to physicians 3,934 Repurchase of Class A common stock and membership rights from physicians ( 3,421) ( 1,400) Net cash provided by (used in) financing activities ( 48,421) 2,534 Increase (decrease) in cash and cash equivalents ( 242,840) 164,563 Cash and cash equivalents at beginning of period 2,129,006 1,934,776 Cash and cash equivalents at end of period $ 1,886,166 2,099,339 (Continued) See accompanying notes to consolidated financial statements (unaudited). FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 1996 and 1995 1996 1995 (Continued) Supplemental disclosures of cash flow information: Cash paid (refunded) during the period for Federal income taxes $( 15,246) 438,000 Supplemental disclosure of non-cash investing activities: Note payable incurred for acquisition of goodwill $ - 45,000 Unrealized gains (losses) on securities available for sale: Current $ 56,838 15,668 Non-current ( 158,737) (102,971) $( 101,899) ( 87,303) Deferred income taxes on unrealized gains (losses) on securities available for sale and securities sold under agreements to repurchase: Current $( 17,170) ( 5,327) Non-current 53,971 35,010 $ 36,801 29,683 Unrealized losses on securities sold under agreements to repurchase: Current $( 6,338) - See accompanying notes to consolidated financial statements (unaudited). FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) (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. In June, 1996, the Company began receiving insurance premium revenue through the operations of its wholly owned subsidiary, First Choice Health Plan, Inc. (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 inter-company balances have been eliminated in consolidation. (c) Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At June 30, 1996 and December 31, 1995, cash equivalents consist of money market funds amounting to $303,781 and $100,764, and cash management funds of $1,311,572 and $1,880,210, respectively. (d) Operating Revenue Operating revenue consists 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. (Continued) FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) (e) Investment Securities Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investment in Debt and Equity Securities, (Statement 115). Statement 115 applies to investments in equity securities that have a readily determinable fair market value and all debt securities. Under Statement 115, investments are classified as held-to-maturity, trading securities, or available-for-sale. The Company classifies all investment securities as available-for-sale. Statement 115 requires that all securities classified as available-for-sale be recorded at fair market value on the balance sheet, with unrealized holding gains and losses excluded from earnings and recognized as a separate component of shareholders' equity. Declines in the fair values of investment securities available for sale determined to be other than temporary are recognized as a component of net income. 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. (f) Furniture, Equipment, Computer Software and License Fee Furniture, equipment, computer software and license fee 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. (g) 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. (h) 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. (Continued) FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) (i) Advertising The Company expenses advertising costs as incurred. Advertising expense amounted to $1,025 and $27,059 for the six months ended June 30, 1996 and 1995, respectively. (j) Accounts Receivable Accounts receivable consists primarily of an estimate 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 upon claims reported in subsequent periods. These estimates are subject to the effects of trends in claim. 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. The Company performs periodic credit evaluations of its customers and maintains allowance for potential credit losses. (k) Use of Estimates The 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. (Continued) FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) (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 non-shareholder district hospitals that have rights equivalent to that of the Class B shareholders. (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 non-shareholder 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 non-shareholder hospitals that have rights equivalent to that of Class B shareholders. (Continued) FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) (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. (g) Net Income Per Common Share The weighted average number of common share and common share equivalents used in computing net income per common share amounted to 47,068 and 47,094 for the six months ended June 30, 1996 and 1995, respectively. (3) Line of Credit At June 30, 1996 and December 31, 1995, the Company had a $300,000 line of credit, expiring on June 3, 1997. Borrowings under the line bear interest at the prime rate plus 1%. There were no borrowings outstanding under the line of credit at June 30, 1996 or December 31, 1995. (4) Investment Securities The amortized cost, gross unrealized gains, gross unrealized losses and fair values of investment securities at June 30, 1996 are as follows: Gross Gross Amortized unrealized unrealized Fair cost gains losses value Marketable equity securities $ 619,267 89,742 34,505 674,504 Mortgage and asset-backed securities 1,956,162 3,368 160,141 1,799,389 Corporate debt securities 1,588,369 2,515 2,878 1,588,006 Securities sold under agreements to repurchase ( 9,525) 2,600 8,938 ( 15,863) $4,154,273 98,225 206,462 4,046,036 (Continued) FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) 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: Gross Gross Amortized unrealized 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 The amortized cost and fair values of mortgage and asset-backed securities and corporate debt securities at June 30, 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 cost Fair value Due in one year or less $1,437,250 1,432,591 Due after one year and through five years 202,269 200,305 Due after five years and through ten years 81,569 81,948 Due after ten years 1,823,443 1,672,551 $3,544,531 3,387,395 During the six months ended June 30, 1996 and 1995, the Company realized gains and losses on investment securities available for sale, as follows: Six Months Ended June 30, 1996 June 30, 1995 Gross proceeds $ 844,672 $ 47,208 Gross realized gains 21,482 4,976 Gross realized losses ( 6,577) ( 8,845) (Continued) FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) (5) Income Taxes Federal income taxes consist of the following components: Three months ended June 30, June 30, 1996 1995 Current $ 222,099 242,590 Deferred ( 34,281) (143,460) $ 187,818 99,130 In 1995, the Company filed amended corporate tax returns to recharacterize certain equity payments, and received tax refunds of $16,868, including interest of $1,622 in 1996, and $233,634, including interest of $18,920 in 1995, related to these filings. 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 six months ended June 30, as follows: 1996 1995 Amount Percent Amount Percent Computed "expected" rate $ 205,136 34.0% $ 96,521 34.0% Tax effect of permanent differences: Dividend income received from domestic corporations ( 2,889) ( .5) Adjustment to prior year tax returns ( 15,246) ( 2.5) Other 3,689 . 6 2,970 1.0 Tax effect of timing differences ( 2,872) ( 5) ( 361) .1 $ 187,818 31.1% 99,130 34.9% Continued) FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred tax asset and deferred tax liabilities at June 30, 1996 and December 31, 1995 are presented below: June 30, December 31, 1996 1995 Deferred tax assets: Accounts payable and accrued expenses $ 96,541 $141,810 Unrealized loss on investment securities 36,801 9,407 Total deferred tax assets 133,342 151,217 Deferred tax liabilities: Service fees receivable 334,369 375,416 Prepaid expenses 28,313 62,039 Furniture, equipment and computer software 20,498 25,059 Other - 216 Total gross deferred tax liabilities 383,180 462,730 Deferred Federal income taxes, net $249,838 $311,513 There was no valuation allowance for deferred tax assets as of June 30, 1996 and December 31, 1995. However, deferred tax assets as of June 30, 1996 and December 31, 1995 include $36,801 and $9,407, respectively, of potential tax benefit if securities were to be disposed of at their current market value. The Federal tax law limits the deductibility of capital losses (permitted only to the extent of recognized gains), with a limited carryback of three years to offset prior recognized gains, and a limited carryforward of five years to offset future recognized gains. Although management does not currently intend to dispose of these assets, the Company's ability to obtain tax benefit from a disposition of this type is uncertain. (Continued) FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) (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 the software application developed and owned by HSD. The agreement calls for an initial one-time license fee of $145,000. (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 begins on the day VHS successfully installs 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 and a $30,000 start- up fee. On an ongoing basis, the agreement calls for miimum monthly fees plus claims procesing fees and out-of-pocket costs with respect to storage and processing. The current monthly fee, as of June 30, 1996, was $3,125. The maximum annual license fee shall not exceed $300,000. The total amount paid for the six months ended June 30, 1996 and 1995 related to this agreement was $18,750 and $0.00, respectively. (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 without cause at any time by the Company. The agreement calls for a minimum monthly fee of $11,000 through the sooner of the completion of certain phases or for the first six months this agreement is in effect. Total fees related to this agreement amounted to $51,359 and $0.00 for the six months ended June 30, 1996 and 1995, respectively. (Continued) FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) (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 six months ended June 30, 1996 and 1995 was $72,336 and $68,557, respectively. Future minimum lease payments under the operating lease for the years ended December 31 are as follows: 1996 $ 69,102 1997 138,204 1998 138,204 1999 96,358 $441,868 (7) Related Party Transactions (a) Note Receivable At December 31, 1994, the Company had an $18,500 note receivable from an officer of the Company. The note bore interest at 4.5% and was paid in full in February, 1995. (b) Operating Revenue and Service Fees Receivable Operating revenue includes approximately $523,301 and $491,067 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 six months ended June 30, 1996 and 1995, respectively. (Continued) FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) (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 due in full on January 31, 1996. In addition to the fixed purchase price, the Company shall 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 due for calendar year 1995. The entire purchase price was allocated to goodwill. The operation of the PPO was merged into the Company. (9) Fair Value of Financial Instruments On December 31, 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 dervative financialinstruments. The Company's financial instruments, included in the June 30, 1996 and December 31, 1995 balance sheet, consist of investment securities available for sale. The fair value of the investment securities is based upon quoted market prices (Note 4). The Company has invested in derivative financial instruments held for non- trading purposes that are subject to off-balance-sheet market risk related to investment securities available for sale. In 1995, the Company placed $250,000 with Prudential Securities Incorporated (Prudential) with the primary investment objective of capital appreciation and secondary objective of current growth. The risk tolerance in the investment portfolio is moderate. (Continued) FIRST CHOICE HEALTH NETWORK, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) (10) Retirement Plans 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 six months ended June 30,1996 and 1995 amounted to $22,034 and $17,756, respectively. (11) Concentration of Credit Risk The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. The Company places its cash and temporary cash investments with high credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit. The Company routinely assesses the financial strength of its customers and, as a consequence, believes that its trade accounts receivable credit risk exposure is limited. (12) Subsequent Events In July, 1996, the Company entered into a participation agreement with a hospital which calls for an affiliation fee in the approximate amount of $931,000. Item 2 Management's Discussion and Analysis or Plan of Operation The following discussion and analysis should be read in conjunction with the financial statements and notes thereto included in this quarterly report and with the Company's 1995 Annual Statement on Form 10-KSB. Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995 Operating revenue increased 16.7% to approximately $1.46 million in the second quarter of 1996, from approximately $1.26 million during the same quarter of 1995, primarily as a result of an increase in the number of subscribers (or members) and their dependents (collectively, "Covered Persons") utilizing the Company's network of physicians, hospitals or other health care providers ("PPO"), and an increase in rates to renewing groups. Total operating expenses decreased 14.2% to approximately $1.06 million in the second quarter of 1996, from approximately $1.24 million in the same quarter of 1995. This change is primarily due to decreased expenditures brought about by the reassessment of advertising and promotional goals; in consulting by the completion of certain specialized computer programming projects in connection with the Company's systems upgrade; and in legal due to the costs associated with proxy items brought to a vote of the shareholders which occurred in 1995. Expenses are expected to increase in the third and fourth quarters of 1996 with the introduction of products through the Company's subsidiary 'First Choice Health Plan, Inc.' Payroll and related expenses increased 5% to $591,989 in the second quarter of 1996, from $563,921 in the same quarter of 1995. This slight change is primarily due to the re-evaluation of staffing and duties when certain positions were vacated in the second quarter. Payroll and related expenses decreased to 40.4% of operating revenue for the three-month period ending June 30, 1996, compared to 45% of operating revenue in the same period of 1995. Selling, general and administrative costs decreased 30.3% to $469,509 in the second quarter of 1996, from $673,034 in same quarter of 1995. This is primarily due to decreases in the following: advertising - through a reassessment of marketing strategies,; in legal - for bylaw changes by proxy made in second quarter 1995 but not in 1996; in travel and entertainment due to a reduction in business trips; and in supplies. Increases in software licensing fees, insurance, depreciation, and subscriptions and memberships were all due to increased business activity. Other income increased 35.5% to $92,183 in the second quarter of 1996, from $68,062 during the same quarter in 1995, primarily due an increase in cash available for investment. Income taxes increased 435% to $168,296 in the second quarter of 1996, from $31,443 during the same quarter in 1995, primarily due to the increase in income before federal income taxes. Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995 Operating revenue increased 11.2% to approximately $2.75 million in the first six months of 1996, from approximately $2.48 million during the same period of 1995, primarily as a result of an increase in the number of subscribers (or members) and their dependents (collectively, "Covered Persons") utilizing the Company's network of physicians, hospitals or other health care providers ("PPO"), and an increase in rates to renewing groups. Total operating expenses decreased 3% to approximately $2.3 million in the first six months of 1996, from approximately $2.32 million in the same period of 1995. This is primarily due to changes in advertising and promotion, legal and accounting, and consulting. A comparatively equal increase in payroll and related expenses account for the negligible decrease between the two periods. It is anticipated that expenses in the last six months of 1996 will increase due to the introduction of new product(s) through the licensure of the Company's subsidiary 'First Choice Health Plan, Inc.' The release dates for these products is dependent upon approval of rates from the Washington state Office of Insurance Commissioner. Payroll and related expenses increased 20.2% to approximately $1.3 million in the first six months of 1996, from approximately $1.1 million in the same period of 1995. This change is primarily due to staffing required for the anticipated introduction of products under the licensure for FCHP; the expansion of technical support for data systems, placement of a full time medical director and increased costs for employee benefits. Payroll and related expenses increased to 47.8% of operating revenue for the six-month period ending June 30, 1996, compared to 44.2% of operating revenue in the same period of 1995. Selling, general and administrative costs decreased 18.7% to approximately $1 million in the first six months ending June 30, 1996, from approximately $1.22 million in same period of 1995. This is primarily due to decreases in advertising - through a reassessment of marketing strategies; in travel and entertainment due to a reduction in business trips; and in supplies. By-law changes made in 1995 but not in 1996 are the primary reason for the decrease in legal expenses in 1996. Increases in insurance an insurance and depreciation were due to increased business activity. Other income increased 28.1% to $157,330 in the first six months ending June 30, 1996, from $122,831 during the same period in 1995, primarily due an increase in cash available for investment. Income taxes increased 89.5% to $187,818 in the first six months ending June 30, 1996, from $99,130 during the same period in 1995, primarily due to the increase in income before federal income taxes. Liquidity and Capital Resources The Company has a $300,000 line of credit from Seafirst Bank. On June 1, 1996, this line of credit was renewed for a one-year period ending June 1, 1997. At June 30, 1996, there were no borrowings outstanding under the line. At June 30, 1996, the Company had cash, cash equivalents and investment securities at fair market value of approximately $5.9 million compared to approximately $5.5 million at March 31, 1996, approximately $5.3 million at December 31, 1995, and approximately $4.4 million at June 30, 1995. Net cash provided by operating activities during the first six months ended June 30, 1996 was $743,230, compared to $308,421 for the same period in 1995, due primarily to decreases in service fees receivable, and in prepaid expenses and in accounts payable. A concerted effort to reduce the service fee receivable accounts for the increase in cash in the first six months of 1996. Net cash used in investing activities during the first six months ended June 30, 1996, was $937,649 compared to $146,392 used during the same period in 1995. The use of cash in the first six months of 1996 was due primarily to the purchase of investment securities. Net cash used by financing activities during the first six months ended June 30, 1996 was $48,421 compared to $2,534 provided in the same 1995 period. The reduction in cash from financing activities is due to the payment, in February 1996, of the note held by Pacific Health Systems, Inc. for the purchase of First Choice Dental System, Inc. On February 1, 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 is payable on February 1, 1996. Under the related purchase agreement, First Choice is required to make additional contingent purchase-price payments equal to 50% 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. The additional aggregate purchase-price, due in January 1996 for 1995, will not be owed because net income projections were not realized. On July 25, 1995, First Choice Health Network, Inc. submitted amended Federal corporate income tax returns for the years 1992 and 1993. KPMG Peat Marwick had been asked to study payments made by shareholders which were recorded as additional income for income tax purposes rather than the equity basis used on our financial statements. It has been determined that, except for certain physician non-membership contracts, these shareholder payments should have been recorded as equity for all purposes. The total of these amended returns is $229,091. As of this filing, the Internal Revenue Service has refunded all portions inclusive of interest, penalty decrease and reduction of interest previously charged. Subsequent to year-end, the Company transferred cash of $150,000 to its subsidiary, First Choice Health Plan, Inc., in connection with its licensure as an HCSC. The Company previously transferred $1.5 million in January 1995 to fund the required statutory reserve. Additional funds may be required 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. As of this filing these funds remain on deposit. The Company signed contracts for software development on March 21, 1994, commenced implementation thereof, and have obtained necessary programming assistance and additional hardware. Portions of the new system have been installed on a pilot test basis and the Company expects to have fully operational systems in place by early Fall, 1996. Subsequent to the end of the second quarter, the Company entered into a 'Subscription Agreement' with Swedish Medical Center, a Washington non- profit corporation, to acquire Fifty-Eight Hundred (5,800) shares of Class B common stock of 'First Choice Health Network, Inc.' Under the terms of the agreement Swedish acknowledges that full disclosure has been made and that they are capable of evaluating the merits and risks of and investment in the Company. They further agreed to pay $931,484 for the 5,800 shares, valued at approximately $160.60 per share. This sales has been reported to the Washington State Department of Financial Institutions, Securities Division. 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. By the quarter ending June 30, 1996 there were 23 policies in force and collected premiums of $2,221. 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. Part II - Other Information Item 1 Legal Proceedings Not applicable. Item 2 Changes in Securities Not applicable. Item 3 Defaults Upon Senior Securities Not applicable. Item 4 Submission of Matters to a Vote of Security Holders At the Annual Meeting of Shareholders of the First Choice Health Network, Inc. held on June 27, 1996, nominees* for three positions on the Board of Directors were put to a vote of the shareholders. The following Directors were elected to a three year term to expire in 1999: For Against Abstain Total Class A: Richard Lipsky 353 11 0 364 Class B: Phil Haas 337 26 1 364 Class C: Paul Elliott 352 11 1 364 (one write-in candidate vote was submitted. * The nominees held the respective directors positions to which they were re-elected. Item 5 Other Information At the June 27, 1996 Board of Directors meeting Gary Gannaway, President and CEO, requested that the Board set and approve the number of First Choice Vice Presidents at seven. The motion was made, seconded and UNANIMOUSLY APPROVED. Mr. Gannaway introduced Mr. David Peel as Vice President ofProduct Development and Underwriting. Mr. Peel's duties willinclude OIC compliance, underwriting and product development. Mr. Peel started on July 1, 1996. Item 6 Exhibits and Reports on Form 8-K (a) Exhibits: 10.19 Copy of Subscription Agreement dated July 16 , 1996, with Swedish Medical Center. 10.20 Copy of Product Line Management Agreement dated April 22, 1996, with Olympic Health Management Systems, Inc. 10.20a Copy of Administrative Agreement dated April 22, 1996, with Olympic Health Management Systems, Inc. 10.20b Copy of Supervising Agent Addendum to Independent Agent Agreement dated April 22, 1996, with Olympic Health Management Services, Inc. 10.20c Copy of Independent Agent Agreement dated May 7, 1996, with Olympic Health Management Services, Inc. 10.20d Copy of Schedule of Commissions and Service Fees dated April 22, 1996, with Olympic Health Management Services, Inc. (b) Reports on Form 8-K Filed - July 24, 1996 Item 5 On July 16, 1996, the Registrant and Swedish Medical Center, Seattle, a Washington non-profit corporation, signed a 'Subscription Agreement.' This document states that Fifty-Eight Hundred (5,800) shares of the registrant's Class B common stock will be acquired by Swedish Medical Center, pursuant to the terms set forth in the agreement. In consideration for such stock, Swedish paid a total of $931,484., approximately $160.60 per share. Report of this sale has been duly filed with the Washington State Department of Financial Institutions, Securities Division. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST CHOICE HEALTH NETWORK, INC. Date: August 15, 1996 By: / s /Randolph R. Barker Randolph R. Barker Vice President of Finance and Treasurer (Principal Financial and Accounting Officer and Duly Authorized Officer) EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST CHOICE HEALTH NETWORK, INC. STATEMENTS, SECOND QUARTER ENDING JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000922622 FIRST CHOICE HEALTH NETWORK, INC. 6-MOS YEAR DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 JUN-30-1996 JUN-30-1995 1,886,166 2,129,006 2,062,204 1,276,783 1,079,626 1,200,351 (96,187) (96,187) 0 0 5,030,081 4,798,176 1,199,263 1,155,097 (630,635) (574,377) 7,713,376 7,403,850 737,612 762,052 0 0 0 0 0 0 29,658 29,676 6,946,106 6,587,060 7,713,376 7,403,850 0 0 2,754,248 2,476,134 0 0 0 0 2,308,237 2,315,079 0 0 0 0 603,341 283,886 187,818 99,130 415,523 184,756 0 0 0 0 0 0 415,523 184,756 8.83 3.92 0 0
EX-10 3 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _____________________ EXHIBITS TO FORM 10Q-SB QUARTERLY REPORT UNDER THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 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. Swedish Medical Center, a Washington non-profit corporation ("Swedish") 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"), upon approval of a majority of the Directors of the Company, and the Company hereby accepts such subscription, all pursuant to the terms set forth herein. 2. Purchase Price. In consideration for such Stock, Swedish shall pay a total purchase price of $931,484.00, approximately $160.60 per share, payable in cash upon tender of this Subscription Agreement to the Company. 3. Stockholder Restrictions. Except as specifically set forth in this Subscription Agreement, Swedish 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, and all other corporate documents binding upon or affecting the Company's stockholders. 4. Representations and Warranties. Swedish hereby represents and warrants that: (a) Swedish 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 Swedish for investment purposes only, for the account of Swedish and not with the view to any resale or distribution thereof, and Swedish 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 Swedish to be deemed an "underwriter" of such Stock as defined in Section 2(11) of the Securities Act of 1933, as amended; (c) Swedish has received and has carefully read a copy of the Company's Articles of Incorporation, its Bylaws, its most recent audited financial statements, its 1995 year-end 10-K report, its first quarter 1996 10-Q report, and other subscription documents, and, in connection therewith, has had access to all other materials, books, records, documents, and information relating to the Company, and has been able to verify the accuracy of and supplement the information contained therein; (d) Swedish acknowledges that Swedish 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 any request for such information has been fully complied with by them; (e) Swedish 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 Swedish has, together with its legal and financial advisors, such knowledge and experience in financial and business matters that Swedish and its legal and financial advisors are capable of evaluating the merits and risks of this investment; (f) Swedish has adequate means of providing for the current needs profits business and operations and possible contingencies, and Swedish has no need for liquidity with respect to its investment in the Company; (g) Swedish has been advised that an investment in the Company involves substantial risk and Swedish 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) Swedish is authorized and otherwise duly qualified to acquire the Stock; (i) The Company has made no representations or warranties in connection with Swedish's purchase of the Stock; and (j) Prior to the time Swedish becomes committed to purchase the Stock, Swedish knew of the restrictions on the Stock as described herein. 5. Restrictions on Transferability of Interests. Although the Company is a reporting company under Section 12 of the 1934 Securities and Exchange Act, Swedish 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. Swedish 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, Swedish understands that by virtue of the provisions of certain rules relating to "restricted securities" promulgated under the Act, the interest in the Company which Swedish 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 Swedish may still be limited with respect to the extent to which such interest may be transferred. 6. Payment of Subscription. Enclosed herewith is a cashier's or certified check payable to the order of the Company for the full amount of this subscription. If this subscription is rejected by Company's Board of Directors, the funds delivered herewith shall be returned to Swedish, without interest or discount, as soon as practicable. 7. Withdrawal. Swedish 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 Swedish's Stock on the same terms and conditions as established pursuant to the Bylaws of the Company then in effect. In the event Swedish withdraws prior to the payment of any capital call, Swedish shall not 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 Swedish, at the address set forth below, or (iii) at such other address as either Swedish or the Company shall designate to the other by notice in writing. 9. 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 Swedish. 10. 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. IN WITNESS WHEREOF, Swedish has executed this Subscription Agreement, this ___16th__ day of _____July____, 1996. 91-0433740 Tax Identification Number Address: 747 Broadway P.O. Box 14999 Seattle, WA 98114-0999 SWEDISH MEDICAL CENTER, a Washington non-profit corporation By /s/Richard Peterson Its President and CEO Accepted: FIRST CHOICE HEALTH NETWORK, INC. By /s/Gary R. Gannaway Gary R. Gannaway, President and CEO Exhibit 10.20 Product Line Management Agreement for Medicare SELECT Olympic Health Management Systems, Inc. 322 N. Commercial St., Suite 300 Bellingham, WA 98225 This Agreement is entered into by and between Olympic Health Management Systems, Inc. (hereinafter referred to as "Systems"), a consultant and third party administrator, and First Choice Health Network, Inc. (hereinafter referred to as "FCHN"). RECITALS WHEREAS, FCHN has entered into an Agreement with First Choice Health Plan, Inc., (hereinafter referred to as "Health Plan") whereby FCHN member hospitals ("hereinafter referred to as "Hospitals") shall participate in a Medicare SELECT supplement program; and WHEREAS, Medicare SELECT plan(s) will restrict payment of certain benefits to Hospitals unless the subscriber could not reasonably access care at Hospitals or the needed care was not available at Hospitals; and WHEREAS, Systems has extensive experience in the sale, promotion, and management of provider-based Medicare supplement programs, including, but not limited to, third party administration, research, marketing, and contracting; and WHEREAS, Systems collects considerable data from its automated interface with the Part B intermediary and, through this Product Line Management Agreement, agrees to provide monthly reports and interpretation to FCHN on sales, premium and claims activity. Now, therefore, in consideration of the promises and mutual covenants herein stated, it is agreed by and between the parties hereto as follows: Article I. Systems' Obligations 1.1 Health Plan Relations. Systems shall advise FCHN on the status of the regulatory filing of Medicare SELECT Plan of Operations, Medicare SELECT contracts, premium rates, disclosure statement and other required forms, along with advertising that is required to be filed with the Office of the Insurance Commissioner. Systems will coordinate the development of the Plan of Operations in such areas as quality assurance standards, developing subscriber grievance procedures, marketing, and, as may be appropriate, negotiating, and revising the Network Hospital Agreement. Systems shall perform the ongoing Medicare supplement regulatory filing and reporting for the Medicare SELECT program as required by state and federal law. 1.2 Monthly Product Line Reports. Systems shall provide these monthly reports as follows: 1.2.1 A report summarizing the data for the FCHN direct marketed Medicare SELECT product. 1.2.2 A report summarizing the data for the agent marketed Medicare SELECT product. Said report to cover the service areas of all participating hospitals. 1.2.3 Reports for each participating hospital summarizing the data for the participating hospital's respective service area. The monthly reports shall contain at least the following information: Current month and year to date sales summary; current month and year to date cancellation summary; current month and year to date in force plan summary; sales and in force statistical recap; risk pool analysis; and claims data in the aggregate and on a per member per month basis, by provider specialty and by network and non-network facilities. 1.3 Quarterly Claims and Premium Accounting. Within thirty (30) days of the end of each calendar quarter, Systems shall provide, in addition to the reports described in Sections 1.2.1, 1.2.2 and 1.2.3 of this Agreement, quarterly reports including the information in the monthly reports, and program performance analysis, including a program financial statement with both actual and projected data, accounting activities for premiums collected and claims paid, show total premiums collected and claims paid by subscriber, and further summarize by age and plan in both aggregate dollars and on a per member per month basis. Such reports shall include an Incurred But Not Reported (IBNR) claims reserve estimate. 1.4 Specialty Reports. If requested by FCHN, and subject to the provisions of 2.3.2, Systems will provide claims data for subscribers listing the provider charge, the Medicare allowable fee, deductibles and co-insurance paid below the Medicare allowable fee or above the Medicare allowable fee, Medicare payment, date of service, date of payment. This data can be sorted by subscriber, plan, provider, provider specialty, place of service, type of service, CPT code, age, sex, or any other data elements captured by Systems. Such reports can be produced for any plan, consolidation of plans, or for any month or consolidation of months. 1.5 Annual Premium Increases. Systems shall provide to FCHN on an annual basis, or upon request, recommendations on premium increases required to meet FCHN's financial objectives as it relates to its risk, marketing objectives, and return on investment. 1.6 Marketing Materials. Systems shall assume responsibility for coordinating the review and filing of marketing materials requested by FCHN. Such marketing material must be authorized by the Health Plan and approved by the Office of the Insurance Commissioner prior to use. 1.7 Hospitals Orientation Program. Systems shall assist Hospitals in communicating the importance and procedures of Health Plan's Medicare SELECT program to its medical staff and employees. Such orientation shall include written communication as well as group presentations. 1.8 Project Coordination. The success of the Medicare SELECT program is contingent upon the support of Hospitals, communications with the Office of the Insurance Commission, communications on the status of the project with the Health Plan, customer support, and agent management. 1.9 Exclusive Management. 1.9.1 While this Agreement is in effect, and except as otherwise provided herein, Systems agrees not to provide services for Medicare SELECT products, to another hospital or hospital systems in the mutually agreed upon service areas for each hospital with which FCHN has signed a Network Hospital Agreement. For those hospitals which currently have executed a Network Hospital Agreement the service area is described by the map and zip codes on Attachment 1.9.1, attached hereto and incorporated herein by this reference. 1.9.2 Systems agrees not to provide services for Medicare SELECT products to another hospital or hospital system, except for Whatcom County, Multicare and hospitals participating in the FCHP hospital sponsored Medicare SELECT program (i) for a period of one (1) year in the areas served by FCHN owner hospitals, and (ii) for a period not to exceed six (6) months in the remaining counties in the state of Washington. For the purposes of this Agreement, those areas served by FCHN owner hospitals are defined as King, Pierce, Snohomish and Spokane counties in Washington state. 1.9.3 After the first six (6) months that this Agreement is in effect, Systems agrees that it will provide FCHN sixty (60) days prior written notice of its intent to provide Medicare SELECT product line management services to another hospital or hospital system ("Systems Hospital") in counties not serviced by FCHN owner hospitals, and the area in which the Hospitals sponsored Medicare SELECT product line will be offered. During this sixty (60) day period, FCHN shall the right to (i) invite the Systems Hospital to sign a FCHN Network Hospital Agreement, or (ii) bring a different hospital into FCHN's Medicare SELECT program in the area identified in the notice. If FCHN brings a different hospital to Systems, Systems will not do business with Systems' Hospital. Any hospital proposed by FCHN under this paragraph, must be of equivalent size, and provide the same or greater level of services than the Systems' Hospital. The provisions of this Section 1.9.3 shall expire one (1) year following the effective date of this Agreement. 1.9.4 Systems shall not provide consulting services to insurers, health maintenance organizations or health care service contractors identified in Exhibit 1.9.4 for the purposes of establishing a Medicare SELECT product, either agent or direct marketed, in the state of Washington for a period not to exceed one (1) year from the effective date of this Agreement. Article II. FCHN's Obligations 2.1 Project Team. FCHN shall assign an administrative point person to communicate with Systems. This individual shall be responsible for coordinating FCHN's obligations hereunder for a project team consisting of competent and appropriate staff, committed to the success of this project. 2.2 Marketing. All marketing activities must be authorized by Health Plan and approved by the Office of the Insurance Commissioner before production. FCHN will notify Systems of any marketing activities which it desires. 2.3 Reimbursement of Systems. 2.3.1. FCHN shall compensate Systems for its services in the amount of $2,500.00 per month. 2.3.2 FCHN shall reimburse Systems on a monthly basis for expenses directly incurred and requested by FCHN and for such expenses as are reasonably incurred by Systems in the performance of its obligations herein. Such expenses include, but are not limited to, travel, costs associated with the development of FCHN specific marketing materials, postage, telephone and any applicable taxes. 2.3.3 Reimbursement to Systems shall be paid by FCHN within thirty (30) days of receipt of billing. 2.3.4 A $15,000.00 deposit from FCHN shall remain with Systems for the term of this Agreement. The deposit shall be returned at the time Systems' services are terminated or applied against any outstanding billings. Article III. Maintenance and Access of Books and Records 3.1 Maintenance of Records. Systems shall maintain, at its administrative office(s), books and records of all transactions among itself, FCHN and Health Plan relating to the services which Systems performs for FCHN under this Agreement, and the Administrative Agreement with Health Plan. These books and records shall be maintained in accordance with prudent standards of insurance record-keeping during the term of this Agreement and for a minimum of four (4) years after any termination of this Agreement, or the longest period required by law. Further, in the event that this Agreement is subject to regulations promulgated by the implementation of 952 of the Omnibus Reconciliation Act of 1980 by the Health Care Financing Administration as codified under 42 USC 1395x(v)(1)(I), the following shall apply: 3.1.1 Each party agrees, until the expiration of four (4) years after furnishing services under the terms of this Agreement, to make available, upon written request, to the Secretary of Health and Human Services or, upon request, to the Comptroller General, or any of their duly authorized representatives, this Agreement and all books, documents and records that are necessary to verify the nature and extent of the costs of such services. 3.2.2 If either party carries out any of the duties of this Agreement through a subcontract with a related organization, having a value or cost of ten thousand dollars ($10,000.00) or more over a twelve (12) month period, such subcontract shall contain a clause to the effect that, until the expiration of four (4) years after furnishing such services pursuant to such subcontract, the subcontracting organization shall make available, upon written request, to the Secretary of Health and Human Services or, upon request, to the Comptroller General, or any of their duly authorized representative, this Agreement and all books, documents and records that are necessary to verify the nature and extent of the costs of such services. 3.2 Inspection of Records. FCHN shall have the right, during Systems' regular business hours, to audit, examine, inspect, and copy all books and records. Systems will release to FCHN on demand any such books and records to answer inquiries or audits. FCHN shall pay for reasonable costs incurred by Systems. Article IV. Advertising 4.1 Neither Systems or FCHN may use the name, image, promotional material, stationery, letterhead or logotype of the other party unless such use is expressly authorized in writing by the other party. Any unauthorized use of such items is outside the limited scope of authority granted by this Agreement. Article V. Term and Termination 5.1 Term. This Agreement will take effect on the Effective Date and shall remain in effect until terminated in accordance with the provisions of this Article V. 5.2 Written Notice. Except as otherwise stated herein, this Agreement may be terminated, without cause, at the option of either party upon written notice to the other of not less than ninety (90) days. During the notice period, the parties shall continue to be bound by the terms of this Agreement. 5.3 Upon Occurrence of Certain Events. Either party may terminate this Agreement immediately upon occurrence of any of the following events: 5.3.1 The liquidation or dissolution of either party, whether voluntary or involuntary unless incidental to a reorganization of either party. 5.3.2 The adjudication of either party as bankrupt; the execution by either party of an assignment for the benefit of creditors; or the appointment of a receiver for either party or a material portion of either party's assets, if the appointment is not vacated within ninety (90) days after the effective date of such appointment. 5.3.3 Any state or federal regulation which significantly alters the Medicare SELECT program. 5.4 Cause. Either party may, upon written notice to the other, terminate this Agreement immediately for cause. Termination for cause shall include, but not be limited to, fraud, failure to perform the terms of this Agreement, failure to secure and maintain necessary licenses and accreditation. Article VI. General Provisions 6.1 Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto, and supersedes any and all other agreements, either oral or written. 6.2 Severability. If any term, provision, covenant, or condition of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the provisions shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 6.3 Amendment. This Agreement may not be modified, changed, or amended in any respect unless agreed upon in writing and signed by the President or Vice President of each of the parties. 6.4 Assignment. This Agreement shall not be assigned by either party without prior written consent of the other, said consent shall not be unreasonably withheld. 6.5 Law Governing. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington. 6.6 Counterparts. This Agreement may be executed in counterparts each of which shall have the same force and effect of an original. 6.7 No waiver. No term or provision hereof shall be deemed waived and no breach excused, unless such waiver or consent shall be in writing and signed by the party claimed to have waived or consented. Any consent or waiver by either party to a breach by the other, whether express or implied, shall not constitute a consent to waiver of, or excuse for, any different or subsequent breach. 6.8 Indemnification and Hold Harmless. Each party agrees to indemnify and hold the other harmless from any demands, suits, loss, liability, damage, claims cost, or expense (including reasonable attorney fees, at trial and on any appeal therefrom) arising out of the negligence of any employee, director, officer or agent of the indemnifying party in connection with this Agreement or the breach by the indemnifying party of any provision of this Agreement. For purposes of this Section, the term "agent" with reference to FCHN shall not include FCHN's Medical Staff, physicians and other health care providers who are not employed by FCHN. 6.9 Relationship of Parties. Each party hereto is an independent contractor with respect to the other and not an agent, servant or employee or joint venturer. 6.10 Notices. Any notice required to be given under the terms of this Agreement shall be deemed to be received within three (3) days of its deposit in the United States mail, first class, postage pre-paid, or the next day if sent by overnight courier or upon actual receipt if hand delivered and if addressed to the parties at the addresses set forth below. The date the notice is sent shall be considered the date of Notice. If to FCHN: First Choice Health Network, Inc. 1100 Olive Way, Suite 1480 Seattle, WA 98101-1838 Attention: Randy Barker If to Systems: Olympic Health Management Systems, Inc. 322 N. Commercial Street, Suite 300 Bellingham, WA 98225 Attention: C. Paul Gauthier Either party may change the address to which such notices are to be directed upon written notice to the other party given in accordance with the terms thereof. Article VII. Effective Date 7.1 The Effective Date of this Agreement is the _22_ day of _April_, 1996. IN WITNESS WHEREOF, FCHN and Systems have, by their respective officers, executed this Agreement. Olympic Health Management First Choice Health Network, Inc. Systems, Inc. By: /s/ C. Paul Gauthier By: /s/ Randy Barker Title: President Title: VP, Finance Date: May 7, 1996 Date: April 23, 1996 Attachment 1.9.4 1. Any other Health Care Services Contractor incorporated in the State of Washington, including any affiliated company, with the exception of HealthGuard Services of Washington. 2. Group Health Cooperative, Good Health Plan, Virginia Mason, Pacificare. 3. Washington Health Network (WHN) and other subsidiaries of WHN. 4. Insurance companies, Third Party Administrators, Union Trusts, and other payors who are First Choice Health Network clients (see attached list of current First Choice Health Network clients). This restriction applies only to assistance with Olympic would provide to these payors to establish a program in the state of Washington. Olympic may work with these payors to help them establish a SELECT program in other states. 6. Ethix, Integrated Network Services and other PPOs incorporated in the state of Washington. Exhibit 10.20a Administrative Agreement This Agreement is entered into this _22nd_ day of _April, 1996_, by and between First Choice Health Plan, Inc., a Washington health care service contractor ("FCHP"), and Olympic Health Management Systems, Inc. a third party administrator ("Olympic"). WITNESSETH THAT: WHEREAS, FCHP desires to utilize the services of Olympic as a third party administrator for certain health coverages; and WHEREAS, FCHP and Olympic are desirous of entering into an Agreement reflecting their rights and obligations with respect to this relationship; and WHEREAS, the parties mutually agree that this Agreement, and any amendments, exhibits, and addenda thereto, if any, shall constitute the full and complete embodiment of the intention of the parties regarding all policies administered pursuant to this Agreement; NOW, THEREFORE, for and in consideration of these premises and of the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: ARTICLE I Obligations of Olympic 1. Administrative Services. Olympic, acting for and on behalf of FCHP, agrees to perform certain services relating to the administration of the Medicare supplement coverage in agreed upon service areas. Each service area and the functions to be performed by Olympic will be described in separate Exhibits which shall be consecutively numbered, executed by the parties, and by reference incorporated and made a part of this Agreement. Each Exhibit shall contain, at a minimum, the following information with respect to the applicable service areas: a. Name of service area; b. Contract forms to be administered; c. Services to be performed by Olympic; d. Amount to be paid to Olympic by FCHP for services to be performed; and e. Any special instructions with regard to the applicable service areas. 2. Performance of Duties. For all service areas, Olympic represents the following: 2.1 It will conform its method of conducting business to rules mutually agreed upon by FCHP and Olympic and which comply with all applicable federal, state and local laws. 2.2 Use of Approved Materials. It will use the forms, materials and procedures approved by the FCHP. FCHP may revise such forms, materials and procedures from time to time. Such revision shall be effective as soon as practical but not more than ninety (90) days, or as required by a state, following the receipt of written notification of such revision. 2.3 Advertising. It will submit to FCHP for prior written approval by FCHP the form and content of all advertising and sales literature to be used in any media for the solicitation of business for FCHP. After the form and content of all advertising have been approved by FCHP and approved for use by the Office of the Insurance Commissioner, the time and place of its use shall be at the discretion of Olympic, except in areas where such advertising may not be distributed due to prohibitions by state law. All information sent directly to agents for their information must be approved in advance by FCHP. 2.4 Ownership of Books and Records. All documents, books, records, and any other material of whatsoever nature of Olympic in any manner relevant to the administration of the Medicare supplement coverage products are and shall remain the property of the FCHP, and will be open for inspection by FCHP at all reasonable times during the time any policies administered hereunder are in force, and until the termination of all Olympic's duties and responsibilities under this Agreement. Copies of all such documents, books, records, and materials of Olympic shall be provided to FCHP, as may be required by FCHP, in a form acceptable to FCHP upon request. Olympic may maintain copies of such documents, books, records and materials to perform its obligations under this Agreement, after which all such documents, books, records and materials will be returned to FCHP, as described in Article IV, Section 2 of this Agreement. Nothing within this section shall prohibit Olympic from providing to hospitals, who have contracted with FCHP, such information and/or reports as the hospitals are entitled to according to the terms of there respective agreements with FCHP. 2.5 Advancing Business Interests. It shall direct its efforts in the performance of services, toward advancing the business and interests of FCHP to the best of its ability. At no time shall Olympic engage in any practice prohibited by applicable state law. 2.6 Periodic Reporting. It will make reports of its conduct of the business in a form and at a time mutually agreed to by FCHP and Olympic, or required of FCHP to properly assess the experience under the Medicare supplement products and the proper level of rates for the Medicare supplement products. 2.7 Governmental Reporting. Olympic will be responsible for all required reporting to any and all government regulatory bodies in connection with Olympic's license requirements, if any, and the level of services provided to FCHP and will cooperate with FCHP in answering any complaints from the Office of the Insurance Commissioner or other regulatory bodies. ARTICLE II Obligations of FCHP FCHP recognizes Olympic as the administrator for policies identified in the Exhibits and agrees to: 1. Payment to Olympic. Pay Olympic, while this Agreement is in force, an allowance based on the functions performed by the Olympic. Such allowance will be agreed to in writing in each Exhibit attached hereto and made a part hereof, and may be modified from time to time by negotiations if there is a change in such functions or in the cost of their performance after the inception of this Agreement. Said allowance shall be computed on a monthly basis and paid to Olympic within thirty (30) days of the end of each calendar month. 2. Premium Rates. Periodically determine the premium rates. These rates are the final responsibility of FCHP and will be communicated to Olympic at least 60 days before they take effect. 3. Establishment of Bank Account(s). FCHP shall establish one or more accounts into which premium may be deposited and claims paid. Premium collected by Olympic is to be deposited into said account(s) established by FCHP. Return premiums shall be remitted to the subscribers entitled thereto. Claim payments will be made from the account(s) established by FCHP. The bank account(s) are to be maintained to clearly record the deposits and withdrawals from the accounts on behalf of FCHP. All bank account records shall be promptly obtained and copies kept. FCHP may demand and be furnished copies upon request by FCHP. Withdrawals of FCHP's funds from the approved bank may be only for: a. Remittance of return premium to persons entitled to them. b. Payment of claims to subscribers or as otherwise assigned. c. Payment of commission to agents entitled thereto. d. Payment of Olympic's administrative fee. ARTICLE III Effective Date, Term and Termination 1. Effective Date. This Agreement shall be effective on April 22, 1996. 2. Term. This Agreement shall have an initial term of twelve months from the effective date hereof and shall continue from year to year upon the expiration of said initial twelve-month period unless terminated in accordance with Article III, Sections 4 through 7. 3. Continuing Obligations. Notwithstanding the termination, for any reason, of any Medicare supplement products, this Agreement, or any part thereof, may continue in effect, at the option of FCHP, until the date on which all premium due to FCHP has been remitted to FCHP. 4. Termination upon Written Notice. This Agreement, or any Exhibit attached hereto, may be terminated at the option of either of the parties upon written notice to the other not less than 90 days before the date set for said termination. This period of notice may be shortened by mutual agreement in writing signed by the parties hereto. 5. Termination for Cause. Either party may, upon written notice to the other, immediately terminate this Agreement for cause. Termination for cause shall include, but not be limited to, fraud, or failure to obtain and maintain necessary licenses. 6. Opportunity to Cure. If Olympic fails to perform any of its obligations under this Agreement, and such failure is detrimental to FCHP, or performs such obligations in a manner detrimental to FCHP, FCHP shall give detailed written notice of such failures of performances. Olympic shall initiate correction of such failures, performances or breaches within fifteen (15) days of receipt of such notice. If Olympic fails to complete said correction within thirty (30) days of receipt of such notice, FCHP may take whatever action is deemed necessary in its sole judgment, including immediate termination of this Agreement. 7. Insolvency. In the event Olympic assigns its assets for the benefit of creditors or admits in writing its insolvency, FCHP may immediately terminate this Agreement, and may temporarily assume the duties of Olympic under this Agreement until such time as a successor administrator is appointed by FCHP. ARTICLE IV General Conditions 1. Entire Agreement. This Agreement and the Exhibits attached hereto shall constitute the entire agreement between the parties relating to matters contained herein and shall supersede all prior written or oral agreements. No modification or amendment or any provision hereof shall be binding upon any party hereto unless it is in writing and signed by the President or a Vice President of each of the Parties. 2. Maintenance of Books and Records. Olympic shall maintain at its principal offices, for a period of five (5) years after this Agreement is terminated, a copy of the Medicare supplement contracts and Agreement, adequate books and records of all transactions between itself, FCHP and subscribers. After that time, said books and records shall be returned to FCHP. The books and records shall be maintained in accordance with present standards of insurance record keeping and in accordance with state law. 3. Federal Regulatory Requirement. In the event that this Agreement is subject to regulations promulgated by the implementation of 952 of the Omnibus Reconciliation Act of 1980 by the Health Care Financing Administration as codified under 42 USC 1395x(v)(1)(I), the following shall apply: 3.1 Each party agrees, until the expiration of four (4) years after furnishing services under the terms of this Agreement, to make available, upon written request, to the Secretary of Health and Human Services or, upon request, to the Comptroller General, or any of their duly authorized representatives, this Agreement and all books, documents and records that are necessary to verify the nature and extent of the costs of such services. 3.2 If either party carries out any of the duties of this Agreement through a subcontract with a related organization, having a value or cost of ten thousand dollars ($10,000.00) or more over a twelve (12) month period, such subcontract shall contain a clause to the effect that, until the expiration of four (4) years after furnishing such services pursuant to such subcontract, the subcontracting organization shall make available, upon written request, to the Secretary of Health and Human Services or, upon request, to the Comptroller General, or any of their duly authorized representative, this Agreement and all books, documents and records that are necessary to verify the nature and extent of the costs of such services. 4. Underwriting of Plans. FCHP's usual underwriting rules shall apply to the plans which are underwritten and issued by Olympic. Any exceptions to these rules must be communicated in written form to Olympic. 5. Payment of Premium. Payment of premium to Olympic by a subscriber shall be deemed to have been received by FCHP. 6. Confidentiality. The names and addresses of subscribers are information to be confidentially held by Olympic and FCHP except when used in legal proceedings against either Olympic or FCHP, or as otherwise provided in this Agreement. 7. Notices and Communications to Subscribers. Any policies, certificates, booklets, termination notices or other written communications delivered by FCHP to Olympic for delivery to subscribers shall be delivered promptly by Olympic after receipt of instructions from FCHP to do so. Olympic or FCHP, depending upon which issues the certificates, shall give written notice to each subscriber of the identity and relationship of Olympic, FCHP and the subscriber. 8. Effect of State and Federal Regulation. In the event that state or federal laws or regulations should change, alter or modify the present services or the standards of eligibility of subscribers, the terms and conditions of this Agreement shall be changed accordingly. 9. Indemnification. Each party agrees to indemnify, defend, and hold harmless the other, its agents, officers and employees from and against any and all liability expense including defense costs and legal fees incurred in connection with claims for damages of any nature whatsoever arising from its performance or failure to perform its obligations hereunder. 10. Relationship of the Parties. Each party hereto is an independent contractor with respect to the other and not an agent, servant or employee or joint venturer. It is expressly understood that without prior written authorization of the other party, neither party shall be the agent of the other in the negotiation of the provider agreements contemplated hereby, and shall have no authority whatsoever to bind the other party to the terms of any such agreement. 11. Waiver. No act of forbearance or toleration on the part of either party in favor of the other in respect to provisions of the Agreement, either express or implied, shall be construed as a waiver by the party of any of its rights hereunder. 12. Assignment. Neither party shall assign its rights or delegate its duties under this Agreement without the prior written consent of the other party, said consent shall not be unreasonably withheld. 13. Notices. Any notices or communications required or permitted hereunder shall be duly given if delivered in person or sent by registered or certified mail addressed as follows: If to FCHP: Randy Barker First Choice Health Plan, Inc. 1100 Olive Way, Suite 1480 Seattle, WA 98101-1838 If to Olympic: C. Paul Gauthier, President Olympic Health Management Systems, Inc. 322 N. Commercial Street, Suite 300 Bellingham, WA 98225 or such other address as shall be furnished in writing to the other party hereto. 14. Severability. If any term, provision, covenant, or condition of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the provisions shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 15. Law Governing. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington. 16. Counterparts. This Agreement may be executed in several copies of counterparts each of which shall have the same force and effect of an original. 16 Headings. The headings to the Articles, Sections and Paragraphs of this Agreement are included only for the convenience of the parties and shall not have the effect of defining, diminishing or enlarging the rights of the parties or affecting the construction or interpretation of any portion of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement effective as set forth herein. Olympic Health Management First Choice Health Plan, Inc. Systems, Inc. By: _/s/ C. Paul Gauthier ___ By: __/s/ Randy Barker ___________ Title: ___President______ Title: _VP, Finance________________ Date: ___May 7, 1996____________ Date: ___ April 23, 1996 Exhibit 10.20a Administrative Agreement Exhibit 1 This Administrative Agreement Exhibit 1 is attached to, and made a part of and subject to all of the provisions of the Administrative Agreement and any supplements thereto (hereinafter referred to as "Agreement") executed by and between First Choice Health Plan, Inc. (hereinafter referred to as "FCHP") and Olympic Health Management Systems, Inc. (hereinafter referred to as "Olympic"). The parties hereto, having first entered into the Agreement, now make this Exhibit as follows: 1. Service Area: See attached map and zip code list marked Attachment 1.1, attached hereto and incorporated herein by this reference. 2. Contract forms to be administered: ASTD.A (2/96), SELA.A (2/96), SELB.A (2/96), SELC.A (2/96). 3. Services to be performed by Olympic: a. Maintenance of applications and other necessary records so as to enable FCHP to determine at any time, the true and accurate status of the Medicare supplement coverage in force. b. Underwrite, issue and deliver to the subscriber forms supplied by or approved, in writing by FCHP, along with Medicare supplement coverage and/or amendments thereto. c. Prepare and mail premium billings, statements or coupons as required. d. Collect and remit premium and supporting premium reports, the form of which shall have been approved by FCHP, to the home office of FCHP or such other place as might be designated in writing by FCHP for receipt of premiums. e. Pay Medicare supplement coverage claims in accordance with the terms of the contract. f. Program accounting in accordance with standard insurance industry practices. g. Provide monthly reports on claims adjudicated. Said reports will be in an electronic format mutually agreed to by the parties. h. Prepare and file with the Office of the Insurance Commissioner those premium rates, notices and other documents and forms required by law for the administration of the Medicare SELECT plans. 4. Administrative Fee: FCHP agrees to pay the following administrative fee to Olympic for the performance of the services designated: twelve (12) percent of earned premium. 5. Exhibit Effective Date: __April 22, 1996____________________. This Administration Agreement Exhibit 1 is executed in duplicate this ____7th_____________ day of __May, 1996_________________. Olympic Health Management Systems, Inc. First Choice Health Plan, Inc. By /s/ C. Paul Gauthier By /s/ Randy Barker VP, Finance Exhibit 10.20b Supervising Agent Addendum To Independent Agent Agreement This Addendum is attached to and made a part of that Independent Agent Agreement (hereinafter referred to as "Agreement") by and between First Choice Health Plan, Inc. (hereinafter referred to as "FCHP") and Olympic Health Management Services, Inc. (hereinafter referred to as "Agent"). 1. In addition to the duties outlined in the Agreement, Agent shall: 1.1 Recruit, for appointment by FCHP as FCHP's representative, persons acceptable to FCHP for the sale of FCHP's plans. Agent shall organize, train, instruct and supervise the work of such Representatives so appointed. 1.2 Recommend to FCHP the appointment and termination of Representatives to sell FCHP plans. FCHP shall not unreasonably refuse appointment of said Representatives. For the purposes of this Agreement, "Representative" means any person or entity, other than Agent, who is licensed by the State of Washington to sell health coverage and is recruited and trained by Agent to sell FCHP's Medicare supplement coverage. 2. For the services provided herein, FCHP shall compensate the Agent as follows: 2.1 Commission. Except as otherwise provided in this Addendum, when a Representative solicits an application resulting in a plan being issued and remaining in force for at least thirty (30) days Agent will receive credit to Agent's commission account in an amount equal to eight (8) percent of the premium paid, less the commission due to the Representative under its agreement with FCHP. Said commission shall be payable for the life of the plan. 2.2 Whenever a premium has been refunded to an applicant or subscriber in accordance with the rules and regulations of FCHP, the Agent agrees to immediately return to FCHP any commissions received as a result of that business. 3. Refunded Premium In any contract year, whenever a premium has been refunded to an applicant or policyholder in accordance with the rules and regulations of FCHP, the Agent agrees to immediately return to FCHP any commissions received as a result of that business either directly or through a debit to the Agent commission account. This Schedule is executed in duplicate this __7th____ day of __May, 1996. First Choice Health Plan, Inc. Olympic Health Management Services, Inc. By: __/s/ Randy Barker By: ____/s/ C. Paul Gauthier Title: __VP, Finance____________ WA CIC.: OLYMPHM068C5 Exhibit 10.20c Independent Agent Agreement First Choice Health Plan, Inc. 1100 Olive Way, Suite 1480 Seattle, WA 98101 This Agreement is entered into by First Choice Health Plan, Inc. (referred to as We, FCHP, or Us), and the person signing as Agent (referred to as Agent of You). 1. Agreement You agree to represent FCHP as an independent agent in accordance with this Agreement, the rules of FCHP, the daily operating procedures established by the market manager and the laws and regulations in the state in which You operate. 2. Relationship You are an Independent Contractor and nothing in this Agreement shall be construed to create the relationship of employee and employer between You and FCHP. Nothing in this Agreement is intended to prevent You from engaging in other business activities. No business activities other than those related to this Agreement shall be conducted on FCHP's premises. 3. Territory Agent's appointment herein shall be for the territory defined by FCHP. Nothing in this Agreement confers on the Agent exclusive representation of FCHP in that Territory and FCHP may appoint such other agent or agents in the same Territory. 4. Authority While this Agreement is in effect, You will have the authority to: a. Procure applications for insurance issued by the FCHP for which You have been appointed as agent, collect the premium for the application and issue the receipt thereon; b. Deliver policies issued on applications so procured, provided first premium has been paid; c. Give service to policyholder of policies so written, so as to maintain the policies in force; d. Endeavor to procure applications for reinstatement of lapsed polices. 5. Limitations of Authority You agree not to perform any acts on behalf of FCHP for which You are not authorized, such as: a. Accept risks, incur debt or liability or enter into contracts; b. Waive, alter, modify or change and FCHP policy or procedure, contract terms, rates or customary requirements; c. Endorse checks payable to FCHP; d. Deliver polices except in accordance with FCHP's instructions and during the good health of the proposed insured; or e. Accept premiums except for the initial premium in accordance with FCHP's procedures. 6. Compensation As compensation in full for the performance of services by the Agent as authorized in this Agreement, FCHP shall pay Agent compensation as set forth in the attached Schedule of Commissions and Service Fees. Said Schedule may be altered, decreased, modified or withdrawn by FCHP at any time. Such change will be effective upon any business written subsequent to the effective date of the change. FCHP shall provide a commission statement to Agent on a periodic basis. Said commission statement will show all activity on Agent's account. Agent has forty-five (45) days from the receipt of each commission statement to report, in writing, any disagreement or dispute with the contents of the commission statement. Failure to notify FCHP of any dispute with the commission statement within the forty-five (45) days shall constitute a waiver by Agent of the right to further audit of Agent's account the period represented by the commission statement. 7. General Provisions a. Advertising and Sales Promotion Material 1. You agree not to use any advertising materials, supplies or other printed or written material used in the sale or promotion of the FCHP's contracts without prior written approval of FCHP. 2. In the event you become aware of any materials used in the sale or promotion of the FCHP's policies which has not been approved by FCHP, you agree to promptly disclose such information to FCHP. b. Collection of Premium Payment 1. You agree to remit immediately any monies collected by You on behalf of FCHP. c. Indebtedness 1. FCHP is hereby given a lien upon any amounts due to Agent under this or any prior agreement as security for payment of any indebtedness owed to FCHP by You. In the event such amount is insufficient to satisfy Your indebtedness to FCHP, You agree to pay the unsatisfied portion in the lump sum to FCHP. Any commission or other amounts advanced to You before actually earned on premiums paid to FCHP, shall be an indebtedness under this section. d. License Responsibility 1. You are required to maintain the appropriate license as required in those states that you solicit insurance under the terms of this contract, and to provide to FCHP evidence of renewed license within thirty (30) days of expiration date. e. Payroll and Employment Taxes 1. No payroll or employment taxes of any kind shall be withheld or paid with respect to compensation paid Agent. The payroll and/or employment taxed are the sole responsibility of Agent. For the purposes of this Section, payroll and employment taxes include, but are not limited to, FICA, FUTA, federal personal income tax, state personal income tax, state disability insurance tax, and state unemployment tax. f. Workers' Compensation 1. No workers compensation insurance has been or will be obtained by FCHP on account of Agent. g. FCHP Property 1. All printed matter or other supplies furnished to Agent by FCHP is the property of FCHP and shall be promptly returned to FCHP upon termination of this Agreement. 2 . All books or accounts, documents of every kind, vouchers, receipts notices, lists of policyholders, or papers of every kind used from time to time by Agent in connection with this Agreement, whether the cost thereof be paid be FCHP or by Agent, shall be and remain the property of FCHP, and the same subject at all times to inspection be FCHP on demand, and at the termination or cancellation of this Agreement the same shall be delivered to FCHP or such place as FCHP may designate. 3. Any and all information obtained by Agent concerning any part of the business of FCHP, the names of subscribers, the dates premiums are due or are to become due shall be considered confidential information and Agent expressly agrees that at all times during the continuance of this Agreement or after its termination or cancellation Agent will not divulge to any person in any manner any information acquired by Agent while acting as Agent of FCHP. 8. No Waiver No act of forbearance or toleration on the part of FCHP in favor of the agent in respect to provisions of the Agreement, either express or implied, shall be construed as a waiver by FCHP of any such rights or a waiver of any subsequent breach. 9. Non-Assignability No assignment of this Agreement nor any benefit to accrue hereunder, in whole or in part, shall be valid or in any way binding on FCHP without prior written consent. 10. Termination a. Either FCHP or Agent may terminate this Agreement immediately by giving the other party written notice at any time. b. It will terminate automatically at any time Agent's license terminates for any reason. 11. Performance This Agreement shall be governed by and construed in accordance with the laws of the State of Washington. 12. Severability Should any term of this Agreement be in violation of any law, rule, regulation or policy of any state or any of its departments, agencies or bureaus, now or in the future, this Agreement shall be amended so as to conform thereto; should any provision be void, it shall not affect the validity of the remaining provisions of this Agreement. 13. Entire Agreement This Agreement, the Schedule of Commissions and Service Fees and amendments, if any, attached hereto, supersede all previous agreements between the parties, if any, and constitute the entire Agreement between the parties. This Agreement can be changed or modified in behalf of FCHP only by the written consent of the President or Vice President of FCHP. 14. Effective Date This Agreement shall take effect on __April 22, 1996_________. In witness Whereof, this Agreement was executed on this __7th___day of __May, 1996__, at _Washington____. First Choice Health Plan, Inc. By:__/s/ Randy Barker_________ _/s/ C. Paul Gauthier Agent Signature Olympic Health Management Services Title:__VP, Finance__________ Print Agent Name: License No. OLYMPHMO68C5 File No. FC11596_______ Mailing Address: 322 N. Commercial Street, Suite 300 Bellingham, Washington 98225 Exhibit 10.20d Schedule of Commissions and Service Fees Subject to Paragraphs 1 through 14 of the Independent Agent Agreement ("Agreement") to which this Schedule is attached and made a part of, and as long as the Agent is actively performing under the terms of the Agreement, the following commissions and fees shall be allowed on premiums paid for policies and riders approved and issued by First Choice Health Plan, Inc., ("FCHP"). Commissions and fees on premiums paid in advance of the current contract year shall not be paid until the contract year the premiums are due. This Schedule is effective on April 22, 1996 and applies to any business solicited on or after this effective date. a. Territory. This Schedule shall be limited to the State of Washington and the applicable service areas for Medicare SELECT. b. Commission. (1 ) During the First Contract Year. When a contract is solicited by Agent and paid for, Agent will receive credit to Agent's commission account in an amount equal to eight (8) percent of the premium paid. Should a contract terminate for any reason, other than the death of the subscriber, during the first three (3) months, Agent's commission account will be charged an amount equal to the commission paid on the unearned portion of the premium. The charge back will occur, in full, immediately following the contract's termination and will be offset against any future commission earnings. When premium is paid to renew the contract into its next premium period, Agent will receive credit to Agent's commission account in the amount equal to eight (8) percent of the premium paid. Except as otherwise provided herein, Commission shall continue to be paid through the first six (6) years the contract is in force. (2) In the case of an individual being converted from another agent marketed Medicare supplement plan offered by FCHP or an individual has been covered by an agent marketed Medicare supplement plan offered by FCHP in the previous twelve (12) months, Agent shall be entitled to receive such commission as would have been paid on the original contract. (3) Refunded Premium. In any contract year, whenever a premium has been refunded to an applicant or policyholder in accordance with the rules and regulations of FCHP, the Agent agrees to immediately return to FCHP any commissions received as a result of that business either directly or through a debit to the Agent commission account. This Schedule is executed in duplicate this _7th_ day of _May, 1996. First Choice Health Plan, Inc. Olympic Health Management Services, Inc. By: /s/ Randy Barker By: ____/s/ C. Paul Gauthier Title: VP, Finance WA CIC: OLYMPHM068C5 -----END PRIVACY-ENHANCED MESSAGE-----