<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 17, 1997
PHP HEALTHCARE CORPORATION
(Exact name of Registrant as specified in its charter)
State or other jurisdiction of incorporation: Delaware
Commission File No.: 0-16235
I.R.S. Employer Identification No.: 54-1023168
Address of principal executive offices: 11440 Commerce Park Drive
Reston, VA 20191
Registrant's telephone number, including area code: (703) 758-3600
Former name or former address, if changed since last report: Not applicable
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Item 5.
- -------
Item 5 is hereby amended in its entirety to read as follows.
As required by the Credit Agreement, the Company used the net proceeds
from the sale of its Series B Convertible Preferred Stock to repay outstanding
borrowings thereunder. In connection therewith, NationsBank released to the
Company the 920,850 warrants to acquire shares of PHP Common Stock which were
held in escrow pending repayment of borrowings under the Credit Agreement. On
January 14, 1998, the Credit Agreement was amended to provide the Company with
$30,000,000 of availability under the Revolving Credit Facility. Among other
things, the amendment also decreased the Applicable Margin with respect to the
Revolving Credit Facility to 2.00% for Eurodollar Rate Advances and 1.00% for
Alternate Rate Advances until the Company delivers financial statements to the
Administrative Agent for the fiscal quarter ended January 31, 1998. Thereafter,
the Applicable Margin will be determined by the Leverage Ratio (as defined in
the Credit Agreement) as set forth below:
<TABLE>
<CAPTION>
Eurodollar Rate Advances Alternate Base Rate Advances
------------------------ ----------------------------
<S> <C> <C>
Level 1
- -------
less than 2.00:1 1.25% 0.25%
Level II
- --------
2.00:1 or greater, 1.50% 0.50%
but less than 2.50:1
Level III
- ---------
2.50:1 or greater, 1.75% 0.75%
but less than 3.00:1
Level IV
- --------
3.00:1 or greater 2.00% 1.00%
</TABLE>
The foregoing discussion of the amendment to the Credit Agreement is
qualified in its entirety by reference to a copy of the amendment which is filed
as an exhibit hereto and incorporated herein by reference.
1
<PAGE>
PHP HEALTHCARE CORPORATION
Item 7. Financial Statements and Exhibits
- ------------------------------------------
Item 7 is hereby restated in its entirety to read as follows:
The following documents are included in this report:
a) Financial statements of the business acquired
- - HIP of New Jersey, Inc. and Subsidiary Consolidated Financial Statements and
Additional Information as of and for the years ended December 31, 1996 and
1995, with Report of Independent Auditors (see Exhibit 99.1)
- - HIP of New Jersey, Inc. and Subsidiary Consolidated Financial Statements and
Additional Information as of and for the years ended December 31, 1995 and
1994, with Report of Independent Auditors (see Exhibit 99.2)
b) Pro forma financial information
The following pro forma financial information is required by Article 11 of
Regulation S-X:
- - PHP Healthcare Corporation Pro Forma Combined Balance Sheet as of October 31,
1997 (unaudited)
- - PHP Healthcare Corporation Pro Forma Combined Statements of Operations for the
Six Months ended October 31, 1997 (unaudited).
- - PHP Healthcare Corporation Pro Forma Combined Statements of Operations for the
Year ended April 30, 1997 (unaudited).
- - PHP Healthcare Corporation Notes to Pro Forma Combined Statements of
Operations for the Year ended April 30, 1997 (unaudited) and the Six Months
ended October 31, 1997 (unaudited).
c) Exhibits. The following exhibits are furnished as a part of this report.
--------
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
4.1 Warrant Agreement between PHP Healthcare Corporation and First Trust
of New York, National Association, Warrant Agreement, dated as of
October 31, 1997*
10.1 Asset Purchase Agreement by and between PHP Healthcare Corporation
and HIP of New Jersey, Inc., dated as of July 24, 1997**
10.2 Credit Agreement, dated October 31, 1997, among PHP Healthcare
Corporation as Borrower and The Initial Lenders and Initial Issuing
Bank Named Herein as Initial Lenders and Initial Issuing Bank and
NationsBank, N.A. as Collateral Agent and Administrative Agent*
</TABLE>
2
<PAGE>
PHP HEALTHCARE CORPORATION
<TABLE>
<S> <C>
10.3 Security Agreement, dated as of October 31, 1997, from PHP Healthcare
Corporation. The Other Grantors Referred to Herein and The Additional
Grantors Referred to Herein as Grantors to NationsBank, N.A. as
Administrative Agent*
10.4 Subsidiary Guaranty, dated as of October 31, 1997, from each of the
Subsidiaries of PHP Healthcare Corporation listed on the Signature
Pages Hereof and the Additional Subsidiary Guarantors referred to
herein as Guarantors in favor of the Secured Parties referred to in
the Credit Agreement referred to herein**
10.5 Letter Amendment dated as of January 14, 1998 to the Credit Agreement,
dated October 31, 1997, among PHP Healthcare Corporation as Borrower
and the Initial Lenders and Initial Issuing Bank named herein as
Initial Lenders and Initial Issuing Bank and NationsBank, N.A. as
Collateral Agent and Administrative Agent
23.1 Consent of Independent Auditors
99.1 HIP of New Jersey, Inc. and Subsidiary Consolidated Financial
Statements and Additional Information as of and for the Years ended
December 31, 1996 and 1995, with Report of Independent Auditors
99.2 HIP of New Jersey, Inc. and Subsidiary Consolidated Financial
Statements and Additional Information as of and for the Years ended
December 31, 1995 and 1994, with Report of Independent Auditors
</TABLE>
- -----------
* Document filed as an exhibit to the Company 8-K Report (File No. 0-
16235) on November 17, 1997 bearing the same exhibit number, which is
incorporated herein by reference.
** Document filed as an exhibit to the Company's 10-Q Report (File No. 0-16235)
for the period ended July 31, 1997, bearing the same exhibit number, which is
incorporated herein by reference.
3
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Pro Forma Combined Financial Statements
Effective October 31, 1997, PHP Healthcare Corporation ("PHP" or the
"Company") acquired eighteen health centers located throughout the state of New
Jersey from HIP of New Jersey, Inc. ("HIPNJ"), a health maintenance
organization. The total purchase price of approximately $80 million, including
transaction costs and other consideration, was paid through a combination of
cash on hand and bank financing under a senior credit facility. The Company may
be required to pay HIP additional amounts based upon membership growth through
the year 2000, up to a total of $15 million. In conjunction with the purchase
agreement, the Company and HIPNJ entered into a twenty year Health Services
Agreement pursuant to which the Company will arrange for the provision of
certain health care services to enrolled HIPNJ beneficiaries in return for
global capitation payments. To enable the Company to provide health care
services as promptly as possible, the Company and HIPNJ also entered into a
Network Access Transition Agreement, whereby HIPNJ will pay the Company $5.4
million to perform various transition functions, and provide HIPNJ members
access to the Company's health care network during the transition period.
On December 30, 1997, PHP announced the completion of a private placement
of shares of its Series B Convertible Preferred Stock at a purchase price of
$1,000 per share, resulting in gross proceeds to the Company of $70 million.
The proceeds of the offering were used to repay outstanding borrowings under a
senior credit facility, to pay related expenses and for working capital. The
senior credit facility was established to temporarily finance the Company's
acquisition of 18 health centers from HIP, although the Company intended to
obtain permanent financing through the issuance of bank debt or equity
securities. The issuance cost under this temporary financing was approximately
$13 million.
The transaction was accounted for using the purchase method of accounting
and accordingly, the purchase price was allocated, on an estimated basis, to the
acquired tangible ($15 million) and identifiable intangible ($65 million) assets
and assumed liabilities based on their respective estimated fair values. The
identifiable intangible assets will be amortized on a straight-line basis over
periods up to 20 years.
The transaction was recorded in the Company's historical balance sheet on
October 31, 1997. The pro forma adjustments in the accompanying Pro Forma
Combined Balance Sheet as of October 31, 1997 gives effect to the issuance of
the $70 million Series B Convertible Preferred Stock and the repayment of the
temporary bank financing under a senior credit facility.
The accompanying Pro Forma Combined Statements of Operations for the year
ended April 30, 1997 and the six months ended October 31, 1997, give effect to
the transaction with HIPNJ completed on October 31, 1997 as if HIPNJ and the
effects of the Health Services Agreement occurred on May 1, 1996.
The pro forma financial information is not necessarily indicative of the
results of operations which would have been attained had the transaction been
consummated on the date indicated or that which may be attained in the future.
The unaudited pro forma financial information should be read in conjunction with
the historical consolidated financial statements of PHP and HIPNJ.
4
<PAGE>
PHP HEALTHCARE CORPORATION
Pro Forma Combined Balance Sheet
As of October 31, 1997 (unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
October 31,
1997 Pro Pro
---- Forma Forma
(Unaudited) Adjustments Combined
----------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 10,981 $ 15,075 $ 26,056
Accounts receivable, net.................................................... 55,700 55,700
Pharmaceutical and medical supplies......................................... 671 671
Receivables from officers................................................... 3,031 3,031
Income tax receivable....................................................... 895 895
Deferred income taxes....................................................... 539 1,838 2,377
Other current assets........................................................ 5,372 5,372
-------- ---------- --------
Total current assets........................................................ 77,189 16,913 94,102
Property and equipment, net.................................................... 54,429 54,429
Intangible assets, net of accumulated amortization of $1,690................... 79,526 79,526
Receivables from officers...................................................... 498 498
Note receivable................................................................ 2,000 2,000
Other assets................................................................... 10,023 1,600 11,623
--------- --------- ---------
Total assets.............................................................. $223,665 $ 18,513 $242,178
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable to bank........................................................ $ 3,000 $ (3,000) $ ---
Amounts due in connection with acquisition.................................. 12,902 (12,902) ---
Current maturities of notes payable - other................................. 2,057 2,057
Accounts payable............................................................ 18,525 18,525
Claims payable - medical services........................................... 6,080 6,080
Accrued salaries and benefits............................................... 10,605 10,605
Income taxes payable........................................................ 1,168 1,168
Deferred revenue............................................................... 24,568 24,568
-------- ---------- --------
Total current liabilities...................................................... 78,905 (15,902) 63,003
Amounts due in connection with acquisition..................................... 25,710 (25,710) ---
Notes payable - other, net of current maturities............................... 5,488 5,488
Convertible subordinated debentures............................................ 66,290 66,290
Deferred income taxes.......................................................... 1,274 1,274
Deferred gain on sale of building.............................................. 873 873
Other liabilities.............................................................. 871 871
-------- ---------- --------
Total liabilities 179,411 (41,612) 137,799
-------- ---------- --------
Minority interest.............................................................. 1,282 1,282
-------- ---------- --------
Stockholders equity:
Preferred stock, Series B Convertible Preferred Stock, $1,000 par value;
80,800 shares authorized, 70,000 shares issued and outstanding (net of
value of beneficial conversion feature at date of issue of $6,300)........ 63,700 63,700
Preferred stock, $.01 par value, 9,919,200 shares authorized, none issued...
Common stock, $.01 par value, 100,000,000 shares authorized, 14,818,415 ---
shares.................................................................... 148 148
Additional paid-in capital.................................................. 44,666 (6,463) 44,503
Note receivable from sale of stock.......................................... (900) 6,300 (900)
Retained earnings........................................................... 5,630 (3,412) 2,218
Treasury stock, 3,258,485 common shares, at cost............................ (6,572) (6,572)
-------- --------- --------
Total stockholders' equity................................................ 42,972 60,125 103,097
-------- --------- --------
Contingencies..................................................................
$223,665 $ 18,513 $242,178
======== ========= ========
</TABLE>
The accompanying notes are an integral part of this pro forma statement.
5
<PAGE>
PHP HEALTHCARE CORPORATION
Pro Forma Combined Statements of Operations
Year ended April 30, 1997(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Historical
----------
Pro
Pro Forma Forma
PHP HIPNJ Subtotal Adjustments Notes Combined
--- ----- -------- ----------- ----- --------
<S> <C> <C> <C> <C> <C>
Revenue................................... $ 232,307 $ 385,540 $ 617,847 $(35,870) 1 $ 581,977
7,238 2
(6,250) 2
3,226 5
Direct Costs.............................. (189,477) (351,037) (540,514) 12,211 3 (524,089)
---------- ---------- ---------- -------- ----------
Gross Profit.............................. 42,830 34,503 77,333 (19,445) 57,888
General and administrative costs.......... (30,846) (43,155) (74,001) 27,920 4 (46,081)
Reserve for Medicaid receivables.......... (9,822) (9,822) (9,822)
Retirement charges........................ (2,275) (2,275) (2,275)
Restructuring charges..................... (2,550) (2,550) (2,550)
---------- ---------- ---------- -------- ----------
Operating income (loss)............ (2,663) (8,652) (11,315) 8,475 (2,840)
Other income (expenses):
Interest expense....................... (5,577) (1,525) (7,102) 1,525 6 (5,577)
Interest income........................ 2,060 2,060 2,060
Miscellaneous income (expense)......... (222) (222) (222)
Minority interest in earnings.......... (196) (196) (196)
---------- ---------- ---------- -------- ----------
Earnings (loss) before income tax.. (6,598) (10,177) (16,775) 10,000 (6,775)
Income tax benefit........................ 2,510 2,510 65 7 2,575
---------- ---------- -------- ----------
Net earnings (loss).................... (4,088) (10,177) (14,265) 10,065 (4,200)
Deemed dividend on Series B Preferred
Stock.................................. (6,300) 8 ( 6,300)
---------- ---------- ---------- -------- ----------
Net loss applicable to common
shareholders........................ $ (4,088) $ (10,177) $ (14,265) $ 3,765 $ (10,500)
========== ========== ========== ======== ==========
Primary earnings per common share:
Net loss............................... $ (.37) $ (.38)
Deemed dividend..................... --- (.57)
---------- ----------
Net loss applicable to common
shareholders........................ $ (.37) $ (.95)
========== ==========
Fully diluted earnings per common
share............................... $ (.37) $ (.95)
========== ==========
Weighted average number of common
shares outstanding:
Primary................................ 11,038 11,038
========== ==========
Fully diluted.......................... 11,038 11,038
========== ==========
</TABLE>
The accompanying notes are an integral part of this pro forma statement.
6
<PAGE>
PHP HEALTHCARE CORPORATION
Pro Forma Combined Statements of Operations
for the Six Months ended October 31, 1997 (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Historical
---------- Pro Forma Pro Forma
PHP HIP Subtotal Adjustments Notes Combined
--- --- -------- ----------- ----- --------
<S> <C> <C> <C> <C> <C>
Revenue.................................. $ 111,495 $188,391 $299,886 $ (16,904) 1 $ 282,982
6,395 2
(3,125) 2
1,768 5
Direct Costs............................. (89,964) (187,272) (277,236) 6,106 3 (266,092)
---------- ---------- ---------- --------- ----------
Gross Profit............................. 21,531 1,119 22,650 (5,760) 16,890
General and administrative costs......... (14,730) (21,361) (36,091) 18,246 4 (17,845)
---------- ---------- ---------- --------- ----------
Operating income (loss)........... 6,801 (20,242) (13,441) 12,486 (955)
Other income (expenses):
Interest expense...................... (3,016) (987) (4,003) 987 6 (3,016)
Interest income....................... 658 658 658
Miscellaneous income (expense)........ (584) (584) (584)
Minority interest in earnings......... (522) (522) (522)
---------- ---------- ---------- --------- ----------
Earnings (loss) before income tax. 3,337 (21,229) (17,892) 13,473 (4,419)
Income tax (expense) benefit............. (1,168) (1,168) 2,715 7 1,547
---------- ---------- --------- ---------
Net earnings (loss)............... $ 2,169 $ (21,229) $ (19,060) $ 16,188 $ (2,872)
========= ========== ========== ========= ==========
Net earnings (loss) per common share:
Primary............................... $ 0.16 $ (0.21)
========= ==========
Fully diluted......................... $ 0.16 $ (0.21)
========= ==========
Weighted average number of common
shares outstanding:
Primary............................... 13,679 13,679
========= =========
Fully diluted......................... 13,790 13,790
========= =========
</TABLE>
The accompanying notes are an integral part of this pro forma statement.
7
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Pro Forma Combined Financial Statements
for the Year Ended April 30, 1997 (unaudited) and
the Six Months Ended October 31, 1997 (unaudited)
(1) Revenue - Global Capitation
In conjunction with the purchase agreement, PHP and HIPNJ entered into a twenty
year Health Services Agreement pursuant to which PHP will provide certain health
care services to enrolled HIPNJ beneficiaries in return for a global capitation
payment to PHP. Pursuant to the Health Services Agreement, PHP will receive
premium revenue, 100% of revenues generated in the health centers, including
optical and pharmacy revenues, and a portion of all Administrative Services Only
fees. This pro forma adjustment is to eliminate the HIPNJ retained revenues.
(2) Direct costs - Depreciation
The pro forma adjustment to direct costs represents a decrease to eliminate the
depreciation expense for the acquired leasehold improvements that HIPNJ
recognized and to eliminate goodwill amortization that will be retained by HIPNJ
($7,238 and $6,395 for the year ended April 30, 1997 and the six months ended
October 31, 1997, respectively). Additionally, the pro forma adjustment to
direct costs represents an increase in depreciation expense that would have been
recognized by PHP based upon the estimated useful lives of the acquired assets
and an increase to record goodwill purchased by PHP ($6,250 and $3,125 for the
year ended April 30, 1997 and the six months ended October 31, 1997,
respectively). This depreciation amount is based on an estimated blended rate
which approximates a period of five (5) years. The Company assesses the
recoverability of intangible assets by determining whether the balance can be
recovered through estimated undiscounted future operating cash flows.
(3) Direct Costs - Labor Savings
The pro forma adjustment to direct costs represent eliminations of HIPNJ labor
cost which will not be incurred by PHP under the Health Services Agreement as a
result of a reduction in the workforce.
8
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Pro Forma Combined Financial Statements
for the Year Ended April 30, 1997 (unaudited) and
the Six Months Ended October 31, 1997 (unaudited) (continued)
(4) General and Administrative - HIPNJ Retained Costs
Pursuant to the Health Services Agreement, HIPNJ will retain certain
administrative activities, including but not limited to marketing, regulatory
relations, plan finance and certain member services. This pro forma adjustment
to general and administrative costs represents the elimination of these
administrative activities.
(5) Health Center Closings
The pro forma adjustment to direct costs represent the elimination of certain
fixed costs as a result of two health center closings.
(6) Interest Expense
The pro forma adjustment to interest expense represent the elimination of
certain interest costs which will be retained by HIPNJ.
(7) Income Tax
The pro forma adjustment to income taxes represents the income tax benefit which
would result in applying the Company's historical tax base.
(8) Deemed Dividend
The deemed dividend represents accretion of value of the beneficial conversion
feature (9% discount in twelfth month after issuance) on Series B Preferred
Stock.
(9) Additional Cost Reductions
There are additional cost reductions in connection with the transaction relating
to recontracting provider agreements on a unit price basis which are not
reflected in the pro forma statements. The Company has estimated that if these
cost reductions were included, the reduction to medical expense (included in
direct costs) would be appoximately 20 million and $24.4 million on an annual
basis. Additional cost reductions are anticipated resulting from more effective
utilization efforts.
9
<PAGE>
PHP HEALTHCARE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
PHP HEALTHCARE CORPORATION
--------------------------
(Registrant)
By: /s/ Anthony M. Picini
-----------------------
ANTHONY M. PICINI
Executive Vice President and
Chief Financial Officer
Date: January 16, 1998
----------------
10
<PAGE>
PHP HEALTHCARE CORPORATION
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
4.1 Warrant Agreement between PHP Healthcare Corporation and First Trust
of New York, National Association, Warrant Agreement, dated as of
October 31, 1997*
10.1 Asset Purchase Agreement by and between PHP Healthcare Corporation
and HIP of New Jersey, Inc., dated as of July 24, 1997**
10.2 Credit Agreement, dated October 31, 1997, among PHP Healthcare
Corporation as Borrower and The Initial Lenders and Initial Issuing
Bank Named Herein as Initial Lenders and Initial Issuing Bank and
NationsBank, N.A. as Collateral Agent and Administrative Agent*
10.3 Security Agreement, dated as of October 31, 1997, from PHP Healthcare
Corporation. The Other Grantors Referred to Herein and The Additional
Grantors Referred to Herein as Grantors to NationsBank, N.A. as
Administrative Agent*
10.4 Subsidiary Guaranty, dated as of October 31, 1997, from each of the
Subsidiaries of PHP Healthcare Corporation listed on the Signature
Pages Hereof and the Additional Subsidiary Guarantors referred to
herein as Guarantors in favor of the Secured Parties referred to in
the Credit Agreement referred to herein**
10.5 Letter Amendment dated as of January 14, 1998 to the Credit
Agreement, dated October 31, 1997, among PHP Healthcare Corporation
as Borrower and the Initial Lenders and Initial Issuing Bank named
herein as Initial Lenders and Initial Issuing Bank and NationsBank,
N.A. as Collateral Agent and Administrative Agent
23.1 Consent of Independent Auditors
99.1 HIP of New Jersey, Inc. and Subsidiary Consolidated Financial
Statements and Additional Information as of and for the Years ended
December 31, 1996 and 1995, with Report of Independent Auditors
99.2 HIP of New Jersey, Inc. and Subsidiary Consolidated Financial
Statements and Additional Information as of and for the Years ended
December 31, 1995 and 1994, with Report of Independent Auditors
</TABLE>
- ------------
* Document filed as an exhibit to the Company 8-K Report (File No. 0-16235)
on November 17, 1997 bearing the same exhibit number, which is incorporated
herein by reference.
** Document filed as an exhibit to the Company's 10-Q Report (File No. 0-
16235) for the period ended July 31, 1997, bearing the same exhibit number,
which is incorporated herein by reference.
11
<PAGE>
LETTER AMENDMENT
Dated as of January 14, 1998
To the banks, financial institutions
and other institutional lenders
(collectively, the "Lender Parties")
--------------
parties to the Credit Agreement
referred to below and to NationsBank, N.A.,
as administrative agent
(the "Administrative Agent")
--------------------
for the Lenders
Ladies and Gentlemen:
We refer to the Credit Agreement dated as of October 31, 1997 (the
"Credit Agreement") among the undersigned and you. Capitalized terms not
----------------
otherwise defined in this Letter Amendment have the same meanings as specified
in the Credit Agreement.
It is hereby agreed by you and us as follows:
The Credit Agreement is, effective as of the date of this Letter
Amendment, hereby amended as follows:
(a) The cover page of the Credit Agreement is hereby amended by
deleting the number "$75,000,000" therein and replacing such number with
"$30,000,000".
(b) Section 1.01 of the Credit Agreement is hereby amended by
adding the following definitions in the correct alphabetical order:
"Applicable Percentage" means (x) prior to the date on which the
---------------------
Borrower delivers the financial statements for the fiscal quarter ended January
31, 1998 to the Administrative Agent pursuant to Section 5.03(c), 0.50% and (y)
thereafter, a percentage per annum determined by the Leverage Ratio as set forth
below:
<TABLE>
<CAPTION>
Level I Percentage
------- ----------
<S> <C>
Less than 2.00:1 0.25%
Level II
--------
2.00:1 or greater,
but less than 2.50:1 0.375%
Level III
---------
2.50:1 or greater 0.50%
</TABLE>
<PAGE>
2
The Applicable Percentage shall be determined by reference to the
ratio in effect from time to time; provided, however, that no change in the
Applicable Percentage shall be effective until three Business Days after the
date on which the Administrative Agent receives financial statements pursuant to
Section 5.03(c) or (d) and a certificate of the chief financial officer of the
Borrower demonstrating such ratio."
"Convertible Preferred Stock" means up to 80,800 shares of Series B
---------------------------
Convertible Preferred Stock, par value $.01 per share, of the Borrower
(including shares issuable upon the exercise of warrants to purchase Series B
Convertible Preferred Stock)".
"Convertible Preferred Stock Documents" means the Certificate of
-------------------------------------
Designations of Series B Convertible Preferred Stock of PHP Healthcare
Corporation dated December 23, 1997 and any other agreement, document or
instrument which governs the terms of the Convertible Preferred Stock".
(c) The definition of "Administrative Agent's Account" in Section
1.01 is hereby amended by deleting the address contained therein and replacing
such address with the following:
"NationsBank, N.A., 101 North Tryon Street, 15th Floor,
Charlotte, North Carolina 28255".
(d) The definition of "Applicable Margin" in Section 1.01 is hereby
amended in full to read as follows:
"`Applicable Margin' means (x) prior to the date on which the
-----------------
Borrower delivers the financial statements for the fiscal quarter ended January
31, 1998 to the Administrative Agent pursuant to Section 5.03(c), 2.00% for
Eurodollar Rate Advances and 1.00% for Alternate Base Rate Advances, and (y)
thereafter, a percentage per annum determined by the Leverage Ratio as set forth
below:
<TABLE>
<CAPTION>
================================================================================
Eurodollar Rate Advances Alternate Base Rate Advances
------------------------ ----------------------------
- --------------------------------------------------------------------------------
<S> <C> <C>
Level I
- -------
less than 2.00:1 1.25% 0.25%
- --------------------------------------------------------------------------------
Level II
- --------
2.00:1 or greater,
but less than 2.50:1 1.50% 0.50%
- --------------------------------------------------------------------------------
Level III
- ---------
2.50:1 or greater,
but less than 3.00:1 1.75% 0.75%
- --------------------------------------------------------------------------------
Level IV
- --------
3.00:1 or greater 2.00% 1.00%
================================================================================
</TABLE>
The Applicable Margin for each Alternate Base Rate Advance shall be
determined by reference to the ratio in effect from time to time and the
Applicable Margin for each Eurodollar Rate Advance shall be determined by
reference to the ratio in effect on the first day of each
<PAGE>
3
Interest Period for such Advance, provided, however, that no change in the
Applicable Margin shall be effective until three Business Days after the date on
which the Administrative Agent receives financial statements pursuant to Section
5.03(c) or (d) and a certificate of the chief financial officer of the Borrower
demonstrating such ratio".
(e) The definition of "Eligible Assignee" in Section 1.01 is hereby
amended by deleting each reference therein to the phrase "NationsBridge and".
(f) The definition of "Related Documents" in Section 1.01 is hereby
amended by adding at the end thereof "and the Convertible Preferred Stock
Documents".
(g) Section 2.01(b) is hereby amended by adding at the end of the
first sentence thereof the following proviso:
"; provided, however, that the aggregate amount of Revolving
-------- -------
Credit Advances outstanding at any time prior to the date on which the Borrower
delivers the financial statements for the fiscal quarter ended January 31, 1998
to the Administrative Agent pursuant to Section 5.03(c) shall not exceed
$15,000,000".
(h) Section 2.05(b)(ii) is hereby amended in full to read as
follows:
"(ii) The Revolving Credit Commitments shall be
automatically and permanently reduced, on a pro rata basis, to $20,000,000 on
April 30, 1998 (after giving effect to all reductions in such Commitments on or
prior to such date as a result of the application of commitment reductions in
accordance with subsection (a) of this Section 2.05 or clause (iii) of this
Section 2.05(b)); provided, however, that, notwithstanding the foregoing
provisions of this clause (ii), the Revolving Credit Commitments shall be
terminated in whole on the Termination Date".
(i) Section 2.05(b)(iii) is hereby amended by adding to the end of
the first sentence therein the following proviso:
"; provided, however, that the Revolving Credit Facility shall
not be reduced below $20,000,000 as a result of the initial issuance of the
Convertible Preferred Stock or the related prepayment of the Net Cash Proceeds
thereof".
(j) Section 2.08(a) is hereby amended by deleting the phrase "of
1/2 of 1%" therein and replacing such phrase with the phrase "equal to the
Applicable Percentage".
(k) Section 5.02(b)(i) is hereby amended by adding at the end
thereof the following:
"and the Convertible Preferred Stock".
(l) Section 5.02(g) is hereby amended by adding at the end of
clause (i) therein the phrase "and (C) issue the Convertible Preferred Stock and
permit the conversion thereof into common stock of the Borrower".
<PAGE>
4
(m) Section 5.03(b) is hereby amended by replacing the phrase "30
days" with the phrase "45 days".
(n) Section 5.04(c) is hereby replaced in its entirety with the
phrase "[Intentionally Omitted]".
(o) Section 5.04(d) is hereby amended in its entirety to read as
follows:
"Maintain at the end of each fiscal quarter a Leverage Ratio of
not more than (i) in the case of the fiscal quarter ended January 31, 1998,
3.5:1.00 and (ii) thereafter 3.0:1.00 for such fiscal quarter".
(p) Section 5.04(e) is hereby replaced in its entirety with the
phrase "[Intentionally Omitted]".
(q) Section 5.04(f) is hereby amended by (i) replacing the number
"$29,500,000" therein with the number "$36,500,000", (ii) replacing the date
"April 30, 1997" with the date "October 31, 1997" and (iii) replacing the phrase
"100% of all proceeds" with the phrase "100% of all net proceeds".
(r) Section 6.01 is hereby amended by (i) adding at the end of
paragraph (m) thereof the word "or" and (ii) adding immediately after paragraph
(p) the following paragraph:
"(n) the Borrower shall fail to pay to NationsBridge
and NationsBank, pursuant to the amended and restated side letter dated as
of October 31, 1997 from NationsBridge and NationsBank to the Borrower
relating to fees, expenses and warrants, $2,250,000 on or prior to the date
of the execution by the Borrower of the Letter Amendment dated as of
January 14, 1998 to the Credit Agreement;"
(s) Section 8.01 is hereby amended by deleting the phrase "and
NationsBridge" therein.
(t) Schedule I to the Credit Agreement is hereby amended in its
entirety to read as set forth in Annex A hereto.
(u) Exhibit C to the Credit Agreement is hereby amended by deleting
the signature block therein for NationsBridge, L.L.C.
This Letter Amendment shall become effective as of the date first
above written when, and only when, the Administrative Agent shall have received
counterparts of this Letter Amendment executed by the undersigned and all of the
Lenders or, as to any of the Lenders, advice satisfactory to the Administrative
Agent that such Lender has executed this Letter Amendment, and the consent
attached hereto executed by the Loan Parties (other than the Borrower). This
Letter Amendment is subject to the provisions of Section 8.01 of the Credit
Agreement.
On and after the effectiveness of this Letter Amendment, each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or
words of like import referring to the Credit Agreement, and each reference in
the Notes and each of the other Loan Documents to
<PAGE>
5
"the Credit Agreement", "thereunder", "thereof" or words of like import
referring to the Credit Agreement, shall mean and be a reference to the Credit
Agreement, as amended by this Letter Amendment.
The Credit Agreement, the Notes and each of the other Loan
Documents, as specifically amended by this Letter Amendment, are and shall
continue to be in full force and effect and are hereby in all respects ratified
and confirmed. Without limiting the generality of the foregoing, the Collateral
Documents and all of the Collateral described therein do and shall continue to
secure the payment of all Obligations of the Loan Parties under the Loan
Documents, in each case as amended this Letter Amendment. The execution,
delivery and effectiveness of this Letter Amendment, shall not, except as
expressly provided herein, operate as a waiver of any right, power or remedy of
any Lender Party or the Administrative Agent under any of the Loan Documents,
nor constitute a waiver of any provision of any of the Loan Documents.
If you agree to the terms and provisions hereof, please evidence
such agreement by executing and returning at least two counterparts of this
Letter Amendment to Maura E. O'Sullivan, Shearman & Sterling, 599 Lexington
Avenue, New York, New York 10022.
This Letter Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement. Delivery of an executed
counterpart of a signature page to this Letter Amendment by telecopier shall be
effective as delivery of a manually executed counterpart of this Letter
Amendment.
This Letter Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York.
Very truly yours,
PHP HEALTHCARE
CORPORATION
By
---------------------------------
Title:
Agreed as of the date first above written:
NATIONSBANK, N.A.
as Administrative Agent and as Lender
By
----------------------------
Title:
<PAGE>
CONSENT
Dated as of January 14, 1998
Each of the undersigned, as a Loan Party under the Loan Documents (as
defined in the Credit Agreement referred to in the foregoing Letter Amendment)
hereby consents to such Letter Amendment and hereby confirms and agrees that (a)
notwithstanding the effectiveness of such Letter Amendment, each Loan Document
to which such Loan Party is a party is, and shall continue to be, in full force
and effect and is hereby ratified and confirmed in all respects, except that, on
and after the effectiveness of such Letter Amendment, each reference in each
such Loan Document to the "Credit Agreement", "thereunder", "thereof" or words
of like import shall mean and be a reference to the Credit Agreement, as amended
by such Letter Amendment, and (b) the Collateral Documents to which such Loan
Party is a party and all of the Collateral described therein do, and shall
continue to, secure the payment of all of the Secured Obligations (as defined
therein).
HEALTH COST CONSULTANTS, INC.
By
----------------------------
Title:
Address:
PHP/CHE, INC.
By
----------------------------
Title:
Address:
<PAGE>
7
PHP/IHS, INC.
By
-----------------------------
Title:
Address:
PHP LOUISIANA, INC.
By
-----------------------------
Title:
Address:
PHP NJ MSO, INC.
By
-----------------------------
Title:
Address:
PINNACLE HEALTH ENTERPRISES, L.L.C.
By PHP HEALTHCARE CORPORATION
as Member
By
-----------------------------
Title:
Address:
<PAGE>
8
By PHP NJ MSO, Inc.
as Member
By
------------------------------
Title:
Address:
<PAGE>
Annex A
SCHEDULE I
COMMITMENTS AND APPLICABLE LENDING OFFICES
<TABLE>
<CAPTION>
==============================================================================================================
Revolving Letter of Eurodollar
Name of Lender Credit Credit Domestic Lending Office Lending Office
- ------------------- Commitment Commitment ----------------------- --------------
---------- ----------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NationsBank, N.A. $30,000,000 $5,000,000 101 North Tryon Street Same
15th Floor
Charlotte, NC 28255
Attn: Jacquetta Banks
Tel: (704) 388-1111
Fax: (704) 386-8694
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
==============================================================================================================
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No. 33-
301101 on Form S-3 and in Registration Statement No. 33-41577 on Form S-8 and
the use of our reports dated February 14, 1997, except for Note 4 which is dated
April 29, 1997 and March 6, 1996, with respect to the consolidated financial
statements and additional information of HIP of New Jersey, Inc. for the years
ended December 31, 1996, 1995, and 1994 included in Form 8-K/A dated January 16,
1998.
/s/ Ernst & Young LLP
Iselin, New Jersey
January 16, 1998
<PAGE>
Consolidated Financial Statements
and Additional Information
HIP of New Jersey, Inc. and Subsidiary
Years ended December 31, 1996 and 1995
with Report of Independent Auditors
<PAGE>
HIP of New Jersey, Inc. and Subsidiary
Consolidated Financial Statements
and Additional Information
Years ended December 31, 1996 and 1995
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors...............................................1
Consolidated Financial Statements
Consolidated Balance Sheets..................................................2
Consolidated Statements of Operations and Changes in Net Assets..............3
Consolidated Statements of Cash Flows........................................5
Notes to Consolidated Financial Statements...................................6
Additional Information
Consolidating Balance Sheet.................................................18
Consolidating Statement of Operations and Changes in Net Assets.............19
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEAR HERE]
Report of Independent Auditors
Board of Trustees
HIP of New Jersey, Inc.
We have audited the accompanying consolidated balance sheets of HIP of New
Jersey, Inc. and subsidiary (the "Plan") as of December 31, 1996 and 1995, and
the related consolidated statements of operations and changes in net assets, and
cash flows for the years then ended. These financial statements are the
responsibility of the Plan'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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of HIP of
New Jersey, Inc. and subsidiary at December 31, 1996 and 1995, and the
consolidated results of their operations and changes in net assets and their
cash flows for the years then ended in conformity with generally accepted
accounting principles.
Our audits were conducted for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The accompanying additional
information is presented for the purpose of additional analysis and is not a
required part of the consolidated financial statements. Such information has
been subjected to the auditing procedures applied in our audits of the
consolidated financial statements and, in our opinion, is fairly stated in all
material respects in relation to the consolidated financial statements taken as
a whole.
As discussed in Note 1 to the financial statements, in 1996 the Plan changed its
method of accounting for investments to conform with the provisions of Statement
of Financial Accounting Standard No. 124; and its method of accounting for
surplus notes to conform with Accounting Standards Executive Committee Bulletin
15.
ERNST & YOUNG LLP
February 14, 1997, except for Note 4
which is dated April 29, 1997.
1
<PAGE>
HIP of New Jersey, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-------------------
(In thousands)
(Restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,015 $ 41,505
Marketable securities 54,256 69,917
Premiums receivable 12,584 10,540
Due from HIP of Pennsylvania, Inc. 686 -
Due from Health Insurance Plan of Greater New York 6,207 7,459
Other current assets 21,608 15,530
-------------------
Total other assets 102,356 144,951
Building, leasehold improvements and equipment, net 46,667 42,199
Intangible assets, net 1,026 1,433
Assets whose use is limited 415 405
Other assets 6,513 4,813
-------------------
Total assets $156,977 $193,801
===================
LIABILITIES AND NET ASSETS
Current liabilities:
Claims payable $ 60,036 $ 70,074
Accounts payable and other accrued expenses 27,309 44,820
Premiums received in advance 5,146 5,652
Current maturities of long-term debt 4,665 2,282
-------------------
Total current liabilities 97,156 122,828
Other long-term liabilities 4,666 4,020
Long-term debt 9,927 14,600
Surplus notes due to Health Insurance Plan of Greater
New York 40,175 40,175
Net assets - unrestricted 5,053 12,178
-------------------
Total liabilities and net assets $156,977 $193,801
===================
</TABLE>
See accompanying notes.
2
<PAGE>
HIP of New Jersey, Inc. and Subsidiary
Consolidated Statements of Operations and
Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
--------------------------
(In thousands)
<S> <C> <C>
REVENUE
Premiums earned $358,922 $325,004
Investment and other income 17,453 20,357
--------------------------
Total revenue 376,375 345,361
--------------------------
EXPENSES
Subscriber's benefits 328,921 289,547
General and administrative 45,131 36,367
Depreciation and amortization 7,490 6,425
Interest 1,685 1,881
--------------------------
Total expenses 383,227 334,220
--------------------------
(Loss) income from operations before cumulative effect of
a change in accounting principle (6,852) 11,141
Cumulative effect of a change in accounting principle 718 -
--------------------------
(Loss) income from operations (6,134) 11,141
--------------------------
</TABLE>
Continued on next page.
3
<PAGE>
HIP of New Jersey, Inc. and Subsidiary
Consolidated Statements of Operations and
Changes in Net Assets (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
----------------------
(In thousands)
<S> <C> <C>
(Loss) income from operations (continued) $ (6,134) $ 11,141
Other change in unrestricted net assets:
Contribution of capital to HIP of Pennsylvania, Inc. (435) -
change in net unrealized gains and losses (556) -
----------------------
(Decrease) increase in unrestricted net assets (7,125) 11,141
Unrestricted net assets at beginning of year 12,178 1,037
----------------------
Unrestricted net assets at end of year $ 5,053 $ 12,178
======================
Pro forma (decrease) increase in unrestricted net assets
assuming the accounting change has been adopted
retroactively $ (6,414) $ 10,643
======================
</TABLE>
See accompanying notes.
4
<PAGE>
HIP of New Jersey, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1996 1995
-----------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Change in net assets $ (7,125) $ 11,141
Adjustments to reconcile change in net assets to net cash (used in)
provided by operating activities:
Cumulative effect of a change in accounting principle (718) -
Depreciation and amortization 7,490 6,425
Contribution of capital of HIP of Pennsylvania, Inc. 435 -
Change in net unrealized gains and losses 556 -
Changes in:
Premiums receivable (2,044) 900
Due from HIP of Pennsylvania, Inc. (686) -
Due from Health Insurance Plan of Greater New York 1,252 113
Other current assets (6,078) (2,040)
Other assets (1,700) (4,236)
Claims payable (10,038) 13,134
Accounts payable and other accrued expenses (17,511) (846)
Premiums received in advance (506) (1,759)
Other long-term liabilities 646 398
----------------------
Net cash (used in) provided by operating activities (36,027) 23,230
----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net sales (purchases) of marketable securities 15,823 (30,783)
Investments in intangible assets and assets whose use is limited (10) (404)
Purchases of building, leasehold improvements and equipment, net (11,551) (12,422)
Contribution of capital to HIP of Pennsylvania, Inc. (435) -
----------------------
Net cash provided by (used in) investing activities 3,827 43,609
----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt (2,290) (2,374)
Proceeds from issuance of long-term debt - 818
Payments from sinking fund and restricted cash reserve - 378
----------------------
Net cash used in financing activities (2,290) (1,178)
----------------------
Net decrease in cash and cash equivalents (34,490) (21,557)
Cash and cash equivalents at beginning of year 41,505 63,062
----------------------
Cash and cash equivalents at end of year $ 7,015 $ 41,505
======================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 1,795 $ 1,541
======================
</TABLE>
See accompanying notes.
5
<PAGE>
HIP of New Jersey, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
HIP of New Jersey, Inc., currently d/b/a HIP Health Plan of New Jersey (the
"Plan"), a New Jersey not-for-profit corporation, was organized as a Health
Maintenance Organization ("HMO") in accordance with the provisions of the
Federal Health Maintenance Organization Act of 1973. The Plan is exempt from
income taxes under Section 501(a) as described in Section 501(c)(3) of the
Internal Revenue Code.
During 1996 and 1995, the Plan contracted with an independent medical group who
provided medical care to most subscribers insured by the Plan. The operations of
the group, which is a professional corporation, are not consolidated with the
Plan's financial statements. As of January 1, 1997, the Plan no longer contracts
with this medical group. In 1997, physician services will be provided under a
variety of contractual relationships with independent physician groups,
independent practice associations and directly contracted or employed
physicians. The Plan's arrangements with Hospitals are primarily on a per diem
reimbursement basis.
During 1995, the Plan purchased 100% of the outstanding stock of HIP-New Jersey
Holdings, Inc. ("HIP Holdings"), a New Jersey holding corporation. HIP Holdings
owns all of the outstanding stock of HIP Insurance Company of New Jersey, Inc.
("HIPIC") and HIP PRO, Inc. ("HIPPRO"). HIPIC commenced operations during 1995.
The purpose of obtaining an insurance license in the State of New Jersey was to
afford the organization the ability to offer a Point-of-Service product. HIPPRO
also commenced operations in 1995. HIPPRO is a state-certified Managed Care
Organization specializing in the treatment of worker's compensation injuries.
The financial statements of HIP Holdings for the years ending December 31, 1996
and 1995 have been consolidated and, accordingly, all appropriate intercompany
transactions have been eliminated.
The Plan is the sole member of HIP of Pennsylvania, Inc. ("HIPPA") a
not-for-profit HMO located in Bucks County, Pennsylvania. The operations of
HIPPA are not consolidated with the Plan's financial statements.
Summary of significant accounting policies is as follows:
Accounting Pronouncements: Effective January 1, 1996, the Plan adopted the
provisions of Statement of Financial Accounting Standards No. 124, Accounting
for Certain Investments Held by Not-For-Profit Organizations ("SFAS 124").
SFAS 124 establishes standards for accounting for certain investments held by
not-for-profit organizations. It requires that investments in debt securities
and equity securities with readily determinable fair values be reported at
fair value with gains and losses included in the statement of operations and
changes in net assets. The effect of this adoption has been recorded in the
statement of operations and changes in net assets for the year ended December
31, 1996 as a cumulative effect of a change in accounting principle.
6
<PAGE>
HIP of New Jersey, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During 1996 the Plan also adopted the provisions of Accounting Standards
Executive Committee Bulletin 15, which requires that surplus notes, which for
statutory purposes are considered capital, to be reported as long-term debt.
The plan adopted the provisions of this pronouncement effective January 1,
1995 and has restated in 1995 balance sheet. The effect of this restatement
was to increase long-term liabilities and decrease net assets by approximately
$40.2 million.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
Cash and Cash Equivalents and Marketable Securities: The Plan has a cash
management program which provides for the investment of excess cash balances
in financial instruments which are readily convertible to cash. The Plan
invests its surplus operating funds in U.S. Government and agency obligations,
debt securities and money market funds. Investments in money market funds are
not insured or guaranteed by the U.S. Government. Investments which have
maturities of one year or less from the date of purchase are considered cash
equivalents. The Plan has determined that all investments reported in the
balance sheets are considered other than trading securities. Investments in
debt securities are measured at fair value in the balance sheets. Realized
gains and losses on investments, interest and dividends are included in net
income. Unrealized gains and losses on investments are included in other
changes in unrestricted net assets.
Other Current Assets: Other current assets include prepaid expenses for
modified advance payments made to various health care providers in excess of
the amounts which have been earned by the providers through the provision of
health care services to subscribers.
Building, Leasehold Improvements and Equipment: Building, leasehold
improvements and equipment are stated on the basis of cost at the date of
acquisition or purchase less accumulated depreciation and amortization.
Depreciation is calculated based on the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized on
a straight-line basis over the shorter of the asset's estimated useful life or
related lease term.
7
<PAGE>
HIP of New Jersey, Inc. Subsidiary
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangible Assets: Intangible assets consist of goodwill recorded in
connection with the purchase of all of the common stock of Rutgers Community
Health Plan, Inc. ("RCHP") by Health Insurance Plan of Greater New York
("HIPNY") on July 5, 1989; goodwill recorded in the connection with the
purchase of HIPPRO; and organizational costs incurred in connection with the
organization of HIPIC. Goodwill related to RCHP is being amortized on a
straight-line basis over ten years and goodwill related to HIPPRO is being
amortized on a straight-line basis over a three-year period. The HIPIC
organizational costs are being amortized on a straight-line basis over a
three-year period. Accumulated amortization was approximately $2.1 million and
$1.7 million at December 31, 1996 and 1995, respectively.
Assets Whose Use is Limited: Under current New Jersey Department of Insurance
Regulations, the Plan and HIPIC are required to maintain a minimum deposit of
$300,000 and $100,000, respectively, with the Commissioner of Insurance of New
Jersey. Funds are held primarily in U.S. Treasury notes and are recorded at
fair value.
Claim Payable: Claims payable represent the amount of payments to be made on
individual claims which have been reported to the Plan as well as estimates of
claims incurred which have not yet been reported as of the balance sheet date.
Claims payable is estimated using various statistical methods that use both
historical financial and operating data. Management believes that the claims
payable liability is adequate to satisfy the ultimate claim liabilities. The
estimates for claims payable are continually reviewed and adjusted as
necessary as experience develops or new information becomes known. Such
adjustments are included in current operations.
Premiums Earned: Subscribers' premiums are recorded as income in the month for
which subscribers are entitled to health care services. Premiums received in
advance are deferred to the period earned.
Medicare and Medicaid Programs: The Plan participates in Medicare and medicaid
HMO programs. Revenues from the Medicare and Medicaid programs accounted for
approximately 23.2% and 13.2%, respectively, of the Plan's revenues for the
year ended December 31, 1996 and 1995. Under the Medicare cost based HMO Plan
program, the Plan receives reimbursement of its costs, subject to audit, for
medical treatment of Medicare enrollees under cost reimbursement contracts
with the Health Care Financing Administration ("HCFA"), a Federal Agency. The
Plan has received final settlements
8
<PAGE>
HIP of New Jersey, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
from HCFA for prior periods through December 31, 1990 related to RCHP and
tentative settlements for periods through December 31, 1993 for the Plan.
Differences between estimated amounts accrued and subsequent settlements are
recorded during the year of settlement.
Subscribers' Benefits: The Plan compensates providers on a capitation,
fee-for-service and on a contracted basis. Operating expenses includes all
amounts incurred by the Plan under the aforementioned arrangements. The cost
of health care services provided or contracted for is accrued in the period in
which it is provided to a member based in part on estimates, including an
accrual for medical services incurred but not reported to the Plan (see Claims
Payable).
Advertising Costs: Advertising costs are charged to operations when the
advertising first takes place. Advertising costs charged to operations were
$3.8 million and $3.2 million for the years 1996 and 1995, respectively.
Income (Loss) from Operations: Transactions deemed by management to be
ongoing, major or central to the provision of health care services are
reported as operating revenue and expenses and are included in income from
operations. Income (loss) from operations includes operating income and
investment income. Changes in unrestricted net assets which are excluded from
income (loss) from operations include contributions of capital to related
entities and unrealized gains and losses on investments.
Reclassifications: Certain reclassifications have been made to prior years'
consolidated financial statements in order to conform to the current year's
presentation.
2. INVESTMENTS
The composition of investments in marketable securities and assets whose use is
limited and scheduled are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------------
(In thousands)
<S> <C> <C>
U.S. Government and Agencies $50,308 $66,538
Corporate Securities 4,363 3,784
------------------
$54,671 $70,322
==================
</TABLE>
9
<PAGE>
HIP of New Jersey, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
Investment income and gains and losses on marketable securities and assets whose
use is limited are composed of the following for years ended December 31, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
-------------------
(In thousands)
<S> <C> <C>
Interest income $5,246 $6,313
Net realized capital gains (losses) on sale of securities 144 (87)
Investment expenses - (78)
-------------------
$5,390 $6,148
===================
Change in net unrealized gains and losses $ (556)
========
</TABLE>
The fair value generally represents estimates based on quoted market prices for
securities traded in the public market place.
Proceeds from the sale of investments in marketable securities during 1996 and
1995 were $67.8 million and $53.6 million; gross gains of $.32 million and
$.15 million, and gross losses of $.18 million and $.24 million were realized on
sales in those years, respectively.
3. BUILDING, LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Building, leasehold improvements and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------------------
(In thousands)
<S> <C> <C>
Building and leasehold improvements $42,226 $38,012
Equipment, furniture and fixtures 42,279 31,349
---------------------
Less accumulated depreciation and amortization 84,505 69,361
40,968 33,885
---------------------
Construction in progress 43,537 35,476
3,130 6,723
---------------------
$46,667 $42,199
=====================
</TABLE>
Depreciation expense was $7.1 million and $6.1 million for the years ended
December 31, 1996 and 1995, respectively.
10
<PAGE>
HIP of New Jersey, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT
Long term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
------------------------
(In thousands)
<S> <C> <C>
Loan payable - NJHCFFA (a) $ 5,874 $ 6,447
Loans payable - Secretary of DHHS, matured during 1996 - 185
Notes payable (b) 3,940 5,320
Mortgage payable (c) 4,731 4,850
Note payable (d) 47 80
------- -------
14,592 16,882
Less current portion 4,665 2,282
------- -------
$ 9,927 $14,600
</TABLE>
(a) On July 7, 1993, the Plan entered into a $9.4 million New Jersey Health
Care Facility Financing Authority (NJHCFFA) Capital Asset Program Loan
pursuant to a trust agreement dated December 1, 1986 between NJHCFFA and
Summit Bank (formerly United Jersey Bank), as trustee. Through December 31,
1996, the Plan has utilized $8.0 million of the available balance for a
capital asset expansion and improvement program to its health care centers
which began during 1992.
Interest and principal are paid monthly based on a 20-year amortization
with a balloon payment in the seventh year. Interest is calculated on any
unpaid principal balance at the prevailing variable interest rate. At
December 31, 1996, interest was being accrued at the rate of 7.53 percent
per annum.
Under the terms of the NJHCFFA loan, the Plan is required to maintain
compliance with certain covenants and financial ratios. The Plan did not
meet certain of these financial ratios as of December 31, 1996, however, it
has received a waiver of default covering the failed covenants through
January 1, 1998.
(b) The Plan entered into a note payable agreement with a bank dated December
30, 1994. The agreement consists of two notes in the amounts of $1.8
million and $4.8 million, Note A and Note B, respectively. Principal and
interest are payable monthly on Note A commencing January 31, 1995. Note A
matures January 30, 2005 and bears interest at a rate of 8.67 percent.
Principal and interest are payable monthly on Note B commencing January 31,
1995. Note B matures January 30.
11
<PAGE>
HIP of New Jersey, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
1999 and bears interest at a rate of 8.05 percent. The notes are
secured by a lien and a security interest in the equipment and
furniture in the New Brunswick Health Center with a carrying value of
approximately $4.1 million at December 31, 1996.
Under the terms of this note payable to a bank, the Plan is required
to maintain certain minimum debt service and cash flow ratios. The
Plan was not in compliance with these ratios as of December 31, 1996.
In April 1997, the bank agreed to waive the covenant violations on a
conditional basis through January 1, 1998. Due to the conditions
stipulated in the waiver, the Plan has classified the note payable as
a current liability in the accompanying balance sheet.
(c) The mortgage, dated April 6, 1993, was entered into to obtain
financing for the construction of the corporate headquarters located
in North Brunswick, New Jersey. Principal and interest are payable
monthly with a maturity of October 31, 2004. The mortgage bears
interest at a rate of 7.5 percent per annum. Under the terms of the
agreement, the Plan must maintain a minimum aggregate balance of $1.0
million in savings accounts. The mortgage is secured by a first
leasehold mortgage on the facility and first priority security
interest in all equipment and fixtures in the headquarters.
(d) On July 1, 1995, HIPPRO issued a $.1 million note payable bearing
interest at a rate equal to the prime lending rate of a local bank
(8.75% at December 31, 1996). Principal and interest are payable
monthly, with fixed monthly principal payments through June 1, 1998.
Required principal payments over the next five years and thereafter are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
---------------------------------------------------
(In thousands)
<S> <C>
1997 $ 4,665
1998 737
1999 724
2000 4,321
2001 176
Thereafter 3,969
----------
Total $14,592
==========
</TABLE>
12
<PAGE>
HIP of New Jersey, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
The fair value of the Plan's long-term debt is estimated using discounted cash
flow analyses, based on the Plan's current incremental borrowing rates for
similar types of borrowing arrangements. The carrying amount reported in the
balance sheet approximates its fair value.
5. SURPLUS NOTES
As of December 31, 1996 and 1995, the Plan had outstanding approximately $40.2
million in surplus notes to HIPNY. In accordance with the terms of the surplus
notes, repayment of these obligations will occur only from free and divisible
surplus as verified by the audited financial statements of the Plan and with
approval of the New Jersey Commissioner of the Department of Insurance. In the
event of dissolution or liquidation of the Plan, no repayment on these notes
shall be made unless and until all other liabilities of the Plan have been
satisfied.
6. COMMITMENTS
LEASES
The Plan leases office space and equipment under various noncancellable
operating leases. Future minimum rental commitments under noncancellable leases
as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
----------------------------------------------------------
(In thousands)
<S> <C>
1997 $ 6,534
1998 5,581
1999 5,041
2000 3,988
2001 3,825
Thereafter 17,258
-----------
$42,227
===========
</TABLE>
Total rent expense was approximately $8.9 million and $7.5 million for the years
ended December 31, 1996 and 1995, respectively.
13
<PAGE>
HIP of New Jersey, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. PENSION PLAN
The Plan sponsors a noncontributory defined benefit pension plan which covers
substantially all employees. The benefits are based on the participant's years
of credited service and the highest average compensation for three consecutive
years during the last ten years of employment. The Plan's funding policy is to
contribute an amount equal to the minimum funding requirement of the Employment
Retirement Income Security Act of 1974 ("ERISA") plus additional amounts which
are approved by the Plan from year to year. Total pension contributions were
$0.9 million and $1.1 million for 1996 and 1995, respectively.
The net periodic pension expense includes the following components:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-----------------
(In thousands)
<S> <C> <C>
Service cost - benefits earned during the period $ 1,178 $ 822
Interest cost on projected benefit obligations 606 459
Return on plan assets (1,463) (1,199)
Amortization of unrecognized net transition obligation 1,076 861
-----------------
Net periodic pension expense $ 1,397 $ 943
=================
</TABLE>
The funded status of this plan is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-----------------
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $ 6,185 $ 4,823
Nonvested benefits 840 770
-----------------
Accumulated benefit obligation 7,025 5,593
Effect of assumed increase in compensation levels 2,800 1,729
-----------------
Projected benefit obligation for services rendered to date 9,825 7,322
Plan assets at fair value 9,575 7,347
-----------------
Projected benefit obligation over (under) plan assets 250 (25)
Unrecognized net gain (1,971) (1,764)
Unrecognized net obligation 2,056 2,257
Unrecognized prior service cost (50) (216)
-----------------
Accrued pension cost $ 285 $ 252
=================
</TABLE>
14
<PAGE>
HIP of New Jersey, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. PENSION PLAN (CONTINUED)
The discount rate used in determining the actuarial present value of the
projected benefit obligations was 7.5 percent in 1996 and 1995. The expected
long-term rate of return on plan assets in 1996 and 1995 was 8.0 percent. The
assumed rate of increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligation was 5.9 percent and
5.0 percent in 1996 and 1995, respectively.
The Plan's assets consist principally of investments in various governmental
securities, corporate debt securities, preferred stock and commercial paper.
8. RELATED PARTY TRANSACTIONS
The Plan contracts with HIPNY for certain medical services, which are charged on
a cost basis. For the years ended December 31, 1996 and 1995, amounts charged
for these services approximated $1.5 million and $1.8 million, respectively, and
are included in the statements of operations and changes in net assets.
The Plan has contracted with HIPNY to provide services for HIPNY members
residing within the Plan's service area. For the years ended December 31, 1996
and 1995, the Plan recognized revenues of approximately $49.5 million and $48.5
million, respectively, from this contract.
HIPNY has guaranteed that it will maintain capital and surplus within the Plan
that meet or exceed the requirements of the State of New Jersey. This guaranty
is subject to compliance with the laws and regulations of the State of New York.
There was no funding required under this guarantee during the years ended
December 31, 1996 and 1995.
During 1996 and 1995 a substantial portion of physician services to the Plan's
subscribers were provided pursuant to Medical Services Agreements (the
"Agreements") with Garden State Medical Group and Central New Jersey Medical
Group (the "Groups"). Effective January 1, 1996, the Groups merged into one
corporation known as Garden State Medical Group. Under the Agreements, the Plan
reimbursed physician salary and referral expenses incurred by the Groups on
behalf of the Plan's membership. In addition, the Plan provided space and
certain administrative services to the Groups under the Agreements. The Plan
incurred approximately $203 million and $178 million of medical
15
<PAGE>
HIP of New Jersey, Inc and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
service expenses relating to the Groups during the years ended December 31, 1996
and 1995, respectively. As a result of incurring these expenses, the Plan had
amounts payable of approximately $25.6 million and $20.3 million to the Groups,
as of December 31, 1996 and 1995, respectively, which are included in claims
payable and other long-term liabilities.
9. REINSURANCE
As a member of The HMO Group, Inc. ("THMOG"), the Plan is a participant in a
captive insurance company formed to provide reinsurance to participating THMOG
members. The captive insurance company has contracted with a major insurance
carrier to provide coverage for large hospital claims of participating members.
Under the current policy, the carrier will reimburse the Plan for 90 percent of
inpatient hospital claims up to a maximum of $0.7 million per member after a
$0.2 million deductible has been satisfied, and 100 percent (up to maximum of
$2.0 million) thereafter.
In the event of the Plan's insolvency, the carrier will continue to pay
benefits to members to the end of the contract period for which a member's
premium has been paid, not to exceed 31 days or until discharged if a member is
hospitalized on the date of insolvency.
Premiums paid under the reinsurance agreement were approximately $0.5 million
and $0.7 million for the years ended December 31, 1996 and 1995, respectively.
10. STATUTORY ACCOUNTING PRACTICES
In 1996, the New Jersey Department of Banking and Insurance (the "Department")
enacted legislation intended to standardize financial reporting for HMOs
licensed in New Jersey, and to ensure that data is properly captured in order to
be in compliance with State regulations. Among other things, the Department
requires a minimum statutory net worth in order to determine its solvency under
New Jersey insurance law. HIP of New Jersey, Inc.'s admitted assets, liabilities
and reserves in accordance with statutory practices at December 31, 1996 are as
follows (in thousands):
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Admitted assets $140,864
=========
Liabilities $111,225
Reserves 29,639
---------
Total $140,864
=========
</TABLE>
16
<PAGE>
HIP of New Jersey, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. STATUTORY ACCOUNTING PRACTICES (CONTINUED)
Reconciliation of statutorily admitted net assets of the Plan and its net assets
in accordance with generally accepted accounting principles at December 31, 1996
is as follows (in thousands):
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Statutorily designated unrestricted net assets $ 305
Unrestricted net assets 29,334
--------
Total statutorily admitted net assets 29,639
Nonadmitted premiums receivable, net 906
Prepaid expenses and deposits 830
Intangible assets, net 820
Building and leasehold improvements, net 14,266
Surplus notes (40,175)
-------
Generally accepted accounting principles basis net assets $ 6,286
=======
</TABLE>
The Plan has satisfied the minimum statutory net worth requirement for 1996, in
accordance with New Jersey Banking and Insurance regulations.
11. CONCENTRATIONS OF CREDIT RISK
In its normal course of business, the Plan extends credit without collateral to
its various customers for premiums charged. Significant concentrations of
premiums receivable included 66% and 57% from certain government entities, and
34% and 53% for commercial payers at December 31, 1996 and 1995, respectively.
17
<PAGE>
ADDITIONAL INFORMATION
<PAGE>
HIP of New Jersey, Inc. and Subsidiary
Consolidating Balance Sheet
December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
HIP
HIP OF NEW JERSEY
NEW JERSEY, HOLDINGS, ELIMINATION CONSOLIDATED
INC. INC. ENTRIES BALANCE
---------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,534 $ 4,481 $ - $ 7,015
Marketable securities 54,256 - - 54,256
Premiums receivable 12,492 92 - 12,584
Due from HIP of Pennsylvania, Inc. 686 - - 686
Due from HIP-New Jersey Holdings, Inc. 1,995 - (1,995) -
Due from Health Insurance Plan of Greater New York 6,207 - - 6,207
Other current assets 21,539 69 - 21,608
---------------------------------------------------------
Total current assets 99,709 4,642 - 102,356
Building, leasehold improvements and equipment, net 46,629 38 - 46,667
Intangible assets, net 820 206 - 1,026
Assets whose use is limited 305 110 - 415
Other assets 10,223 - (3,710) 6,513
---------------------------------------------------------
Total assets $157,686 $ 4,996 $ (5,705) $156,977
=========================================================
LIABILITIES AND NET ASSETS
Current liabilities:
Claims payable $ 59,644 $ 392 $ - $ 60,036
Accounts payable and other accrued expenses 27,281 28 - 27,309
Due to HIP of New Jersey, Inc. - 1,995 (1,995) -
Premiums received in advance 5,089 57 - 5,146
Current maturities of long-term debt 4,632 33 - 4,665
---------------------------------------------------------
Total current liabilities 96,646 2,505 (1,995) 97,156
Other long-term liabilities 4,666 - - 4,666
Long-term debt 9,913 14 - 9,927
Surplus notes due to Health Insurance Plan of Greater New York 40,175 - - 40,175
Net assets - unrestricted 6,286 2,477 (3,710) 5,053
---------------------------------------------------------
Total liabilities and not net assets $157,686 $ 4,996 $ (5,705) $156,977
=========================================================
</TABLE>
<PAGE>
HIP of New Jersey, Inc. and Subsidiary
Consolidating Statement of Operations
and Changes in Net Assets
Year ended December 31, 1996
(In thousands)
<TABLE>
<CAPTION>
HIP-
HIP OF NEW JERSEY
NEW JERSEY, HOLDINGS, ELIMINATION CONSOLIDATED
INC. INC. ENTRIES BALANCE
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE
Premiums earned $358,039 $ 883 $ - $358,922
Investment and other income 17,264 189 - 17,453
--------------------------------------------------------------------
Total revenue 375,303 1,072 - 376,375
--------------------------------------------------------------------
EXPENSES
Subscribers' benefits 328,462 459 - 328,921
General and administrative 43,757 1,374 - 45,131
Depreciation and amortization 7,352 138 - 7,490
Interest 1,679 6 - 1,685
--------------------------------------------------------------------
Total expenses 381,250 1,977 - 383,227
--------------------------------------------------------------------
Loss from operations before cumulative
effect of a change in accounting
principle (5,947) (905) - (6,852)
Cumulative effect of a change in
accounting principle 718 - - 718
--------------------------------------------------------------------
Loss from operations (5,229) (905) - (6,134)
--------------------------------------------------------------------
</TABLE>
Continued on next page.
19
<PAGE>
HIP of New Jersey, Inc. and Subsidiary
Consolidating Statement of Operations
and Changes in Net Assets (continued)
Year ended December 31, 1996
(In thousands)
<TABLE>
<CAPTION>
HIP-
HIP OF NEW JERSEY
NEW JERSEY, HOLDINGS, ELIMINATION CONSOLIDATED
INC. INC. ENTRIES BALANCE
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss from operations (continued) $ (5,229) $ (905) $ - $ (6,134)
Other changes in unrestricted net assets:
Contribution of capital to HIP of
Pennsylvania, Inc. (435) - - (435)
Contribution of capital to HIP-New
Jersey Holdings, Inc. (275) 275 - -
Change in net unrealized gains and
losses (556) - - (556)
-----------------------------------------------------------------------------
Decrease in unrestricted net assets (6,495) (630) - (7,125)
Unrestricted net assets at beginning of
year 12,781 3,107 (3,710) 12,178
-----------------------------------------------------------------------------
Unrestricted net assets at end of year $ 6,286 $2,477 $(3,710) $ 5,053
=============================================================================
</TABLE>
20
<PAGE>
Consolidated Financial Statements
and Additional Information
HIP of New Jersey, Inc.
Years ended December 31, 1995 and 1994
with Report of Independent Auditors
<PAGE>
HIP of New Jersey, Inc.
Consolidated Financial Statements
and Additional Information
Years ended December 31, 1995 and 1994
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................ 1
Consolidated Financial Statements
Consolidated Statements of Financial Position............................. 2
Consolidated Statements of Operations..................................... 3
Consolidated Statements of Changes in Net Assets.......................... 4
Consolidated Statements of Cash Flows..................................... 5
Notes to Consolidated Financial Statements................................ 6
Additional Information
Consolidating Statement of Financial Position............................. 18
Consolidating Statement of Operations..................................... 19
Consolidating Statement of Cash Flows..................................... 20
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP]
Report of Independent Auditors
The Board of Trustees
HIP of New Jersey, Inc.
We have audited the accompanying consolidated statements of financial position
of HIP of New Jersey, Inc. (the "Plan") as of December 31, 1995 and 1994, and
the related consolidated statements of operations, changes in net assets and
cash flows for the years then ended. These financial statements are the
responsibility of the Plan'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 the Plan and its
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The additional consolidating
information for 1995 on pages 18, 19 and 20 is presented for the purpose of
additional analysis and is not a required part of the consolidated financial
statements. Such information has been subjected to the auditing procedures
applied in our audits of the consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the
consolidated financial statements taken as a whole.
/s/ Ernst & Young LLP
March 6, 1996
1
<PAGE>
HIP of New Jersey, Inc.
Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
-----------------
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 41,416 $ 63,062
Cash deposited in sinking fund 89 193
Marketable securities 70,322 39,539
Premiums receivable 10,540 11,440
Due from Health Insurance Plan of Greater New York 7,459 7,572
Prepaid expenses and other current assets 15,530 13,490
------------------
Total current assets 145,356 135,296
BUILDING, LEASEHOLD IMPROVEMENTS AND
EQUIPMENT, NET 42,199 35,864
INTANGIBLE ASSETS, NET 1,433 1,367
RESTRICTED CASH RESERVE - 185
OTHER ASSETS 4,813 577
------------------
TOTAL $193,801 $173,289
==================
LIABILITIES AND NET ASSETS
CURRENT LIABILITIES:
Claims payable $ 70,074 $ 56,940
Accounts payable and other accrued expenses 41,017 41,863
Premiums received in advance 9,455 11,214
Current portion of long-term debt 2,282 2,512
------------------
Total current liabilities 122,828 112,529
OTHER LONG-TERM LIABILITIES 4,020 3,622
LONG-TERM DEBT 14,600 15,926
NET ASSETS:
Surplus notes due to Health Insurance Plan of Greater New York 40,175 40,175
Unrestricted net assets 12,178 1,037
------------------
TOTAL NET ASSETS 52,353 41,212
------------------
TOTAL $193,801 $173,289
==================
</TABLE>
See accompanying notes.
2
<PAGE>
HIP of New Jersey, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
----------------------
(In thousands)
<S> <C> <C>
REVENUE
Premiums earned $325,004 $336,686
Investment and other income 20,357 18,023
-----------------------
Total revenue 345,361 354,709
-----------------------
EXPENSES
Subscriber's benefits 289,547 309,749
General and administrative 36,367 24,863
Depreciation and amortization 6,425 6,778
Interest 1,881 1,407
-----------------------
Total expenses 334,220 342,797
-----------------------
NET INCOME $ 11,141 $ 11,912
=======================
</TABLE>
See accompanying notes.
3
<PAGE>
HIP of New Jersey, Inc.
Consolidated Statements of Changes in Net Assets
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
SURPLUS
NOTES DUE
TO HIP OF TOTAL
GREATER UNRESTRICTED NET
NEW YORK NET ASSETS ASSETS
-------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance, January 1, 1994 $ 40,175 $ (10,875) $ 29,300
Net Income - 11,912 11,912
-------------------------------------
Balance, December 31, 1994 40,175 1,037 41,212
Net Income - 11,141 11,141
-------------------------------------
Balance, December 31, 1995 $ 40,175 $ 12,178 $ 52,353
=====================================
</TABLE>
See accompanying notes.
4
<PAGE>
HIP of New Jersey, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1995 1994
------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ 11,141 $ 11,912
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 6,425 6,778
Changes in operating assets and liabilities:
Decrease (increase) in premiums receivable 900 (3,324)
(Increase) decrease in prepaid expenses and other current assets (2,040) 251
Increase in claims payable 13,134 9,563
(Decrease) increase in accounts payable and other accrued expenses (846) 16,210
Decrease in premiums received in advance (1,759) (38)
Decrease (increase) in due from Health Insurance Plan of Greater
New York 113 (1,602)
(Increase) decrease in other assets (4,236) 277
Increase in other long-term liabilities 398 952
------------------------
Net cash provided by operating activities 23,230 40,979
------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchases) sales of marketable securities, net (30,783) 16,831
Investment in tangible assets (404) -
Investments in building, leasehold improvements and equipment, net (12,422) (13,630)
------------------------
Net cash (used in) provided by investing activities (43,609) 3,201
------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments from sinking fund and restricted cash reserve 289 1,049
Payments of principal indebtedness (2,374) (4,874)
Proceeds from issuance of debt 818 11,581
------------------------
Net cash (used in) provided by financing activities (1,267) 7,756
------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (21,646) 51,936
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 63,062 11,126
------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 41,416 $ 63,062
========================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 1,541 $ 1,297
========================
</TABLE>
See accompanying notes.
5
<PAGE>
HIP of New Jersey, Inc.
Notes to Consolidated Financial Statements
Years ended December 31, 1995 and 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
HIP of New Jersey, Inc., currently d/b/a HIP Health Plan of New Jersey (the
"Plan"), a New Jersey not-for-profit corporation, was organized as a Health
Maintenance Organization ("HMO") in accordance with the provisions of the
Federal Health Maintenance Organization Act of 1973. The Plan is exempt from
income taxes under Section 501(a) as described in Section 501(c)(3) of the
Internal Revenue Code.
Effective December 31, 1991, Rutgers Community Health Plan, Inc. ("RCHP"), an
affiliate of the Plan, converted from a New Jersey for-profit corporation to a
New Jersey not-for-profit corporation and merged with and into the Plan in a
transaction that was accounted for as a pooling-of-interests. The Plan conducted
business as HIP/Rutgers Health Plan until September 13, 1994, at which time the
corporation commenced doing business as HIP Health Plan of New Jersey.
The Plan contracts annually with two independent medical groups who provide
medical care to subscribers insured by the Plan. The operations of the groups,
which are professional corporations, are not consolidated with the Plan's
financial statements. The Plan's arrangements with Hospitals are primarily on a
per diem reimbursement basis.
During 1995, the Plan purchased 100% of the outstanding stock of HIP-New Jersey
Holdings, Inc. ("HIP Holdings"), a New Jersey holding corporation. HIP Holdings
owns all of the outstanding stock of HIP Insurance Company of New Jersey, Inc.
("HIPIC") and HIP PRO, Inc. ("HIPPRO"). HIPIC commenced operations during 1995.
The purpose of obtaining an insurance license in the State of New Jersey was to
afford the organization the ability to offer a Point-of-Service product. HIPPRO
also commenced operations in 1995. HIPPRO is a state-certified Managed Care
Organization specializing in the treatment of worker's compensation injuries.
The financial statements of HIP Holdings for the year ended December 31, 1995
have been consolidated and, accordingly, all appropriate intercompany
transactions have been eliminated.
The Plan is the sole member of HIP Pennsylvania, Inc. ("HIPPA") a not-for-profit
HMO located in Bucks County, Pennsylvania. The operations of HIPPA are not
consolidated with the Plan's financial statements.
Summary of significant accounting policies:
Accounting Pronouncements: In June 1993, the Financial Accounting Standards
Board issued Statement No. 117 Financial Statements of Not-for-Profit
Organizations ("SFAS 117"). Effective January 1, 1995, the Plan adopted the
provisions of this new standard which requires restatement of the financial
statements of the earliest year presented. These changes affect the
classification of certain items within the financial statements.
6
<PAGE>
HIP of New Jersey, Inc.
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Statement of Financial Accounting Standards Board No. 124 (SFAS No. 124) which
is required to be implemented for fiscal years beginning after December 15,
1995 will require a change in 1996 in the method used by the Plan in
accounting for its investments. SFAS No. 124 stipulates that investments are
to be stated at fair value on the balance sheet. Had SFAS No. 124 been applied
in 1995, net assets would have been approximately $.9 million higher at
December 31, 1995.
Premiums: Subscribers' premiums are recorded as income in the month for which
subscribers are entitled to service. Premiums collected in advance are
deferred.
Cash and Cash Equivalents and Marketable Securities: The Plan has a cash
management program which provides for the investment of excess cash balances
in financial instruments that are readily convertible to cash. Investments
with maturities of one year or less from the date of purchase are considered
cash equivalents and are stated at the lower of cost or market. Marketable
securities consisting of U.S. Government securities and highly rated corporate
bonds are recorded at the lower of aggregate cost or market at the balance
sheet date. Gains and losses on the sales of securities are recorded based on
the average cost of the security sold.
Prepaid Expenses: Prepaid expenses include periodic interim payments made to
various health care providers in excess of the amounts which have been earned
by the providers through the provision of health care services to subscribers.
Building, Leasehold Improvements and Equipment: Building, leasehold
improvements and equipment are stated on the basis of cost at the date of
acquisition or purchase less accumulated depreciation and amortization.
Depreciation is calculated based on the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized on
a straight-line basis over the shorter of the asset's estimated useful life or
related lease term.
Intangible Assets: Intangible assets consist of goodwill recorded in
connection with the purchase of all common stock of RCHP by Health Insurance
Plan of Greater New York ("HIPNY") on July 5, 1989; goodwill recorded in
connection of the purchase of HIPPRO; and organizational costs incurred in
connection with the organization of
7
<PAGE>
HIP of New Jersey, Inc.
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
HIPC. Through 1993, the Plan was amortizing the goodwill related to RCHP based
on a 40-year useful life. During 1994, the Plan changed the amortization
period from 40 years to 10 years (commencing in 1994) to reflect a change in
the estimated period of benefit of the business goodwill. The effect of the
change in estimate increased amortization expense for the year ended December
31, 1994 by approximately $1.0 million. Goodwill related to HIPPRO is being
amortized on a straight-line basis over a three-year period. The
organizational costs are being amortized on a straight-line basis over a
three-year period. Accumulated amortization was approximately $1.7 million and
$1.4 million at December 31, 1995 and 1994, respectively.
Claims Payable: Claims payable represent the amount of payments to be made on
individual claims which have been reported to the Plan as well as estimates of
claims incurred which have not yet been reported as of the balance sheet date.
Claims payable is estimated using various statistical methods that use both
historical financial and operating data. Management believes that the claims
payable liability is adequate to satisfy the ultimate claim liabilities. The
estimates for claims payable are continually reviewed and adjusted as
necessary as experience develops or new information becomes known. Such
adjustments are included in current operations.
Medicare Premiums: The Plan receives reimbursement of its costs, subject to
audit, for medical treatment of Medicare enrollees under cost reimbursement
contracts with the Health Care Financing Administration ("HCFA"), a Federal
Agency. The Plan has received final settlements from HCFA for prior periods
through December 31, 1988 related to RCHP and tentative settlements for
periods through December 31, 1993 for the Plan. Differences between estimated
amounts accrued and subsequent settlements are recorded during the year of
settlement.
Advertising Costs: Advertising costs are charged to operations when the
advertising first takes place. Advertising costs charged to operations were
$3.2 million and $1.2 million for the years 1995 and 1994, respectively.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
Reclassifications: Certain reclassifications have been made to the prior
year's financial statements to conform to the presentation followed in the
current year.
8
<PAGE>
HIP of New Jersey, Inc.
Notes to Consolidated Financial Statements (continued)
2. MARKETABLE SECURITIES
The cost and fair market value of investments in marketable securities and
scheduled maturity from the date of purchase are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
GROSS GROSS
UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
-------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Government and
Agencies $66,562 $746 $52 $67,256 $66,562
Corporate Securities 3,760 28 4 3,784 3,760
-------------------------------------------------------
$70,322 $774 $56 $71,040 $70,322
=======================================================
</TABLE>
<TABLE>
<CAPTION>
FAIR
COST VALUE
-------------------
<S> <C> <C>
Due in one year or less $ - $ -
Due after one year through five years 69,597 70,311
Due after five years through ten years 725 729
Due after ten years - -
-------------------
$70,322 $71,040
===================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
GROSS GROSS
UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Government and
Agencies $36,865 $ - $1,084 $35,781 $36,865
Corporate Securities 2,674 - 132 2,542 2,674
------------------------------------------------------
$39,539 $ - $1,216 $38,323 $39,539
======================================================
</TABLE>
The fair value generally represents quoted market prices for securities traded
in the public market place.
9
<PAGE>
HIP of New Jersey, Inc.
Notes to Consolidated Financial Statements (continued)
2. MARKETABLE SECURITIES (CONTINUED)
Proceeds from the sale of investments in marketable securities during 1995 and
1994 were $53.6 million and $35.8 million; gross gains of $.15 million and $.06
million, and gross losses of $.24 million and $.56 million were realized on
sales in those years, respectively.
Major categories of the Plan's net investment income are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1995 1994
---------------
(In thousands)
<S> <C> <C>
Income:
Cash and short-term investments $6,313 $3,026
---------------
Total investment income 6,313 3,026
Investment expenses 78 80
---------------
Net investment income earned 6,235 2,946
Net realized capital gains (losses) (87) (503)
---------------
Net investment gains $6,148 $2,443
===============
</TABLE>
3. BUILDING, LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Building, leasehold improvements and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
---------------
(In thousands)
<S> <C> <C>
Building and leasehold improvements $38,012 $34,957
Equipment, furniture and fixtures 31,349 25,535
---------------
69,361 60,492
Less accumulated depreciation and amortization 33,885 27,796
---------------
35,476 32,696
Construction in progress 6,723 3,168
---------------
$42,199 $35,864
===============
</TABLE>
10
<PAGE>
HIP of New Jersey, Inc.
Notes to Consolidated Financial Statements (continued)
3. BUILDING, LEASEHOLD IMPROVEMENTS AND EQUIPMENT (CONTINUED)
Depreciation expense was $6.1 million and $5.7 million for the years ended
December 31, 1995 and 1994, respectively.
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
-----------------
(In thousands)
<S> <C> <C>
Loan payable - NJHCFFA (a) $ 6,447 $ 6,320
Loans payable - Secretary of DHHS (b) 185 555
Notes payable (c) 5,320 6,600
Mortgage payable (d) 4,850 4,963
Note payable (e) 80 -
-----------------
16,882 18,438
Less current portion 2,282 2,512
-----------------
$14,600 $15,926
=================
</TABLE>
(a) On July 7, 1993, the Plan entered into a $9.4 million New Jersey Health
Care Facility Financing Authority ("NJHCFFA") Capital Asset Program Loan
pursuant to a trust agreement dated December 1, 1985, between NJHCFFA and
United Jersey Bank, as trustee. Through December 31, 1995, the Plan has
utilized $8.0 million of the available balance for a capital asset
expansion and improvement program to its health care centers which began
during 1992.
Interest and principal are paid monthly based on a 20-year amortization
with a balloon payment in the seventh year. Interest is calculated on any
unpaid principal balance at the prevailing variable interest rate. At
December 31, 1995, interest was being accrued at the rate of $8.25 percent
per annum.
(b) The loan payable to the Secretary of the Department of Health and Human
Services ("DHHS") bears interest of 8.25 percent per annum. Principal is
payable annually, while interest is payable semiannually on the unpaid
principal amount. The loan matures on July 1, 1996.
In accordance with the DHHS agreement, the Plan is required to maintain a
sinking fund for the principal and interest payments. In addition,
pursuant to the DHHS agreement and Title XIII of the Public Health Service
Act, the Plan must maintain
11
<PAGE>
HIP of New Jersey, Inc.
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
a restricted cash reserve. At December 31, 1995 and 1994, such funds
aggregated approximately $.1 million and $.4 million, respectively,
and are included in the cash deposited in sinking funds and restricted
cash reserve accounts.
The loans are secured by a first lien on all revenues derived from
operations, including, but not limited to, cash and cash equivalents
and subscriber premiums receivable. The Secretary of DHHS retains
options to require additional liens on real property, leasehold
interests or personal property.
(c) The Plan entered into a note payable agreement with a bank dated
December 30, 1994. The agreement consists of two notes in the amounts
of $1.8 million and $4.8 million, Note A and Note B, respectively.
Principal and interest are payable monthly on Note A commencing
January 31, 1995. Note A matures January 30, 2005 and bears interest
at a rate of 8.67 percent. Principal and interest are payable monthly
on Note B commencing January 31, 1995. Note B matures January 30, 1999
and bears interest at a rate of 8.05 percent. The notes are secured by
a lien and a security interest in the equipment and furniture in the
New Brunswick Health Center with a carrying value of approximately
$7.3 million at December 31, 1995.
(d) The mortgage, dated April 6, 1993, was entered into to obtain
financing for the construction of the corporate headquarters located
in North Brunswick, New Jersey. Principal and interest are payable
monthly with a maturity of October 31, 2004. The mortgage bears
interest at a rate of 7.5 percent per annum. Under the terms of the
agreement, the Plan must maintain a minimum aggregate balance of $1.0
million in savings accounts. The mortgage is secured by a first
leasehold mortgage on the facility and first priority security
interest in all equipment and fixtures in the headquarters.
(e) On July 1, 1995, HIPPRO issued a $.1 million note payable bearing
interest at a rate equal to the prime lending rate of a local bank
(8.75% at December 31, 1995). Principal and interest are payable
monthly, with fixed monthly principal payments of $.002 million
through June 1, 1998.
12
<PAGE>
HIP of New Jersey, Inc.
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
Required principal payments subsequent to December 31, 1995 are as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(In thousands)
Year:
<S> <C>
1996 $ 2,282
1997 2,124
1998 2,106
1999 1,004
2000 4,501
Thereafter 4,865
--------------
$16,882
==============
</TABLE>
5. SURPLUS NOTES
As of December 31, 1995, the Plan had issued approximately $40.2 million surplus
notes to HIPNY. In accordance with the terms of the surplus notes, repayment of
these obligations will occur only from free and divisible surplus as verified by
the audited financial statements of the Plan and with approval of the
Commissioner of the Department of Insurance. In the event of dissolution or
liquidation of the Plan, no repayment on these notes shall be made unless and
until all other liabilities of the Plan have been satisfied.
6. COMMITMENTS
LEASES
The Plan leases office space and equipment under various noncancellable
operating leases. Future minimum rental commitments under noncancellable leases
as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(In thousands)
Year:
<S> <C>
1996 $ 5,384
1997 5,319
1998 4,979
1999 4,311
2000 3,258
Thereafter 19,958
--------------
$43,209
==============
</TABLE>
13
<PAGE>
HIP of New Jersey, Inc.
Notes to Consolidated Financial Statements (continued)
6. COMMITMENTS (CONTINUED)
Total rent expense was approximately $7.5 million and $7.4 million for the years
ended December 31, 1995 and 1994, respectively.
7. PENSION PLAN
The Plan sponsors a noncontributory defined benefit pension plan which covers
substantially all employees. The benefits are based on the participant's years
of credited service and the highest average compensation for three consecutive
years during the last ten years of employment. The Plan's funding policy is to
contribute an amount to fund the normal costs on a current basis. Total pension
contributions were $0.1 million in both 1995 and 1994.
The net periodic pension expense includes the following components:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
----------------
(In thousands)
<S> <C> <C>
Service cost - benefits earned during the period $ 822 $ 652
Interest cost on projected benefit obligations 459 426
(Return) loss on plan assets (1,199) 294
Amortization of unrecognized net transition obligation 861 (482)
----------------
Net periodic pension expense $ 943 $ 890
================
</TABLE>
14
<PAGE>
HIP of New Jersey, Inc.
Notes to Consolidated Financial Statements (continued)
7. PENSION PLAN (CONTINUED)
The funded status of this plan is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
----------------
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $ 4,823 $ 3,886
Nonvested benefits 770 643
----------------
Accumulated benefit obligation 5,593 4,529
Effect of assumed increase in compensation levels 1,729 2,148
----------------
Projected benefit obligation for services rendered to date 7,322 6,677
Plan assets at fair value 7,347 4,761
----------------
Excess of projected benefit obligation over plan assets 25 (1,916)
Unrecognized net gain (1,764) (294)
Unrecognized net obligation 2,257 2,457
Unrecognized prior service cost (216) (235)
----------------
Prepaid pension cost $ 302 $ 12
================
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligations was 7.5 percent in 1995 and 1994. The expected
long-term rate of return on plan assets in 1995 and 1994 was 8 percent. The
assumed rate of increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligation was 5 percent in
1995 and 1994.
The Plan's assets consist principally of investments in various governmental
securities, corporate debt securities, preferred stock and commercial paper.
8. RELATED PARTY TRANSACTIONS
The Plan contracts with HIPNY for certain medical services, which are charged on
a cost basis. For the years ended December 31, 1995 and 1994, amounts charged
for these services approximated $1.8 million and $1.3 million, respectively, and
are included in the statements of operations.
15
<PAGE>
HIP of New Jersey, Inc.
Notes to Consolidated Financial Statements (continued)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
The Plan has contracted with HIPNY to provide services for HIPNY members
residing within the Plan's service area. For the years ended December 31, 1995
and 1994, the Plan recognized revenues of approximately $48.5 million and $54.9
million, respectively, from this contract.
HIPNY guarantees the loan payable of approximately $6.4 million and $6.3 million
at December 31, 1995 and 1994, respectively, and certain of the loans payable to
the Secretary of DHHS totaling approximately $.2 million and $.6 million at
December 31, 1995 and 1994, respectively.
HIPNY has guaranteed that it will maintain capital and surplus within the Plan
that meet or exceed the requirements of the State of New Jersey. This guaranty
is subject to compliance with the laws and regulations of the State of New York.
There was no funding required under this guarantee during the years ended
December 31, 1995 and 1994.
The substantial portion of physician services to the Plan's subscribers are
provided pursuant to Medical Services Agreements (the "Agreements") with Garden
State Medical Group and Central New Jersey Medical Group (the "Groups"). Under
the Agreements, the Plan reimburses physician salary and referral expenses
incurred by the Groups on behalf of the Plan's membership. In addition, the Plan
provides space and certain administrative services to the Groups under the
Agreements. The Plan incurred approximately $177.6 million and $177.2 million of
medical service expenses relating to the Groups during the years ended December
31, 1995 and 1994, respectively. As a result of incurring these expenses, the
Plan had amounts payable of approximately $20.3 million and $26.3 million to the
Groups, as of December 31, 1995 and 1994, respectively, which are included in
claims payable and other long-term liabilities.
9. REINSURANCE
As a member of The HMO Group, Inc. ("THMOG"), the Plan is a participant in a
captive insurance company formed to provide reinsurance to participating THMOG
members. The captive insurance company has contracted with a major insurance
carrier to provide coverage for large hospital claims of participating members.
Under the current policy, the carrier will reimburse the Plan for 90 percent of
inpatient hospital claims up to a maximum of $.7 million per member after a $.2
million deductible has been satisfied, and 100 percent (up to a maximum of $2.0
million) thereafter.
16
<PAGE>
HIP of New Jersey, Inc.
Notes to Consolidated Financial Statements (continued)
9. REINSURANCE (CONTINUED)
In the event of the Plan's insolvency, the carrier will continue to pay benefits
to members to the end of the contract period for which a member's premium has
been paid, not to exceed 31 days or until discharged if a member is hospitalized
on the date of insolvency.
Premiums paid under the reinsurance agreement were approximately $.7 million and
$.8 million for the years ended December 31, 1995 and 1994, respectively.
17
<PAGE>
OTHER FINANCIAL INFORMATION
<PAGE>
HIP of New Jersey, Inc.
Consolidating Statement of Financial Position
December 31, 1995
(In thousands)
<TABLE>
<CAPTION>
CONSOLIDATING
HIP- AND
HIP OF NEW NEW JERSEY ELIMINATING CONSOLIDATED
JERSEY, INC. HOLDINGS, INC. ENTRIES BALANCE
------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 37,834 $3,582 $ - $ 41,416
Cash deposited in sinking fund 89 - - 89
Marketable securities 70,222 100 - 70,322
Premiums receivable 10,309 231 - 10,540
Due from Health Insurance Plan of Greater
New York 7,459 - - 7,459
Prepaid expenses and other current assets 15,462 68 - 15,530
------------------------------------------------------------------
Total current assets 141,375 3,981 - 145,356
BUILDING, LEASEHOLD IMPROVEMENTS
AND EQUIPMENT, NET 42,199 - - 42,199
INTANGIBLE ASSETS, NET 1,092 341 - 1,433
OTHER ASSETS 9,583 - (4,770) 4,813
------------------------------------------------------------------
TOTAL $194,249 $4,322 $(4,770) $193,801
==================================================================
LIABILITIES AND NET ASSETS
CURRENT LIABILITIES:
Claims payable $ 70,070 $ 4 $ - $ 70,074
Accounts payable and accrued expenses 40,946 1,131 (1,060) 41,017
Premiums received in advance 9,455 - - 9,455
Current portion of long-term debt 2,249 33 - 2,282
------------------------------------------------------------------
Total current liabilities 122,720 1,168 (1,060) 122,828
OTHER LONG-TERM LIABILITIES 4,020 - - 4,020
LONG-TERM DEBT 14,553 47 - 14,600
NET ASSETS 52,956 3,107 (3,710) 52.353
------------------------------------------------------------------
TOTAL $194,249 $4,322 $(4,770) $193,801
==================================================================
</TABLE>
18
<PAGE>
HIP OF NEW JERSEY, INC.
Consolidating Statement of Operations
Year ended December 31, 1995
(In thousands)
<TABLE>
<CAPTION>
CONSOLIDATING
HIP- AND
HIP OF NEW NEW JERSEY ELIMINATING CONSOLIDATED
JERSEY, INC. HOLDINGS ENTRIES BALANCE
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE
Premiums earned $324,747 $ 257 $ - $325,004
Investment and other income 20,215 142 - 20,357
-----------------------------------------------------------------
Total revenue 344,962 399 - 345,361
-----------------------------------------------------------------
EXPENSES
Subscribers' benefits 289,534 13 - 289,547
General and administrative 35,446 921 - 36,367
Depreciation and amortization 6,362 63 - 6,425
Interest expense 1,876 5 - 1,881
-----------------------------------------------------------------
Total expenses 333,218 1,002 - 334,220
-----------------------------------------------------------------
NET INCOME (LOSS) $ 11,744 $ (603) $ - $ 11,141
=================================================================
</TABLE>
19
<PAGE>
HIP of New Jersey, Inc.
Consolidating Statement of Cash Flows
Year ended December 31, 1995
(In thousands)
<TABLE>
<CAPTION>
CONSOLIDATING
HIP OF HIP AND
NEW JERSEY, NEW JERSEY ELIMINATING CONSOLIDATED
INC. HOLDINGS, INC. ENTRIES BALANCE
------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 11,744 $ (603) $ - $ 11,141
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 6,362 63 - 6,425
Changes in operating assets and liabilities:
Decrease (increase) in premiums receivable 1,131 (231) - 900
Increase in prepaid expenses and other current assets (1,972) (68) - (2,040)
Increase in claims payable 13,130 4 - 13,134
(Decrease) increase in accounts payable and other accrued
expenses (917) 1,131 (1,060) (846)
Decrease in premiums received in advance (1,759) - - (1,759)
Decrease in due from Health Insurance Plan of Greater New York 113 - - 113
Increase in other assets (9,006) - 4,770 (4,236)
Increase in other long-term liabilities 398 - - 398
------------------------------------------------------------
Net cash provided by operating activities 19,224 296 3,710 23,230
------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities, net (30,683) (100) - (30,783)
Investments in intangible assets - (404) - (404)
Investments in building, leasehold improvements and equipment (12,422) - - (12,422)
-----------------------------------------------------------
Net cash used in investing activities (43,105) (504) - (43,609)
-----------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments from sinking fund and restricted cash reserve 289 - - 289
Payments of principal indebtedness (2,354) (20) - (2,374)
Proceeds from issuance of debt 718 100 - 818
Proceeds from issuance of common stock - 3,710 (3,710) -
------------------------------------------------------------
Net cash (used in) provided by financing activities (1,347) 3,790 (3,710) (1,267)
------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (25,228) 3,582 - (21,646)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 63,062 - - 63,062
------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 37,834 $ 3,582 $ - $ 41,416
============================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the year for interest $ 1,536 $ 5 $ - $ 1,541
============================================================
</TABLE>
20
