SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file no. 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 (I.R.S. Employer Identification No.)
incorporation or organization)
3501 State Highway 66
Neptune, New Jersey 07753
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(Address of principal executive offices) Zip Code
Registrant's telephone number,
including area code: (732) 918-6700
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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(Title of class)
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the shares of the Registrant's Common
Stock, par value $.01 per share ("Common Stock"), held by non-affiliates of the
Registrant, as of March 15, 1999, was $458,445. Common Stock is the only class
of the Registrant's capital stock with shares currently issued and outstanding.
Inasmuch as shares of Common Stock are not listed on any exchange or quoted on
any quotation system, nor has there been any regular trading in shares of Common
Stock since the inception of the Registrant, the aforestated aggregate market
value of outstanding Common Stock held by non-affiliates of the Registrant was
computed by multiplying the number of shares of Common Stock held by
non-affiliates of the Registrant as of March 15, 1999, by the per share book
value of the Common Stock as of December 31, 1998.
As of March 15, 1999, the number of outstanding shares of Common Stock
was 499,000,000.
Documents incorporated by Part of Form 10-K into which
reference into this report document is incorporated
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None Not Applicable
Certain information included in this report and other filings of the
Registrant under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as well as information
communicated orally or in writing between the dates of such filings, contains or
may contain forward looking information that is subject to certain risks, trends
and uncertainties that could cause actual results to differ materially from
expected results. Among these risks, trends and uncertainties are matters
related to national and local economic conditions, the effect of governmental
regulation on the Registrant and its subsidiaries and affiliates, the
competitive environment in which the Registrant and its subsidiaries and
affiliates operate, the relationship between the Registrant and Foundation
Health Systems, Inc., the holder of more than 99% of the Registrant's Common
Stock, including the proposed merger of FHS Transition Company, a wholly-owned
subsidiary of Foundation Health Systems, Inc., into the Registrant, and the
ability of the Registrant and its subsidiaries to generate or raise sufficient
capital to remain in compliance with any applicable statutory net worth or other
capital requirements and to continue to operate their businesses as currently
operated. See "Description of Business," "Management's Discussion and Analysis
of Financial Condition and Results of Operation" and "Certain Relationships and
Related Transactions."
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PART I
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS
FOHP, Inc., a New Jersey corporation (the "Company" or "Registrant"),
was formed in May 1994 to effect the reorganization (the "Reorganization") of
First Option Health Plan of New Jersey, Inc., a New Jersey corporation which
operates as a health maintenance organization ("HMO") in the State of New Jersey
("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. All health care benefit products and
services are provided by the Company's subsidiaries. See "Description of
Business."
During 1997, Foundation Health Systems, Inc., a Delaware corporation
formerly known as Health Systems International, Inc. ("FHS"), purchased
convertible debentures from the Company in the aggregate principal amount of
approximately $80 million (each a "Convertible Debenture" and collectively, the
"Convertible Debentures"). FHS has converted approximately $72 million principal
amount of the Convertible Debentures into 496,916,161 shares of Common Stock,
which represents more than 99% of the outstanding Common Stock of the Company.
The Company and FHS have entered into a merger agreement pursuant to which FHS
will acquire a 100% ownership interest in the Company. See "Description of
Business - Transactions with FHS; The Merger; Description of FHS" and "Certain
Relationships and Related Transactions."
On January 1, 1999, Physicians Health Services of New Jersey, Inc., a
New Jersey HMO controlled by FHS ("PHS-NJ"), merged with and into FOHP-NJ. At
the effective time of the merger, FOHP-NJ changed its name to "Physicians Health
Services of New Jersey, Inc." See "Description of Business - Merger of FOHP-NJ
and Physicians Health Services of New Jersey, Inc."
The principal executive offices of the Company are located at 3501
State Highway 66, Neptune, New Jersey 07753 and its telephone number at such
location is (732) 918-6700.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Since its inception, substantially all of the Company's revenues,
operating results and assets have been attributable to the operation of FOHP-NJ,
an HMO which operates in the State of New Jersey.
(c) DESCRIPTION OF BUSINESS
In response to exclusively profit driven managed care organizations
generally operated by large insurance companies, FOHP-NJ, a wholly-owned
subsidiary of the Company, was formed in May 1993 by certain New Jersey
hospitals and physicians to operate as a provider owned HMO in New Jersey.
FOHP-NJ received a Certificate of Authority ("COA") to operate as an HMO in New
Jersey in June 1994, and commenced operations on July 1, 1994.
The Company 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, and all the former shareholders of FOHP-NJ became
shareholders of the Company.
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TRANSACTIONS WITH FHS
During the first quarter of 1996, the Company learned that FOHP-NJ had
a statutory net worth deficiency. To raise the capital necessary for FOHP-NJ to
remain in compliance with its statutory net worth requirements, the Board of
Directors of the Company (the "FOHP Board") determined that the Company needed
to locate potential investors who would be interested in acquiring a significant
equity position in the Company. On October 24, 1996, the Company entered into a
Securities Purchase Agreement with Health Systems International, Inc., the
predecessor to FHS, which was later amended and, as so amended, became effective
on March 14, 1997 (the "Amended Securities Purchase Agreement").
On April 16, 1997, the Amended Securities Purchase Agreement, and the
transactions contemplated thereby, were approved by the shareholders of the
Company. On April 30, 1997, pursuant to the Amended Securities Purchase
Agreement, FHS purchased from the Company a Convertible Debenture in the
aggregate principal amount of $51,701,120.38 (the "Initial Convertible
Debenture"). The principal amount of the Initial Convertible Debenture was
convertible, at the option of FHS, into up to 71% of the Company's capital stock
on a fully-diluted basis.
At the closing of the purchase of the Initial Convertible Debenture,
FHS converted $1,701,120.38 of the principal amount of the Initial Convertible
Debenture into 168,109 shares of the Company's Common Stock. Effective December
1, 1997, FHS converted the remaining $50 million of the principal amount of the
Initial Convertible Debenture into 4,941,049 shares of Common Stock, and, as a
result, owned at that time 71% of the outstanding shares of the Company's Common
Stock.
Pursuant to the Amended Securities Purchase Agreement, as clarified by
a letter agreement dated April 30, 1997 between FHS and the Company, FHS had the
right to infuse additional capital into the Company in 1997, for additional
Convertible Debentures in substantially the same form as the Initial Convertible
Debenture, in the event that it was determined that FOHP-NJ needed capital to
meet applicable statutory net worth requirements.
The Amended Securities Purchase Agreement also provided that FHS may,
at its option, acquire during 1999, through a tender offer or merger, all of the
then outstanding shares of the Company's Common Stock not held by FHS at a
purchase price per share that is determined by independent appraisers. In any
such tender offer or merger, the hospital, physician and other provider
shareholders of the Company (collectively, the "Provider Shareholders," and
individually a "Provider Shareholder") would receive cash or, at FHS' sole
option, registered FHS Class A Common Stock, par value $.001 per share, for
their shares of Common Stock of the Company.
As the Company continued to reduce its medical claims back-log during
the second quarter of 1997, it became apparent that the Company's reserves were
not adequate to ensure payment of all outstanding claims. In addition, it was
anticipated that the Company would continue to incur significant operating
losses until certain unprofitable products were phased-out or revised and
administrative expenses reduced. As a result, management of the Company informed
the FOHP Board that the Company would likely need a capital infusion in excess
of $18 million by December 31, 1997 so that FOHP-NJ could meet applicable
statutory net worth requirements by year end.
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Recognizing that an additional capital infusion by FHS of more than $18
million in exchange for additional Convertible Debentures could result in a
significant dilution to the equity position of the Provider Shareholders, and
that such dilution would reduce the amount of consideration that the Provider
Shareholders would be entitled to receive in any transaction whereby FHS would
acquire all of the outstanding Common Stock of the Company pursuant to the
Amended Securities Purchase Agreement, the FOHP Board and FHS began, in July
1997, discussing various alternatives directed at preserving the Provider
Shareholders' investment in the Company.
In order to satisfy certain statutory net worth requirements applicable
to FOHP-NJ, and in accordance with the Amended Securities Purchase Agreement, as
clarified by a letter agreement dated April 30, 1997, FHS elected on December 8,
1997 to infuse $29 million into the Company in exchange for a Convertible
Debenture (the "New Convertible Debenture") in form and substance substantially
similar to the Initial Convertible Debenture. Immediately upon receipt of the
New Convertible Debenture, FHS converted approximately $18,952,930 of the
principal amount thereof into 92,804,003 shares of Common Stock. After the
partial conversion of the New Convertible Debenture, FHS owned 97,913,161 shares
of the 100,000,000 shares of the Company's Common Stock then outstanding, which
represented approximately 98% of the fully-diluted equity of the Company. On
December 31, 1998, FHS converted $1,197,183 of the principal amount of the New
Convertible Debenture into 399,003,000 shares of Common Stock pursuant to the
conversion formula contained therein. As a result of such conversion, FHS
currently owns 496,916,161 shares of Common Stock, representing more than 99% of
the outstanding shares of the Company's Common Stock.
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 which are not convertible into
shares of Common Stock (the "Subordinated Debentures"). Further, FHS contributed
$29,897,801 to the Company as additional paid in capital to satisfy certain
statutory net worth requirements applicable to FOHP-NJ during 1998.
FHS and the members of the FOHP Board who were not affiliated with FHS
nor employees of the Company (the "Non-FHS Directors"), assisted by legal
counsel and a financial advisor retained by the FOHP Board, held discussions
from October 1997 through June 1998 for purposes of developing a proposal aimed
at preserving the Provider Shareholders' investment in the Company. The Non-FHS
Directors believed it was necessary that any consideration to be offered for a
share of Common Stock be equal to at least $15.00, the amount originally paid by
a Provider Shareholder to the Company for one share of the Company's Common
Stock. After several months of discussion, FHS was willing to offer a Provider
Shareholder the opportunity to obtain $15.00 for each share of Common Stock held
by him, her or it, provided that the Provider Shareholder continue to
participate in the provider network of FOHP-NJ, or its successor, until December
31, 2001, and provided certain other conditions are met.
THE MERGER
Pursuant to the terms of the Agreement and Plan of Merger (the "Merger
Agreement"), dated as of November 16, 1998, by and among the Company, FHS and
FHS Transition Company, a wholly-owned subsidiary of FHS, FHS Transition Company
will merge with and into the Company (the "Merger"), and the Company will become
a wholly-owned subsidiary of Physicians Health Services, Inc. ("PHS"), a
Delaware corporation which is a wholly-owned
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subsidiary of FHS. In connection with the Merger, a Provider Shareholder will be
entitled to choose to receive for his, her and its shares of Common Stock of the
Company either (i) the value of such shares as determined by one or more
independent qualified appraisers as of December 31, 1998, or (ii) payment rights
(individually a "Payment Right," and collectively, the "Payment Rights"),
pursuant to which a holder thereof will be entitled to receive a payment of not
less than $15.00 per Payment Right on or about July 1, 2001, provided the holder
remains a provider to FOHP-NJ until July 1, 2001, and agrees in writing to
remain a provider to FOHP-NJ until December 31, 2001, and a specified number of
hospital providers in the FOHP-NJ provider network does not leave the network
prior to December 31, 2001. In addition, a hospital provider that chooses to
receive Payment Rights will be subject to additional conditions to payment
relating to reimbursements rates, enrollment of hospital employees in FOHP-NJ
health plans and payments of premiums to FOHP-NJ.
Any Provider Shareholder who or which is not a hospital, and chooses to
receive Payment Rights for his, her or its shares of Common Stock of the Company
in connection with the Merger, will be entitled to receive additional
consideration of (i) $2.25 per Payment Right, and (ii) a pro rata portion of a
bonus pool to be funded by monies forfeited by Provider Shareholders; provided,
however, that the additional consideration will only be paid if FOHP-NJ produces
an annualized return on average common equity capital of at least 10% for the
period January 1, 1999 through June 30, 2001.
The obligation of each party to the Merger Agreement to complete the
Merger is subject to several conditions, including, among others: (i) the
approval of the Merger Agreement by the holders of the majority of the
outstanding shares of the Company's Common Stock; (ii) no statute, rule,
regulation, executive order, decree, injunction or restraining order shall have
been enacted, promulgated, enforced or otherwise made applicable (and not
repealed or superceded) by any court of competent jurisdiction, administrative
agency or commission or other governmental authority or instrumentality, which
prohibits the consummation of the transactions contemplated by the Merger
Agreement; (iii) the receipt of requisite governmental consents and approvals to
consummate the Merger; and (iv) the execution and delivery by the Company and
FHS of a contribution agreement pursuant to which FHS will commit to contribute
to the Company the amount of cash necessary for the Company to pay, among other
things, all amounts payable under the Payment Rights to be issued in connection
with the Merger.
The approval of the majority of the outstanding shares of the Company's
Common Stock is required to approve the Merger Agreement. FHS currently owns
more than 99% of the outstanding shares of Common Stock. Accordingly, if FHS
approves the Merger Agreement, the Merger will occur, provided all of the other
conditions to the Merger are either satisfied or waived.
If the Merger is consummated, no Provider Shareholder will have an
equity position in the Company. As a result, FHS, or an affiliate thereof, as
the sole shareholder of the Company, will terminate the registration of the
Common Stock under the Exchange Act. Consequently, the Company's obligation to
file periodic reports under the Exchange Act, such as this Annual Report on Form
10-K, will be suspended shortly after the Merger.
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DESCRIPTION OF FHS
FHS is an integrated managed care organization which administers the
delivery of managed health care services. FHS' HMOs, insured preferred provider
organizations and government contracts subsidiaries provide health benefits to
5.8 million individuals in 21 states through group, individual, Medicare risk,
Medicaid and CHAMPUS programs. FHS' subsidiaries also offer managed health care
products related to behavioral health, dental and vision services, and offer
managed health care product coordination for multi-region employers and
administrative services for medical groups and self-funded benefits programs.
Over the past several years, FHS has developed a diversified product line and
has achieved geographic expansion throughout the United States. FHS operates and
conducts its HMO and other businesses through its wholly and majority owned
subsidiaries, including the Company.
DESCRIPTION OF FOHP-NJ
FOHP-NJ is the Company's principal subsidiary and only subsidiary which
has obtained a COA to operate as an HMO. FOHP-NJ operates an HMO in the State of
New Jersey pursuant to a COA issued by the New Jersey Department of Banking and
Insurance (the "DOI") and the New Jersey Department of Health and Senior
Services (the "DOH") (the DOI and the DOH are collectively referred to herein as
the "Departments"). FOHP-NJ has established a provider network and has entered
into provider agreements with NJ Practitioners, NJ Acute Care Institutions and
NJ Other Providers (as such terms are defined below). FOHP-NJ has entered into
provider agreements with (i) 62 NJ Acute Care Institutions located throughout
New Jersey's 21 counties, (ii) approximately 11,000 NJ Practitioners, practicing
in primary care and 30 medical specialties throughout New Jersey, and (iii)
approximately 75 NJ Other Providers. Providers contracting with FOHP-NJ are not
required to be shareholders of the Company. Currently, of the approximately
11,137 providers who have contracted with FOHP-NJ, 2,628 are shareholders of the
Company.
As used herein, a "NJ Acute Care Institution" shall mean a hospital or
acute care institution, licensed by the DOH, which has entered into a provider
agreement with FOHP-NJ to provide health care services to the members of
FOHP-NJ's health plans; a "NJ Practitioner" shall mean a member of the medical
staff of a NJ Acute Care Institution, or a physician designated by a NJ Acute
Care Institution, who is licensed to practice medicine or osteopathy in the
State of New Jersey and who has entered into a provider agreement with FOHP-NJ
to provide health care services to the members of FOHP-NJ's health plans; and a
"NJ Other Provider" shall mean a health care provider or professional, other
than a NJ Practitioner or NJ Acute Care Institution, licensed, certified or
authorized to operate or practice in the State of New Jersey, who has entered
into a provider agreement with FOHP-NJ.
Each member of FOHP-NJ's provider network has entered into a provider
agreement with FOHP-NJ. Each provider agreement has a one-year term and is
renewable annually. Such agreements with NJ Acute Care Institutions and NJ Other
Providers 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 shareholders that are NJ Acute
Care Institutions and subscribers in FOHP-NJ health plans are different from the
subscriber agreements of non-
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shareholders in that premium rates for those NJ Acute Care Institutions 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.
Preferred Providers (i.e., members of FOHP-NJ's provider network) are permitted
to contract with other entities, including other health plans.
FOHP-NJ markets its services to employers, including NJ Acute Care
Institutions that are providers of health care services to FOHP-NJ and
shareholders of the Company. Pursuant to the Company's Certificate of
Incorporation, NJ Acute Care Institutions that own shares of Common Stock,
directly or through affiliates, are required to offer a FOHP-NJ health plan to
their employees under certain circumstances. In the event that a NJ Acute Care
Institution fails to comply with such requirements, the Company may elect to
repurchase the shares of Common Stock held by the NJ Acute Care Institution. See
"Marketing."
MERGER OF FOHP-NJ AND PHYSICIANS HEALTH SERVICES OF NEW JERSEY, INC.
On January 1, 1999, PHS-NJ, a New Jersey HMO controlled by FHS, merged
with and into FOHP-NJ pursuant to an Agreement and Plan of Merger dated as of
October 26, 1998. At the effective time of the merger, FOHP-NJ changed its name
to "Physicians Health Services of New Jersey, Inc." The purpose of the merger
was to consolidate the FHS controlled HMO operations in the State of New Jersey
into primarily one corporation.
BENEFITS PROVIDED BY FOHP-NJ
FOHP-NJ currently offers two principal types of coverage plans, point
of service ("POS") and Non-POS, each having multiple variations. Under both
types of product, each new FOHP-NJ member will be required to select a primary
care physician from a list supplied by FOHP-NJ. All medical care thereafter
received by the member under a Non-POS plan, including specialist and hospital
care, will be supervised by the primary care physician who is familiar with the
member's medical history. A POS plan will permit members to utilize providers
who are not under contract with FOHP-NJ. In such circumstances, members will be
subject to higher co-payments and be responsible for payment of any difference
between what FOHP-NJ pays for covered services and the amount of the charges
incurred for such services. Generally, FOHP-NJ will pay no more than 80% and the
member will pay no less than 20% of the charges for covered services when care
is provided by non-Preferred Providers.
FOHP-NJ's health plans require precertification for hospital admissions
and diagnostic and outpatient procedures. Except for co-payments, FOHP-NJ covers
all other charges for treatment at non-Preferred Provider emergency rooms in the
event of a medical emergency or urgently needed services, as determined by
FOHP-NJ.
Generally, rates for each employer group are fixed for a twelve-month
period and may be increased for each renewal term; provided, however, that the
new rate methodology must be submitted to the DOI and there can be no assurance
that any new rate methodology will be accepted by the DOI. Renewal dates vary
among employer groups. FOHP-NJ utilizes a system of community rating by class,
adjusted (with respect to employer groups of more than 100 employees) by age,
sex and industry classification, in determining its rates for various employers
in the proposed service area. Accordingly, rates can vary between employer
groups for coverage under the same FOHP-NJ health plan. FOHP-NJ has also
established rates for the health benefits plans required by the State of New
Jersey to be offered by all HMOs that choose to market to small employer groups
(50 employees or less), which are based on overall community rates for
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New Jersey calculated by independent consulting actuaries, as statutorily
required. Proposed rates for the basic health care coverage required by the
State of New Jersey is submitted to the DOI. Rates will also be affected by
federal regulations which generally limit experience rating of group accounts.
FOHP-NJ health plans require members to make co-payments directly to
the treating health care provider for office visits, house calls and certain
hospital emergency room visits. All FOHP-NJ plans allow subscribers to enroll
their spouses and eligible dependents.
FOHP-NJ offers multiple coverage plans to employer groups of more than
50 employees. Some coverages in each product are subject to annual maximum
benefits. Generally, the products within each POS and Non-POS plan are
distinguished by the amount of the applicable co-payments and the obligation of
the POS member to pay to the provider the difference between what FOHP-NJ pays
and the total charges.
FOHP-NJ offers seven small employer group (50 employees or less)
products. Four of them are identical to the small business plans designed by the
Board of Directors of the Small Employer Health Benefits Program, the regulatory
agency responsible for the regulation of small business health insurance
products in New Jersey. The other three small employer group products are
offered as riders to one of the four other small employer products. Each rider
makes that product virtually identical to one of FOHP-NJ's large employer group
products.
FOHP-NJ also offers a dental plan and has expanded the coverage of the
benefits plans offered by FOHP-NJ to include vision care. Moreover, commencing
in December 1995, FOHP-NJ began offering Non-POS products to individuals as
required by the State of New Jersey. The Non-POS products being offered by
FOHP-NJ to individuals pursuant to the state requirement contain all the state
mandated benefits, including coverage for preventive care, in-patient hospital
care, substance abuse and mental health. All the products offered to individuals
by FOHP-NJ as required by the State of New Jersey require co-payments. See
"Government Regulation."
FOHP-NJ currently offers coverage for Medicaid beneficiaries in the New
Jersey counties of Essex, Cumberland, Gloucester, Hudson, Middlesex, Passaic,
Union, Mercer and Camden. In December 1995, FOHP-NJ qualified federally as an
HMO, and, as a result, currently offers coverage for Medicare beneficiaries in
certain counties of New Jersey.
FOHP-NJ also provides utilization management and its Preferred Provider
Organization ("PPO") product to the members of self-funded plans. FOHP-NJ also
offers pharmacy, mental health and chemical dependency management services
through third parties who or which have entered into sub-contract arrangements
with FOHP-NJ.
ARRANGEMENTS WITH NJ PRACTITIONERS
FOHP-NJ may contract with Individual or Independent Practice
Associations (individually, an "IPA"), Physician Hospital Organizations or NJ
Practitioners. Under the terms of FOHP-NJ's practitioner provider agreement, NJ
Practitioners will provide primary and specialty care to FOHP-NJ members.
FOHP-NJ has entered into provider agreements with physicians and others who are
not shareholders to provide services to its members. NJ Practitioners are paid
pursuant to a fee schedule established by FOHP-NJ and only bill members of a
FOHP-NJ plan 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
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Medicare. Co-payments, in amounts approved by FOHP-NJ, are collected directly by
the NJ Practitioner from the member.
In addition to specifying the types of services required, each
practitioner provider agreement imposes various requirements and standards (many
of which are also mandated by applicable federal and state law) on NJ
Practitioners.
Each member selects a primary care physician from a list of primary
care physicians who are under contract with FOHP-NJ. Under the Non-POS plans
offered by FOHP-NJ, primary care physicians are required, when medically
necessary and appropriate, to refer members to specialist physicians, hospitals
and other health care providers who are under contract with FOHP-NJ.
FOHP-NJ is a named insured under the Company's comprehensive general
liability insurance, with coverage of at least $1,000,000 per occurrence and
$10,000,000 in the aggregate per year. In addition, FOHP-NJ maintains HMO
reinsurance for those situations where the acute care of a commercial, Medicaid
or Medicare member exceeds $175,000 in a calendar year, with a per member annual
maximum of $1,000,000 and lifetime maximum of $2,000,000. Individual physicians,
including any physician practicing in an IPA or other group, must maintain
professional liability insurance coverage of at least $1,000,000 per occurrence
and $3,000,000 in the aggregate per year.
ARRANGEMENTS WITH NJ ACUTE CARE INSTITUTIONS
FOHP-NJ's agreements with NJ Acute Care Institutions provide, among
other things, for 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 an 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's health plans vary
from institution to institution and are based on, among other things, the types
of services provided by, and the location of, the NJ Acute Care Institution. The
agreements are site specific. Therefore, in the event of a merger or acquisition
or similar transaction between an NJ Acute Care Institution and another
institution, services provided to members of FOHP-NJ health plans pursuant to an
agreement between it and the affected NJ Acute Care Institution are required to
be provided only at the location of such institution. Also, under the terms of
such agreements, NJ Acute Care Institutions are required to use their best
efforts to notify FOHP-NJ within 48 hours or one business day of a member's
emergency admission. NJ Practitioners are required to notify and receive prior
approval from FOHP-NJ for all elective hospital admissions. Agreements with
participating NJ Acute Care Institutions prohibit the NJ Acute Care Institutions
from billing a member of a FOHP-NJ health plan for any services paid for under
such plan except for any applicable co-payment.
In addition to specifying the types of services required, each
agreement with an NJ Acute Care Institution imposes various requirements and
standards (some of which are also mandated under state and federal law) on the
NJ Acute Care Institution.
Each NJ Acute Care Institution must maintain a policy of general
liability insurance in amounts of at least $1,000,000 per occurrence and
$3,000,000 in the aggregate per year. In addition, each NJ Acute Care
Institution must maintain professional liability insurance coverage in amounts
required by the State of New Jersey. Each NJ Acute Care Institution has agreed
to
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indemnify FOHP-NJ, and FOHP-NJ has agreed to indemnify each such NJ Acute Care
Institution, against liability arising from its actions, except to the extent
that injury results from the negligence of the other party.
ARRANGEMENTS WITH NJ OTHER PROVIDERS
FOHP-NJ contracts with NJ Other Providers such as skilled nursing
facilities and home health care agencies to provide services to members. These
providers are paid pursuant to a program rate which is individually negotiated
with FOHP-NJ. Payment procedures, service authorization requirements,
obligations imposed on the provider, and insurance and indemnification
obligations are similar to those outlined above for NJ Acute Care Institutions.
OTHER ARRANGEMENTS INVOLVING FOHP-NJ
FOHP-NJ arranges for the provision of certain services to members
including mental health/chemical dependency, pharmacy, laboratory and radiology
through risk sharing arrangements with other entities, where feasible and not
prohibited by applicable law.
COMPETITION
The competition for prospective enrollees in prepaid health plans has
increased over the past few years as a result of the significant increase in the
number of companies offering HMO and other managed care products. For example,
FOHP-NJ competes with other prepaid health plans and with traditional health
insurers as well as with self-insured programs, PPOs and other managed or
coordinated care organizations. Other programs or entities may be substantially
better capitalized than FOHP-NJ. Moreover, a number of traditional health
insurers have begun to aggressively market HMO and other managed care products
of their own. In addition, competition may be affected if any federal
legislation or regulation with respect to health plans or health care providers
is adopted. See "Government Regulation."
Competition among HMOs and traditional and other health insurers is
based principally on benefits offered and premium cost. FOHP-NJ, which operates
an HMO, may find itself at a competitive disadvantage if its premiums are higher
than those of other HMOs or traditional health insurers. Premiums negotiated
with employers, fee schedules negotiated with hospitals, physicians and other
providers, the scope of benefits offered, unique benefit designs and access to
physicians and hospitals constitute the principal methods of competition.
MARKETING
FOHP-NJ markets its health care benefits products and services to
prospective members through full-time marketing representatives, selected
brokers and consultants and other sales professionals under the direction of a
Director of Sales. Marketing efforts are concentrated on employer groups of all
sizes with particular emphasis placed on employers with fewer than 1,000
employees.
FOHP-NJ markets its services to employers, including NJ Acute Care
Institutions that are providers to FOHP-NJ and are either shareholders of the
Company or affiliated with shareholders of the Company. Pursuant to the
Company's Certificate of Incorporation, if the existing health plan of any NJ
Acute Care Institution shareholder is a self-insured plan, such NJ Acute Care
Institution is obliged to offer a FOHP-NJ health plan to its employees as their
exclusive plan in accordance with a timetable determined by FOHP-NJ to be
feasible. The Company's Certificate of Incorporation also provides that NJ Acute
Care Institutions which are shareholders or
-11-
affiliated with shareholders and offer one or more health plans, including any
self-insured plan, are obliged to offer a FOHP-NJ health plan and have at least
75% of its employees enrolled in a FOHP-NJ health plan, and NJ Acute Care
Institutions which are shareholders or affiliated with shareholders and are
subject to collective bargaining agreements are required to use their best
efforts to offer a FOHP-NJ health plan to their non-union employees on a
"non-exclusive" basis. In addition, NJ Acute Care Institutions which are
shareholders or affiliated with shareholders and are subject to collective
bargaining agreements are required to use their best efforts to qualify a
FOHP-NJ health plan as the union-designated plan and to pay reasonable
deductibles or other costs to so qualify a FOHP-NJ health plan.
The provisions in the Certificate of Incorporation of the Company with
respect to the above described covenants of the NJ Acute Care Institutions which
own shares of Common Stock or of the affiliates of NJ Acute Care Institutions
which own shares of Common Stock (collectively referred to herein as "NJ
Institutional Shareholders," and individually referred to herein as a "NJ
Institutional Shareholder") shall continue until December 31, 1999. The
Company's Certificate of Incorporation also provides that, if, upon the
termination of the covenants contained therein as they relate to a specific NJ
Institutional Shareholder, the NJ Institutional Shareholder or its affiliated NJ
Acute Care Institution proposes to offer to its employees any health plan
similar to a health plan offered by FOHP-NJ, such NJ Institutional Shareholder
shall provide prior written notice to FOHP-NJ of the material terms of the Bona
Fide Offer (as hereinafter defined) by such other health benefits plans. In the
event FOHP-NJ offers to provide an FOHP-NJ health plan containing terms at least
as favorable in all material respects to the employees of the NJ Institutional
Shareholder or its affiliated NJ Acute Care Institution as those contained in
the Bona Fide Offer, such NJ Institutional Shareholder or its affiliated NJ
Acute Care Institution shall offer such FOHP-NJ health plan to its employees on
the same basis as it would have been obligated under the covenants if such
covenants had not terminated.
In the event a NJ Institutional Shareholder or its affiliated NJ Acute
Care Institution (i) breaches any of the covenants in the Certificate of
Incorporation of the Company applicable to it, or (ii) fails to provide
reimbursement rates (a) for in-patient visits at the lower of (1) the lowest
rate of reimbursement received by such provider from nongovernmental payors for
each line of business, or (2) the rate of reimbursement reflecting a reduction
(compared to calendar 1996 rates) of 5% in in-patient costs, provided that such
reduction is solely as a result of rate reductions and not through utilization
or medical management efforts, and (b) for outpatient visits at the lower of (1)
the lowest rate of reimbursement received by such providers from nongovernmental
payors for each line of business, or (2) the rate of reimbursement reflecting a
reduction (compared to calendar 1996 rates) of 10% in out-patient costs,
provided that such reduction is solely as a result of rate reductions and not
through utilization or medical management efforts, then the Company shall have
the option to purchase all or a portion of the Common Stock held by the NJ
Institutional Shareholder at a purchase price equal to the lowest of (A) the
Book Value (as such term is defined in the Company's Certificate of
Incorporation), (B) the lowest shareholder equity reflected on the Company's
quarter-end balance sheets during the period of noncompliance giving rise to the
repurchase right, excluding any Convertible Debentures issued to FHS, prepared
in accordance with generally accepted accounting principles, divided by the
number of outstanding shares of Common Stock on a fully diluted basis, or (C)
the original purchase price paid by such NJ Institutional Shareholder for such
shares of Common Stock. The Company shall have full discretion with respect to
its election to exercise or not to exercise the foregoing rights of repurchase
with respect to any given shareholder, taking into
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account any factors the Company deems appropriate relating to such shareholder's
relationships with the Company or the Company's business or otherwise, and the
Company's election to make or not to make a repurchase from one shareholder
shall have no affect on the Company's election to make or not to make a
repurchase from any other shareholder.
Pursuant to the form of Payment Rights to be issued in connection with
the Merger, an NJ Acute Care Institution will have to comply with enrollment and
reimbursement rate commitments similar to those currently contained in the
Company's Certificate of Incorporation, as discussed above, to receive full
payment under a Payment Right.
A "Bona Fide Offer" shall mean an offer of a health benefits plan that
is prepared with the objective of covering the offeror's (i) health care costs
and administrative expenses in the case of risk products, and (ii) costs of
performing administrative services and any risk assumed (e.g., reinsurance) in
the case of self funded products. An offer by any health benefits plan below the
offeror's costs for the purpose of achieving market share increases shall not
constitute a Bona Fide Offer.
GOVERNMENT REGULATION
For a tax exempt hospital or other entity to maintain its tax exempt
status under section 501(c)(3) of the Internal Revenue Code of 1986, as amended
(the "Code"), (i) it must be operated exclusively for charitable purposes and
(ii) its income or assets may not be utilized to inure to the benefit of an
individual considered to be an insider by virtue of his or her relationship with
the exempt organization (generally, any person having a personal or private
interest in the activities of an organization exempt under section 501(c)(3) of
the Code and having the ability to control or influence its activities,
including key staff personnel or any physician employed by or with admitting
privileges at a tax exempt hospital, is often referred to as an "insider"). Any
conduct in contravention of the furtherance of the entity's exempt purposes may
result in the loss of a health care provider's tax exempt status. Any
transaction with any person or entity (including, among others, vendors) which
results in an excessive benefit which is not incidental to the accomplishment of
the entity's exempt purposes may constitute private benefit thereby jeopardizing
the entity's tax exempt status. In the case of an insider, a compensation
arrangement in excess of fair market value, a below market loan, or a no rent or
below market rent arrangement may constitute private inurement.
Federal law prohibits the payment or receipt of remuneration directly
or indirectly for referring business or furnishing any service for which payment
may be made under the Medicare or Medicaid programs. Section 1128B(b) of the
Social Security Act, known as the Medicare/Medicaid Anti-Kickback Statute, and
implementing regulations and advisory opinions, prohibit, among other things, an
entity from selecting a physician or other investor based upon his, her or its
ability to make referrals or from offering such an investor (i) a greater
investment opportunity, or (ii) a disproportionately large return on a
disproportionately small investment. The statute imposes criminal as well as
other penalties for engaging in prohibited practices.
Federal law also prohibits physician referrals to entities in which the
physician or a member of his or her family has a financial interest for certain
designated health services. The statute, adopted as part of the Omnibus Budget
Reconciliation Act of 1989, as subsequently amended, and more commonly known as
the Stark Laws, specifically excludes from the prohibition, in-network referrals
by physicians who have ownership or investment interests in, or
-13-
compensation arrangements with, certain Medicare competitive medical plans,
federally qualified HMOs, or other prepaid plans operating under a demonstration
project.
Management does not believe that any arrangements between the Company
or any of its subsidiaries and its shareholders or directors is violative of the
Medicare/Medicaid Anti-Kickback Statute or the Stark Laws. No Company
shareholder nor any provider of services to a subsidiary of the Company is
required to make referrals as a condition of making or maintaining an investment
interest in the Company or otherwise. If any arrangement between the Company or
a subsidiary of the Company and its shareholders or directors was found to
contravene current law or in the event any change in the law should prohibit any
such arrangement, the Company would seek to restructure such arrangement.
New Jersey has also adopted legislation which prohibits physicians from
referring patients to health care services in which they or their immediate
families have a significant beneficial interest unless such interests are
disclosed in advance to such patients. The restriction does not apply to
services provided in a physician's medical office or to certain specified
services.
Federal antitrust laws generally prohibit agreements between
competitors that unreasonably restrict competition and, as such laws relate to
the Company, may prohibit, among other things, the disclosure of information by
a provider to FOHP-NJ relating to (i) the providers' rates, costs, salaries and
benefits, and (ii) the terms, prices and conditions of any managed care plan in
which the provider participates, unless such information is a matter of public
record. Such laws also may prohibit the disclosure by FOHP-NJ of the prices and
terms of any arrangement between FOHP-NJ and one of its providers to other
providers in FOHP-NJ's provider network. In an effort to prevent any such
conduct, the Company has distributed an Antitrust Compliance Manual to its NJ
Institutional Shareholders and requires that each NJ Institutional Shareholder
acknowledge the receipt of such manual. In addition, the Company includes
information regarding prohibitions under federal antitrust laws in the provider
agreements entered into by FOHP-NJ and NJ Practitioners. Any prohibited
disclosure or other violations of the federal antitrust laws could subject the
Company or FOHP-NJ or any of their directors or shareholders to monetary damages
and other penalties under such antitrust laws.
HMOs are subject to extensive governmental regulation. Among the areas
regulated are the scope of benefits required to be made available to members,
reserves required to be maintained, the manner in which members' co-payments are
structured, procedures for review of quality assurance, enrollment requirements,
the relationship between the HMO and its health care providers and the financial
condition of the HMO. Any HMO formed in New Jersey is regulated by two
governmental departments, the DOI and the DOH. The DOI monitors the financial
condition of an HMO formed in New Jersey whereas the DOH reviews quality and
access issues.
In June 1994, FOHP-NJ, the Company's only subsidiary licensed as an
HMO, received its COA from the Departments. In December 1995, FOHP-NJ received
approval from the U.S. Health Care Financing Administration of the U.S.
Department of Health and Human Services (commonly known as HCFA) to operate as a
federally qualified HMO and, as a result, is now providing services to Medicare
beneficiaries. In February 1995, FOHP-NJ entered into an agreement with the New
Jersey Department of Human Services to provide services to Medicaid recipients,
and it has received approval to provide such services in nine New Jersey
counties.
-14-
If a New Jersey HMO fails to meet the statutory net worth requirements
applicable to it, the DOI has the power to suspend or revoke the HMO's COA.
Without a COA, an entity cannot conduct business as an HMO in New Jersey.
Federal law requires a federally qualified HMO to have a positive net
worth (however, no amount is specified) and to provide evidence of financing
until revenues are sufficient to support operations. The financial reserves of
federally qualified HMOs are required to provide adequately against the risk of
insolvency, but the amount of such reserves are not specified in applicable
regulations and is subject to the discretion of the Secretary of the United
States Department of Health and Human Services.
Provisions affecting HMOs were enacted as part of the federal "Balanced
Budget Act of 1997." The Balanced Budget Act of 1997 provides Medicare
beneficiaries with the option to enroll in a new Medicare + Choice Program which
allows provider-sponsored networks and other non-HMO entities to contract
directly with Medicare to provide services to Medicare + Choice Program
beneficiaries. The Balanced Budget Act of 1997 also includes provisions
impacting on state administered Medicaid managed care plans. These provisions
include, among others, provisions relating to increased beneficiary protection
and quality assurance.
As a result of legislation enacted by the State of New Jersey in 1991
and 1993, New Jersey HMOs must offer health care benefits plans to individuals
including hospital expense coverage and annual physical examinations for a
defined period. HMOs which do not offer coverage to individuals are subject to
an assessment. Additionally, legislation adopted in New Jersey, which became
effective on July 1, 1994, requires health insurers, including HMOs which
provide pharmacy services, to permit enrollees to select their own pharmacists
and pharmacies. In 1995, New Jersey enacted legislation which requires that a
mother delivering a baby be permitted to remain at the facility where the baby
was born for a minimum of 48 or 96 hours, depending upon the method of birth.
Legislation also was enacted in New Jersey in 1995 which requires health
insurers, including HMOs, to provide certain mandated diabetes benefits.
In 1997, the New Jersey legislature enacted the "Health Care Quality
Act." Among other things, the Health Care Quality Act provides that health
insurers, including HMOs, must disclose information regarding the terms and
conditions of their health benefit plans, as well as other related information,
to subscribers at the time of enrollment and annually thereafter. The Health
Care Quality Act also imposes on an HMO requirements with respect to the
responsibilities of the HMO's medical director, the HMO's utilization management
program and the HMO's relationship with participating providers. The legislation
also requires an HMO to offer a POS plan to every contract holder (either
directly or through a selective contracting arrangement) which would allow a
covered person to receive covered services from out-of-network health care
providers. Also in 1997, the DOH adopted extensive amendments to the New Jersey
regulations applicable to HMOs for purposes of providing additional protections
to consumers of HMO products and promoting consumer confidence in HMOs.
Generally, the amended regulations provide, among other things, that a member of
an HMO plan shall be entitled to appeal service denials to an independent
medical panel and require health plans to disclose operational information,
including information regarding financial incentives provided to physicians by
HMOs in their reimbursement procedures.
Prior to the adopting of the Health Care Quality Act, the DOH, in
consultation with the DOI, adopted new regulations (the "POS Regulations")
intended generally to apply to HMOs
-15
offering POS products. The POS Regulations clarify the circumstances under which
an HMO may contract with a health insurer, health service corporation or medical
service corporation to provide indemnity benefits or services. Under the POS
Regulations, it is necessary for an HMO offering POS products to enter into a
contractual arrangement with a licensed indemnity carrier. In response to these
regulations, FOHP-NJ has entered into a contractual arrangement with an
indemnity carrier.
Additional amendments to the New Jersey HMO regulations have been
recently proposed. The proposed amendments address financial and insolvency
issues relating to HMOs. More specifically, the proposed amendments would, among
other things, require that a minimum of 60% of an HMO's admitted assets be in
cash, cash equivalents or investments; require that HMO guarantors have certain
liquid assets available to the HMO; require that an HMO maintain reserve
liabilities in an amount sufficient to provide for continued health care
services to members who, on the date of termination of an HMO contract, are
confined in an inpatient facility until discharge from the facility; change the
basis of the required HMO solvency deposit from claims to premium; require an
HMO to file with the Commissioner of the DOI an annual certification with an
actuarial opinion certified by a member of the American Academy of Actuaries or
an active fellow the Society of Actuaries that the reserves required under the
HMO regulations and included in the HMO's annual report are sufficient; require
that HMOs submit a quarterly certification that includes information identical
to that contained in the annual certification; and require additional annual and
quarterly reports. In addition to these amendments, the Commissioner of the DOH,
in consultation with the Commissioner of the DOI, intends to propose in the near
future further amendments to the HMO regulations addressing other issues,
including pre-operational review of unlicensed subcontractors and the
standardization of rate filing. If the proposed amendments are adopted, HMOs
operating in New Jersey, including FOHP-NJ, could be subject to increased
operating restrictions and additional reporting requirements which could have an
adverse impact on operating results.
Generally, rates and proposed coverage benefits must be submitted to
the DOI prior to their imposition. There can be no assurance that rates
submitted by FOHP-NJ will be accepted without objection or approved.
Finally, it is impossible to predict whether federal legislation or
regulations with respect to health plans or health care providers will be
adopted or the impact that any such federal legislation or regulations may have
on the health care delivery system.
EMPLOYEES
At March 15, 1999, the Company, through its principal subsidiary
FOHP-NJ, employed 393 full-time and 16 part-time active employees. In addition,
the Company currently utilizes the services of approximately 51 temporary
employees. The Company currently has four executive officers who are employed by
FHS or one of its subsidiaries pursuant to the Administrative Management
Agreement (as hereinafter defined). See "Certain Relationships and Related
Transactions." None of the Company's employees are represented by a union. The
Company believes that its relationships with its employees are satisfactory.
-16
ITEM 2. PROPERTIES.
The Company, through FOHP-NJ, subleases approximately 59,706 square
feet of office space at 3501 State Highway 66, Neptune, New Jersey 07753. The
lease expires on February 28, 2004. The monthly rental during the lease term is
$84,504.16, plus certain additional charges and expenses, including maintenance,
utilities and taxes.
The Company also leases approximately 11,000 square feet of office
space at 2 Bridge Avenue, Building 6, Red Bank, New Jersey 07701-1106. The lease
has a term of 5 years ending August 31, 1999, and a 5 year renewal option. The
monthly rental ranges from $10.00 to $12.50 per square foot over the initial
term of the lease, plus certain additional charges and expenses including common
maintenance charges, utilities and taxes. The monthly rental of the 5 year
option term of the lease ranges from approximately $14.00 to $16.00 per square
foot.
The Company also leases office space in Mt. Laurel, New Jersey.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal, governmental, administrative or other
proceedings pending against the Company or its properties or to which the
Company is a party, and to the knowledge of management no such material
proceedings are threatened or contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter ended December 31, 1998, no matter was
submitted to a vote of security holders of the Company through the solicitation
of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
There is no public market for the Company's Common Stock, and the
Company has no current intention of listing or including any shares of Common
Stock on a stock exchange or quotation system since shares of Common Stock only
can be held by or transferred to (i) providers to the Company's subsidiaries
which operate as HMOs, (ii) FHS, or (iii) the Company. Accordingly, it is
improbable that a market will develop for the Common Stock.
Since its inception, the Company has not sold any shares of Common
Stock for any price other than $15.00, except for shares issued to FHS upon
conversion of the Initial Convertible Debenture and New Convertible Debenture.
In addition, the Company is not aware of any sale of Common Stock by one
provider to another for any price other than $15.00.
As of March 15, 1999, 499,000,000 shares of Common Stock were
outstanding and were held by 2,629 shareholders, including 496,916,161 shares
held by FHS, 1,006,717 shares held by 41 NJ Institutional Shareholders and
1,077,122 shares held by 2,587 NJ Practitioners and NJ Other Providers.
The Company has not paid any cash dividends on Common Stock, and does
not expect to pay any dividends in the future.
The certificates representing Payment Rights to be offered by the
Company to the Provider Shareholders in the Merger will be non-negotiable and
the Payment Rights will not be transferable or assignable by the holders
thereof, unless such transfer or assignment is expressly authorized in writing
by the Company. Accordingly, there will be no public market for the Payment
Rights.
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ITEM 6. SELECTED FINANCIAL DATA.
The selected financial information as of December 31, 1998, 1997, 1996,
1995, and for the years ended December 31, 1998, 1997, 1996 and 1995, is derived
from the consolidated financial statements of the Company. Prior to the
Reorganization, the Company did not conduct any business nor did it have any
significant assets or liabilities. Accordingly, the selected financial
information as of December 31, 1994 and for the year ended December 31, 1994 is
derived from the financial statements of FOHP-NJ, the Company's principal
subsidiary. The selected financial information should be read in conjunction
with the consolidated financial statements of the Company and the related notes
thereto and management's discussion and analysis thereof appearing elsewhere in
this report.
-19-
SUMMARIZED BALANCE SHEET INFORMATION
FINANCIAL DATA
OF FOHP-NJ
PREDECESSOR TO
THE COMPANY
-----------
AS OF
AS OF DECEMBER 31, DECEMBER 31,
---------------------------------------------------------- ------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
Assets:
Cash and cash equivalents $ 44,052,058 $ 79,266,721 $ 36,664,911 $ 23,882,286 $ 13,030,295
Goodwill (net) 96,237,857 107,730,254 --- --- ---
Other 77,989,500 31,614,256 17,578,306 13,479,547 7,050,765
------------ ------------ ------------ ------------ ------------
Total Assets $218,279,415 $218,611,231 $ 54,252,217 $ 37,361,833 $ 20,081,060
============ ============ ============ ============ ============
Liabilities and Shareholders'
Equity (Deficiency):
Liabilities:
Medical claims payable,
accounts payable, accrued
expenses and other
current liabilities $ 73,349,221 $110,883,608 $ 80,118,284 $ 32,482,794 $ 8,101,405
Convertible debentures 11,131,386 11,294,406 --- --- ---
Subordinated debentures 25,113,575 24,000,000 --- --- ---
------------ ------------ ------------ ------------ ------------
Total Liabilities 109,594,182 146,178,014 80,118,284 32,482,794 8,101,405
FOHP-NJ Practitioner
Provider Common
Stock, $.01 par value,
511,800 shares issued
and outstanding (at
December 31, 1994,
redeemable at
$ 3,900,000) --- --- --- --- 7,677,000
Shareholders' Equity
(Deficiency):
FOHP, Inc. Preferred Stock,
$1.00 par value,
1,000,000 shares
authorized, none
issued and outstanding --- --- --- --- ---
FOHP, Inc. Common Stock
$.01 par value,
499,000,000 shares
authorized, 499,000,000
shares issued and
outstanding 1,011,941 1,000,000 21,002 21,002 ---
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SUMMARIZED BALANCE SHEET INFORMATION (CONT.)
FINANCIAL DATA
OF FOHP-NJ
PREDECESSOR TO
THE COMPANY
-------------
AS OF
AS OF DECEMBER 31, DECEMBER 31,
--------------------------------------------------------------- -------------
1998 1997 1996 1995 1994
------------- ------------ ------------ ---------------- -------------
FOHP-NJ Institutional
Provider Common Stock,
$.01 par value, 1,020,051
shares issued and
outstanding --- --- --- --- 10,201
FOHP-NJ Other Provider
Common Stock, $.01
par value, 40,002 shares
issued and outstanding --- --- --- --- 400
Additional paid-in capital 239,135,758 208,053,796 30,648,489 30,648,489 15,341,561
Deficit (131,462,466) (136,620,579) (56,535,558) (25,790,452) (11,049,507)
------------- ------------- ------------- ------------- -------------
Total Shareholders' Equity
(Deficiency) 108,685,233 72,433,217 (25,886,067) 4,879,039 11,979,655
------------- ------------- ------------- ------------- -------------
Total Liabilities and
Shareholders' Equity
(Deficiency) $ 218,279,415 $ 218,611,231 $ 54,252,217 $ 37,361,833 $ 20,081,060
============= ============= ============= ============= =============
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SUMMARIZED STATEMENT OF OPERATIONS INFORMATION
FINANCIAL DATA OF
FOHP-NJ
PREDECESSOR TO THE
COMPANY
-------------------
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------------------------------------------------------- -------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------------
Revenue:
Premium revenue from
owners/providers $ 118,591,143 $ 132,575,894 $ 135,544,112 $ 63,630,797 $ 5,639,724
Other premium revenue 209,268,135 239,132,416 112,125,670 38,819,206 1,803,624
Interest and other income 6,822,455 5,697,921 9,706,526 8,844,036 1,177,171
------------- ------------- ------------- ------------- ------------
Total Revenue 334,681,733 377,406,231 257,376,308 111,294,039 8,620,519
------------- ------------- ------------- ------------- ------------
Expenses:
Medical services to owners/providers 46,895,944 63,882,103 37,026,903 17,319,035 1,405,175
Hospital services to
owners/providers 32,154,087 64,553,166 30,156,890 11,068,909 880,920
Other medical services 109,423,870 148,812,233 105,551,393 38,548,819 2,727,694
Other hospital services 75,026,204 101,521,355 63,760,554 24,637,249 1,710,020
Selling, general and administrative 53,199,216 55,106,022 50,734,197 32,638,106 10,624,261
Management fee - Foundation Health
Systems, Inc. 2,543,000 7,502,899 -- -- --
Interest - Foundation Health
Systems, Inc. 2,229,890 1,790,410 -- -- --
Restructuring costs (2,250,000) 12,825,570 -- -- --
Other 4,761,178 1,495,355 890,553 1,751,263 240,021
------------- ------------- ------------- ------------- ------------
Total Expenses 323,983,389 457,489,113 288,120,490 125,963,381 17,588,091
------------- ------------- ------------- ------------- ------------
Provision for income taxes 5,540,231 2,139 924 71,603 --
------------- ------------- ------------- ------------- ------------
Net income (loss) $ 5,158,113 $ (80,085,021) $ (30,745,106) $ (14,740,945) $ (8,967,572)
============= ============= ============= ============= ============
Net income (loss) per common share $ .05 $ (9.18) $ (14.64) $ (8.65) $ (8.40)
============= ============= ============= ============= ============
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ITEM 7. 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 March 15, 1999, FOHP-NJ had entered into
provider agreements with 62 NJ Acute Care Institutions, approximately 11,000 NJ
Practitioners and approximately 75 NJ Other Providers. The provider agreements
have an initial term of one-year and are renewable annually. Such agreements
with NJ Acute Care Institutions and NJ Other Providers 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 shareholders that are NJ Acute Care Institutions and 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 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 an 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's health plans vary
from institution to institution and are based on, among other things, the types
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 a 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 a 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
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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.
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 cancelled 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 YEARS ENDED DECEMBER 31, 1998 AND 1997
PREMIUM REVENUE. For the year ended December 31, 1998, medical premium
revenue totaled $327.9 million or $43.8 million less than the $371.7 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 36% of medical premium generated in
1998 and approximately 35% of medical premium 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' Northeast Division, which is comprised of three health
plans with a total of more than one million members in the New York tri-state
area, and the merger of PHS-NJ into FOHP-NJ, and that such inclusion and merger
will result in a greater percentage of future premium revenue attributable to
members who are not employees of NJ Acute Care Institutions.
OTHER REVENUE. Other revenue, principally administrative fees, for the
year ended December 31, 1998 was $2.5 million compared to $2.0 million of other
revenue for the same period of the prior year. Interest income for 1998 was $4.3
million, as compared to the $3.7 million generated in 1997.
MEDICAL AND HOSPITAL SERVICES. Total expenses attributable to medical
and hospital services for the year ended December 31, 1998 were $263.5 million
or $115.3 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 year
ended December 31, 1998 was 80.3% compared to 101.9% 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 claims reserves due to more complete claims
payment data being available to the Company as a result of a reduction of the
significant medical claims back-log which had existed at December 31, 1997.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $58.4 million for the year ended December 31,
1998, including a $2.5 million administrative management fee charged by FHS and
$2.2 million interest expense associated with the Convertible Debentures and
Subordinated Debentures issued to FHS, as compared to $64.5 million incurred for
the same period in 1997. This decrease was primarily the result of a decrease in
the management fee charged by FHS to FOHP.
OTHER EXPENSES. Depreciation and amortization expenses for the year
ended December 31, 1998 increased by $2.8 million from the $1.4 million incurred
during the same period in 1997. This increase was primarily the result of
amortization of goodwill associated with FHS' investment in the Company.
RESTRUCTURING COSTS. During 1998, the Company recorded a reduction of
$2.2 million of its estimated $12.8 million restructuring charge originally
recorded in 1997 in connection with the FHS investment as a result of
management's reevaluation of estimated restructuring costs. The plan of
restructuring primarily includes costs associated with work force reductions,
terminations and settlements of existing contracts and asset impairment. Of the
$2.2 million reduction, $2.0 million is related to the continuation of a mental
health contract during 1998 that was originally expected to be terminated as
part of the overall restructuring plan.
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
PREMIUM REVENUE. For the year ended December 31, 1997, medical premium
revenue totaled $371.7 million or $124.0 million more than the $247.7 million of
medical premium revenue generated during the same period in 1996. This increase
was due to significant subscriber growth experienced during 1997. Approximately
35% of medical premium revenue generated in 1997 and approximately 55% of
medical premium generated in 1996 was attributable to NJ Acute Care Institutions
which are obligated to enroll their employees in FOHP-NJ health plans. The
Company believes that the percentage of medical premium revenue attributable to
NJ Acute Care Institutions will continue to decrease as FOHP-NJ's operations
grow and as FOHP-NJ's current sales efforts continue to focus on products which
are not sold directly to employees of providers of FOHP-NJ. The Company also
believes that it will benefit by its inclusion in the formation of FHS'
Northeast Division, 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
year ended December 31, 1997 was $2.0 million compared to $7.9 million of other
revenue for 1996. This decrease is attributed to the sale of First Managed Care
Option, Inc., formally a wholly owned subsidiary of the Company, in the last
quarter of 1996. Interest income for 1997 was $3.7 million, a $1.9 million
increase from the $1.8 million generated in 1996. The increase in interest
income was due to the larger cash reserves related to the investments by FHS in
April 1997 and December 1997.
MEDICAL AND HOSPITAL SERVICES. Total expenses attributable to medical
and hospital services for the year ended December 31, 1997 were $378.8 million
or $142.4 million higher than expenses incurred for the same period in 1996. The
increase in medical and hospital service expenses from 1996 to 1997 was
primarily attributable to a significant increase in enrollees in FOHP-NJ health
plans. In addition, the medical loss ratio (i.e., the percentage of each premium
dollar used to pay medical expenses) for the year ended December 31, 1997 was
101.9% compared to 95.5% for the same period in 1996. This increase was a result
of increased
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utilization in FOHP-NJ health benefit plans, changes in the mix of products
offered by FOHP-NJ, the inability of FOHP-NJ to effectively control utilization
and referrals due to the significant growth of FOHP-NJ and an increase in claims
reserves to an amount at the high end of an actuarially determined range to
reflect the Company's recent fluctuation of claims payment patterns. The Company
believes that recent operational changes, specifically the implementation of a
modified provider reimbursement schedule, along with enhanced utilization
management efforts, will lower the percentage of medical expenses to premium
dollars in the future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $64.4 million for the year ended December 31,
1997, including a $7.5 million management fee charged by FHS and $1.8 million
interest expense associated with the Convertible Debentures and Subordinated
Debentures issued to FHS, compared to $50.8 million incurred for the same period
in 1996. This increase in selling, general and administrative expenses was the
result of the significant growth of FOHP-NJ.
OTHER EXPENSES. Depreciation and amortization expenses for the year
ended December 31, 1997 increased by $525 thousand from the $879 thousand
incurred during 1996. This increase was mostly the result of the costs of the
Convertible Debentures being amortized in 1997 (approximately $309,000).
RESTRUCTURING COSTS. During 1997, the Company estimated and recorded a
restructuring charge of $12.8 million in connection with the FHS investment. The
plan of restructuring primarily includes costs associated with work force
reductions, terminations and settlements of existing contracts and asset
impairment.
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, 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. 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.
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As part of the plan of action, on April 30, 1997, the Company sold to
FHS the Initial Convertible Debenture in the aggregate principal amount of
$51,701,120.38, pursuant to the Amended Securities Purchase Agreement. The
principal amount of the Initial Convertible Debenture was convertible, at the
option of FHS, into up to 71% of the Company's capital stock on a fully diluted
basis. At the closing of the purchase of the Initial Convertible Debenture, FHS
converted $1,701,120.38 of principal amount of the Initial Convertible Debenture
into 168,109 shares of Common Stock.
To facilitate the sale of the Initial Convertible 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 Departments'
right to require FOHP-NJ to submit a new plan of action if FOHP-NJ failed 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 Convertible Debenture, provided that FHS guaranteed, 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 certain benchmarks each quarter during 1998.
In connection with the sale of the Initial Convertible Debenture, FHS
and the Company entered into a letter agreement which clarified FHS' right under
the Amended Securities Purchase Agreement to infuse additional capital into the
Company 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 the Company 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 the
Company to meet a Net Capital Shortfall or projected Net Capital Shortfall in
accordance with the terms of the Amended Securities Purchase Agreement, as
clarified by the letter agreement, FHS would be issued additional Convertible
Debentures.
The Amended Securities Purchase Agreement also provided 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 Convertible 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.
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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 92,804,003 shares of 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 then outstanding, which represented
approximately 98% of the fully-diluted equity of the Company.
In October 1998, the Certificate of Incorporation of the Company was
further amended to increase the number of shares of Common Stock authorized for
issuance and decrease the number of shares of Preferred Stock authorized for
issuance. As a result, the Company currently has 500,000,000 shares of
authorized capital stock, which is comprised of 499,000,000 shares of Common
Stock and 1,000,000 shares of Preferred Stock, par value $1.00 per share.
On December 31, 1998, FHS converted $1,197,182 of the principal amount
of the New Convertible Debenture into 399,003,000 shares of the Company's Common
Stock. After this conversion, 499,000,000 shares of the Company's Common Stock
were outstanding, with FHS owning 496,916,161 of such shares or approximately
99.6% of the fully-diluted equity of the Company. The price per share paid by
FHS upon conversion of the New Convertible Debenture was calculated in
accordance with the Amended Securities Purchase Agreement entered into by FHS,
the Company and FOHP-NJ in connection with the sale of the Initial Convertible
Debenture.
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
$29,897,801 to the Company as additional paid in capital to satisfy certain
statutory net worth requirements applicable to FOHP-NJ during 1998.
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 December 31, 1998, the deposit covering two months of
incurred health care expenditures is approximately $56 million. The initial
deposit, or $12.5 million, 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, $14.6 million was deposited on June 30, 1998 and $14.1 million was
deposited on September 30, 1998. These deposits (including interest earned) have
been deemed sufficient in accordance with the HMO regulations and no additional
deposits were required at December 31, 1998.
IMPACT OF YEAR 2000
The Company, and its parent, FHS, recognize that the arrival of the
year 2000 (the "Year 2000") requires computer systems to be able to recognize
the date change from 1999 to 2000 and, like other companies, are assessing and
modifying their computer applications and business processes to provide for
their continued functionality.
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
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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, prepare invoices or engage in normal business
activities. In addition, the Year 2000 problems of the Company's providers and
customers, including governmental entities, can affect the Company's operations,
which are highly dependent upon information technology for processing claims,
determining eligibility and exchanging information.
FHS, for itself and on behalf of its subsidiaries, including the
Company, has undertaken a comprehensive review of the Year 2000 issue and its
affect on the operations of FHS and its subsidiaries. The Company has assisted
FHS in addressing the Year 2000 issue as it pertains to the Company. However,
FHS will ultimately direct how the Company addresses the Year 2000 issue and
will initially incur all the costs associated with ensuring that the Company is
Year 2000 compliant, which costs may be allocated to the Company at a future
point in time.
Set forth below is a brief description of FHS' effort to address the
Year 2000 issue:
PROJECT STATUS. The Year 2000 effort for FHS has the highest priority
of technology projects and has the full support of FHS' management. The project
has dedicated resources with multiple teams to address its unique systems
environments. Uniform project management techniques have been adopted with
overall oversight responsibility residing with FHS' Chief Technology Officer,
assisted by a special project manager hired by FHS. An executive management
committee is also actively involved in FHS' Year 2000 project and receives
monthly reports from the project manager. In addition, the project manager
regularly meets with FHS' audit committee to further discuss FHS' Year 2000
issues.
FHS is addressing its Year 2000 issues in several ways. Selected
systems are being retired with the business functions being converted to Year
2000 compliant systems. A number of the FHS' systems include packaged software
from large vendors that FHS is closely monitoring to ensure that those systems
are Year 2000 compliant. FHS believes that vendors will make timely updates
available to ensure that all remaining purchased software is Year 2000
compliant. The remaining systems' compliance with Year 2000 will be addressed by
internal technical staff. FHS has engaged IBM Global Services to assist in the
program management of the project. In addition, FHS is in the process of
assessing its third party relationships with respect to non-information
technology assets and services. FHS has also retained legal consultants to
assist in the review of insurance and FHS' obligations and rights, and IBM's The
Wilkerson Group, technical consultants specializing in health care, to help
develop contingency plans.
FHS has divided its Year 2000 effort into five phases: (1) Assessment
and Strategy; (2) Detailed Analysis and Planning; (3) Remediation; (4) Testing
and Implementation; and (5) Certification. FHS believes that Phase 1 is almost
complete. FHS' geographical and specialty service divisions are conducting a
detailed self-assessment as to their compliance, needs, risks, and contingency
planning, which will then be reviewed and prioritized at the corporate level.
During the fourth quarter of 1998, FHS continued moving forward in its efforts
to address Year 2000 issues, though its overall progress was less significant
due to organizational changes and restructuring. The Year 2000 project is
experiencing increased progress at the start of 1999. FHS has established the
third quarter of 1999 to complete all phases and is endeavoring to accelerate
completion ahead of that time. The following table sets forth the estimated
percentage
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completion of each of FHS' Year 2000 phases as of February 1999 with respect to
its core applications and information technology infrastructure, and its Year
2000 project overall.
Phase 1 Phase 2 Phase 3 Phase 4 Phase 5
------- ------- ------- ------- -------
Core applications and
IT infrastructure 100% 94% 56% 15% 0%
Overall 100% 83% 54% 11% 0%
THIRD PARTIES. FHS has commenced an inventory of third party
relationships, identifying them and analyzing their strategic importance to FHS
and their Year 2000 readiness. The strategically important third party
relationships identified by FHS are general purpose utility vendors, care
delivery organizations (such as providers), and customer service vendors. FHS
now anticipates completing its risk assessment for third parties in the second
quarter of 1999. There can be no assurance that the systems of other companies
on which the Company and FHS rely will be compliant on a timely basis, or that
the failure by a third party to be compliant would not have a material adverse
affect on the Company or FHS.
COSTS. FHS is evaluating on an on-going basis the related costs to
resolve its potential Year 2000 problems. FHS currently estimates that the total
cost for the project will be approximately $42.7 million, excluding the costs to
accelerate the replacement of hardware or software otherwise required to be
purchased by FHS. Through 1998, FHS expended approximately $13.6 million
relating to, among other things, the cost to repair or replace software and
related hardware problems, cost of assessment, analysis and planning and
internal and external communications. FHS estimates that the percentages of its
total expenditures for Year 2000 issues will be approximately as follows: 35%
for internal costs, 37% for outside consultants and contractors, 6.5% for
software-related costs, and 21.5% for hardware-related costs. FHS has
established a line-item in its overall operating budget specifically to cover
Year 2000 costs. The operating subsidiaries for each line of business of FHS,
however, are paying for the costs of assessment, planning, remediation and
testing of Year 2000 issues for their respective operations.
Notwithstanding the foregoing, the costs of the project and the
timetable in which FHS plans to complete the Year 2000 compliance requirements
are based on estimates derived from utilizing numerous assumptions of future
events including the continued availability of certain resources, third party
modification plans and other factors. There can be no assurances that these
estimates will be achieved and actual results and costs could differ materially
from these estimates.
Certain insurance coverages for defense costs associated with Year 2000
litigation have already been secured under FHS' Directors and Officers Liability
Insurance policy and will be re-evaluated upon renewal of that policy. At this
time, it is unclear as to the extent of existing insurance coverage, if any, FHS
may have to cover potential Year 2000 costs and liabilities under its other
insurance policies. FHS is currently analyzing the availability of such coverage
under other existing and future insurance policies and products.
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CONTINGENCY PLANNING. An important part of FHS' Year 2000 project
involves identifying worst case scenarios and seeking to develop contingency
plans. Each geographical, and specialty services division of FHS, is
prioritizing its mission critical business functions in order to address the
most critical issues and to develop alternatives to these critical processes as
part of contingency planning. A mission critical business activity or system is
one that cannot be without an automated or functional system for a period of 21
days without causing significant business impact to the particular line of
business. Among other things, FHS' divisions are assessing potential negative
impacts on a valid member's ability to receive services, the ability to generate
revenue, the need for additional expenditures, compliance with legal, regulatory
or accreditation requirements, meeting contractual obligations and reimbursing
providers, vendors and agents. FHS is currently projecting to complete the
assessment of its most critical business functions by the end of the first
quarter of 1999 and the documentation and validation of its contingency plans by
the end of the second quarter of 1999. FHS currently anticipates that its
contingency plans will include the use of manual as well as on-line files of its
members to avoid disruption in the verification of membership and eligibility
for the provision of health care services to its members.
RISKS. The Company and FHS are highly dependent upon their own
information technology systems and that of their providers and customers.
Failure by the Company, FHS or a third party to correct a material Year 2000
problem could result in a failure of or an interruption in the Company's or FHS'
business activities and operations. Such interruptions and failures could
materially and adversely affect the Company's or FHS' results of operations,
liquidity and financial condition. Due to the general uncertainty inherent in
the Year 2000 problem, resulting in part from the uncertainty of the readiness
of third party providers and customers, neither the Company nor FHS is able to
determine at this time whether the Year 2000 problems will have a material
adverse effect on the Company's or FHS' results of operations, liquidity or
financial condition. FHS' Year 2000 project is expected to reduce significantly
the Company's and FHS' level of uncertainty and the possibility of significant
or long-lasting interruptions of the Company's and FHS' business operations;
however, the Company and FHS believe that it is impossible to predict all of the
areas in which material problems may arise.
FHS has initiated formal communications with others with whom it does
significant business to determine their Year 2000 issues. FHS is currently
projecting to complete its assessment of third party risks by the end of the
second quarter of 1999. There can be no assurances that the systems of other
companies on which the Company's or FHS' systems rely will be timely converted,
or that the failure to convert by another company would not have a material
adverse affect on the Company or FHS. Forward-looking statements contained in
this Year 2000 section should be read in connection with the Company's
cautionary statements identifying important risk factors that could cause the
Company's actual results to differ materially from those projected in these
forward-looking statements, which cautionary statements are contained in the
forepart of this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company currently has no outstanding bank or external financing.
Moreover, all of the Company's investments are in money market funds and U.S.
Treasury Bills with original maturities of three months or less when purchased.
Accordingly, the Company believes that its
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business operations are not exposed to market risk relating to interest rate
risk, foreign currency exchange risk, commodity price risk or equity price risk.
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA.
The consolidated financial statements and supplementary data of the
Company called for by this item are submitted as a separate section of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On July 13, 1998, the Audit and Finance Committees of the Company
approved the appointment of Deloitte & Touche LLP ("Deloitte") as the Company's
independent accountants for the year ended December 31, 1998. Deloitte replaced
Ernst & Young LLP ("Ernst & Young") as the Company's independent accountants.
Ernst & Young was replaced as the Company's independent accountants as of July
13, 1998. The change of independent accountants was made in connection with the
acquisition by FHS of substantially all of the outstanding equity of the
Company. FHS currently engages Deloitte as its independent accountants. The
Audit and Finance Committees of the Company and FHS determined that only one
independent accounting firm should be engaged by FHS and its subsidiaries so
that there is a consistent and efficient review of the individual and
consolidated financial statements of FHS and its subsidiaries, including the
Company. See also the Company's Current Report on Form 8-K dated July 13, 1998,
as amended.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age and position of each person serving as an executive
officer of the Company are set forth below and brief summaries of their business
experience and certain other information with respect to each of them is set
forth in the information which follows the table:
Name Age Position
---- --- --------
Thomas W. Wilfong 43 President and Chief Executive Officer
Dr. Joseph Singer 41 Vice President and Chief Medical Officer
Donald Parisi 43 Vice President, Secretary and General Counsel
Marc M. Stein 47 Chief Financial Officer
Mr. Thomas W. Wilfong has served as President and Chief Executive
Officer of the Company since April 1, 1998 and as Chief Operating Officer of
FHS' Northeast Division since December 8, 1998. Mr. Wilfong served as President
of FHS' New Jersey operations from February 1998 to December 1998 and served as
Executive Director of PHS' New Jersey operations from August 1996 to February
1998. From July 1986 to August 1996, Mr. Wilfong served as Vice President of
Medical Management of Central New Jersey Medical Group. He has served as a
director of the Company since March 25, 1998.
Dr. Joseph Singer has served as a Vice President and Chief Medical
Officer of the Company since June 8, 1995. Dr. Singer joined FOHP-NJ on December
1, 1994 and has served as the Vice President, Medical Affairs and Medical
Director of FOHP-NJ since February 1995. Prior to joining FOHP-NJ, Dr. Singer
was a practicing physician in Moorestown and Medford, New Jersey, with a family
practice and specialty in geriatrics.
Donald Parisi has served as a Vice President, Secretary and General
Counsel of the Company since June 1, 1997 and from June 8, 1995 to December
1996. Mr. Parisi served as acting President and Chief Executive Officer of the
Company from December 1996 to June 1, 1997. Mr. Parisi served as Vice President,
Legal Affairs and General Counsel of FOHP-NJ from August 1994 to June 8, 1995.
From 1992 to 1994 he was a partner in the law firm of Donington, Karcher, Leroe,
Salmond, Ronan & Rainone and from 1988 to 1992 he served as a Deputy Attorney
General for the State of New Jersey.
Marc M. Stein has served as Chief Financial Officer of the Company
since February 18, 1997. Prior to becoming the Chief Financial Officer of the
Company, he served as Treasurer of HIP Insurance Company of New Jersey and
Financial Officer of HIP Health Plan of Pennsylvania from February 1995. From
November 1992 to February 1995, Mr. Stein served as Senior Vice President of
Finance for HIP of Greater New York.
Pursuant to the Administrative Management Agreement (as hereinafter
defined), each of Mr. Wilfong, Dr. Singer, Mr. Parisi, and Mr. Stein is employed
by FHS or a subsidiary thereof. The salaries and benefits of the aforementioned
executive officers is either paid by or charged to the Company. See "Executive
Compensation-Employment Agreements" and "Certain Relationships and Related
Transactions."
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CURRENT DIRECTORS OF THE REGISTRANT
The name, address, age and principal occupation or employment of each director
currently serving on the Board of Directors of the Company is set forth below:
PRINCIPAL OCCUPATION
NAME AND ADDRESS AGE OR EMPLOYMENT
- - ---------------- --- -------------
Dr. John F. Bonamo 48 Obstetrician and Gynecologist
95 Northfield Avenue
West Orange, NJ 07052
Mr. Bruce G. Coe 68 President Emeritus of New Jersey Business and
41 Lambert Lane Industry Association
Lambertville, NJ 08530
Ms. Karen A. Coughlin 50 President and Chief Executive Officer of FHS
Physicians Health Services, Inc. Northeast Division
One Far Mill Crossing
Shelton, CT 06484
Mr. Christopher Dadlez 45 Executive Vice President of Saint Barnabas
Saint Barnabas Health Care System Health Care System
Old Short Hills Road
Livingston, NJ 07039
Dr. Mark L. Engel 52 Ophthalmologist
733 North Beers Street
Holmdel, NJ 07733
Dr. Thomas J. Feneran 50 Urologist
102 East Bay Avenue, Suite C
Manahawkin, NJ 08050
Mr. John J. Gantner 46 Senior Vice President of Finance and Treasurer
Robert Wood Johnson of the Robert Wood Johnson University Hospital
University Hospital
One Robert Wood Johnson Place
New Brunswick, NJ 08903
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PRINCIPAL OCCUPATION
NAME AND ADDRESS AGE OR EMPLOYMENT
- - ---------------- --- -------------
Mr. Jay M. Gellert 45 President and Chief Executive Officer of
Foundation Health Systems, Inc. Foundation Health Systems, Inc.
21600 Oxanard Street
Woodland Hills, CA 91367
Dr. Om P. Sawhney 61 Plastic Surgeon
1550 Park Avenue
South Plainfield, NJ 07080
Mr. Thomas W. Wilfong 43 President and Chief Executive Officer of FOHP,
FOHP, Inc. Inc.
3501 State Highway 66
Neptune, NJ 07753
There are no family relationships among the current directors or
executive officers of the Company. None of the executive officers or directors
of the Company are directors of any company registered pursuant to Section 12 of
the Exchange Act or subject to the requirements of Section 15(d) of the Exchange
Act or any company registered as an investment company under the Investment
Company Act of 1940. Pursuant to the By-laws of FOHP-NJ, each person serving on
the Board of the Company automatically serves on the Board of Directors of
FOHP-NJ.
Dr. John F. Bonamo has been an obstetrician and gynecologist in private
practice since 1981. He is Clinical Chief of the Department of OB/GYN of Saint
Barnabas Medical Center. Dr. Bonamo serves as Chairman of the Board of MetroWest
I.P.A. He has served as a director of the Company since April 16, 1997.
Mr. Bruce G. Coe is currently serving as President Emeritus of the New
Jersey Business and Industry Association. From 1982 to 1996 he served as
President of the New Jersey Business and Industry Association. Mr. Coe serves on
the Board of Directors of New Jersey Resources Corporation. He also serves on
the Boards of Trustees of New Jersey Future and New Jersey Historical Society.
He has served as a director of the Company since April 16, 1997.
Ms. Karen A. Coughlin became President and Chief Executive Officer of
FHS' Northeast Division in October 1998. Prior to joining FHS, Ms. Coughlin
served as President of one of two operating divisions of Humana, Inc., a leading
national health care company. During her 18 year tenure with Humana, Inc., Ms.
Coughlin also served as Vice President and General Manager of Humana, Inc. in
Chicago, Illinois and as a Vice President of Humana Health Care Plans of
Kentucky. In the not-for-profit sector, Ms. Coughlin served as head nurse of the
Pediatric Intensive Care Unit of Loma Linda University Center in California, as
Assistant Professor of Nursing for Minot State University in North Dakota, and
as a staff nurse in the Neonatal Intensive Care Unit for Cleveland's Fairview
General Hospital. She has served as a director of the Company since November 18,
1998.
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Mr. Christopher M. Dadlez, FACHE, has been Executive Vice President of
the Saint Barnabas Health Care System since June 1996. From March 1992 to June
1996, Mr. Dadlez served as the President and Chief Executive Officer of Monmouth
Medical Center. From January 1995 to May 1996, Mr. Dadlez served as the
President of Mid-Atlantic Health Group. From June 1984 to March 1992, he was
Executive Vice President and Chief Operating Officer of Sinai Hospital,
Baltimore, Maryland. Mr. Dadlez serves on the Boards of Trustees of the New
Jersey Hospital Association and Ronald McDonald House. He serves as Chairman of
Long Branch Tomorrow and is on the Board of Trustees of the Greater Long Branch
Chamber of Commerce. He has served as a director of the Company since June 7,
1995 and as a director of FOHP-NJ since January 1994.
Dr. Mark L. Engel, an ophthalmologist, has served as President of
Ophthalmic Physicians of Monmouth since August 1975. From January 1989 through
December 1990 he served as President of the Bayshore Hospital Medical Staff. Dr.
Engel is a trustee of Ophthalmic Physicians of Monmouth. He has served as a
director of FOHP since June 7, 1995 and as Chairman of the Board of the Company
since April 16, 1997. Dr. Engel also served as a director of FOHP-NJ since
January 1994 and as Chairman of the Board of FOHP-NJ since June 1995.
Dr. Thomas J. Feneran has been a physician in the private practice of
urology since June 1983. He is associated in Drs. Feneran & Fernicola, P.C. He
has served as a director of the Company since June 7, 1995 and as a director of
FOHP-NJ since January 1994.
Mr. John J. Gantner has served as Treasurer of the Robert Wood Johnson
University Hospital since May 1995. In 1993, he joined Robert Wood Johnson
University as Senior Vice President of Finance. From October 1988 to December
1992, Mr. Gantner was a partner in the New York/New Jersey office of Ernst &
Young. Mr. Gantner is a Certified Public Accountant and a Certified Managerial
Accountant. He has served as a director of the Company since April 16, 1997.
Mr. Jay M. Gellert became President and Chief Operating Officer of FHS
on May 7, 1997, and assumed the position of Chief Executive Officer of FHS on
August 7, 1998. From April 1, 1997 until May 7, 1997, Mr. Gellert served as
President and Chief Operating Officer of FHS. Mr. Gellert served as a director
and President and Chief Operating Officer of Health Systems International, Inc.,
a predecessor of FHS, from June 1996 until April 1, 1997. Prior to joining FHS,
Mr. Gellert directed Shattuck Hammond Partners Inc.'s strategic advisory
engagements in the area of integrated delivery systems development, managed care
network formation and physician group practice integration. Prior to joining
Shattuck Hammond Partners, Inc., Mr. Gellert was an independent consultant, and
from 1988 to 1991, he served as President and Chief Executive Officer of Bay
Pacific Health Corporation. From 1985 to 1988 Mr. Gellert was Senior Vice
President and Chief Operating Officer for California Healthcare System. Mr.
Gellert serves on the Board of Directors of Paragon Health Network, Inc. He has
served as a director of the Company since March 25, 1998.
Dr. Om P. Sawhney has been a practicing physician in Plastic Surgery &
Rehabilitation Medicine Associates since January 1974. Dr. Sawhney is a
consultant to the Audit Committee of the Medical Inter Insurance Exchange and
the Board of Managers of Associates in Medical Service at Muhlenberg, L. L. C.
He is on the Board of Directors of the Muhlenberg Foundation and the Central
Jersey I.P.A. Dr. Sawhney is also President of Associates in Medicine and
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Surgery, P.A. He has served as a director of the Company since June 7, 1995 and
as a director of FOHP-NJ since January 1994.
Mr. Thomas W. Wilfong - Information regarding Mr. Wilfong is included
under the caption "Executive Officers of the Registrant."
DIRECTOR COMPENSATION; COMMITTEE SERVICE
The members of the FOHP Board and any committee thereof may be paid
their expenses, if any, relating to their attendance at FOHP Board or committee
meetings, and directors who are not full-time employees of the Company may be
paid a fixed sum for attendance at FOHP Board or committee meetings or paid a
stated salary as a director. Currently, the members of the FOHP Board are
entitled to receive an annual retainer of $10,000 and $500 for each FOHP Board
meeting attended, $300 for each telephonic FOHP Board meeting in which the
director participates, $300 for each committee meeting attended, and $200 for
each telephonic committee meeting in which a director participates. The Chairman
of the Board is entitled to receive an additional $5,000 annual retainer and the
chairpersons of the following committees are entitled to receive a $2,000 annual
retainer: Audit Committee; Finance Committee; Medical Affairs Committee; and
Grievance Committee.
The Company paid approximately $129,900 during the year ended December
31, 1998 to members of the FOHP Board, or charitable organizations designated by
certain members of the FOHP Board, for their services as directors and committee
members.
COMMITTEES
Pursuant to the Company's By-laws, the Company has an Audit Committee
which is responsible for evaluating and recommending the appointment of
independent auditors for the Company and its subsidiaries, and for reviewing, in
consultation with such auditors, the annual financial statements (on a
consolidated and separate company basis), systems of internal controls and
accounting principles of the Company and its subsidiaries.
In addition, pursuant to the Company's By-laws, the FOHP Board may, by
one or more resolutions passed by a majority of the directors then in office,
establish such other committees as it shall determine necessary for the
operations of the Company. The FOHP Board has empowered the members of the Audit
Committee to act as the Company's Compensation Committee which shall make
decisions relating to the compensation of the officers, directors and employees
of the Company. The Compensation Committee is currently comprised of the
following directors: Mr. Bruce G. Coe, Mr. John J. Gantner and Dr. Om P.
Sawhney.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN
COMPENSATION DECISIONS
During the year ended December 31, 1998, the Compensation Committee
consisted of Mr. Coe, Mr. Gantner and Dr. Sawhney.
During the year ended December 31, 1998, no executive officer of the
Company, served as a member of the compensation committee or as a director of
another entity, except for a subsidiary or affiliate of the Company.
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COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's executive
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission (the
"Commission"). Executive officers, directors and greater than 10% percent
shareholders are required by the Commission's regulations to furnish the Company
with copies of all Forms 3, 4 and 5 that they file.
Based solely on the Company's review of the copies of such forms it has
received, the Company believes that all its executive officers, directors and
greater than 10% beneficial owners complied with all filing requirements
applicable to them with respect to events or transactions during fiscal 1998
except that the Form 4 required to be filed by FHS in January 1999 in connection
with the conversion of Convertible Debentures on December 31, 1998 has not yet
been filed.
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ITEM 11.
EXECUTIVE COMPENSATION.
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to the Company and its
subsidiaries, for the years ended December 31, 1998, 1997 and 1996, of the
persons serving as the Chief Executive Officer of the Company during the year
ended December 31, 1998, and the next three highest paid executive officers of
the Company in 1998 (collectively, the "Named Officers"):
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
--------------------------------------- -----------------------------------------------
Awards Payouts
----------------------- --------
Other Securities
Annual Restricted Underlying LTIP All other
Name and Compen- Stock Options/ Payouts Compensation
Principal Position Year Salary($) Bonus($) sations($) Award(s)($) SARs(#) ($) ($)(1)(2)
- - ------------------------- ---- ------------ --------- --------- -------- -------- ------- ------------
Thomas W. Wilfong 1998 $133,462(3) $ -- $ -- $ -- $ -- $ -- $ --
President and Chief
Executive Officer
Roger W. Birnbaum (4) 1998 74,038(5) 25,000(6) -- -- -- -- 208,754(7)
Former President and 1997 140,615(8) 25,000(9) -- -- -- -- 85,722
Chief Executive
Officer
Joseph Singer, M.D. 1998 252,923 -- -- -- -- -- 5,336
Vice President and 1997 240,000 28,000 -- -- -- -- 5,035
Chief Medical Officer 1996 239,354 -- -- -- -- -- 4,905
Donald Parisi 1998 163,346 -- -- -- -- -- 5,336
Vice President, 1997 151,346 40,000 -- -- -- -- 5,056
Secretary and 1996 144,231 -- -- -- -- -- 4,981
General Counsel
Marc M. Stein 1998 184,423 -- -- -- -- -- 5,336
Chief Financial 1997 144,038 (10) 35,000(9) -- -- -- -- 5,132
Officer
- - ---------------
(1) Includes amounts contributed by the Company under its 401(k) Plan. All
full-time employees who have completed 30 days of service with the
Company or any of its subsidiaries are eligible to participate in the
401 (k) Plan which allows eligible employees to save up to 15% of their
pre-tax compensation (subject to a maximum amount per year established
annually pursuant to the Code) through a payroll deduction. Subject to
the discretion of the FOHP Board, the Company may make matching
contributions to the 401(k) Plan. Amounts contributed by the Company to
the accounts of the Named Officers for 1998 are as follows: Mr. Wilfong
- $0; Mr. Birnbaum - $5,000; Dr. Singer - $5,000; Mr. Parisi - $5,000;
and Mr. Stein - $5,000.
(2) Includes amounts of insurance premiums paid by the Company in 1998 with
respect to term life insurance for the benefit of the Named Officers.
Amounts paid by the Company for the benefit of the Named Officers are
as follows: Mr. Wilfong - $0; Mr. Birnbaum - $336; Dr. Singer - $336;
Mr. Parisi - $336; and Mr. Stein $336.
(3) Represents the period April 1, 1998 to December 31, 1998.
(4) Mr. Birnbaum served as President and Chief Executive Officer of the
Company from June 1, 1997 to April 1, 1998.
(5) Represents the period January 1, 1998 to March 31, 1998.
(6) Such bonus was earned in fiscal 1998 and is payable in 1999.
(7) Of this amount, $189,423 represents severance and consulting payments
pursuant to his employment agreement with the Company, and $13,995
represents unused vacation pay.
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(8) Represents the period June 1, 1997 to December 31, 1997.
(9) Such bonus was earned in fiscal year 1997 but was not paid until March
1998.
(10) Represents the period February 18, 1997 to December 31, 1997.
EMPLOYMENT AGREEMENTS
Effective June 1, 1998, Thomas W. Wilfong and PHS, a subsidiary of FHS,
entered into an employment letter agreement (the "Wilfong Employment Agreement")
pursuant to which Mr. Wilfong will act as the President and Chief Executive
Officer of the Company. The Wilfong Employment Agreement supercedes all prior
employment agreements relating to Mr. Wilfong's employment by the Company. In
accordance with the terms of the Wilfong Employment Agreement, Mr. Wilfong (i)
earns an annual salary of $190,000, (ii) is eligible to participate in the FHS
Executive Incentive Plan with a maximum benefit of 40% of his base salary for
1998 and 50% of his base salary for 1999, (iii) is eligible to participate in
FHS' Stock Option Program, and (iv) is eligible to receive and/or participate in
the benefits customarily provided by FHS to its employees. The Wilfong
Employment Agreement may be terminated by FHS or Mr. Wilfong at any time. In the
event that Mr. Wilfong's employment is terminated by FHS for any reason other
than "cause" (as defined in the Wilfong Employment Agreement), FHS will provide
Mr. Wilfong with a minimum of 60 days notice and a severance package, provided
he agrees to enter into a standard general release agreement, totaling one year
of base salary in effect at the date of termination.
Effective June 1, 1997, Roger W. Birnbaum became the President and
Chief Executive Officer of the Company pursuant to an employment letter
agreement entered into by Mr. Birnbaum and FHS dated May 6, 1997 (the "Birnbaum
Employment Agreement"). As a consequence of the formation of FHS' Northeast
Division, Mr. Birnbaum's employment as President and Chief Executive Officer of
the Company ended as of April 1, 1998. In connection with such separation, Mr.
Birnbaum received six months of additional salary as severance. In addition,
pursuant to the Birnbaum Employment Agreement, Mr. Birnbaum provided consulting
services to the Company for a six month period following the termination of his
employment for $125,000.
Effective July 1, 1997, FHS entered into an employment letter agreement
(the "Singer Employment Agreement") with Dr. Joseph Singer pursuant to which Dr.
Singer remained as Chief Medical Officer of the Company. The Singer Employment
Agreement supercedes all prior employment agreements relating to Dr. Singer's
employment by the Company. In accordance with the terms of the Singer Employment
Agreement, Dr. Singer (i) earns a monthly salary of $20,000, (ii) is eligible to
receive a monthly automobile allowance of $1,000, (iii) received a $28,000
signing bonus in 1997, (iv) is eligible to participate in the FHS Management
Bonus Plan under which he may earn a percentage of his base salary as a bonus
subject to the discretion of the FHS Compensation and Stock Option Committee,
and (v) is eligible to receive and/or participate in the benefits customarily
provided by FHS to its employees. Pursuant to the terms of the Singer Employment
Agreement, Dr. Singer is an "employee-at-will" and is eligible to receive four
months of severance pay upon his leaving the employ of FHS, provided that such
termination is not by reason of "just cause," as defined in the Singer
Employment Agreement.
On February 9, 1998, FHS and Mr. Stein entered into an employment
letter agreement (the "Stein Employment Agreement"), which agreement superseded
a previous employment letter agreement dated February 6, 1997. In accordance
with the terms of the Stein Employment
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Agreement, Mr. Stein (i) earns an annual salary of $175,000, (ii) is eligible to
participate in the 1998 FHS Management Bonus Plan and in the 1999 FHS Management
Bonus Plan on a prorated basis, (iii) is entitled to receive a monthly
automobile allowance of $500, (iv) is eligible to participate in the FHS
Management Stock Option Plan, and (v) receives other customary benefits provided
by FHS to its employees. Provided that Mr. Stein remains employed by FHS until
March 31, 1999, or if his employment is terminated prior to March 31, 1999 for
any reason other than "just cause," as defined in the Stein Employment
Agreement, Mr. Stein will receive as retention bonus equal to three months
salary on March 31, 1999. Pursuant to the terms of the Stein Employment
Agreement, if Mr. Stein's employment is terminated for any reason other than
"just cause" prior to March 31, 1999, FHS will continue to pay Mr. Stein his
salary through September 30, 1999, which includes six months severance. The
Stein Employment Agreement was amended on October 14, 1998 to extend the term of
the agreement until June 30, 1999. The Stein Employment Agreement, as amended,
now provides that Mr. Stein will receive a retention bonus equal to 10% of his
salary if he remains employed by FHS until June 30, 1999 or if his employment is
terminated for any reason other than "just cause."
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ITEM 12. PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP MANAGEMENT.
The following table sets forth information as of March 15, 1999, with
respect to the beneficial ownership (as defined in Rule 13d-3 of the Exchange
Act), of the Company's Common Stock by each director of the Company, each of the
Named Officers (as defined in the section herein captioned "Executive
Compensation"), each person or group of persons known by the Company to be the
beneficial owner of more than 5% of Common Stock, and all directors and
executive officers of the Company as a group:
BENEFICIAL OWNERSHIP OF
COMMON STOCK
---------------------------
PERCENT OF
NAME OF BENEFICIAL OWNER NO. OF SHARES (1) CLASS
- - ------------------------ ------------- ----------
Foundation Health Systems, Inc. (2)................. 496,916,161(3) 99.6%(3)
Dr. John F. Bonamo (4).............................. 1,500 (5)
Karen A. Coughlin (6)...............................
Bruce G. Coe (4).................................... --
Christopher M. Dadlez (4)........................... --
Dr. Mark L. Engel (4)............................... 7,017 (7) (5)
Dr. Thomas J. Feneran (4)........................... 4,100 (5)
John J. Gantner (4)................................. --
Jay M. Gellert (6).................................. --
Dr. Om P. Sawhney (4)............................... 5,800 (8) (5)
Thomas W. Wilfong (6) (9)........................... --
Roger W. Birnbaum (10).............................. --
Dr. Joseph Singer (9)............................... 8,000 (5)
Donald Parisi (9)................................... --
Marc M. Stein (9)................................... --
All Directors and Executive Officers
as a Group (14 persons)............................. 26,417 (7)(8) (5)
- - ----------
(1) Except as otherwise indicated, all of the shares of Common Stock are
held beneficially and of record.
(2) FHS' principal offices are located at 21600 Oxnard Street, Woodland
Hills, CA 91367.
(3) Such number and percentage do not include or give effect to the number
of shares of Common Stock that FHS has the right to receive upon full
conversion of the New Convertible Debenture. In December 1997, FHS
converted approximately $18,952,930 of the principal amount of the New
Convertible Debenture into 92,804,003 shares of Common Stock and, in
December 1998, FHS converted $1,197,183 of the principal amount of the
New Convertible Debenture into 399,003,000 shares of Common Stock . If
FHS elects to convert the remaining New Convertible Debenture, FHS
would receive, in accordance with a formula set forth in the New
Convertible Debenture, additional shares of Common Stock, resulting in
FHS owning more than 99.9% of the then outstanding Common Stock.
(4) Such person currently serves as a Non-FHS Director of the Company.
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(5) Shares beneficially owned do not exceed 1% of the outstanding Common
Stock.
(6) Such person is affiliated with FHS and serves as a director of the
Company.
(7) Includes an aggregate of 417 shares of Common Stock held by Dr. Barbara
Engel, Dr. Mark L. Engel's wife, as to which shares he disclaims any
beneficial interest.
(8) Includes an aggregate of 500 shares of Common Stock held by Dr. Veena
Sawhney, Dr. Om P. Sawhney's wife, as to which shares he disclaims any
beneficial interest.
(9) Such person is an executive officer of the Company.
(10) Such person was a former executive officer and director of the Company.
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Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
MANAGEMENT AGREEMENTS
In connection with FHS' initial investment in the Company, FHS and the
Company entered into a General Administrative Services Management Agreement (the
"Administrative Management Agreement"), pursuant to which FHS oversees the
management of the Company and assists the Company's management in providing
contracting, utilization review and quality assurance, employee relations, sales
and marketing, and strategic planning, among other services. In addition, FHS
and the Company have entered into a Management Information Systems and Claims
Processing Services Management Agreement, (the "MIS Agreement," and together
with the Administrative Management Agreement, the "Management Agreements"),
pursuant to which FHS would provide claims processing, record keeping and data
processing services to all the health plans offered, or to be offered, by the
Company's subsidiaries. The MIS Agreement will be effective at FHS' option.
Each of the Management Agreements provides that FHS will employ the
business executives in charge of the Company and each of its subsidiaries, and
each executive in charge of a principal business division, unit or function
(including, but not limited to finance, legal, operations, sales and marketing,
information systems, medical management, and provider contracting and
relations). Each of the executives report to FHS' senior management. All the
executives of the Company shall be appointed by the FOHP Board to the offices
requested by FHS: provided, however, that the FOHP Board may reject any proposed
appointee it reasonably finds to be of insufficient ethical character for such
office; and provided further, that the FOHP Board may, after due consultation
with FHS based on a reasonable determination of intentional and material
unethical behavior or insubordination or willful misconduct or gross negligence,
remove any such executive. Currently, Mr. Thomas W. Wilfong, President and Chief
Executive Officer of the Company, Dr. Singer, Vice President and Chief Medical
Officer of the Company, Mr. Donald Parisi, Vice President, General Counsel and
Secretary of the Company, and Mr. Marc M. Stein, Chief Financial Officer of
Company, are employed by FHS or a subsidiary thereof.
Each of the Management Agreements provides that the Company will employ
an internal auditor who will report directly to the FOHP Board.
Each of the Management Agreements has an initial term of five years,
subject to automatic one year renewal terms unless either party provides written
notice of non-renewal to the other party at least two years prior to the then
current term of the agreement. A party may terminate either of the Management
Agreements if (i) the other party is in material breach of the agreement
(subject to certain rights to cure any such breach), or (ii) the other party (a)
becomes insolvent, (b) voluntarily seeks, consents to or acquiesces in the
benefit or benefits of any Debtor Relief Law (as defined in the Management
Agreements), or (c) becomes a party to (or be made the subject of) any
proceeding provided by any Debtor Relief Law, other than as a creditor or
claimant (unless, in the event the proceeding is voluntary, the petition
instituting the voluntary proceeding is dismissed within 45 days of the date it
was filed).
Under the Administrative Management Agreement, FHS is entitled to
receive a monthly management fee (the "Management Fee"). Originally, the
Management Fee equaled the sum of (i) 2% of the total revenue of the health
plans offered by the Company (the "FOHP Health Plans") for a month, plus (ii)
reimbursement for (a) direct expenses incurred by third parties, and
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(b) salaries and benefits of the executives of the Company. Subsequent to the
execution of the Administrative Management Agreement and conversion of the
Initial Convertible Debenture, the Company and FHS agreed that the Management
Fee to be charged the Company by FHS under the Administrative Management
Agreement should be based on allocated corporate charges and not on the formula
originally provided in the Administrative Management Agreement.
In connection with the sale of the Initial Convertible Debenture, the
Company paid FHS a phase-in period management fee of $1,701,120.38, which was
based on certain administrative services provided by FHS to the Company from
January 1, 1997 to April 30, 1997.
At the end of each month during the term of the Administrative
Management Agreement, FHS shall provide the Company with statements setting
forth the Management Fee for such month. The Management Fee for any month shall
become payable within ten days after receipt by FOHP from FHS of the statements
for such month.
In the event that FHS establishes a regional or centralized multi-entry
system relating to functions ordinarily and customarily handled at the plan
level and not described in the MIS Management Agreement (such as plan level
accounting and membership services), FHS shall have the right to transfer such
functions performed by the FOHP Health Plans to such regional system, in which
case the Company shall be obligated to pay to FHS the share of such regional
systems costs incurred by FHS with respect to such function which is allocable
to the FOHP Health Plans; provided, however, the regionalization or
centralization of functions by FHS must result, in the aggregate, in cost
savings to the FOHP Health Plans and any data processing functions performed
under such regionalization or centralization shall not cost more than what was
contemplated under the Company's then-existing Management Information Services
Agreement (the "HSII Agreement") with Health Systems Integration, Inc. ("HSII").
In the event any of the Management Fees due and payable to FHS under
the Administrative Management Agreement are not paid, such Management Fees may,
at FHS' option, be added to the principal amount of the Convertible Debentures
issued by the Company to FHS except that Management Fees due and payable during
calendar year 1998 may only be added to such principal amount to the extent
permitted by the Convertible Debentures. Any due and payable but unpaid
Management Fees not added to the principal amount of the Convertible Debentures
issued by the Company to FHS shall bear interest at the rate of the Initial
Convertible Debenture until paid in their entirety or added to the principal
amount of the Convertible Debentures.
As compensation under the MIS Management Agreement, the Company will
(i) pay FHS fees and charges to be specified by FHS upon the effectiveness of
the agreement, which fees and charges shall be no greater than the compensation
paid to HSII pursuant to the HSII Agreement and (ii) reimburse FHS for such
costs and expenses as to which HSII was entitled to reimbursement under the HSII
Agreement and documents related thereto.
FHS is required to provide and perform the following services under the
Administrative Management Agreement, subject to the direction of the FOHP Health
Plans and consistent with the manner in which FHS provides such services to its
other subsidiaries, without disadvantage to the Company or the FOHP Health
Plans: (i) manage the diagnosis and assessment of the information/operating
systems of the FOHP Health Plans and provide support for all necessary
conversions, supplements and enhancements to such systems; (ii) manage the FOHP
Health Plans in their provider contracting efforts and provider relations
matters, including the
-45-
establishment of appropriate provider reimbursement structures; (iii) provide
human resources and employee benefit corporate management services to the FOHP
Health Plans in recruiting employees and in implementing personnel policies and
procedures and employee benefit programs; (iv) provide consultation and
assistance to the FOHP Health Plans in connection with governmental relations
and legislative activities (including regulatory compliance matters) affecting
the FOHP Health Plans; (v) provide consultation and assistance to the FOHP
Health Plans in conducting analyses of the marketplace in which they operate and
in developing an appropriate strategic plan; (vi) provide consultation and
assistance to the FOHP Health Plans in connection with the development and
dissemination of enrollment and disclosure materials for enrollees thereof,
employers and other groups contracting with any of the FOHP Health Plans and
other third parties; (vii) provide administrative support to the FOHP Health
Plans in the formulation, review and implementation of the utilization review
and quality assurance programs thereof; (viii) provide consultation and
assistance to the FOHP Health Plans in connection with protecting the
confidentiality of the records thereof and ensuring compliance with all
applicable federal, state and local laws and regulations relating to the records
thereof; (ix) consult with and assist the FOHP Health Plans in support of the
medical management policies and procedures thereof, in preparing and negotiating
contracts with participating providers, subscriber groups, vendors and other
third parties; (x) provide consultation and assistance to the FOHP Health Plans
in the preparation of the annual budget thereof, which will set forth their
major operating objectives, anticipated revenues, expenses, cash flow and
capital expenditures; (xi) provide oversight management to the FOHP Health Plans
in recording and analyzing the financial conditions thereof, including financial
review and analysis of health care costs incurred thereby and assist in the
preparation of appropriate federal, state and local tax returns and provide the
FOHP Health Plans with advice as to appropriate tax accruals; (xii) provide
consultation and assistance to the FOHP Health Plans in the establishment,
review and modification of collection policies and programs designed to minimize
the number and amount of outstanding accounts receivable thereof; (xiii) provide
consultation and assistance in implementing the FOHP Health Plans' premium
structures, which premium structures shall take into account the financial
obligations of the FOHP Health Plans, the importance of providing quality health
care at a reasonable cost, and the competition of the FOHP Health Plans in the
service areas; (xiv) give advice to the FOHP Health Plans concerning various
business insurance programs, including but not limited to, professional
liability insurance, directors and officers liability insurance, reinsurance and
workers' compensation insurance; (xv) provide consultation and assistance to the
FOHP Health Plans in connection with the sales and marketing efforts of the FOHP
Health Plans, including assistance with regard to the selection of advertising
agencies, the conduct of surveys respecting the satisfaction of subscriber
groups and enrollees of the FOHP Health Plans and the FOHP Health Plans' sales
programs and techniques; (xvi) provide to the FOHP Health Plans actuarial and
data analysis services, and assistance in the development of underwriting
standards; (xvii) assist the Boards of Directors of the Company and its
subsidiaries in reviewing the short, medium and long range objectives of the
FOHP Health Plans and in formulating recommendations with respect thereto; and
(xviii) provide such other services, not specifically mentioned herein, that are
mutually agreed upon between the parties.
FHS shall provide and perform the following services under the MIS
Management Agreement: (i) provide all claims processing, record keeping and data
processing services to the FOHP Health Plans that had been provided by HSII
pursuant to the HSII Agreement; and (ii) provide such other related services as
are mutually agreed upon between the parties.
-46-
Under each of the Management Agreements, FHS will defend, indemnify and
hold the FOHP Health Plans and, among others, their respective officers,
directors, shareholders, employees and agents, from and against any and all
claims, actions, damages, obligations, losses, liabilities, costs and expenses,
including attorneys' fees, other professional fees, costs of collection and
other costs of defense ("Management Agreement Damages"), resulting from FHS'
gross negligence or willful misconduct. In addition, the Company has agreed to
defend, indemnify and hold FHS and, among others, its officers, directors,
shareholders, employees and agents, from and against any and all Management
Agreement Damages resulting from FHS' execution of the Management Agreements or
performance of services thereunder, provided that no such indemnification shall
be provided to the extent that such Management Agreement Damages result from
FHS' gross negligence or willful misconduct.
MERGERS
The Company and FHS have entered the Merger Agreement, pursuant to
which FHS Transition Company will merge with and into the Company. See
"Description of Business - The Merger."
On January 1, 1999, PHS-NJ, a New Jersey HMO controlled by FHS, merged
with and into FOHP-NJ. See "Description of Business - Merger of FOHP-NJ and
Physicians Health Services of New Jersey, Inc."
EXECUTIVE OFFICERS OF NJ ACUTE CARE INSTITUTIONS AND FHS SERVING ON
FOHP BOARD.
The following directors of the Company are executive officers of NJ
Acute Care Institutions which have purchased, either directly or through an
affiliate, shares of Common Stock; Mr. Christopher Dadlez, Executive Vice
President of Saint Barnabas Health Care System, which includes Clara Maass
Medical Center, Irvington General Hospital, Monmouth Medical Center, Newark Beth
Israel Medical Center, Saint Barnabas Medical Center, Union Hospital, Wayne
General Hospital and West Hudson Hospital; and Mr. John J. Gantner, Senior Vice
President of Finance and Treasurer of the Robert Wood Johnson University
Hospital. See "Directors and Executive Officers of the Registrant - Current
Directors of the Registrant." In addition, a large percentage of the revenues of
FOHP-NJ is generated from NJ Acute Care Institutions that have enrolled
employees in FOHP-NJ plans as required by the Certificate of Incorporation of
the Company.
Each of Karen A. Coughlin, Jay M. Gellert and Thomas W. Wilfong serve
as executive officers of FHS and currently serve as directors of the Company.
See "Directors and Executive Officers of the Registrant - Current Directors of
the Registrant."
-47-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
Reference is made to the Index of Financial
Statements hereinafter contained.......................F-1
Other than the Financial Data Schedule included as Exhibit 27, no
Financial Statement Schedules are required to, nor will any, be filed
with this Annual Report on Form 10-K.
3. EXHIBITS
Reference is made to the Index of Exhibits
hereinafter contained..................................E-1
(b) Reports on Form 8-K
During the fourth quarter ended December 31, 1998, no Current Reports
on Form 8-K were filed by the Company with the Commission.
-48-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
Date: March 30, 1999 By: /s/ THOMAS W. WILFONG
---------------------------------------
Thomas W. Wilfong, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
- - --------- ----- ----
/s/ THOMAS W. WILFONG President and Chief Executive March 30, 1999
-------------------------- Officer (Principal Executive
Thomas W. Wilfong Officer) and Director
/s/ MARC M. STEIN Chief Financial Officer (Principal March 30, 1999
-------------------------- Financial and Accounting Officer)
Marc M.Stein
/s/ DR. MARK L. ENGEL Chairman of the Board March 30, 1999
--------------------------
Dr. Mark L. Engel
/s/ DR. JOHN F. BONAMO Director March 30, 1999
--------------------------
Dr. John F. Bonamo
/s/ KAREN A. COUGHLIN Director March 30, 1999
--------------------------
Karen A. Coughlin
/s/ BRUCE G. COE Director March 30, 1999
--------------------------
Bruce G. Coe
-49-
Signature Title Date
- - --------- ----- ----
/s/ CHRISTOPHER M. DADLEZ Director March 30, 1999
--------------------------
Christopher M. Dadlez
/s/ DR. THOMAS J. FENERAN Director March 30, 1999
--------------------------
Dr. Thomas J. Feneran
/s/ JOHN J. GANTNER Director March 30, 1999
--------------------------
John J. Gantner
/s/ JAY M. GELLERT Director March 30, 1999
--------------------------
Jay M. Gellert
/s/ DR. OM P. SAWHNEY Director March 30, 1999
--------------------------
Dr. Om P. Sawhney
-50-
CONSOLIDATED FINANCIAL STATEMENTS
FOHP, INC. AND SUBSIDIARIES
DECEMBER 31, 1998
CONTENTS
Reports of Independent Auditors F-2
Consolidated Financial Statements:
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FOHP, Inc.
Neptune, NJ
We have audited the accompanying consolidated balance sheet of FOHP Inc. and
subsidiaries as of December 31, 1998 and the related consolidated statements of
operations, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of FOHP, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 1998 financial statements present fairly, in all material
respects, the consolidated financial position of FOHP Inc. and subsidiaries as
of December 31, 1998 and the consolidated results of their operations and cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Hartford, CT
February 26, 1999
F-2
Report of Independent Auditors
The Board of Directors
FOHP, Inc.
We have audited the accompanying consolidated balance sheets of FOHP, Inc. (the
"Company") and subsidiaries, as of December 31, 1997 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years ended December 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of FOHP, Inc. and
subsidiaries as of December 31, 1997, and the consolidated results of their
operations and their cash flows for the years ended December 31, 1997 and 1996,
in conformity with generally accepted accounting principles.
Iselin, New Jersey
February 13, 1998 Ernst & Young LLP
F-3
FOHP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
1998 1997
--------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 44,052,058 $ 79,266,721
Accounts receivable from owners/providers, net of allowances
for doubtful accounts and retroactive terminations of
$1,546,616 in 1998 and $922,354 in 1997 5,138,201 11,096,487
Other accounts receivable, net of allowances for doubtful
accounts and retroactive terminations of $662,836 in 1998
and $2,507,619 in 1997 4,918,844 3,131,333
Due from Integrated Pharmacy Services, Inc. 3,540,608 --
Prepaids and other current assets 513,073 635,548
--------------------------------------------
Total current assets 58,162,784 94,130,089
Restricted cash 57,855,421 13,846,682
Furniture and equipment, net 1,730,136 2,480,042
Goodwill, net of accumulated amortization of $2,693,256
and $0 at December 31, 1998 and 1997, respectively 96,237,857 107,730,254
Deferred tax asset 3,942,798 --
Other assets 350,419 424,164
--------------------------------------------
Total assets $ 218,279,415 $ 218,611,231
============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical claims payable to owners/providers $ 18,106,942 $ 20,308,241
Other medical claims payable 42,249,530 62,614,704
Accounts payable 215,855 741,010
Accrued expenses, including restructuring accrual
of approximately $1,577,000 and $12,709,000 at
December 31, 1998 and 1997, respectively 9,512,535 17,510,150
Due to Foundation Health Systems, Inc. 1,446,459 543,075
Due to other affiliates 612,989 1,192,716
Unearned premium 1,204,911 7,965,658
Other current liabilities -- 8,054
--------------------------------------------
Total current liabilities 73,349,221 110,883,608
Convertible debentures payable to Foundation Health Systems, Inc. 11,131,386 11,294,406
Subordinated debentures payable to Foundation Health Systems, Inc. 25,113,575 24,000,000
--------------------------------------------
Total liabilities 109,594,182 146,178,014
--------------------------------------------
Commitments and contingencies (Note 10)
Shareholders' equity:
Preferred Stock, $1.00 par value, 1,000,000 shares authorized,
none issued or outstanding -- --
Common Stock, $.01 par value, 499,000,000 shares
authorized, 499,000,000 shares and 100,000,000 shares issued
and outstanding at December 31, 1998 and 1997, respectively 1,011,941 1,000,000
Additional paid-in capital 239,135,758 208,053,796
Accumulated deficit (131,462,466) (136,620,579)
--------------------------------------------
Total shareholders' equity 108,685,233 72,433,217
--------------------------------------------
Total liabilities and shareholders' equity $ 218,279,415 $ 218,611,231
============================================
See notes to consolidated financial statements.
F-4
FOHP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------------------
Revenue:
Premiums from owners/providers $ 118,591,143 $ 132,575,894 $ 135,544,112
Other premium revenue 209,268,135 239,132,416 112,125,670
Other, principally administrative service fees 2,513,576 2,045,011 7,863,006
Interest income 4,308,879 3,652,910 1,843,520
------------------------------------------------
Total revenue 334,681,733 377,406,231 257,376,308
------------------------------------------------
Expenses:
Medical services to owners/providers 46,895,944 63,882,103 37,026,903
Hospital services to owners/providers 32,154,087 64,553,166 30,156,890
Other medical services 109,423,870 148,812,233 105,551,393
Other hospital services 75,026,204 101,521,355 63,760,554
Selling, general and administrative 53,199,216 55,106,022 50,734,197
Management fee - Foundation Health Systems, Inc. 2,543,000 7,502,899 --
Depreciation & amortization 4,224,987 1,404,192 879,306
Interest - Foundation Health Systems, Inc. 2,229,890 1,790,410 --
Other interest 536,191 91,163 11,247
Restructuring costs (2,250,000) 12,825,570 --
------------------------------------------------
Total expenses 323,983,389 457,489,113 288,120,490
------------------------------------------------
Net income (loss) before provision for income taxes 10,698,344 (80,082,882) (30,744,182)
Provision for income taxes 5,540,231 2,139 924
------------------------------------------------
Net income (loss) $ 5,158,113 $ (80,085,021) $ (30,745,106)
================================================
Net income (loss) per common share $ 0.05 $ (9.18) $ (14.64)
================================================
Net income (loss) per common share - assuming dilution $ -- $ (9.18) $ (14.64)
=================================================
See notes to consolidated financial statements.
F-5
FOHP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK TOTAL
----------------------------- ADDITIONAL SHAREHOLDERS'
PAR PAID-IN ACCUMULATED EQUITY
SHARES VALUE CAPITAL DEFICIT (DEFICIENCY)
--------------------------------------------------------------------------------
Balance at January 1, 1996 2,100,173 $ 21,002 $ 30,648,489 $ (25,790,452) $ 4,879,039
Net loss (30,745,106) (30,745,106)
--------------------------------------------------------------------------------
Balance at December 31, 1996 2,100,173 21,002 30,648,489 (56,535,558) (25,866,067)
Redemption of FOHP, Inc. Common Stock-NJ (13,334) (133) 133 --
Conversion of outstanding shares of FOHP, Inc.
Common Stock-NJ to Common Stock:
FOHP, Inc. Common Stock-NJ (2,086,839) (20,869) (20,869)
Issued Common Stock (at $.01 per
share) 2,086,839 20,869 20,869
Issued Common Stock (April 30, 1997
at $10.12 per share) 168,109 1,681 1,699,440 1,701,121
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
Net loss (80,085,021) (80,085,021)
--------------------------------------------------------------------------------
Balance at December 31, 1997 100,000,000 1,000,000 208,053,796 (136,620,579) 72,433,217
Redemption of Common Stock (3,000) (30) (1,050) (1,080)
Capital contribution from Foundation Health
Systems, Inc. 29,897,801 29,897,801
Issued Common Stock (December 31,
1998 at $.003 per share) 399,003,000 11,971 1,185,211 1,197,182
Net income 5,158,113 5,158,113
---------------------------------------------------------------------------------
Balance at December 31, 1998 499,000,000 $ 1,011,941 $ 239,135,758 $(131,462,466) $ 108,685,233
=================================================================================
See notes to consolidated financial statements.
F-6
FOHP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------------------
Cash Flows from operating activities
Net income (loss) $ 5,158,113 $ (80,085,021) $ (30,745,106)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 4,224,987 1,404,192 879,306
Loss on disposal of fixed assets 434,689 80,966 --
Write-off of deferred issuance costs -- 1,132,656 --
Interest cost converted to debt 2,147,737 1,247,337 --
Tax settlements with Foundation Health Systems, Inc. 8,799,141 -- --
Changes in operating assets and liabilities:
Accounts receivable from owners/providers 5,958,286 (2,890,016) (1,865,379)
Other accounts receivable (1,787,511) 535,554 (414,248)
Due from Integrated Pharmacy Services, Inc. (3,540,608) -- --
Prepaids and other current assets 122,475 1,268,812 (1,369,609)
Restricted cash (44,008,739) (12,581,233) (64,648)
Deferred tax asset (3,942,798) -- --
Other assets 73,745 235,417 (368,448)
Medical claims payable to owners/providers (2,201,299) 6,532,707 5,417,849
Other medical claims payable (20,365,174) 7,244,247 36,767,869
Accounts payable and accrued expenses (8,522,770) 13,088,045 872,013
Due to Foundation Health Systems, Inc. 903,384 543,075 --
Due to other affiliates (579,727) 1,192,716 --
Unearned premium revenue (6,760,747) 3,366,996 4,257,570
Other current liabilities (8,054) (1,202,462) 320,189
-------------------------------------------------
Net cash (used in) provided by operating activities (63,894,870) (58,886,012) 13,687,358
-------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture and equipment (1,216,514) (1,799,093) (904,733)
Proceeds from sale of furniture and equipment -- 27,260 --
-------------------------------------------------
Net cash used in investing activities (1,216,514) (1,771,833) (904,733)
-------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Deferred issuance costs -- (1,441,465) --
Capital contribution from parent 29,897,801 -- --
Issuance of convertible debentures -- 80,701,120 --
Issuance of subordinated debentures -- 24,000,000 --
Redemption of common stock (1,080) -- --
-------------------------------------------------
Net cash provided by financing activities 29,896,721 103,259,655 --
-------------------------------------------------
Increase (decrease) in cash and cash equivalents (35,214,663) 42,601,810 12,782,625
Cash and cash equivalents at beginning of period 79,266,721 36,664,911 23,882,286
=================================================
Cash and cash equivalents at end of period 44,052,058 79,266,721 36,664,911
=================================================
SUPPLEMENTAL INFORMATION:
- - -------------------------
Cash paid for interest $ 536,191 $ 48,319 $ 7,488
=================================================
Conversion of debentures into common stock $ 1,197,182 $ 70,654,051 $ --
=================================================
See notes to consolidated financial statements.
F-7
FOHP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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") during 1998. 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 are 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 are not active. Since January 1, 1998, First Option Health Plan of
New York, Inc., First Option Health Plan of Delaware, Inc. and First Option
Dental, Inc., former inactive subsidiaries of the Company, have been dissolved.
The Company is a New Jersey corporation that 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 HMOs in states other than New Jersey. In December 1996, the Company
sold all of the outstanding common stock of FMCO.
Health care providers investing in the Company are required to enter into
provider agreements (the "Provider Agreements") with the Company. The Provider
Agreements have an initial term of one year and are renewable annually. Such
agreements with acute care institutions and certain other health care providers
may be terminated by either party upon 90 days written notice; agreements with
physicians may be terminated by either party upon 60 days written notice. The
Provider Agreements may also be terminated for breaches specified therein. The
Provider Agreements, among other things, establish covered services, billing and
payment procedures, and reimbursement methods.
Effective December 8, 1997, through the conversion of debentures (the
"Convertible Debentures") into shares of the Company's Common Stock ("Common
Stock"), the Company became a 98% owned subsidiary of Foundation Health Systems,
Inc. ("FHS"), a Delaware corporation (Note 2). On December 31, 1998, FHS
converted additional Convertible Debentures into shares of Common Stock, which
increased its ownership interest to 99.6%.
On January 1, 1999, Physicians Health Services of New Jersey, Inc. ("PHS-NJ"), a
New Jersey corporation which operated as an HMO in the State of New Jersey,
merged with and into FOHP-NJ pursuant to an Agreement and Plan of Merger dated
October 26, 1998. In connection with the merger, FOHP-NJ changed its name to
Physicians Health Services of New Jersey, Inc. The purpose of the merger was to
consolidate the operations of FOHP-NJ and PHS-NJ, both FHS controlled HMOs in
the State of New Jersey, into one corporation. This merger will be accounted for
as a pooling of interest of entities under common control.
F-8
Selected financial information for PHS-NJ as of and for the year ended December
31, 1998 is as follows:
Revenue $ 55,512,000
Net (Loss) $(13,074,000)
Total Assets $45,550,000
Total Liabilities $42,414,000
Shareholders' Equity $3,136,000
Pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), dated
November 16, 1998, FHS will acquire the remaining 0.4% outstanding ownership
interest in the Company from the provider shareholders of FOHP. In connection
with the Merger Agreement, a provider shareholder of FOHP will receive for his,
her or its shares of Common Stock either the value of such shares at December
31, 1998 as determined by one or more independent appraisers or payment rights
(one payment rate per share). Such payment rights would entitle provider
shareholders to receive a payment of not less than $15 per share on or about
July 1, 2001, provided that certain conditions are either satisfied or waived.
The Merger Agreement is subject to several conditions, including shareholder and
regulatory approval.
The Company is dependent upon 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 Company generated net income of $5,158,113 in 1998 and had an accumulated
deficit of $131,462,466 at December 31, 1998. In order for the Company's
principal operating subsidiary, FOHP-NJ (See Note 7), to meet statutory net
worth requirements set forth in its COA granted by the New Jersey Department of
Banking and Insurance (the "DOI") and the New Jersey Department of Health and
Senior Services (the "DOH") (the DOI and DOH are collectively referred to herein
as the "Departments"), the Company must generate sufficient operating profits
and/or obtain one or more capital contributions from FHS.
In connection with FOHP-NJ's plan to remedy its statutory net worth deficiency
at December 31, 1995 (See Note 7) and a corresponding plan of action submitted
to the Departments, the Board of Directors of the Company approved an investment
by FHS of approximately $51.7 million into the Company effective April 30, 1997.
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 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 in 1997, FHS invested an additional $29,897,801 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, increasing
FHS's ownership interest in the Company to approximately 98%.
On December 31, 1998, FHS converted $1,197,182 of principal of the New
Convertible Debenture into 399,003,000 shares of the Company's Common Stock.
After this conversion, 499,000,000 shares of the Company's Common Stock were
outstanding, with FHS owning 496,916,161 of such shares or 99.6% of the
fully-diluted equity of the Company. The price per share paid by FHS upon
conversion of the Convertible Debentures was calculated in accordance with the
Amended and Restated 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 December 31, 1998, $3,395,074 of defaulted interest is included
in the principal amount of the Convertible Debentures.
F-9
In connection with the purchase by FHS of the Company's Common Stock through the
conversion of Convertible Debentures, goodwill totaling $107,730,254 was
recorded to reflect the excess of FHS' purchase price over the estimated 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 year ended December 31, 1998, totaling
$2,693,256, has been reflected in the accompanying statement of operations. As a
result of the utilization in 1998 of certain of the Company's preacquisition net
deferred tax assets by FHS, the Company reduced goodwill by $8,799,141. In the
event that the deferred tax assets related to the net operating loss
carryforwards are used by FHS, the future tax benefits will be allocated to
reduce goodwill. The Company evaluates the recoverability of goodwill from
expected future cash flows. Impairments would be recognized in operating results
if a permanent diminution in value were to occur.
In December 1997, FHS 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 $29,897,801 to FOHP as additional paid in capital to satisfy certain
statutory net worth requirements applicable to FOHP-NJ during 1998.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's financial statements are prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles. The
following is a summary of significant accounting policies of the Company:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
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.
ACCOUNTS RECEIVABLE
Accounts receivable are reported at estimated net realizable value by including
provisions for retroactive terminations and uncollectible amounts.
RESTRICTED CASH
At December 31, 1998, FOHP-NJ maintained $56,448,778 on deposit with the New
Jersey Department of Banking and Insurance (the "DOI"), as required, to meet its
"Minimum Insolvency Deposit for Healthcare Expenditures" under current insurance
regulations. In addition, FOHP-NJ is required to maintain a $1,200,000 cash
reserve with the Health Care Financing Administration ("HCFA") for its federal
programs. As of December 31,1998, FOHP-NJ had $1,406,643 on deposit for its
federal programs.
F-10
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 is renewable
annually. The contract can be suspended (by NJDHS-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 SERVICES
Medical and hospital services costs 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.
FOHP-NJ's arrangements for commercial products with hospitals are primarily on a
per diem reimbursement basis and with physicians on a discounted fee for service
basis. Under the NJDHS-DMAHS for Medicaid, providers are reimbursed for health
care services provided to Medicaid eligible members on a per member, per month
capitation basis for primary care services, fee for service basis for specialty
services and per diem arrangement for inpatient services.
FOHP-NJ also contracts with another party for the arrangement of mental health
services provided to enrollees in its health care plans. FOHP-NJ pays for such
services on a capitated basis. If the costs of such services are less than the
capitation payments, the amount of any savings is shared equally by FOHP-NJ and
the servicer. If costs are greater than the capitation payments, any shortfall
must be funded equally by FOHP-NJ and the servicer.
Also included in medical claims payable for the year 1997 is a premium
deficiency accrual related to FOHP-NJ's Medicare product.
INCOME TAXES
The Company's operations are included in FHS' consolidated federal and state
income tax returns. Under FHS' 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, however, benefits are
not allocated to the Company if such benefits can't be used by FHS. Deferred
taxes are provided for the
F-11
expected future income tax consequences of events that have been recognized in
the Company's financial statements. Deferred tax assets and liabilities are
determined based on the temporary differences between the financial statement
carrying amounts and the tax bases of assets or liabilities using enacted tax
rates in effect in the years in which the temporary differences are expected to
reverse.
PER SHARE DATA
Per share data considered in net income (loss) per common share is based on the
weighted average number of shares of Common Stock outstanding during the related
period (101,000,000 in 1998, 8,724,000 in 1997 and 2,100,000 in 1996).
For net income (loss) per common share - assuming dilution for 1998, net income
in the accompanying consolidated statements of operations was increased by the
interest expense (after tax effect impact considering a 41% tax rate) related to
Convertible Debentures (See Note 1) for an adjusted "numerator" of $6,474,000.
The weighted average number of shares for all classes of Common Stock
outstanding during 1998 of 101,000,000 was increased for the following:
(i) If the December 31, 1998 conversion of Convertible Debentures into
399,003,000 shares of Common Stock had occurred on January 1, 1998,
the weighted average shares would have been approximately 400,000,000.
(ii) If the remaining Convertible Debentures of $11,131,386 were converted
into common shares at .003 per share (the conversion rate applied at
December 31, 1998 for the above-mentioned 399,003,000 shares) on
January 1, 1998, an additional 3,712,129,000 of common shares would be
considered for dilutive purposes.
The adjusted weighted average shares or the "denominator" for purposes of
calculating net income (loss) per common share - assuming dilution was
4,112,129,000. Consequently, net income (loss) per common share - assuming
dilution for 1998 was .0016. For 1997 and 1996, net income (loss) per common
share - assuming dilution is equal to net income (loss) per common share as
based on the net loss for such periods, conversion of Convertible Debentures as
performed above would be antidilutive (decrease the loss per share).
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
"derivatives"), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative (that is, gains and losses) depends on the intended use of the
derivative and resulting designation if used as a hedge. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The adoption of SFAS No. 133 is not expected to have a material, if any, impact
on the Company's consolidated financial statements.
RECLASSIFICATION
Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform with the current year presentation.
F-12
3. ACCOUNTS RECEIVABLE
The following is the activity of the allowances for doubtful accounts and
retroactive terminations:
ACCOUNTS
RECEIVABLE
FROM OTHER
OWNERS/ ACCOUNTS
PROVIDERS RECEIVABLE
------------------------------
Balance, January 1, 1996 $ -- $ 676,215
Provision for bad debts -- 431,849
Provision for retroactive terminations 1,600,000 349,579
Write-offs -- (1,357,643)
------------------------------
Balance, December 31, 1996 1,600,000 100,000
Provision for bad debts 32,316 475,775
Provision for retroactive terminations -- 2,283,905
Write-offs (709,962) (352,061)
------------------------------
Balance, December 31, 1997 922,354 2,507,619
Provision for bad debts 794,838 1,098,379
Reduction in retroactive terminations -- (1,730,905)
Write-offs (170,576) (1,212,257)
------------------------------
Balance, December 31, 1998 $ 1,546,616 $ 662,836
==============================
4. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
1998 1997
------------------------------
Leasehold Improvements $ 237,062 $ 247,640
Furniture and fixtures 719,744 767,401
Equipment 3,526,249 3,740,779
Automobiles 33,836 74,096
------------------------------
4,516,891 4,829,916
Less accumulated depreciation (2,786,755) (2,349,874)
------------------------------
$ 1,730,136 $2,480,042
==============================
Depreciation expense was $1,531,731, $1,095,383 and $879,306 for 1998, 1997 and
1996, respectively.
5. 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.
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 (6.19% and 5.98% as of December 31, 1998 and 1997,
respectively). Interest is due and payable within ten days after the end of each
quarter, subject to the terms noted above.
6. 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. In October 1998, the Certificate of Incorporation of
the Company was further amended to increase the number of shares of Common Stock
authorized for issuance and decrease the number of shares of Preferred Stock
authorized for issuance. As a result, the Company currently has 500,000,000
shares of authorized capital stock,
F-13
which is comprised of 499,000,000 shares of Common Stock, par value $.01 per
share, and 1,000,000 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 FHS made its initial investment in FOHP 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.
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 an HMO
subsidiary of the Company may purchase Common Stock. Acute care institutions
that enter into a provider agreement with an HMO 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. In October 1998, the
Company repurchased 3,000 shares at a cost of $.36 per share from a physician
who left the provider network. In March 1997, the Company redeemed 13,334 shares
of Common Stock-NJ at no cost from a New Jersey acute care institution which had
not complied with the enrollment provision of the Company's Certificate of
Incorporation applicable to it.
7. STATUTORY NET WORTH AND DIVIDEND RESTRICTIONS
FOHP-NJ, pursuant to its COA to operate as 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. 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
Convertible Debenture to FHS in the principal amount of $51,701,121. The
principal amount of the Initial Convertible Debenture was converted by FHS, into
71% of FOHP's capital stock on a fully-diluted basis.
To facilitate the sale of the Initial Convertible 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 failed to
increase its net worth to 100% of the minimum statutory net worth requirement,
provided that FHS guaranteed, 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
certain benchmarks 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 $29,897,801 to the
Company as additional paid in capital to satisfy certain statutory net
F-14
worth requirements applicable to FOHP-NJ during 1998. At December 31, 1998,
FOHP-NJ was approximately $17,515,000 above 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.
8. INCOME TAXES
Significant components of the provision (benefit) for income taxes are as
follows for the years ended December 31:
1998 1997 1996
Current:
Federal $ 6,750,865 $ -- $ --
State 1,808,006 2,139 924
-----------------------------------------------
Total current 8,558,871 2,139 924
-----------------------------------------------
Deferred:
Federal (2,431,248) -- --
State (587,392) -- --
-----------------------------------------------
Total Deferred (3,018,640) -- --
-----------------------------------------------
Total provision for
===============================================
income taxes $ 5,540,231 $ 2,139 $ 924
===============================================
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows for the years ended December 31:
1998 1997 1996
Statutory federal income tax rate 35% 35% 35%
State income taxes, net of federal
income tax effect 7% 6% 6%
Goodwill amortization 9% -- --
Other permanent differences 1% -- --
------------------------------------
Effective income tax rate 52% 41% 41%
-- (41)% (41)%
------------------------------------
Valuation allowance
Effective income tax rate 52% -- --
====================================
F-15
Significant components (approximated) of the Company's deferred tax assets and
liabilities as of December 31 are as follows:
1998 1997
Capitalization of start-up costs and organization costs $ 231,000 $ 603,000
Net operating loss carryforwards 45,060,000 42,990,000
Reserve discounting 875,000 877,000
Allowance for doubtful accounts and retroactive terminations 903,000 1,200,000
Other 1,289,000 2,287,000
Restructuring costs 645,000 3,832,000
-----------------------------------
Total deferred tax assets 49,003,000 51,789,000
Valuation allowance for deferred tax assets (45,060,000) (51,789,000)
-----------------------------------
Net deferred tax assets $ 3,943,000 $ --
===================================
As of December 31, 1998, the Company had federal and state net operating loss
carryforwards of approximately $110 million which may be subject to carryover
limitations under Section 382 of the Internal Revenue Code of 1986, as amended
(the "Code"). A valuation allowance has been provided to account for the
potential limitations associated with utilization of net operating loss
carryforwards as well as the uncertainty of the realization of the deferred tax
asset since the realization of such asset is dependent on future operating
profits of the Company. The net operating loss carryforwards expire between 2008
and 2012.
The valuation allowance decreased by approximately 6.7 million in 1998 while
such allowance increased by approximately 31.7 million in 1997. In the event
that the deferred tax assets related to the net operating loss carryforward are
utilized, the future tax benefits realized by FHS will be allocated to reduce
goodwill.
9. DEFINED CONTRIBUTION PLAN
The Company maintains a defined contribution 401(k) plan covering substantially
all of its employees. Employees may contribute to the plans after completing
certain service requirements. The Company matches 50% of employee contributions
not to exceed (i) limits established under Section 415 of the Code or (ii) the
lesser of 25% of compensation or $30,000. Total plan expense for 1998, 1997 and
1996 amounted to $359,000, $403,000 and $406,000, respectively.
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space under noncancelable lease arrangements. The
leases are for terms of 5 years and generally provide for renewal options of up
to 5 additional years. Total rent expense for 1998, 1997 and 1996 was
approximately $1,400,000, $1,403,000 and $1,796,000, respectively.
The following is a schedule of minimum future payments on long-term operating
leases at December 31, 1998:
1999 $714,780
2000 199,995
2001 19,669
2002 1,186
--------
$935,630
========
F-16
MEDICARE CONSULTING AGREEMENT
In January 1995, FOHP-NJ entered into an agreement with an unrelated company to
assist FOHP-NJ in obtaining approval from the HCFA to offer health care products
to Medicare beneficiaries in New Jersey. Such approval was obtained in December
1995. Fees paid by FOHP-NJ, including specified bonus payments, under the
agreement totaled $1,012,604 and $1,621,186 in 1997 and 1996, respectively. No
payments were made in 1998 pending a negotiation of a termination of the
agreement. In addition, a variable percentage (.5% to 1%) of any Medicare
revenue generated by FOHP-NJ for a total of eight years after FOHP-NJ entered
into a Medicare Risk Contract with HCFA would be payable to the consulting
company. The minimum payment for each year, pursuant to such variable
percentage, was $1,000,000 and the maximum for any such payment was $3,500,000.
In connection with the sale of Convertible Debentures (see Note 2), the Company
agreed under the terms of the Amended Securities Purchase Agreement with FHS to
negotiate termination of its agreement with the company.
In 1998, a settlement agreement was reached between the two companies whereby
FOHP-NJ paid $6 million (which was accrued in 1997) for a final settlement of
payments due to the company for revenue generated by FOHP-NJ under the Medicare
Risk Contract (See Note 12). Additionally, and separate from the aforementioned
$6 million settlement, the consulting company reimbursed FOHP-NJ $2.5 million
related to the significant losses incurred by FOHP-NJ under the Medicare Risk
Contract. Such reimbursement was recorded as a decrease to medical service costs
in the accompanying consolidated statements of operations during 1998.
REINSURANCE ARRANGEMENTS
The Company has entered into a reinsurance contract to limit its losses on
individual claims. The reinsurance contract for 1998 provides for reimbursement
of eligible hospital claims per enrollee which exceed $175,000 for all enrollees
within a calendar year up to a maximum reimbursement per enrollee of $1,000,000
per calendar year and $2,000,000 per lifetime. The reinsurance contracts for
1997 and 1996 were consistent with the 1998 contract, except that the contracts
provided for reimbursement of eligible hospital claims which exceed $150,000 and
$75,000 for all enrollees for 1997 and 1996, respectively. Additionally for
1996, the contract provided for reimbursement of eligible hospital claims which
exceed $100,000 for Medicare enrollees. Per diem arrangements with hospitals are
also subject to maximum limits dependent upon length of stay, and claims per
enrollee which exceed certain deductibles are subject to coinsurance provisions.
Reinsurance expense, net of recoveries, was approximately $1,538,000, $4,294,000
and $55,000 for 1998, 1997 and 1996, respectively.
LITIGATION
The Company is involved in litigation matters involving certain claims which
arise in the normal course of business, none of which, in the opinion of
management, are expected to have a material adverse effect on the Company's
financial statements.
STATUTORY NET WORTH
Financial statements issued in accordance with statutory accounting practices
differ from financial statements issued in accordance with generally accepted
accounting principles (GAAP). Statutory financial statements exclude certain
items included in GAAP financial statements. These "non-admitted" items include
certain assets such as accounts receivable greater than 90 days past due,
prepaid expenses, equipment other than certain computer equipment, organization
costs, certain loans and other receivables, supplies and other items.
FOHP-NJ, pursuant to its COA to operate an HMO in New Jersey, is required to
maintain a minimum statutory net worth. The minimum statutory net worth
requirement at December 31, 1998 and 1997 amounted to $16,570,000 and
$23,694,000, respectively. In addition, under the terms of its COA, if net worth
is less than 125% of the required minimum, FOHP-NJ was required to submit a plan
of action to
F-17
the DOI. In the first quarter of 1996, FOHP-NJ learned that its net worth was
less than 125% of the required minimum and, as a result, obtained approval of a
plan of action to address such shortfall from the Departments. The plan of
action required FOHP-NJ to have a positive statutory net worth for the year
ended December 31, 1997 and a statutory net worth of 100% of the required
minimum by December 31, 1998. FOHP-NJ's statutory net worth at December 31, 1998
and 1997, respectively, were as follows:
1998 1997
GAAP ELIMINATIONS STATUTORY GAAP ELIMINATIONS STATUTORY
-----------------------------------------------------------------------------------------
Assets $117,553,168 $2,958,452 $114,594,716 $108,142,744 $3,463,563 $104,679,181
Liabilities 80,508,863 -- 80,508,863 104,252,789 -- 104,252,789
-----------------------------------------------------------------------------------------
Net equity $ 37,044,305 $2,958,452 $ 34,085,853 $ 3,889,955 $3,463,563 $ 426,392
=========================================================================================
11. RELATED PARTY TRANSACTIONS
Pursuant to an administrative management agreement entered into by FHS and FOHP
in connection with the closing of the Amended Securities Purchase Agreement with
FHS, the Company is required to pay FHS a monthly management fee which is
currently based on allocated corporate charges. For the years ended December 31,
1998 and 1997, FHS charged $2,543,000 and $7,502,899, respectively, to FOHP
which is included as management fees in the accompanying statements of
operations.
The amount due to FHS at December 31, 1998, represents management fees payable
and interest payable related to the Convertible Debentures (which haven't been
converted to principal at December 31, 1998) and Subordinated Debentures.
Amounts due to other affiliates, which are wholly owned by FHS, represent cost
allocations for administrative services. The balances due from Integrated
Pharmacy Services, Inc. ("IPS") represents amounts due for payments made by the
Company, on behalf of IPS, for pharmacy services.
12. RESTRUCTURING COSTS
Pursuant to the Amended Securities Purchase Agreement with FHS, the Company
recorded the impact of a restructuring plan designed to increase overall
profitability of FOHP-NJ by scaling back certain product lines that have not met
profitability expectations. Restructuring costs of approximately $12.8 million
were recorded in 1997 and represented estimated contract settlements, provisions
for lease termination costs, employee termination benefits, write-down of the
related assets and other miscellaneous items. Included in total restructuring
costs was approximately $2.6 million related to employee termination benefits
for approximately 140 employees from various departments of the Company. In
addition, $6 million related to an anticipated settlement of a Medicare
consulting contract with a non-related company and $2 million related to the
anticipated termination of a mental health contract were included in
restructuring costs at December 31, 1997. As of December 31, 1997, approximately
$116,000 of employee termination benefits were paid and six employees were
terminated.
During 1998, the following activity occurred related to restructuring charges
resulting in a current year decrease of approximately $11,132,000 and an ending
restructuring accrual balance of approximately $1,577,000. The ending
restructuring accrual is solely related to employee termination benefits which
management believes will be fully paid by the third quarter of fiscal year 1999.
Such accrual is included in accrued expenses in the accompanying consolidated
balance sheets:
(i) $6 million of settlement costs related to a terminated Medicare
consulting contract was paid during 1998;
(ii) Approximately $978,000 of employee termination benefits were paid as
of December 31, 1998, including approximately $116,000 paid during
1997;
(iii) Approximately $100,000 of payments made for a lease buyout;
F-18
(iv) Asset write-offs, disposals and other non-cash charges of
approximately $1.92 million; and
(v) 1998 reduction of the restructuring accrual of $2.25 million, which
is recorded in the accompanying statements of operations, as a
result of management's re-evaluation of estimated restructuring
costs. Of the $2.25 reduction, $2 million is related to the
continuation of a mental health contract during 1998 that was
originally expected to be terminated as part of the overall
restructuring plan.
No additions were recorded to the restructuring accrual during 1998.
13. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments, including cash and cash
equivalents, restricted cash, and the debentures (convertible and subordinated)
approximate their carrying value at December 31, 1998 and 1997.
F-19
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
EXHIBITS
TO
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
-------------------------
FOHP, INC.
(EXACT NAME OF REGISTRANT AS
SPECIFIED IN ITS CHARTER)
-------------------------
================================================================================
FOHP, INC.
EXHIBIT INDEX
EXHIBIT NO.
----------
b 2.1 Agreement of Merger and Plan of Reorganization
dated April 12, 1995 among the Registrant, First
Option Health Plan of New Jersey, Inc.
("FOHP-NJ"), a wholly-owned subsidiary of the
Registrant, and FOHP Transition Company, a
wholly-owned subsidiary of the Registrant.
2.2 Agreement and Plan of Merger dated as of October
26, 1998 between FOHP-NJ and Physicians Health
Services of New Jersey, Inc. and the following
exhibits thereto: Exhibit A - Amended and
Restated Certificate of Incorporation of
Physicians Health Services of New Jersey, Inc.
(formerly First Option Health Plan of New Jersey,
Inc.); Exhibit B - By-Laws of Physicians Health
Services of New Jersey, Inc.; Exhibit C -
Directors of Physicians Health Services of New
Jersey, Inc.; and Exhibit D - Officers of
Physicians Health Services of New Jersey, Inc.
j 2.3 Agreement and Plan of Merger dated as of November
16, 1998 by and among Foundation Health Systems,
Inc. ("FHS"), FHS Transition Company and the
Registrant and the following exhibits thereto:
Exhibit A - Amended and Restated Certificate of
Incorporation of the Registrant; Exhibit B -
By-laws of the Registrant; Exhibit F-1 - Form of
Payment Right - Hospital Shareholders; Exhibit
F-2 - Form of Payment Right - Non-Hospital
Shareholders; and Exhibit G - Contribution
Agreement. Upon the request of the Securities and
Exchange Commission (the "Commission"), the
Registrant agrees to furnish a copy of Exhibit C
- Directors of Surviving Corporation, Exhibit D -
Officers of Surviving Corporation and Exhibit E -
Section 6.4 of the Amended Securities Purchase
Agreement.
f 3.1 Amended and Restated Certificate of Incorporation
of the Registrant, as filed with the Secretary of
State of the State of New Jersey on April 17,
1997.
3.2 Certificate of Amendment to the Amended and
Restated Certificate of Incorporation of the
Registrant, as filed with the Department of
Treasury, Division of Revenue of the State of New
Jersey on October 6, 1998.
ff 3.3 By-laws of Registrant, as amended.
fff 4.1 Specimen certificate representing Registrant's
Common Stock.
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i 4.2 Convertible Subordinated Surplus Debentures in
the aggregate principal amount of $29,000,000
issued by the Registrant to FHS on December 8,
1997.
i 4.3 Subordinated Surplus Debentures in the aggregate
principal amount of $24,000,000 issued by the
Registrant to FHS on December 31, 1997.
(*) i 10.1 Employment Agreement dated May 6, 1997 between
FHS and Roger W. Birnbaum.
(*) i 10.2 Employment Agreement dated July 1, 1997 among the
Registrant, FHS and Joseph Singer, M.D.
(*) i 10.3 Employment Agreement dated February 8, 1998
between FHS and Marc M. Stein.
(*) 10.3.1 Addendum to Employment Agreement between FHS and
Marc M. Stein dated October 14, 1998.
(*) 10.4 Employment Agreement dated June 10, 1998 between
Thomas W. Wilfong and Physicians Heath Services,
Inc., a subsidiary of FHS.
a 10.7 Lease Agreement dated September 1, 1994 between
Theodore G. Sourlis and Elaine Sourlis, husband
and wife, and FOHP-NJ, and an undated addendum
thereto.
b 10.21 Agreement to provide HMO services to Medicaid
recipients dated February 8, 1995 between FOHP-NJ
and the State of New Jersey Department of Human
Services, Division of Medical Assistance and
Health Services.
d 10.22 Sublease dated as of December 15, 1995 between
FOHP-NJ and The Continental Insurance Company.
d 10.28 Mental Health Management Agreement dated July 1,
1994 between FOHP-NJ and Mental Health Network,
Inc., and amendment thereto entered into in
January 1996.
d 10.33 Contract between FOHP-NJ and the Secretary of the
Department of Health and Human Services, who has
delegated authority to the Administrator of the
Health Care Financing Administration, with
respect to health insurance benefits for the aged
and disabled (Contract No. H3155).
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d 10.43 Capital Contribution Agreement dated as of
December 31, 1995 between the Registrant and
FOHP-NJ.
e 10.45.1 Amended and Restated Securities Purchase
Agreement dated February 10, 1997 among the
Registrant, FOHP-NJ and Health Systems
International, Inc. (the predecessor to FHS) and
the following exhibits thereto: Exhibit A - Form
of Debentures; Exhibit B-1 - Form of Amended and
Restated Certificate of Incorporation of the
Registrant; Exhibit B-2 - Form of By-laws of the
Registrant; Exhibit B-3 - Form of Amended and
Restated Certificate of Incorporation of FOHP-NJ;
Exhibit B-4 - Form of By-laws of FOHP-NJ; Exhibit
D-1 - Form of General Administrative Services
Management Agreement; and Exhibit D-2 - Form of
Management Information Systems and Claims
Processing Services Agreement. Upon the request
of the Commission, the Registrant agrees to
furnish a copy of Exhibit C-1 - Form of Exclusive
Plan Hospital Provider Agreement, Exhibit C-2 -
Forms of Non-Exclusive Plan Hospital Provider
Agreements, Exhibit E - Form of Investors
Agreement, Exhibit F - Form of Opinion of Outside
Counsel of Registrant and FOHP-NJ, Exhibit G -
Form of Officer's Certificate and Exhibit H -
Form of Opinion of Outside Counsel of Health
Systems International, Inc., and Schedules 2.1A
through 2.25 as follows: Schedule 2.1A -
Subsidiaries; Schedule 2.1B - Good Standing;
Schedule 2.3 - Rights of First Refusal; Schedule
2.4(a) - SEC Reports; Schedule 2.4(b) -
Unreported Liabilities and Obligations; Schedule
2.5 - Company's Reports; Schedule 2.6 -
Noncontravention; Schedule 2.7 - Litigation;
Schedule 2.9 - Compliance with Law; Schedule 2.10
- Certain Material Contracts and Defaults;
Schedule 2.11 - Consents; Schedule 2.12 -
Licenses, Permits and Governmental Approvals;
Schedule 2.14 - Environmental Matters; Schedule
2.15 - Properties and Assets; Schedule 2.16 -
Taxes; Schedule 2.20 - Insurance; Schedule 2.22 -
Employment/Severance Matters; and Schedule 2.25 -
Employee Benefit Plans.
e 10.45.2 Amendment dated March 13, 1997 to the Amended and
Restated Securities Purchase Agreement referenced
in Exhibit 10.45.1.
g 10.46 General Administrative Services Management
Agreement dated April 30, 1997 between FHS and
the Registrant.
h 10.47 Management Information Systems and Claims
Processing Services Agreement dated April 30,
1997 between FHS and the Registrant.
21. Subsidiaries of the Registrant.
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k 27. Financial Data Schedule for Year ended December
31, 1998.
- - ---------------------------------
(*) Constitutes a management contract required to be
filed as an exhibit pursuant to Item 14(c) of
Form 10-K.
a Incorporated by reference to the identically
numbered exhibit to the Registrant's Registration
Statement on Form S-4 (Registration No.
33-89356).
b Incorporated by reference to the identically
numbered exhibit to Amendment No. 1 to the
Registrant's Registration Statement on Form S-4
(Registration No. 33-89356).
d Incorporated by reference to the identically
numbered exhibit to the Registrant's Annual
Report on Form 10-K for the year ended December
31, 1995.
e Incorporated by reference to Appendices A-H of
the Registrant's definitive Proxy Statement filed
with the Commission on March 19, 1997 in
connection with the Registrant's 1996 Annual
Meeting of Shareholders.
f Incorporated by reference to Exhibit 2.1 of the
Registrant's Registration Statement on Form 8-A,
effective July 8, 1997.
ff Incorporated by reference to Exhibit 2.2 of the
Registrant's Registration Statement on Form 8-A,
effective July 8, 1997.
fff Incorporated by reference to Exhibit 4 of the
Registrant's Registration Statement on Form 8-A,
effective July 8, 1997.
g Incorporated by reference to Appendix C of the
Registrant's definitive Proxy Statement filed
with the Commission on March 19, 1997 in
connection with the Registrant's 1996 Annual
Meeting of Shareholders.
h Incorporated by reference to Appendix D of the
Registrant's definitive Proxy Statement filed
with the Commission on March 19, 1997 in
connection with the Registrant's 1996 Annual
Meeting of Shareholders.
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i Incorporated by reference to the identically
numbered exhibit to the Registrant's Annual
Report on Form 10-K for the year ended December
31, 1997.
j Incorporated by reference to Appendices A, B, C,
D-1, D-2 and E of the Registrant's preliminary
Proxy Statement filed with the Commission on
February 4, 1999 in connection with the proposed
merger of FHS Transition Company with and into
the Registrant.
k The Financial Data Schedule is submitted in
electronic format only.
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