UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the quarterly period ended September 30, 1997
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number: 0-25944
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FOHP, Inc.
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(Exact name of registrant as specified in its charter)
New Jersey 22-3314813
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3501 State Highway 66, Neptune, New Jersey 07754
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(Address of principal executive offices) (Zip Code)
(732) 918 - 6700
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes |X| No ___.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes |X| No ___.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, 2,254,948 shares outstanding as of November 10, 1997
INDEX
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations 4
For the periods January 1 to September 30, 1997 & 1996
For the periods July 1 to September 30, 1997 & 1996
Condensed Consolidated Statements of
Shareholders' (Deficiency) Equity 5
For the period January 1, 1996 to December 31, 1996
For the period January 1, 1997 to September 30, 1997
Condensed Consolidated Statements of Cash Flows 6
For the periods January 1, to September 30, 1997 & 1996
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition
and Results of Operations 12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signature Page 17
2
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
------------- -------------
(unaudited) (audited)
Assets
Cash and cash equivalents $ 27,804,585 $ 36,664,911
Accounts receivable from owners/ providers, net of allowance for retroactive
terminations of $558,759 in 1997 and $1,600,000 in 1996 9,195,482 8,206,471
Other accounts receivable, net of allowance for doubtful accounts of
$186,179 in 1997 and $100,000 in 1996, and net of allowance for retroactive
terminations of $1,218,070 and $0, respectively 3,503,754 3,666,887
Prepaid expenses 704,256 803,542
Other current assets 0 1,100,818
------------- -------------
Total current assets 41,208,077 50,442,629
Restricted Cash 13,664,020 1,265,449
Furniture and equipment (at cost, net of accumulated depreciation
and amortization of $2,120,954 and $1,338,474, respectively) 2,372,802 1,884,558
Other assets 1,652,101 659,581
============= =============
Total Assets $ 58,897,000 $ 54,252,217
============= =============
Liabilities and Shareholders' Deficiency
Current Liabilities:
Medical claims payable to owners/providers $ 25,409,370 $ 13,775,534
Other medical claims payable 47,251,046 55,370,457
Accounts payable 681,905
634,511
Accrued expenses 6,034,781 4,528,604
Due to Foundation Health Systems, Inc 1,830,830 0
Unearned premium revenue 1,198,440 4,598,662
Other current liabilities 32,237 1,210,516
------------- -------------
Total current liabilities 82,438,609 80,118,284
Long-term debt - convertible debentures 50,503,459 --
------------- -------------
Total Liabilities 132,942,068 80,118,284
Shareholders' Deficiency:
Common Stock, $.01 par value, 2,254,948 shares issued and outstanding (1996
Common Stock - NJ 2,100,173 shares issued
and outstanding) 22,550
21,002
Additional paid-in capital 32,348,061 30,648,489
Accumulated deficit (106,415,679) (56,535,558)
------------- -------------
Total shareholders' deficiency (74,045,068) (25,866,067)
------------- -------------
Total liabilities and shareholders' deficiency $ 58,897,000 $ 54,252,217
============= =============
See accompanying notes
3
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue:
Premiums from owners/providers $ 36,793,341 $ 33,002,584 $ 97,781,152 $ 100,981,053
Other premium revenue 60,943,037 33,979,097 176,701,692 70,871,936
Other, principally administrative service fees 888,817 1,946,321 1,797,068 5,827,805
Interest income 1,200,923 539,411 2,891,062 1,290,590
------------- ------------- ------------- -------------
Total revenue 99,826,118 69,467,413 279,170,974 178,971,384
------------- ------------- ------------- -------------
Expenses:
Medical expenses to owners/providers 32,646,831 17,062,365 78,638,764 43,382,552
Other medical expenses 81,753,021 43,847,085 204,748,375 112,288,404
Selling, general and administrative 13,475,649 11,397,979 42,211,450 36,476,300
Depreciation and amortization 410,408 242,630 1,000,678 658,853
Interest 783,142 2,899 1,315,592 6,228
Restructuring cost -- -- 1,134,097 --
------------- ------------- ------------- -------------
Total expenses 129,069,051 72,552,958 329,048,956 192,812,337
------------- ------------- ------------- -------------
Net loss before provision for income taxes (29,242,933) (3,085,545) (49,877,982) (13,840,953)
Provision for state income taxes 103 -- 2,139 815
------------- ------------- ------------- -------------
Net loss $ (29,243,036) $ (3,085,545) $ (49,880,121) $ (13,841,768)
============= ============= ============= =============
Net loss per common share $ (12.97) $ (1.47) $ (22.85) $ (6.59)
============= ============= ============= =============
See accompanying notes
4
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIENCY) EQUITY
Common Stock Total
------------------------------ Additional Shareholders
Par Paid-In Accumulated (Deficiency)
Shares Value Capital Deficit Equity
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1995 2,100,173 $ 21,002 $ 30,648,489 $ (25,790,452) $ 4,879,039
Net loss for the period January 1, 1996 to
December 31, 1996 (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)
Net loss for the period January 1, 1997 to
September 30, 1997 (49,880,121) (49,880,121)
Retirement of Common Stock - NJ (13,334) (133) 133 0
Conversion of debentures into shares of
FOHP, Inc. Common Stock 168,109 1,681 1,699,439 1,701,120
Reclassification of Common Stock - NJ to Common
Stock:
Common Stock - NJ (2,086,839) (20,869) (20,869)
Common Stock 2,086,839 20,869 20,869
------------- ------------- ------------- ------------- -------------
Balance at September 30, 1997 (unaudited) 2,254,948 $ 22,550 $ 32,348,061 $(106,415,679) $ (74,045,068)
============= ============= ============= ============= =============
See accompanying notes
5
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period For the period
January 1, 1997 January 1, 1996
to September to September
30, 1997 30, 1996
------------ ------------
(unaudited) (unaudited)
Cash flows from operating activities
Net loss $(49,880,121) $(13,841,768)
Adjustments to reconcile net loss to cash flows provided by
(used in) operating activities:
Depreciation and amortization 1,000,678 658,853
Provision for accounts receivable bad debts/retroactive
terminations 263,008 317,597
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable from owners/providers 52,230 (3,709,504)
(Increase) decrease in other accounts receivable (1,141,116) 990,214
Decrease (increase) in prepaid expenses 99,286 (271,806)
Decrease in other current assets 1,100,818 0
Increase in restricted cash (12,398,571) (26,466)
Increase in other assets (18,283) (307,996)
Increase in medical claims payable 3,514,425 28,877,207
Increase in accounts payable 47,394 1,049,555
Increase in accrued expenses 2,009,636 785,614
Increase in amount due to Foundation Health Systems, Inc 1,830,830 0
(Decrease) increase in unearned premium revenue (3,400,222) 775,131
(Decrease) increase in other current liabilities (1,178,279) 414,954
------------ ------------
Net cash flows (used in) provided by operating activities (58,098,287) 15,711,585
Cash flows from investing activities
Purchases of furniture and equipment (1,270,724) (1,060,990)
------------ ------------
Net cash used in investing activities (1,270,724) (1,060,990)
Cash flows from financing activities
Issuance of convertible debentures 51,701,120 0
Payment of debt issue costs (1,192,435) 0
------------ ------------
Net cash provided by financing activities 50,508,685 0
Net (decrease) increase in cash and cash equivalents
at the end of the period (8,860,326) 14,650,595
Cash and cash equivalents at the beginning of the period 36,664,911 23,882,286
------------ ------------
Cash and cash equivalents at the end of the period $ 27,804,585 $ 38,532,881
============ ============
Interest paid for the period $ 43,696 $ 6,228
============ ============
State income taxes paid for the period $ 1,939 $ 1,198
============ ============
Supplemental Schedule of Noncash Investing and Financing Activities:
Conversion of debentures to 168,109 shares of
common stock $ 1,701,120
Conversion of defaulted interest to debenture principal $ 503,459
See accompanying notes
6
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
1. General
FOHP, Inc. ("FOHP" or the "Holding Company") is a New Jersey corporation
which was formed in May 1994. The Holding Company was formed to effect the
reorganization (the "Reorganization") of First Option Health Plan of New Jersey,
Inc. ("FOHP-NJ"), 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 Holding 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 Holding Company. Pursuant to the
Reorganization, FOHP-NJ and FMCO became wholly-owned subsidiaries of FOHP. Prior
to the Reorganization, the Holding Company did not conduct any business nor did
it have any significant assets or liabilities. The primary purpose of the
Reorganization was to facilitate the formation of additional health maintenance
organizations in states other than New Jersey. FMCO was subsequently sold to an
unrelated third party in December, 1996.
The Holding Company serves as the holding company for its wholly-owned
subsidiaries. The Holding Company's principal operating subsidiary is FOHP-NJ.
FOHP-NJ, a New Jersey corporation formed in May 1993, received its Certificate
of Authority ("COA") to operate as a health maintenance organization ("HMO") in
New Jersey in June 1994. Other wholly-owned subsidiaries of the Holding Company
include First Option Health Plan of New York, Inc. ("FOHP-NY"), a New York
corporation, First Option Health Plan of Pennsylvania, Inc. ("FOHP-PA"), a
Pennsylvania corporation, First Option Health Plan of Maryland, Inc., a Maryland
corporation, First Option Health Plan of Delaware, Inc., a Delaware corporation,
and FOHP Agency, Inc., a New Jersey corporation, each formed in 1995, and First
Option Dental, Inc. formed in 1996. These other subsidiaries have not commenced
operations. Each of FOHP-NY and FOHP-PA has filed an application for a COA to
operate as an HMO in its state of incorporation.
During the summer of 1996, as a result of FOHP-NJ's statutory net worth
deficiency discussed in Note 4 hereof and the conditions imposed by the New
Jersey Departments of Banking and Insurance and Health and Senior Services (the
"Departments") in connection therewith, the Board of Directors of the Holding
Company discontinued the Holding Company's expansion efforts in states other
than New Jersey, including expansion efforts in New York, Pennsylvania and
Maryland. It is not determinable at this time when, or if, the Holding Company
will continue expansion efforts in any state other than New Jersey.
The financial information for the three and nine month periods ended September
30, 1997 and September 30, 1996 included herein are unaudited. Such information
includes all adjustments, including adjustments of a normal and recurring
nature, which, in the opinion of management, are necessary for a fair
presentation of the Holding Company's financial position, results of operations
and cash flows. Additionally, such information should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Part I - Item 2 hereof.
2. Basis of Presentation and Significant Accounting Policies
The Holding Company has incurred a loss of $49,880,121 for the nine month period
ended September 30, 1997 and has an accumulated deficit of $106,415,679 as of
September 30, 1997. In order for the Holding Company's principal operating
subsidiary FOHP-NJ to meet its 1997 statutory net worth requirements pursuant to
its COA granted by the Departments, the Holding Company must generate sufficient
operating profits and/or obtain one or more capital infusions. See Note 4.
7
In connection with FOHP-NJ's plan to remedy the statutory net worth deficiency,
the Board of Directors of the Holding Company approved an investment by
Foundation Health Systems, Inc., a Delaware corporation formerly known as Health
Systems International, Inc. ("FHS"), of approximately $51.7 million into the
Holding Company. The shareholders of the Holding Company approved the investment
on April 16, 1997 and the investment was made and related transactions were
consummated on April 30, 1997. In exchange for FHS' investment, FHS received
$51,701,120.38 of principal amount of convertible debentures (the "Debentures")
which are convertible into 71% of the Holding Company's outstanding equity, on a
fully diluted basis. See Note 8. Pursuant to a contractual arrangement, FHS may
acquire the remaining shares of the Holding Company's outstanding equity during
the year 1999. Prior to 1999, FHS may only acquire outstanding shares of the
Holding Company's New Common Stock (as hereinafter defined) by tender offer. At
the closing of the purchase of the Debentures, FHS converted $1,701,120.38 of
principal amount of Debentures into 168,109 shares of the Holding Company's New
Common Stock.
These consolidated financial statements have been prepared assuming the Holding
Company will continue as a going concern and do not include any adjustments that
might result from the opposite outcome.
The statement of operations and statement of cash flows for 1996 include the
results of the wholly-owned subsidiary, FMCO, which was sold on December 31,
1996. On a consolidated basis, the revenue and operating results of FMCO were
not a significant part of the Holding Company's revenue and operating results.
The following are significant accounting policies of the Holding Company:
Principles of Consolidation. The consolidated financial statements include
the accounts of the Holding 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 US Treasury Bills. Fair market values, as determined through quoted
market prices, of the cash equivalents approximate carrying value. Cash and cash
equivalents were on deposit with two commercial banks.
Accounts Receivable. Accounts receivable are reported at estimated net
realizable value including provisions for retroactive terminations and
uncollectible amounts.
Restricted Cash. Under New Jersey law, FOHP-NJ is required to maintain
$13,546,120 on deposit with the New Jersey Department of Banking and Insurance
(the "DOI"). $1,200,000 is for the reserve maintained for the Health Care
Financing Administration and $12,346,120 is for the "Minimum Insolvency Deposit
for Healthcare Expenditures."
Debt Issue Costs. Costs related to the Debentures have been capitalized and
recorded as other assets. Amortization is provided on a straight-line basis
through December 31, 1999, the period through which FHS has the right to acquire
the remaining shares of the Holding Company's outstanding equity.
Medical Expenses. Medical expenses include healthcare costs, medical
management costs and reinsurance expense (net of recoveries). During 1996
medical management costs and reinsurance were classified as selling, general and
administrative expenses. These expenses were restated accordingly for 1996.
Income Taxes. The Holding Company provides for income taxes based on income
recognized for financial statement purposes. The Holding Company recognizes a
deferred tax asset or liability for the expected future tax effects attributable
to the temporary differences between the tax and financial statement basis of
assets and liabilities. Deferred tax assets and liabilities are adjusted to
reflect changes in tax rates or other provisions of applicable federal and state
tax laws in the period in which such changes are enacted.
8
Deferred tax assets are recognized unless it is more likely than not that
some portion or all of the deferred tax assets will not be recovered.
Per Share Data. Per share data are based on the weighted average number of
shares of all classes of Common Stock outstanding during the comparative three
and nine month periods ended September 30 (2,100,173 in 1996, 2,254,948 in 1997
and 2,100,173 in 1996, 2,183,196 in 1997, respectively).
3. Common Stock
Prior to the April 30, 1997 investment by FHS, the authorized capital stock of
the Holding 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 Holding Company issued 2,100,173 shares of Common Stock-NJ. There were
no additional shares of Common Stock-NJ issued during 1996. In March 1997, the
Holding Company redeemed 13,334 shares of Common Stock-NJ from an NJ Acute Care
Institution (as hereinafter defined) which had not complied with the enrollment
provisions of the Holding Company's Certificate Incorporation applicable to it.
In connection with the April 30, 1997 investment by FHS, the Certificate of
Incorporation of the Holding Company was amended to, among other things,
reclassify the Holding Company's capital stock. As a result, the Holding Company
currently has 110,000,000 shares of authorized capital stock, which is comprised
of 100,000,000 shares of Common Stock, par value $.01 per share ("New Common
Stock"), and 10,000,000 shares of Preferred Stock, par value $1.00 per share. In
connection with the reclassification of the Holding Company's capital stock,
each outstanding share of Common Stock-NJ was converted into one share of New
Common Stock. As a result, all 2,086,839 shares of Common Stock-NJ outstanding
at the time of the Holding Company's Certificate of Incorporation was amended
were converted into New Common Stock.
At December 31, 1994, the authorized common stock of FOHP-NJ, the predecessor to
the Holding Company, totaled 10 million shares. The authorized common stock of
FOHP-NJ was comprised of the following classes of common stock, $.01 par value:
Institutional Provider Common Stock; Practitioner Provider Common Stock and
Other Provider Common Stock. During 1994, FOHP-NJ issued 1,020,051 shares of
Institutional Provider Common Stock, 511,800 shares of Practitioner Provider
Common Stock, and 40,002 shares of Other Provider Common Stock.
The Certificate of Incorporation and By-Laws of the Holding Company include
significant restrictions on the issuance and transfer of shares of New Common
Stock. The Certificate of Incorporation of the Holding Company provides that
only FHS and health care providers who enter into and maintain a provider
agreement with a subsidiary of the Holding Company may purchase New Common
Stock. Acute care institutions which enter into a provider agreement with a
subsidiary of the Holding Company may purchase shares of New Common Stock
directly or through an affiliate.
The Holding Company may, but is not obligated to, repurchase shares of New
Common Stock from any shareholder whose provider agreement terminates for any
reason or upon the occurrence of certain events, as described in the Holding
Company's Certificate of Incorporation. The determination of the repurchase
price of the shares is also described in the Holding Company's Certificate of
Incorporation.
4. Statutory Net Worth & Dividend Restrictions
FOHP-NJ is required by the Departments to maintain a minimum statutory net
worth. In addition, if FOHP-NJ's statutory net worth is, or is expected to be,
less than 125% of the minimum statutory net worth requirement, FOHP-NJ is
required to submit to the Departments a plan of action to address the deficiency
or expected deficiency. During the first quarter of 1996, FOHP learned that
FOHP-NJ's statutory net
9
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 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
Holding Company sold Debentures to FHS in the aggregate principal amount of
$51,701,120.38, pursuant to the Amended and Restated Securities Purchase
Agreement, dated February 10, 1997, among FOHP, FOHP-NJ and FHS, as amended by
the amendment thereto dated as of March 13, 1997 (referred to herein, as so
amended, as the "Amended Securities Purchase Agreement"). The principal amount
of the Debentures are convertible, at the option of FHS, into 71% of FOHP's
capital stock on a fully-diluted basis. See Note 8.
To facilitate the sale of the Debentures to FHS, the Departments agreed to
rescind their conditions attached to their approval of the plan of action
submitted by FOHP-NJ in April 1996, subject to the Department's right to require
FOHP-NJ to submit a new plan of action if FOHP-NJ fails to increase its net
worth to 100% of the minimum statutory net worth requirement by December 31,
1997. In addition, the Departments agreed that subsequent to December 31, 1997,
FOHP-NJ will only be required to maintain net worth at 100% of the minimum
statutory net worth requirement applicable to it, and not 125% of the minimum
statutory net worth requirement as required prior to the sale of the Debentures,
provided that FHS guarantees, in form satisfactory to the Commissioner of the
Department of Banking and Insurance, 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. As of September 30, 1997, FOHP-NJ was
approximately $51 million below 100% of the minimum statutory net worth
requirement.
In the event that it is determined that FOHP-NJ needs capital to meet applicable
statutory net worth requirements, FHS may, at its sole discretion, contribute
additional capital to FOHP in accordance with the Amended Securities Purchase
Agreement and a letter agreement (the "Letter Agreement") between FHS and FOHP
which clarifies FHS' right to contribute additional capital to FOHP. In as much
as FOHP-NJ has reported to the Departments a negative statutory net worth as of
September 30, 1997, the Departments have informed FOHP and FHS that an infusion
of capital from FHS will be required prior to year-end in order to eradicate the
negative statutory net worth of FOHP-NJ.
5. Management Agreement
In connection with FHS' purchase of the Debentures, FHS and FOHP entered into a
General Administrative Services Management Agreement (the "Administrative
Management Agreement"), pursuant to which FHS will oversee the management of
FOHP and will assist FOHP's management in provider contracting, utilization
review and quality assurance, employee relations, sales and marketing, strategic
planning, information operating systems, and actuarial and underwriting, among
other services. FOHP will pay FHS 2% of its total revenue (exclusive of interest
income) for the services provided by FHS under the Administrative Management
Agreement.
6. Related Party Transactions - FHS
The balance sheet includes $1,830,830 due to FHS. This balance primarily
represents the interest accrued on the Debentures for July, August and
September, as well as the administrative management fee owed to FHS under the
Administrative Management Agreement for September. The long-term debt of
$50,503,459 represents the $50,000,000 Debentures FHS purchased on April 30,
1997, and $503,459 of defaulted interest for the period ended June 30, 1997. See
Note 8. The interest expense related to the Debentures for the three and nine
months ended September 30, 1997 includes interest of $743,877 and $1,247,336,
respectively.
7. Restructuring Costs
During the second quarter of 1997, the Holding Company estimated and recorded a
restructuring charge of $1,134,097 in connection with the FHS investment. The
plan of restructuring primarily includes costs associated with work force
reductions as it is anticipated that pursuant to the Administrative Management
10
Agreement FHS will assume the functions currently performed by the Information
Services, Billing and Enrollment and Claims staffs of FOHP. It is anticipated
that these functions will transfer to FHS by June 30, 1998.
8. Long-term Debt
On April 30, 1997, FHS invested approximately $51.7 million into the Holding
Company through the purchase of Debentures in the principal amount of
$51,701,120.38. The Debentures mature April 30, 2002 and carry an annual
interest rate equal to the rate charged to FHS under its credit facility (the
"BA Facility") issued by a consortium of commercial banks led by Bank of
America, National Trust & Savings Association or such credit facility as is used
to refinance the BA Facility. This rate is subject to adjustment at the
beginning of each calendar quarter. During the third quarter 1997, this rate was
5.85%. The Debentures are convertible at any time on or before the maturity
date, at the option of FHS, into such number of shares of New Common Stock which
is equal to 72 percent of the total equity of the Holding Company on a
fully-diluted basis. At the closing of the purchase of the Debentures, FHS
converted $1,701,120.38 of principal amount of Debentures into 168,109 shares of
New Common Stock.
The obligation of the Holding Company to repay the principal amount and accrued
interest under these Debentures shall be subordinated to all other indebtedness
of the Holding Company and its subsidiaries. No payments of interest or
principal can be made without prior approval of the Departments. The second and
third quarter 1997 interest has not yet been paid since approval has not yet
been received from the Departments. Thus, the interest is considered in default
and is now included in the principal amount of the Debentures which increases
the number of shares of the Holding Company's New Common Stock that FHS may
acquire upon conversion of the Debentures to a number which is greater than 71
percent of the total equity of the Holding Company on a fully-diluted basis. Any
subsequent interest payments which are not paid by the Holding Company and are
added to the principal amount of the Debentures will similarly increase the
percentage of the total equity of the Holding Company which FHS may acquire upon
conversion of the Debentures.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation
Overview
The Holding 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 Holding Company. Prior to the
Reorganization, the Holding Company did not conduct any business nor did it have
any significant assets or liabilities. The Holding 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 Holding
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 Holding Company on June 8, 1995.
Currently, it is the Holding 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 November 10, 1997, FOHP-NJ had entered into provider
agreements with 62 New Jersey hospitals and acute care institutions ("NJ Acute
Care Institutions"), approximately 11,000 physicians licensed to practice in New
Jersey ("NJ Practitioners"), and approximately 75 other health care providers.
The provider agreements have an initial term of one year and are renewable
annually. Such agreements with NJ Acute Care Institutions and other health care
providers who are not NJ Practitioners may be terminated by mutual consent or,
after the initial one year term, by either party upon 90 days notice; agreements
with NJ Practitioners may be terminated by either party upon 60 days notice. The
agreements also may be terminated for breaches specified therein. The terms and
conditions of provider agreements are not affected by whether the provider is,
or is not, a shareholder of the Holding Company. However, some agreements with
NJ Acute Care Institution shareholders as subscribers in FOHP-NJ health plans
are different from the subscriber agreements of non-shareholders in that,
premium rates for those NJ Acute Care Institutions that are shareholders are
capped to be within a certain corridor (+/- 4%) from their prior year premium
rates. There are 24 NJ Acute Care Institutions with such subscriber agreements.
FOHP-NJ's agreements with NJ Acute Care Institutions provide for, among other
things, a reimbursement schedule setting the amounts to be paid to the NJ Acute
Care Institutions by FOHP-NJ for services provided to members. The reimbursement
schedule of a provider agreement between a NJ Acute Care Institution and FOHP-NJ
is individually negotiated. Rates paid to NJ Acute Care Institutions for
services provided to members of FOHP-NJ health plans vary from institution to
institution and are based on, among other things, the type of services provided
by, and the location of, the NJ Acute Care Institution. Agreements with
participating NJ Acute Care Institutions prohibit the NJ Acute Care Institutions
from billing a member of an FOHP-NJ health plan for any services paid for under
such plan except for any applicable co-payment, co-insurance, deductibles and
non-covered services.
NJ Practitioners are paid pursuant to a fee schedule established by FOHP-NJ and
are prohibited from billing members of an FOHP-NJ health plan except for
co-payments and non-covered services, if any. The fees paid to NJ Practitioners
are based on a percentage of the fees payable under the fee schedule developed
for Medicare. Co-payments, co-insurance and deductibles in amounts approved by
FOHP-NJ, are collected directly by the NJ Practitioner from the member.
Subscriber contracts are entered into with large employer groups (more than 50
employees) and small employer groups (50 employees or less). Such contracts are
generally for a term of one year, but may be canceled by the employer group upon
30 days written notice. Under these contracts, FOHP-NJ has agreed to provide the
employer groups with health coverage in return for a monthly premium. FOHP-NJ
utilizes a system of community rating by class, adjusted (with respect to
employer groups of 100 or more employees) by age, sex and industry
classification, in determining its rates for various employers in the proposed
service area. Premium revenue generated from subscriber contracts is recorded as
revenue in the month in which subscribers are entitled to service. Premiums
collected in advance are reported as unearned premium revenue.
12
Results of Operations
For the three months ended September 30, 1997, and 1996
Premium Revenue. For the three-month period ended September 30, 1997, medical
premium revenue totaled $98 million or $31 million more than the $67 million of
medical premium revenue generated during the same period in 1996. This increase
was due to the significant subscriber growth experienced since the end of the
third quarter of 1996. Approximately 38% of medical premium revenue generated in
the third quarter of 1997 and approximately 49% of medical premium revenue
generated in the third quarter of 1996 was attributable to NJ Acute Care
Institutions which are obligated to enroll their employees in FOHP-NJ health
plans. The Holding 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 FOHP-NJ continues to benefit from current
marketing efforts focused on commercial and medicaid products which are not
marketed directly to employees of providers of FOHP-NJ.
Other Revenue. Other revenue, principally administrative fees, for the
three-month period ended September 30, 1997 was $889 thousand compared to $1.9
million of other revenue for the same period of the prior year. This decrease is
attributed to the sale of FMCO, formally a wholly-owned subsidiary of the
Holding Company, in the last quarter of 1996. Interest income for the third
quarter of 1997 was $1.2 million, a $661 thousand increase from the $539
thousand generated in the third quarter of 1996. The increase in interest income
was due to the larger cash reserves related to the investment by FHS on April
30, 1997.
Medical and Hospital Service Expenses. Total expenses attributable to medical
and hospital service for the three-month period ended September 30, 1997 were
$114.4 million or $53.5 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 three month period
ended September 30, 1997 was 117.0% compared to 90.9% for the same period in
1996. This increase was a result of increased utilization in FOHP-NJ health
benefit plans, changes in the mix of products offered by FOHP-NJ, and prior
period adjustments to healthcare costs related to a reduction of claims backlog.
The Holding 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 future quarters.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $13.4 million for the three-month period ended
September 30, 1997, including a $2.0 million administrative management fee
charged by FHS, compared to $11.4 million incurred for the same period in 1996.
Other Expenses. Depreciation and amortization expenses for the three-month
period ended September 30, 1997 increased by $168 thousand from the $243
thousand incurred during the same period in 1996. This increase was mostly the
result of the Debenture costs being amortized in 1997 (approximately $128,000).
For the nine months ended September 30, 1997, and 1996
Premium Revenue. For the nine-month period ended September 30, 1997, medical
premium revenue totaled $274 million or $102 million more than the $172 million
of medical premium revenue generated during the same period in 1996. This
increase was due to the significant subscriber growth experienced since the end
of the third quarter of 1996. Approximately 36% of medical premium revenue
generated in the first nine months of 1997 and approximately 59% of medical
premium revenue generated in the first nine months of 1996 was attributable to
NJ Acute Care Institutions which are obligated to enroll their employees in
FOHP-NJ health plans. The Holding 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 FOHP-NJ continues to benefit from
current marketing efforts focused on commercial and medicaid products which are
not marketed directly to employees of providers of FOHP-NJ.
Other Revenue. Other revenue, principally administrative fees, for the
nine-month period ended September 30, 1997 was $1.8 million compared to $5.8
million of other revenue for the same period of the prior year. This decrease is
attributed to the sale of FMCO, formally a wholly-owned subsidiary of the
Holding Company, in the last quarter of 1996. Interest
13
income for the first nine months of 1997 was $2.9 million, a $1.6 million
increase from the $1.3 million generated in the first nine months of 1996. The
increase in interest income was due to the larger cash reserves related to the
investment by FHS on April 30, 1997.
Medical and Hospital Service Expenses. Total expenses attributable to medical
and hospital service for the nine-month period ended September 30, 1997 were
$283 million or $127.7 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 nine month period ended
September 30, 1997 was 103.2% compared to 90.5% for the same period in 1996.
This increase was a result of increased utilization in FOHP-NJ health benefit
plans, changes in the mix of products offered by FOHP-NJ and prior period
adjustments to healthcare costs related to a reduction of claims backlog. The
Holding 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 future quarters.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $42.2 million for the nine-month period ended
September 30, 1997, including a $5.5 million management fee payable to FHS,
compared to $36.4 million incurred for the same period in 1996.
Other Expenses. Depreciation and amortization expenses for the nine-month period
ended September 30, 1997 increased by $342 thousand from the $659 thousand
incurred during the same period in 1996. This increase was mostly the result of
the Debenture costs being amortized in 1997 (approximately $218,000).
Restructuring Costs. During the first nine months of 1997, the Holding Company
estimated and recorded a restructuring charge of $1.1 million in connection with
the FHS investment. The plan of restructuring primarily includes costs
associated with work force reductions as it is anticipated that pursuant to the
Administrative Management Agreement FHS will assume the functions currently
performed by the Information Services, Billing and Enrollment and Claims staffs
of FOHP. It is anticipated that these functions will transfer to FHS by June 30,
1998. There are several major components of the plan that need to be finalized
and an additional charge will be recorded by the end of 1997.
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 Holding 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 Holding Company as a result of the sale
of Common Stock-NJ in the offering to NJ Practitioners amounted to $7,937,000.
FOHP-NJ is required by the Departments to maintain a minimum statutory net
worth. In addition, if FOHP-NJ's statutory net worth is, or is expected to be,
less than 125% of the minimum statutory net worth requirement, FOHP-NJ is
required to submit to the Departments a plan of action to address the deficiency
or expected deficiency. During the first quarter of 1996, FOHP learned that
FOHP-NJ's statutory net worth as of December 31, 1995 may have been below 125%
of the minimum statutory net worth requirement. FOHP-NJ addressed this potential
deficiency by submitting to the Departments in April 1996 a plan of action which
outlined the actions 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, FOHP sold to FHS the
Debentures in the aggregate principal amount of $51,701,120.38, pursuant to the
Amended Securities Purchase Agreement. The principal amount of the Debentures
are convertible, at the option of FHS, into 71 percent of FOHP's capital stock
on a fully-diluted basis. See Notes to Consolidated Financial Statements - Note
8. At the closing of the purchase of the Debentures, FHS converted $1,701,120.38
of principal amount of Debentures into 168,109 shares of New Common Stock.
To facilitate the sale of the Debentures to FHS, the Departments agreed to
rescind their conditions attached to their approval of the plan of action
submitted by FOHP-NJ in April 1996, subject to the Department's right to require
FOHP-NJ to submit a new plan of action if FOHP-NJ fails to increase its net
worth to 100% of the minimum statutory net worth requirement by December 31,
1997. In addition, the Departments agreed that subsequent to December 31, 1997,
FOHP-NJ will only be
14
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 Debentures, provided that FHS
guarantees, in form satisfactory to the Commissioner of the Department of
Banking and Insurance, 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. As of September 30, 1997, FOHP-NJ was approximately $51
million below 100% of the minimum statutory net worth requirement.
In connection with the sale of the Debentures, FHS and FOHP entered into the
Letter Agreement which clarifies FHS' right under the Amended Securities
Purchase Agreement to infuse additional capital into FOHP in the event that it
is determined that FOHP-NJ needs capital to meet applicable statutory net worth
requirements (referred to herein as a "Net Capital Shortfall"). Pursuant to the
Letter Agreement, FHS may, at any time prior to December 31, 1997, at its own
discretion, contribute up to $5,000,000 in additional capital to FOHP to be used
in connection with certain anticipated liabilities and contribute such
additional amounts that may be projected to be required from time to time (based
upon reasonable projections prepared by FHS taking into account anticipated full
year 1997 operating results) in order for FOHP-NJ to meet 100% of the minimum
statutory net worth requirements as of December 31, 1997. In the event that, in
accordance with the terms of the Letter Agreement, FHS contributes additional
capital to FOHP to meet a Net Capital Shortfall or projected Net Capital
Shortfall, FHS will be issued additional convertible debentures in substantially
the same form as the Debentures. In as much as FOHP-NJ has reported to the
Departments a negative satutory net worth as of September 30, 1997, the
Departments have informed FOHP and FHS that an infusion of capital from FHS will
be required prior to year-end in order to eradicate the negative statutory net
worth of FOHP-NJ.
The Amended Securities Purchase Agreement also provides that if FOHP projects a
Net Capital Shortfall and FHS does not advance funds to FOHP to satisfy such Net
Capital Shortfall, FOHP may initiate a pro rata offering of its New Common Stock
to all the then-current shareholders of FOHP to raise capital to satisfy the Net
Capital Shortfall.
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." It is estimated that this deposit covering two months of incurred
health expenditures will be approximately $50 million. One-fourth of the
deposit, or $12.3 million, was made by September 30, 1997. The remainder of the
deposit must be submitted by January 2, 1998 in cash or in the form of a
guarantee from FHS acceptable to the Departments. This deposit, along with the
operating loss contributed to the net decrease in cash of $9 million for the
nine months ended September 30, 1997.
15
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11 - See attached exhibit on following page regarding computation of
earnings per share.
Exhibit 27 - Financial Data Schedule
Reports on Form 8-K - None.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOHP, Inc.
-----------------------------------------
(Registrant)
November 13, 1997 /s/ Roger Birnbaum
- ------------------------- ----------------------------------------
Date (Signature)**
Roger Birnbaum
President and Chief Executive Officer
November 13, 1997 /s/ Marc Stein
- ------------------------- ----------------------------------------
Date (Signature)**
Marc Stein
Principal Financial and Accounting Officer
17
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE