UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the quarterly period ended June 30, 1998
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-25944
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FOHP, Inc.
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(Exact name of registrant as specified in its charter)
New Jersey 22-3314813
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(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
3501 State Highway 66, Neptune, New Jersey 07753
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(Address of principal executive offices) (Zip Code)
(732) 918 - 6700
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes X No ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, 100,000,000 shares outstanding as of August 13, 1998
INDEX PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations 4
For the periods April 1 to June 30, 1998 & 1997
For the periods January 1 to June 30, 1998 & 1997
Condensed Consolidated Statements of Shareholders' (Deficiency) Equity 5
For the period January 1, 1997 to December 31, 1997
For the period January 1, 1998 to June 30, 1998
Condensed Consolidated Statements of Cash Flows 6
For the periods January 1, 1998 to June 30, 1998
For the periods January 1, 1997 to June 30, 1997
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 20
Signature Page 21
2
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
---------------------------------
(unaudited) (audited)
Assets
Cash and cash equivalents $ 29,559,336 $ 79,266,721
Accounts receivable from owners/providers, net of allowance for doubtful accounts
and retroactive terminations of $345,144 in 1998 and $922,354 in 1997 9,642,628 11,096,487
Other accounts receivable, net of allowance for doubtful accounts and retroactive
terminations of $2,709,230 in 1998 and $2,507,619 in 1997. 3,418,481 3,131,333
Prepaid and other current assets 755,822 635,548
---------------------------------
Total current assets 43,376,267 94,130,089
Restricted Cash 42,614,363 13,846,682
Furniture and equipment (at cost, net of accumulated depreciation
and amortization of $2,313,716 and $2,349,874, respectively) 2,641,555 2,480,042
Goodwill (net of accumulated amortization of $1,346,628 and $0, respectively) 106,383,626 107,730,254
Other assets 383,379 424,164
---------------------------------
Total Assets $ 195,399,190 $ 218,611,231
=================================
Liabilities and Shareholders' Equity
Current Liabilities:
Medical claims payable to owners/providers $ 13,398,403 $ 20,308,241
Other medical claims payable 31,262,941 62,614,704
Accounts payable 924,408 746,369
Accrued expenses 15,379,691 17,512,845
Due to Foundation Health Systems, Inc. 741,387 543,075
Due to QualMed, Inc. 2,047,303 1,192,716
Unearned premium 391,914 7,965,658
---------------------------------
Total current liabilities 64,146,047 110,883,608
Convertible debentures 12,007,362 11,294,406
Subordinated debentures 24,346,192 24,000,000
---------------------------------
Total Liabilities 100,499,601 146,178,014
Shareholders' Equity:
Preferred Stock, $1.00 par value, 10,000,000 shares authorized,
none issued or outstanding
FOHP, Inc. Common Stock, $.01 par value, 100,000,000 shares authorized,
100,000,000 in 1998 and 100,000,000 in 1997 issued and outstanding 1,000,000 1,000,000
Additional paid-in capital 227,951,597 208,053,796
Accumulated deficit (134,052,008) (136,620,579)
---------------------------------
Total shareholders' equity 94,899,589 72,433,217
---------------------------------
Total Liabilities and Shareholders' Equity $ 195,399,190 $ 218,611,231
=================================
See accompanying notes
3
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30 June 30,
1998 1997 1998 1997
--------------------------------- --------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue:
Premiums from owners/providers $ 31,681,729 $ 30,061,855 $ 66,663,668 $ 60,987,811
Other premium revenue 49,817,037 62,640,050 104,708,230 115,758,655
Other, principally administrative service fees 638,203 221,982 1,513,534 908,251
Interest income 998,390 1,082,268 2,230,452 1,690,139
--------------------------------- ---------------------------------
Total revenue 83,135,359 94,006,155 175,115,884 179,344,856
--------------------------------- ---------------------------------
Expenses:
Medical services to owners/providers 17,436,261 23,966,704 40,595,318 45,991,933
Other medical services 40,684,608 63,632,941 94,722,408 122,995,354
Selling, general and administrative 14,003,766 13,626,664 28,710,370 25,196,327
Management fee - QualMed, Inc. - 1,838,354 - 3,539,474
Management fee - Foundation Health Systems, Inc. 636,000 - 1,271,000 -
Amortization of goodwill 673,314 - 1,346,628 -
Depreciation and other amortization 375,234 349,279 738,633 590,270
Interest - Foundation Health Systems, Inc. 529,862 503,459 1,045,460 503,459
Other interest 149,105 27,434 258,256 28,991
Restructuring Costs - 1,134,097 - 1,134,097
--------------------------------- ---------------------------------
Total expenses 74,488,150 105,078,932 168,688,073 199,979,905
--------------------------------- ---------------------------------
Net income (loss) before provision for income taxes 8,647,209 (11,072,777) 6,427,811 (20,635,049)
Provision for income taxes 5,188,953 600 3,859,240 2,036
--------------------------------- ---------------------------------
Net income (loss) $ 3,458,256 $(11,073,377) $ 2,568,571 $ (20,637,085)
================================= =================================
Net income (loss) per common share $ 0.04 $ (5.04) $ 0.03 $ (9.61)
================================= =================================
See accompanying notes
4
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIENCY) EQUITY
Common Stock
-------------------------- Additional Total
Par Paid-In Accumulated Shareholders
Shares Value Capital Deficit (Deficiency) Equity
-------------------------------------------------------------------------
Balance at December 31, 1996 2,100,173 $ 21,002 $30,648,489 $(56,535,558) $ (25,866,067)
Net loss for the period January 1, 1997 to
December 31, 1997 (80,085,021) (80,085,021)
Retirement of Common Stock-NJ (13,334) (133) 133 0
Conversion of debentures into shares of
FOHP, Inc. Common Stock 168,109 1,681 1,699,440 1,701,121
Reclassification of Common Stock-NJ to Common
Stock:
Common Stock-NJ (2,086,839) (20,869) (20,869)
Common Stock 2,086,839 20,869 20,869
Issued Common Stock (December 1, 1997
at $10.12 per share) 4,941,049 49,410 49,950,590 50,000,000
Issued Common Stock (December 8, 1997
at $.20 per share) 92,804,003 928,040 18,024,890 18,952,930
Goodwill 107,730,254 107,730,254
-------------------------------------------------------------------------
Balance at December 31, 1997 100,000,000 1,000,000 208,053,796 (136,620,579) 72,433,217
Net income for the period January 1, 1998 to
June 30, 1998 2,568,571 2,568,571
Capital contributed by Foundation Health
Systems, Inc. 19,897,801 19,897,801
-------------------------------------------------------------------------
Balance at June 30, 1998 (unaudited) 100,000,000 $1,000,000 $227,951,597 $(134,052,008) $ 94,899,589
=========================================================================
See accompanying notes
5
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period For the period
January 1, 1998 January 1, 1997
to June 30, 1998 to June 30, 1997
----------------------------------------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income (loss) $ 2,568,571 $ (20,637,085)
Adjustments to reconcile net loss to cash flows provided by
(used in) operating activities:
Depreciation and amortization 2,085,261 590,270
Interest cost converted to debt 1,059,148 -
Changes in operating assets and liabilities:
Accounts receivable from owners/providers 1,453,859 (2,613,246)
Other accounts receivable (287,148) 792,113
Prepaid expenses and other current assets (120,274) 1,248,469
Restricted cash (28,767,681) (34,264)
Other assets 40,785 7,130
Medical claims payable to owners/providers (6,909,838) 4,770,362
Other medical claims payable (31,351,763) 19,970,998
Accounts payable 178,039 (1,348,797)
Accrued expenses (2,133,154) 2,721,310
Due to Foundation Health Systems, Inc. 198,312 1,224,423
Due to QualMed, Inc. 854,587 0
Unearned premium revenue (7,573,744) (3,672,720)
Other liabilities 0 (1,154,096)
----------------------------------------
Net cash flows (used in) provided by operating activities (68,705,040) 1,864,867
Cash flows from investing activities
Purchases of furniture and equipment (900,146) (315,902)
----------------------------------------
Net cash used in investing activities (900,146) (315,902)
Cash flows from financing activities
Capital contributed by Foundation Health Systems, Inc. 19,897,801 51,701,120
Payment of issue costs - (1,188,269)
----------------------------------------
Net cash provided by (used in) financing activities 19,897,801 50,512,851
Net (decrease) increase in cash and cash equivalents
at the end of the period (49,707,385) 52,061,816
Cash and cash equivalents at the beginning of the period 79,266,721 36,664,911
----------------------------------------
Cash and cash equivalents at the end of the period $ 29,559,336 $ 88,726,727
========================================
Interest paid for the period $ 258,256 $ 11,567
========================================
State income taxes paid for the period $ 625 $ 1,836
========================================
See accompanying notes
6
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Condensed Consolidated Financial Statements
June 30, 1998
1. General
FOHP, Inc. (the "Company" or "FOHP") serves as the holding company for its
wholly-owned subsidiaries. The Company's principal operating subsidiary is First
Option Health Plan of New Jersey, Inc. ("FOHP-NJ"). FOHP-NJ, a New Jersey
corporation formed in May 1993, received its Certificate of Authority ("COA") to
operate as a health maintenance organization ("HMO") in New Jersey in June 1994.
Other wholly-owned subsidiaries of the Company include First Option Health Plan
of New York, Inc. ("FOHP-NY"), a New York corporation, First Option Health Plan
of Pennsylvania, Inc., a Pennsylvania corporation, First Option Health Plan of
Maryland, Inc. ("FOHP-MD"), a Maryland corporation, and FOHP Agency, Inc., a New
Jersey corporation, each formed in 1995. These other subsidiaries have not
commenced operations. The Board of Directors of the Company recently approved
the dissolution of FOHP-NY and FOHP-MD. First Option Health Plan of Delaware,
Inc. and First Option Dental, Inc., former inactive subsidiaries of the Company,
were dissolved during the second quarter of 1998.
The Company is a New Jersey corporation which was formed in May 1994. The
Company was formed to effect the reorganization of FOHP-NJ into a holding
company structure (the "Reorganization"), which was consummated on June 8, 1995.
The Reorganization was completed through an exchange of FOHP-NJ's outstanding
common stock for shares of the Company's Common Stock-NJ. In connection with the
Reorganization, FOHP-NJ distributed, as a dividend, all of the outstanding
common stock of First Managed Care Option, Inc. ("FMCO") to the Company.
Pursuant to the Reorganization, FOHP-NJ and FMCO became wholly-owned
subsidiaries of the Company. Prior to the Reorganization, the Company did not
conduct any business nor did it have any significant assets or liabilities. The
primary purpose of the Reorganization was to facilitate the formation of
additional health maintenance organizations in states other than New Jersey. In
December 1996, the Company sold all of the outstanding common stock of FMCO.
During the summer of 1996, as a result of FOHP-NJ's statutory net worth
deficiency and the conditions imposed by the New Jersey Departments of Banking
and Insurance and Health and Senior Services (the "Departments"), the Board of
Directors of the Company discontinued the Company's expansion efforts in states
other than New Jersey, including expansion efforts in New York, Pennsylvania and
Maryland. The Company currently has no plans to expand into any other state.
Effective December 8, 1997, through the conversion of debentures (the
"Convertible Debentures") into shares of Common Stock, the Company became a 98%
owned subsidiary of Foundation Health Systems, Inc. (Note 2). The Company is
dependent upon Foundation Health Systems, Inc. ("FHS") to provide sufficient
capital to meet its operating and statutory financial requirements. It is the
intention of FHS to provide such funds, as needed.
The financial information for the six month periods ended June 30, 1998 and June
30, 1997 included herein are unaudited. Such information includes all
adjustments, including adjustments of a normal and recurring nature, which, in
the opinion of management, are necessary for a fair presentation of the
Company's financial position, results of operations and cash flows.
Additionally, such information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in Part I - Item 2 hereof.
7
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Condensed Consolidated Financial Statements
June 30, 1998
2. Basis of Presentation and Significant Accounting Policies
The Company has generated net income of $3,458,256 for the three-month period
ended June 30, 1998 and has an accumulated deficit of $134,052,008 at June 30,
1998. In order for the Company's principal operating subsidiary FOHP-NJ to meet
statutory net worth requirements set forth in its COA granted by the
Departments, the Company must generate sufficient operating profits and/or
obtain one or more capital infusions. See Note 5.
In connection with FOHP-NJ's plan to remedy its statutory net worth deficiency,
the Board of Directors of the Company approved an investment by FHS of
approximately $51.7 million into the Company. FHS invested $51,701,121 into the
Company through the purchase of a Convertible Debenture (the "Initial
Convertible Debenture") convertible into 71% of the Company's outstanding
equity, on a fully diluted basis. At the closing of the purchase of the Initial
Convertible Debenture, which occurred on April 30, 1997, FHS converted
$1,701,121 of the principal amount of the Initial Convertible Debenture into
168,109 shares of the Company's Common Stock. On December 1, 1997, FHS converted
the remaining $50,000,000 of the principal into 4,941,049 shares of the
Company's Common Stock. On December 8, 1997, due to the continued operating
losses of FOHP-NJ, FHS invested an additional $29,000,000 into the Company in
exchange for a Convertible Debenture (the "New Convertible Debenture") in form
and substance substantially similar to the Initial Convertible Debenture issued
to FHS on April 30, 1997. Immediately upon receipt of the New Convertible
Debenture, FHS converted $18,952,930 of the principal amount thereof into
92,804,003 shares of the Company's Common Stock. The price per share paid by FHS
upon conversion of the Convertible Debentures was calculated in accordance with
the Amended Securities Purchase Agreement (the "Amended Securities Purchase
Agreement") entered into by FHS, the Company and FOHP-NJ in connection with the
sale of the Initial Convertible Debenture. The Convertible Debentures accrue
interest at a variable rate adjusted on a calendar quarterly basis. Such
interest is due and payable within ten days after the end of each calendar
quarter. Any such interest not paid when due and payable is considered defaulted
interest and shall be added to the principal amount of the Convertible
Debentures. At June 30, 1998, $2,306,485 of defaulted interest is included in
the principal amount of the Convertible Debentures.
In connection with the purchase by FHS of the Company's Common Stock through the
conversion of Convertible Debentures, goodwill totaling $107,730,254 has been
recorded to reflect the excess of FHS's purchase price over the appropriate fair
value of the net assets acquired. The acquisition was treated as a purchase for
accounting purposes. The goodwill is being amortized on a straight-line basis
over 40 years. Amortization for the six-month period ended June 30, 1998
totaling $1,346,628 has been reflected in the statement of operations.
In December 1997, FHS also contributed an additional $24,000,000 to the Company
to satisfy certain statutory net worth requirements applicable to FOHP-NJ in
return for additional subordinated debentures (the "Subordinated Debentures")
which are not convertible into the Company's Common Stock, but otherwise have
substantially the same terms as the Convertible Debentures. Further, FHS
contributed $19,897,801 to FOHP as additional paid in capital to satisfy certain
statutory net worth requirements applicable to FOHP-NJ as of June 30, 1998.
8
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Condensed Consolidated Financial Statements
June 30, 1998
The following are significant accounting policies of the Company:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include money market funds and U.S. Treasury Bills
with original maturities of three months or less when purchased. Fair market
values, as determined through quoted market prices, of the cash equivalents
approximate carrying value. Cash and cash equivalents were on deposit with two
commercial banks.
Accounts Receivable
Accounts receivable are reported at estimated net realizable value by including
provisions for retroactive terminations and uncollectible amounts.
Restricted Cash
At June 30, 1998, FOHP-NJ was required to maintain $69,115,157 on deposit with
the New Jersey Department of Banking and Insurance (the "DOI") to meet its
"Minimum Insolvency Deposit for Healthcare Expenditures" (the "Insolvency
Deposit") under current insurance regulations. The Insolvency Deposit is
calculated based on the current financial statements and is required to be
funded by June 30, 1998. As of June 30, 1998, FOHP-NJ had $41,243,643 on deposit
with the DOI. FOHP-NJ has obtained approval from the DOI to fund the remaining
Insolvency Deposit quarterly through December 31, 1998. The remainder of the
deposit is subject to a revised calculation as of September 30, 1998. In
addition, FOHP-NJ is required to maintain $1,200,000 cash reserve with the
Health Care Financing Administration ("HCFA") for its federal programs. As of
June 30,1998, FOHP-NJ had $1,370,720 on deposit for its federal programs.
Furniture and Equipment
Furniture and equipment are recorded at cost. Depreciation is calculated on the
straight-line method over the useful lives of the depreciable assets (3 to 5
years).
Premium Revenue
Subscriber contracts for commercial managed care products are on a yearly basis
subject to cancellation by the employer group upon 30 days written notice.
Premium revenue is recorded as revenue in the month in which subscribers are
entitled to service. Premiums collected in advance are reported as unearned
premium revenue.
Certain premium revenue is earned under a contract between FOHP-NJ and the State
of New Jersey Department of Human Services, Division of Medical Assistance and
Health Services ("NJDHS-DMAHS"). The contract with NJDHS-DMAHS had an initial
term of 18 months and may be renewed for successive one year terms. The contract
can be suspended (by NJDHS-
9
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Condensed Consolidated Financial Statements
June 30, 1998
DMAHS) or terminated (by either party) upon the occurrence of certain events.
Premiums are earned monthly on a per capita basis, based on the number of
eligible members enrolled in FOHP-NJ health plans. Members may disenroll at any
time other than months 2 through 6 of membership and eligibility is determined
by NJDHS-DMAHS.
Certain premium revenue is earned under a contract between FOHP-NJ and HCFA for
services provided to Medicare eligible recipients. The contract with HCFA had an
initial term of 12 months and may be renewed for successive one-year terms.
Premiums are earned monthly on a per capita basis, based on the number of
eligible members enrolled in FOHP-NJ health plans.
Other Revenue
Other revenue consists principally of fees for administrative service only
contracts, which are recognized as income as services are rendered.
Medical and Hospital Service Expenses
Medical and hospital service expenses are accrued in the period the services are
provided to enrollees, based in part on estimates for hospital and other health
care services which have been incurred but not reported ("IBNR"). Such estimates
are continually monitored and reviewed and, as settlements are made or estimates
adjusted, the resulting differences are reflected in the current period of
operations.
Income Taxes
The Company's operations are included in FHS's consolidated federal and state
income tax returns. The Company records income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Under FHS's tax allocation method, a tax provision or tax benefit is
allocated to the Company based upon a calculation of the Company's income taxes
as if it filed separate income tax returns.
Per Share Data
Per share data are based on the weighted average number of shares of all classes
of common stock outstanding during the comparative six-month periods ended June
30 (100,000,000 in 1998 and 2,147,320 in 1997, respectively).
3. Subordinated Debt
In accordance with the terms of the Convertible Debentures and Subordinated
Debentures, repayment of principal and interest will occur only from free and
divisible surplus as reflected in the financial statements of the Company and
with written approval of the Commissioner of the DOI. In the event of
dissolution or liquidation of the Company, no repayment on these notes can be
made unless and until all other liabilities of the Company have been satisfied.
10
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Condensed Consolidated Financial Statements
June 30, 1998
The Convertible Debentures and Subordinated Debentures are due December 31, 2002
and accrue interest at a rate determined quarterly based on the rate charged to
FHS under its credit facility (5.85% as of June 30, 1998). Interest is due and
payable within ten days after the end of each quarter, subject to the terms
noted above.
4. Common Stock
In connection with the April 30, 1997 investment by FHS, the Certificate of
Incorporation of the Company was amended to, among other things, reclassify the
Company's capital stock. As a result, the Company currently has 110,000,000
shares of authorized capital stock, which is comprised of 100,000,000 shares of
Common Stock, par value $.01 per share, and 10,000,000 shares of Preferred
Stock, par value $1.00 per share. In connection with the reclassification of the
Company's capital stock, each outstanding share of Common Stock-NJ was converted
into one share of Common Stock. As a result, all 2,086,839 shares of Common
Stock-NJ outstanding at the time of the Company's Certificate of Incorporation
was amended, were converted into Common Stock. Prior to the April 30, 1997
investment by FHS, the authorized capital stock of the Company totaled 100
million shares and was comprised of the following classes of Common Stock, $.01
par value: Common Stock-NJ, Common Stock-NY, Common Stock-PA, Common Stock-DE
and Unclassified Common Stock. During 1995, the Company issued 2,100,173 shares
of Common Stock-NJ. There were no additional shares of Common Stock-NJ issued
during 1996.
On March 25, 1998, the Board of Directors of the Company and FHS, as the
majority shareholder of the Company, approved an increase in the total number of
shares of the Company's authorized capital stock from 110,000,000 shares to
500,000,000 shares. Of the total shares, 499,000,000 shares will be classified
as Common Stock and 1,000,000 shares will be classified as Preferred Stock. The
Company expects to amend its Certificate of Incorporation in the near future to
effect the approved increase in the Company's authorized capital stock.
The Certificate of Incorporation and By-Laws of the Company include significant
restrictions on the issuance and transfer of shares of Common Stock. The
Certificate of Incorporation of the Company provides that only FHS and health
care providers who enter into and maintain a provider agreement with a
subsidiary of the Company may purchase Common Stock. Acute care institutions
that enter into a provider agreement with a subsidiary of the Company may
purchase shares of Common Stock directly or through an affiliate.
The Company may, but is not obligated to, repurchase shares of Common Stock from
any shareholder whose provider agreement terminates for any reason or upon the
occurrence of certain events, as described in the Company's Certificate of
Incorporation. The determination of the repurchase price of the shares is also
described in the Company's Certificate of Incorporation.
5. Statutory Net Worth and Dividend Restrictions
FOHP-NJ, pursuant to its COA to operate an HMO in New Jersey, is required to
maintain a minimum statutory net worth. In addition, the COA provides that if
FOHP-NJ's statutory net worth is, or is expected to be, less than 125% of the
minimum statutory net worth requirement applicable to it, FOHP-NJ is required to
submit to the Departments a plan of action to address the deficiency or expected
deficiency.
11
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Condensed Consolidated Financial Statements
June 30, 1998
During the first quarter of 1996, the Company learned that FOHP-NJ's statutory
net worth as of December 31, 1995 may have been below 125% of the minimum
statutory net worth requirement applicable to FOHP-NJ. FOHP-NJ addressed this
potential deficiency by submitting to the Departments in April 1996 a plan of
action which outlined the actions which had been taken and measures to be used
by FOHP-NJ to correct the potential deficiency.
As part of the plan of action, on April 30, 1997, the Company sold the Initial
Debenture to FHS in the principal amount of $51,701,120.38. The principal amount
of the Initial Debenture was converted by FHS, into 71% of FOHP's capital stock
on a fully-diluted basis.
To facilitate the sale of the Initial Debenture to FHS, the Departments agreed
to rescind their conditions attached to their approval of the plan of action
submitted by FOHP-NJ in April 1996, subject to the Department's right to require
FOHP-NJ to submit a new plan of action if FOHP-NJ fails to increase its net
worth to 100% of the minimum statutory net worth requirement, provided that FHS
guarantees, in form satisfactory to the Commissioner of the DOI, that FOHP-NJ's
net worth will be maintained at a level equal to or in excess of 100% of the
minimum statutory net worth requirement applicable to FOHP-NJ. In December 1997,
the Departments further agreed to permit FOHP-NJ's net worth to remain below
100% until December 31, 1998, provided that it attain 25% increments each
quarter during 1998.
In December 1997, FHS contributed an additional $24 million to the Company to
satisfy certain statutory net worth requirements applicable to FOHP-NJ in return
for the New Convertible Debenture. Further, FHS contributed $19,897,801 to the
Company as additional paid in capital to satisfy certain statutory net worth
requirements applicable to FOHP-NJ as of June 30, 1998. At June 30, 1998,
FOHP-NJ was approximately $2.5 million below 100% of the minimum statutory net
worth requirement.
In addition to the minimum statutory net worth requirements, FOHP-NJ may not pay
dividends to its parent without prior approval of the Commissioner of the DOI.
6. Related Party Transaction
Pursuant to the Amended Securities Purchase Agreement with FHS, the Company is
required to pay FHS, or a designated subsidiary of FHS (QualMed, Inc.), a
management fee based on allocated corporate charges. For the six-month period
ended June 30, 1998, the Company charged $1,271,000 to expense related to these
management fees.
The amount due to FHS at June 30, 1998, represents management fees payable and
interest payable related to the Debentures. The amount due to QualMed, Inc. at
June 30, 1998 primarily represents cost allocations for claims processing
services.
7. Impact of Year 2000 (Unaudited)
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
12
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Condensed Consolidated Financial Statements
June 30, 1998
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will be required to
modify or replace significant portions of its software so that its computer
systems will function properly with respect to dates in the Year 2000 and
thereafter. The Company presently believes that with modifications to existing
software and conversions to new software, the Year 2000 issue will not pose
significant operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 issue could have a material impact on the operations of the Company.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 issues.
The Company has developed a plan to modify its information technology to be
ready for the Year 2000 and has begun converting critical data processing
systems. The Company currently expects the project to be substantially complete
by early 1999 and as yet is unable to estimate the cost. The Company does not
expect this project to have a significant effect on operations. Expenditures
through June 30, 1998 have not been material. The Company will implement its
plan by placing a higher priority on the systems with significant operational
implications. The Company will continue to implement systems with strategic
value though some projects may be delayed due to resource constraints.
13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation
Overview
The Company, a New Jersey corporation, was formed in May 1994 to effect the
Reorganization of FOHP-NJ into a holding company structure. The Reorganization
was consummated on June 8, 1995. Pursuant to the Reorganization, FOHP-NJ became
a wholly owned subsidiary of the Company. Prior to the Reorganization, the
Company did not conduct any business nor did it have any significant assets or
liabilities. The Company does not conduct, nor does management believe that it
will conduct, any business. All health care benefit products and services are,
and will be, provided by the Company's subsidiaries.
FOHP-NJ, a New Jersey corporation, was formed in May 1993 to operate as an HMO
in the State of New Jersey. FOHP-NJ received its COA in June 1994 to operate as
an HMO in the service area encompassing the entire State of New Jersey and
commenced operations on July 1, 1994. Pursuant to the Reorganization, FOHP-NJ
became a wholly owned subsidiary of the Company on June 8, 1995. Currently, it
is the Company's principal subsidiary.
FOHP-NJ markets a comprehensive range of health care benefit plan products,
pursuant to contractual arrangements with physicians, hospitals and other health
care providers. As of August 13, 1998, FOHP-NJ had entered into provider
agreements with 62 New Jersey hospitals and acute care institutions ("NJ Acute
Care Institutions"), approximately 11,000 physicians licensed to practice in New
Jersey ("NJ Practitioners"), and approximately 75 other health care providers.
The provider agreements have an initial term of one year and are renewable
annually. Such agreements with NJ Acute Care Institutions and other health care
providers who are not NJ Practitioners may be terminated by mutual consent or,
after the initial one year term, by either party upon 90 days notice; agreements
with NJ Practitioners may be terminated by either party upon 60 days notice. The
agreements also may be terminated for breaches specified therein. The terms and
conditions of provider agreements are not affected by whether the provider is,
or is not, a shareholder of the Company. However, some agreements with NJ Acute
Care Institution shareholders as subscribers in FOHP-NJ health plans are
different from the subscriber agreements of non-shareholders in that premium
rates for those NJ Acute Care Institutions that are shareholders are capped to
be within a certain corridor (+/- 4%) from their prior year premium rates. There
are 24 NJ Acute Care Institutions with such subscriber agreements.
FOHP-NJ's agreements with NJ Acute Care Institutions provide for, among other
things, a reimbursement schedule setting the amounts to be paid to the NJ Acute
Care Institutions by FOHP-NJ for services provided to members. The reimbursement
schedule of a provider agreement between a NJ Acute Care Institution and FOHP-NJ
is individually negotiated. Rates paid to NJ Acute Care Institutions for
services provided to members of FOHP-NJ health plans vary from institution to
institution and are based on, among other things, the type of services provided
by, and the location of, the NJ Acute Care Institution. Agreements with
participating NJ Acute Care Institutions prohibit the NJ Acute Care Institutions
from billing a member of an FOHP-NJ health plan for any services paid for under
such plan except for any applicable co-payment, co-insurance, deductibles and
non-covered services.
NJ Practitioners are paid pursuant to a fee schedule established by FOHP-NJ and
are prohibited from billing members of an FOHP-NJ health plan except for
co-payments and non-covered services, if any. The fees paid to NJ Practitioners
are based on a percentage of the fees payable under the fee schedule developed
for Medicare. Co-payments, co-insurance and deductibles in amounts approved by
FOHP-NJ, are collected directly by the NJ Practitioner from the member.
14
Subscriber contracts are entered into with large employer groups (more than 50
employees) and small employer groups (50 employees or less). Such contracts are
generally for a term of one year, but may be canceled by the employer group upon
30 days written notice. Under these contracts, FOHP-NJ has agreed to provide the
employer groups with health coverage in return for a monthly premium. FOHP-NJ
utilizes a system of community rating by class, adjusted (with respect to
employer groups of 100 or more employees) by age, sex and industry
classification, in determining its rates for various employers in the proposed
service area. Premium revenue generated from subscriber contracts is recorded as
revenue in the month in which subscribers are entitled to service. Premiums
collected in advance are reported as unearned premium revenue.
Results of Operations
For the three months ended June 30, 1998 and 1997
Premium Revenue. For the three-month period ended June 30, 1998, medical premium
revenue totaled $81.5 million or $11.2 million less than the $92.7 million of
medical premium revenue generated during the same period in 1997. This decrease
was due to reduced enrollment in FOHP-NJ health benefit plans, specifically in
the Medicare line of business. Approximately 39% of medical premium revenue
generated in 1998 and approximately 32% of medical premium revenue generated in
1997 was attributable to NJ Acute Care Institutions, which are obligated to
enroll their employees in FOHP-NJ health plans. The Company believes that it
will benefit by its inclusion in the formation of FHS's Northeast region, which
is comprised of three health plans with a total of more than one million members
in the New York tri-state area.
Other Revenue. Other revenue, principally administrative fees, for the
three-month period ended June 30, 1998 was $638 thousand compared to $222
thousand of other revenue for the same period of the prior year. Interest income
for the second quarter of 1998 was $998 thousand, as compared to the $1.0
million generated in 1997.
Medical and Hospital Service Expenses. Total expenses attributable to medical
and hospital service for the three-month period ended June 30, 1998 were $58.1
million or $29.5 million lower than expenses incurred for the same period in
1997. The decrease in medical and hospital service expenses from 1997 to 1998
was primarily attributable to a decrease in enrollees in the Medicare line of
business as well as enhanced utilization efforts in the Commercial, Medicaid and
Medicare lines of business. In addition, the medical loss ratio (i.e., the
percentage of each premium dollar used to pay medical expenses) for the
three-month period ended June 30, 1998 was 71.3% compared to 94.5% for the same
period in 1997. The Company believes that this decrease is attributed to recent
operational changes, specifically the implementation of a modified provider
reimbursement schedule, enhanced utilization management efforts, a reduction of
Medicare enrollment, which had a higher medical loss ratio than the Company's
other lines of business and a reduction of the IBNR reserve due to more complete
claims payment data being available to the Company.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $15.3 million for the three-month period ended
June 30, 1998, including a $636 thousand administrative management fee charged
by FHS and $530 thousand interest expense associated with the Convertible and
Subordinated Debentures, compared to $15.5 million incurred for the same period
in 1997.
Other Expenses. Depreciation and amortization expenses for the three-month
period ended June 30, 1998 increased by $699 thousand from the $349 thousand
incurred during the same period in 1997. This increase was mostly the result of
amortization of goodwill associated with FHS's investment in the Company.
15
For the six-months ended June 30, 1998 and 1997
Premium Revenue. For the six-month period ended June 30, 1998, medical premium
revenue totaled $171.4 million or $5.3 million less than the $176.7 million of
medical premium revenue generated during the same period in 1997. This decrease
was due to reduced enrollment in FOHP-NJ health benefit plans, specifically in
the Medicare line of business. Approximately 38% of medical premium revenue
generated in the first six months of 1998 and approximately 35% of medical
premium generated in the first six months of 1997 was attributable to NJ Acute
Care Institutions which are obligated to enroll their employees in FOHP-NJ
health plans. The Company believes that it will benefit by its inclusion in the
formation of FHS's Northeast region, which is comprised of three health plans
with a total of more than one million members in the New York tri-state area.
Other Revenue. Other revenue, principally administrative fees, for the six-month
period ended June 30, 1998 was $1.5 million compared to $908 thousand of other
revenue for the same period of the prior year. Interest income for the first six
months of 1998 was $2.2 million, a $500 thousand increase from the $1.7 million
generated in the first six months of 1997. The increase in interest income was
due to the larger cash reserves related to the investment by FHS on April 30,
1997.
Medical and Hospital Service Expenses. Total expenses attributable to medical
and hospital service for the six-month period ended June 30, 1998 were $135.3
million or $33.7 million less than expenses incurred for the same period in
1997. The decrease in medical and hospital service expenses from 1997 to 1998
was primarily attributable to a decrease in enrollees in the Medicare line of
business as well as enhanced utilization efforts in the Commercial, Medicaid and
Medicare lines of business. In addition, the medical loss ratio (i.e., the
percentage of each premium dollar used to pay medical expenses) for the
six-month period ended June 30, 1998 was 78.9% compared to 95.6% for the same
period in 1997. The Company believes that this decrease is attributed to recent
operational changes, specifically the implementation of a modified provider
reimbursement schedule, enhanced utilization management efforts, a reduction of
Medicare enrollment, which had a higher medical loss ratio than the Company's
other lines of business and a reduction of the IBNR reserve due to more complete
claims payment data being available to the Company.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $31.3 million for the six-month period ended
June 30, 1998, including a $1.3 million management fee payable to FHS, compared
to $29.3 million incurred for the same period in 1997.
Other Expenses. Depreciation and amortization expenses for the six-month period
ended June 30, 1998 increased by $1.5 million from $590 thousand incurred during
the same period in 1997. This increase was mostly the result of amortization of
goodwill associated with FHS's investment in the Company.
Liquidity and Capital Resources
Gross proceeds of approximately $12,400,000, received by FOHP-NJ from the
private offering and sale of 826,708 shares of common stock in 1993, were
sufficient to cover the expenses incurred by FOHP-NJ in connection with the
formation and development of its business. In order to fund its continuing
development activities, FOHP-NJ sold 744,445 shares of common stock in a public
offering which closed on October 31, 1994. Gross proceeds received by FOHP-NJ as
a result of the sale of stock in the public offering amounted to $11,166,675.
Further, in order to fund its continuing development of HMOs in New York,
Pennsylvania and several other states, the Company sold 529,120 shares of Common
Stock-NJ to NJ Practitioners in an offering which ended on September 1, 1995.
Gross proceeds received by the Company as a result of the sale of Common
Stock-NJ in the offering to NJ Practitioners amounted to $7,937,000.
FOHP-NJ is required by the Departments to maintain a minimum statutory net
worth. In addition, if FOHP-NJ's statutory net worth is, or is expected to be,
less than 125% of the minimum statutory net worth requirement, FOHP-NJ is
required to submit to the Departments a plan of action to address the deficiency
or expected deficiency. During the first quarter of 1996, FOHP learned that
FOHP-NJ's statutory net worth as of December 31, 1995 may have been below 125%
of the minimum statutory net worth requirement. FOHP-NJ addressed this potential
deficiency by submitting to the Departments in April 1996 a plan of action,
which outlined the actions taken and measures to be used by FOHP-NJ to correct
the potential deficiency.
16
As part of the plan of action, on April 30, 1997, FOHP sold to FHS the Initial
Debenture in the aggregate principal amount of $51,701,120.38, pursuant to the
Amended Securities Purchase Agreement. The principal amount of the Initial
Debenture was convertible, at the option of FHS, into 71% of FOHP's capital
stock on a fully diluted basis. At the closing of the purchase of the Initial
Debenture, FHS converted $1,701,120.38 of principal amount of the Initial
Debenture into 168,109 shares of Common Stock.
To facilitate the sale of the Initial Debenture to FHS, the Departments agreed
to rescind their conditions attached to their approval of the plan of action
submitted by FOHP-NJ in April 1996, subject to the Department's right to require
FOHP-NJ to submit a new plan of action if FOHP-NJ fails to increase its net
worth to 100% of the minimum statutory net worth requirement by December 31,
1997. In addition, the Departments agreed that subsequent to December 31, 1997,
FOHP-NJ will only be required to maintain net worth at 100% of the minimum
statutory net worth requirement applicable to it, and not 125% of the minimum
statutory net worth requirement as required prior to the sale of the Initial
Debenture, provided that FHS guarantees, in form satisfactory to the
Commissioner of the DOI, that FOHP-NJ's net worth will be maintained at a level
equal to or in excess of 100% of the minimum statutory net worth requirement
applicable to FOHP-NJ. In December 1997 the Departments further agreed to permit
FOHP-NJ's net worth to remain below 100% until December 31, 1998, provided that
it attain 25% increments each quarter during 1998.
In connection with the sale of the Initial Debenture, FHS and FOHP entered into
a Letter Agreement (the "Letter Agreement") which clarifies FHS' right under the
Amended Securities Purchase Agreement to infuse additional capital into FOHP in
the event that it is determined that FOHP-NJ needs capital to meet applicable
statutory net worth requirements (referred to herein as a "Net Capital
Shortfall"). Pursuant to the Letter Agreement, FHS had the right to, at any time
prior to December 31, 1997, contribute up to $5,000,000 in additional capital to
FOHP to be used in connection with certain anticipated liabilities and
contribute such additional amounts that may be projected to be required from
time to time (based upon reasonable projections prepared by FHS taking into
account anticipated full year 1997 operating results) in order for FOHP-NJ to
meet 100% of the minimum statutory net worth requirements as of December 31,
1997. In the event that FHS contributed additional capital to FOHP to meet a Net
Capital Shortfall or projected Net Capital Shortfall in accordance with the
terms of the Letter Agreement, FHS would be issued additional convertible
debentures in substantially the same form as the Debentures.
The Amended Securities Purchase Agreement also provides that if FOHP projects a
Net Capital Shortfall and FHS does not advance funds to FOHP to satisfy such Net
Capital Shortfall, FOHP may initiate a pro rata offering of its Common Stock to
all the then-current shareholders of the Company to raise capital to satisfy the
Net Capital Shortfall.
Effective December 1, 1997, FHS converted the remaining $50 million of the
principal amount of the Initial Debenture, dated as of April 30, 1997, into
4,941,049 shares of Common Stock. After the conversion, FHS owned 5,109,158
shares of the 7,195,997 shares of Common Stock then outstanding, which
represented 71% of the fully diluted equity of the Company.
In order to satisfy certain statutory net worth requirements applicable to
FOHP-NJ and in accordance with the Amended Securities Purchase Agreement, FHS
elected on December 8, 1997 to infuse $29 million into the Company in exchange
for the New Convertible Debenture. Immediately upon receipt of the New
Convertible Debenture, FHS converted approximately $18,952,930 of the principal
amount thereof into 92,804,000 shares of the Common Stock. After the partial
conversion of the New Convertible Debenture, FHS owned 97,913,161 shares of the
100,000,000 shares of Common Stock outstanding, which represents approximately
98% of the fully-diluted equity of the Company.
In December 1997, FHS also contributed an additional $24 million to the Company
to satisfy certain statutory net worth requirements applicable to FOHP-NJ in
return for Subordinated Debentures. Further, FHS contributed $19,897,801 to the
Company as additional paid in capital to satisfy certain statutory net worth
requirements applicable to FOHP-NJ as of June 30, 1998.
17
Pursuant to new HMO regulations adopted in the State of New Jersey, FOHP-NJ is
required to maintain a "Minimum Insolvency Deposit for Health Care
Expenditures." As of June 30, 1998, it is estimated that this deposit covering
two months of incurred health expenditures will be approximately $69 million.
The initial deposit, or $12.5 million (including interest earned), was made by
September 30, 1997. An additional $4.6 million was deposited on March 31, 1998,
$9.5 million was deposited on April 2, 1998 and an additional $14.6 was
deposited on June 30, 1998. The remainder of the deposit will be made in
quarterly installments and is subject to a revised calculation as of September
30, 1998.
Impact of Year 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
See "Part 1, Item 1 Notes to Condensed Consolidated Financial Statements - Note
7."
18
Item 1. Legal Proceedings
As reported in Item 3 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, FOHP received a letter from the New Jersey Department
of Health and Senior Services (the "DOH") dated January 23, 1998 (the "DOH
Letter"), in which the DOH stated that it was in receipt of information that
indicated that FOHP was in violation of a number of provisions of the statutes
and rules governing HMOs in New Jersey. In the DOH Letter, the DOH alleged that
FOHP constructively terminated its provider contracts with certain NJ Acute Care
Institutions by unilaterally adding new terms to the existing contracts between
FOHP and such NJ Acute Care Institutions. More specifically, the DOH alleged
that FOHP had stated that it would not honor its existing agreements with
certain NJ Acute Care Institutions for the provision of surgical services unless
all anesthesiologists at the hospitals became providers in FOHP's provider
network. The DOH also stated in the DOH Letter its intention to levy fines
against FOHP based on the information that it had already received with respect
to FOHP and on any additional information obtained by the DOH during its
investigation of FOHP.
After FOHP's receipt of the DOH Letter, various members of the DOH visited FOHP
and met with certain employees and representatives of FOHP for the purposes of
gathering information necessary to complete the DOH's inquiry with respect to
the matters identified in the DOH Letter. FOHP fully cooperated with the DOH's
investigation and provided all of the information requested by the DOH.
Subsequent to the DOH's site visit at FOHP, representatives of the DOH and FOHP
had ongoing discussions regarding the DOH's investigation into the matters which
were identified in the DOH Letter.
As a result of the ongoing discussions between representatives of the DOH and
FOHP, the DOH and FOHP entered into an administrative consent order, effective
July 2, 1998 (the "ACO"), in order to amicably resolve the matters identified in
the DOH Letter and promote the public's interests, without any admission of
liability or fact by either party, and without trial or adjudication of any
facts or issues contained therein. Pursuant to the ACO, FOHP agrees (i) to
provide in-network coverage for anesthesiology services for non-emergent
procedures at participating hospitals for its commercial HMO and point of
service members, even in those circumstances where there is no participating
anesthesiologist at a participating facility, unless FOHP notifies all affected
members, providers and the DOH to the contrary at least thirty (30) days in
advance, and, if requested by the DOH, meets with the DOH for consultation and
review, (ii) in the event FOHP is required to give notice to members and/or
providers concerning a change in FOHP's network of providers, to provide
assistance to its members during the transition period necessitated by the
change, and (iii) to pay the DOH the amount of $99,800 within ninety (90) days
of the effective date of the ACO.
19
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11 - Computation of Earnings Per Share.
Exhibit 27 - Financial Data Schedule.
Reports on Form 8-K - For the three months ended June 30, 1998, the Company did
not file any Current Reports on Form 8-K with the Securities and Exchange
Commission.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOHP, Inc.
-------------------------------------------
(Registrant)
August 13, 1998 /s/ Thomas W. Wilfong
--------------- -------------------------------------------
Date (Signature)**
Thomas W. Wilfong
President and Chief Executive Officer
August 13, 1998 /s/ Marc M. Stein
--------------- --------------------------------------------
Date (Signature)**
Marc M. Stein
Principal Financial and Accounting Officer
21