SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No.___)
Filed by the Registrant |X|
Filed by a party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
|_| Soliciting Material Pursuant to Rule Section Sign 240.14a-11(c) or Section
Sign 14a-12
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
FOHP, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
1) Title of each class of securities to which transaction applies:
___________________________________________________________________________
2) Aggregate number of securities to which transaction applies:
___________________________________________________________________________
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was
determined):_______________________________________________________________
4) Proposed maximum aggregate value of transaction:___________________________
5) Total fee paid:____________________________________________________________
|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:____________________________________________________
2) Form, Schedule or Registration Statement No.:______________________________
3) Filing Party:______________________________________________________________
4) Date Filed:________________________________________________________________
<PAGE>
PRELIMINARY COPY - For Information of the
Securities and Exchange Commission Only
FOHP, INC.
2 Bridge Avenue
Building 6
Red Bank, New Jersey 07701-1106
Dear Shareholder:
You are cordially invited to attend the 1996 Annual Meeting of
Shareholders (the "Annual Meeting") of FOHP, Inc. (the "Holding Company") to be
held at the CNA Building, 3501 State Highway 66, Neptune, New Jersey 07753 on
December __, 1996 commencing at ___ a.m./p.m. local time. The matters to be
considered and voted upon at the Annual Meeting are important to your investment
in and to the future of the Holding Company and its subsidiaries, including
First Option Health Plan of New Jersey, Inc. ("FOHP-NJ").
At the Annual Meeting, you will be asked to consider and to approve the
Securities Purchase Agreement (the "Securities Purchase Agreement") by and among
the Holding Company, FOHP-NJ and Health Systems International, Inc. ("HSI"), and
the transactions contemplated thereby (collectively, the "Transaction").
As you may know, FOHP-NJ is approximately $24,000,000 below 125% of the
statutory net worth requirement applicable to it. The Board of Directors of the
Holding Company and I have carefully considered multiple alternatives to address
this deficiency and correct the current operational shortfalls of the Holding
Company and FOHP-NJ. We believe the Transaction will achieve each of those
objectives and is in the best interest of the Holding Company and its
shareholders, providers, members and employees. However, before the Transaction
may be consummated, the approval of shareholders holding at least 75% of the
Holding Company's outstanding Common Stock-NJ is required. Therefore, it is
imperative that you vote on the Transaction.
If the Transaction is not approved by the Holding Company's shareholders,
the Board of Directors believes that the New Jersey Department of Banking and
Insurance would suspend or revoke FOHP-NJ's Certificate of Authority to operate
as a health maintenance organization in New Jersey and would place FOHP-NJ into
rehabilitation or liquidation. If FOHP-NJ is placed in rehabilitation or
liquidation, it is possible that none of the shareholders of the Holding Company
will receive any distribution on the shares of Common Stock-NJ held by them
since all the assets of the Holding Company will be used to pay the liabilities
and other debts of FOHP-NJ and the Holding Company before any distributions are
made to shareholders.
<PAGE>
Below are the highlights of the proposed Transaction:
1. HSI will infuse $30 million into the Holding Company through the
purchase of convertible subordinated surplus debentures (the
"Debentures").
2. The initial principal amount of the Debentures is convertible into
40% of the Holding Company's outstanding equity (calculated on a
fully-diluted basis, assuming the conversion of all securities
convertible into Holding Company capital stock and the exercise of
any options exercisable for shares of Holding Company capital
stock).
3. Shortly after the consummation of the Transaction, HSI or the
Holding Company will offer to purchase from the shareholders of the
Holding Company up to 857,284 shares of the Holding Company's then
outstanding capital stock for $21.43 per share; provided, however,
should greater than 857,284 shares of Holding Company capital stock
be tendered by the shareholders, any purchase by HSI or the Holding
Company will be on a pro rata basis.
4. Between January 1, 1999 and May 31, 1999, HSI will offer to purchase
all the then outstanding shares of Holding Company capital stock at
a purchase price per share that is agreed to by the Holding Company
and HSI or determined by independent appraisers; provided, however,
that if the Holding Company's revenues exceed $62.5 million for the
quarter preceding HSI's offer, the value that a shareholder will
receive for one share of Holding Company capital stock will, at the
very least, reflect an aggregate valuation of the Holding Company of
$75,000,000. The shareholders of the Holding Company will be offered
for their shares of Holding Company capital stock either HSI stock
or, at HSI's option, cash.
5. The grant to HSI of an option to acquire 11% of the capital stock of
the Holding Company, on a fully-diluted basis.
6. HSI and the Holding Company will enter into an agreement, pursuant
to which HSI would have full power and authority for the management
of all administrative services of the Holding Company.
7. At HSI's option, HSI and the Holding Company will enter into an
agreement, pursuant to which HSI will provide all claims processing,
recordkeeping and data processing services to all FOHP-NJ health
plans.
8. HSI will be entitled to designate that number of directors on the
Board of Directors of the Holding Company as is commensurate with
its equity interest in the Holding Company; provided, however, that
prior to conversion of the Debentures, HSI will be entitled to
designate not less than 15% of the Board of Directors of the Holding
Company.
<PAGE>
HSI is well known on the west coast; however it is just beginning to
establish a presence on the east coast. Set forth below is information that I
believe will give you a better understanding of HSI:
o HSI is a national, well-capitalized managed health care organization
with more than 1.9 million health maintenance organization ("HMO")
and administrative services only members, $3.5 billion in annual
revenues and $350 million in stockholder equity. HSI has been built
by a succession of acquisitions, many of which involved intensive
turnarounds of financially troubled HMOs. HSI is poised to make an
immediate capital infusion into the Holding Company and will use its
management expertise to strengthen the Holding Company.
o HSI's recently announced merger with Foundation Health Corporation
has the potential to create an organization that will be
well-positioned for accelerated growth in the health care industry
throughout the United States. The new company will be named
Foundation Health Systems, Inc.
o HSI was formed through the January 1994 merger of Health Net, the
second largest HMO in California, and QualMed, Inc., the parent of a
system of HMOs with operations in six western states.
o HSI, headquartered in Pueblo, Colorado and Woodland Hills,
California, provides a wide range of health care services through
HMOs located in California, Connecticut, Pennsylvania, New Jersey,
Washington, Oregon, Idaho, Colorado and New Mexico.
o As a result of acquisitions in Philadelphia (Greater Atlantic Health
Plan) and Connecticut (M.D. Health Plans), HSI has a strategic
interest in New Jersey, as well as a significant and growing
presence in the northeastern United States.
In addition to the matters discussed above, the Securities Purchase
Agreement also contemplates:
a. Certain amendments to the Certificates of Incorporation and
By-laws of the Holding Company and FOHP-NJ, which are
necessary for the consummation of the Transaction.
b. The conversion of each outstanding share of Holding Company
Common Stock-NJ into one share of new Common Stock of the
Holding Company which will be available for issuance after the
amendments to the Holding Company's Certificate of
Incorporation mentioned above are effected.
c. The election of ten directors to serve on the Holding
Company's Board of Directors for the following year or until
their successors have been elected and qualify; provided, that
the Transaction is first approved by the shareholders of the
Holding Company.
The Board of Directors has fixed the close of business on November 13,
1996 as the record date for determining shareholders entitled to receive notice
of and to vote at the Annual Meeting or any adjournment thereof.
<PAGE>
A full description of the Transaction and certain related information is
provided in the attached Notice of Special Meeting of Shareholders and Proxy
Statement which you are urged to read.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO
APPROVE THE TRANSACTION AND THE NOMINEES FOR DIRECTOR NAMED IN THE PROXY
STATEMENT ACCOMPANYING THIS NOTICE.
By Order of the Board of Directors
/s/ John W. Rohfritch
---------------------
JOHN W. ROHFRITCH
President and
Chief Executive Officer
Red Bank, New Jersey
November ___, 1996
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. TO ASSURE YOUR
REPRESENTATION AT THE ANNUAL MEETING, HOWEVER, YOU ARE URGED TO SIGN AND DATE
THE ACCOMPANYING PROXY AND MAIL IT AT ONCE IN THE ENCLOSED ENVELOPE. PROMPT
RESPONSE IS HELPFUL AND YOUR COOPERATION WILL BE APPRECIATED.
<PAGE>
YOU ARE CORDIALLY INVITED TO ATTEND THE HOLDING COMPANY'S 1996 ANNUAL
MEETING OF SHAREHOLDERS WHICH WILL BE HELD AT THE CNA BUILDING, 3501 STATE
HIGHWAY 66, NEPTUNE, NEW JERSEY 07753, ON ___________, DECEMBER ____, 1996.
HOWEVER, REGARDLESS OF WHETHER YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON,
YOU ARE URGED TO SIGN AND DATE THE ACCOMPANYING PROXY AND MAIL IT AT ONCE IN THE
ENCLOSED ENVELOPE TO ENSURE YOUR REPRESENTATION AT THE ANNUAL MEETING. PROMPT
RESPONSE IS HELPFUL AND YOUR COOPERATION WILL BE APPRECIATED.
<PAGE>
<PAGE>
PRELIMINARY COPY - For Information of the
Securities and Exchange Commission Only
[Logo]
FIRST OPTION
HEALTH PLAN
PROXY STATEMENT
FOHP, INC.
2 Bridge Avenue
Building 6
Red Bank, New Jersey 07701-1106
________________________________________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
December ______, 1996
________________________________________
To the Shareholders of FOHP, Inc.:
The Annual Meeting of the Shareholders (the "Annual Meeting") of FOHP,
Inc. (the "Holding Company") will be held at the CNA Building, 3501 State
Highway 66, Neptune, New Jersey 07753, on ______________, December ______, 1996,
commencing at ________ a.m./p.m. local time, for the following purposes:
1. To consider and vote upon a proposal to approve the Securities
Purchase Agreement (the "Securities Purchase Agreement") by and
among the Holding Company, First Option Health Plan of New Jersey,
Inc. ("FOHP-NJ"), a wholly-owned subsidiary of the Holding Company,
and Health Systems International, Inc. ("HSI"), a Delaware
corporation, and the transactions contemplated thereby, including,
among others:
(a) the sale to HSI of Convertible Subordinated Surplus Debentures
in the initial aggregate principal amount of $30,000,000,
which will be convertible, at the option of HSI, into 40% of
the Holding Company's capital stock, on a fully-diluted basis;
(b) the grant to HSI of an option to acquire 11% of the Common
Stock of the Holding Company, on a fully-diluted basis;
(c) the execution by HSI and the Holding Company of a General
Administrative Services Management Agreement, pursuant to
which HSI will be engaged to manage all of the Holding
Company's administrative services;
(d) at HSI's option, the execution by HSI and the Holding Company
of a Management Information Systems and Claims Processing
Services Management Agreement, pursuant to which HSI will
provide claims processing, record keeping and data processing
services to all of the health plans offered, or to be offered,
by the Holding Company's subsidiaries;
<PAGE>
(e) the adoption of amendments to the Certificate of Incorporation
and By-laws of the Holding Company and amendments to the
Certificate of Incorporation and By-laws of FOHP-NJ, which are
necessary for the consummation of the transactions
contemplated by the Securities Purchase Agreement; and
(f) the conversion of each outstanding share of Holding Company
Common Stock-NJ into one share of the Common Stock of the
Holding Company which will be available for issuance after the
amendments to the Holding Company's Certificate of
Incorporation contemplated in subparagraph (e) above are
effected.
To elect ten (10) directors to serve on the Holding Company's Board of
Directors for the following year or until their successors have been elected and
qualify; provided, that the proposal in paragraph 1 above is approved and
adopted by the shareholders of the Holding Company.
To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on November 13,
1996, as the record date for determining shareholders entitled to receive notice
of and to vote at the Annual Meeting or any adjournment thereof.
The Board of Directors recommends that you vote for the above proposal and
the nominees for director named in the Proxy Statement accompanying this notice.
By Order of the Board of Directors
/s/ John W. Rohfritch
-----------------------------
JOHN W. ROHFRITCH
President and
Chief Executive Officer
Red Bank, New Jersey
November ______, 1996
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. TO ASSURE YOUR
REPRESENTATION AT THE ANNUAL MEETING, HOWEVER, YOU ARE URGED TO SIGN AND DATE
THE ACCOMPANYING PROXY AND MAIL IT AT ONCE IN THE ENCLOSED ENVELOPE. PROMPT
RESPONSE IS HELPFUL AND YOUR COOPERATION WILL BE APPRECIATED.
<PAGE>
PRELIMINARY COPY - For Information of the
Securities and Exchange Commission Only
FOHP, INC.
-----------------------------------
PROXY STATEMENT
-----------------------------------
General Information
This Proxy Statement is furnished to the holders of Common Stock-NJ, par
value $.01 per share ("Common Stock-NJ"), of FOHP, Inc. ("FOHP" or the "Holding
Company") in connection with the solicitation of proxies for use at the annual
meeting of shareholders of the Holding Company to be held at the CNA Building,
3501 State Highway 66, Neptune, New Jersey 07753, on December _______, 1996, at
__________ a.m./p.m. local time, and at any adjournment thereof (the "Meeting"
or "Annual Meeting"), pursuant to the accompanying Notice of Annual Meeting of
Shareholders. A form of proxy for use at the Meeting is also enclosed. The
Holding Company anticipates mailing this Proxy Statement to its shareholders on
or about November _______, 1996. The principal executive offices of the Holding
Company are located at 2 Bridge Avenue, Red Bank, New Jersey 07701-1106.
At the Annual Meeting, the shareholders of FOHP will be asked to consider
and vote upon a proposal to approve the Securities Purchase Agreement, as
amended and restated (the "Securities Purchase Agreement"), by and among the
Holding Company, First Option Health Plan of New Jersey, Inc. ("FOHP-NJ"), a New
Jersey corporation and wholly-owned subsidiary of the Holding Company which
operates as a health maintenance organization ("HMO") in New Jersey, and Health
Systems International, Inc. ("HSI"), a Delaware corporation, and the
transactions contemplated thereby, including the sale by FOHP to HSI of
Convertible Subordinated Surplus Debentures (the "Debentures") in the initial
aggregate principal amount of $30,000,000. The issuance and sale of the
Debentures to HSI and the other transactions contemplated by the Securities
Purchase Agreement are collectively referred to herein as the "Transaction." If
the Transaction is approved by the shareholders of the Holding Company, the
shareholders will then vote for and elect ten (10) directors to serve on the
Holding Company's Board of Directors (the "Board" or the "Board of Directors")
until their successors have been elected and qualify. If the Transaction is not
approved by the shareholders of the Holding Company, the Board will hold a
special meeting of the shareholders as soon as practicable after the date of the
Annual Meeting for the purpose of electing a Board of Directors in accordance
with the Holding Company's existing Certificate of Incorporation and By-laws.
Shareholders may revoke the authority granted by their execution of
proxies at any time before the effective exercise of proxies by filing written
notice of such revocation with the secretary of the Meeting. Presence at the
Meeting does not in and of itself revoke the proxy. All shares represented by
executed and unrevoked proxies will be voted in accordance with the
specifications therein. Proxies submitted without specification will be voted
FOR the proposal to approve the Transaction and FOR the nominees for director
named herein. Management is not aware, at the date hereof, of any matter to be
presented at the Meeting other than the matters described herein, but, if any
other matter is properly presented, the persons named in the proxy will vote
thereon according to their best judgment.
<PAGE>
Proxies for use at the Meeting are being solicited by the Board of
Directors. The cost of preparing, assembling and mailing the proxy material is
to be borne by the Holding Company. It is not anticipated that any compensation
will be paid for soliciting proxies, and the Holding Company does not intend to
employ specially engaged personnel in the solicitation of proxies. It is
contemplated that proxies will be solicited principally through the mail, but
directors, officers and employees of the Holding Company or its subsidiaries
may, without additional compensation, solicit proxies, personally or by
telephone, telegraph, facsimile transmission or special letter.
Summary of the Proposed Transaction
As described herein under the caption "Proposal to Approve the
Transaction," on October 24, 1996, the Holding Company and FOHP-NJ entered into
the Securities Purchase Agreement with HSI which contemplates, among other
things, that:
o The Holding Company will issue, and HSI will purchase for $30,000,000,
Debentures in the initial aggregate principal amount of $30,000,000 which (i)
will be convertible, at the option of HSI, into shares of Common Stock, par
value $.01 per share ("New Common Stock"), of the Holding Company that will be
available for issuance after the amendments to the Holding Company's Certificate
of Incorporation contemplated by the Securities Purchase Agreement are effected,
which will represent 40% of the Holding Company's outstanding common equity
(after taking into account the exercise of the Option described below, the
conversion of the Debentures and the exercise of all outstanding options and
warrants exercisable for shares of New Common Stock), and (ii) will bear
interest at a rate per annum equal to the rate charged to HSI under its existing
credit facility with a consortium of commercial banks (as such rate may be
adjusted from time to time).
o HSI will be granted an option (the "Option") to purchase shares of New
Common Stock representing 11% of the Holding Company's outstanding common equity
(after taking into account the exercise of the Option, conversion of the
Debentures and the exercise of all outstanding options and warrants exercisable
for shares of New Common Stock) for an aggregate purchase price of (i) either
$8,250,000 or, under certain circumstances described herein under the caption
"The Option Agreement," $11,250,000 minus, in either case, (ii) the product of
$3.93 multiplied by the number of shares of New Common Stock purchased by HSI in
the Purchase Offer (as hereinafter defined) or redeemed by the Holding Company
in the Holding Company Offer (as hereinafter defined), as the case may be.
o If the Option is exercised by HSI, the proceeds may be distributed to
the shareholders of the Holding Company (other than HSI) as a dividend, provided
certain events take place.
o After the closing of the Securities Purchase Agreement, HSI will (i)
make a pro rata offer to all of the Holding Company's shareholders to purchase
up to 857,284 shares of New Common Stock at a per share value of $21.43, or (ii)
require the Holding Company to offer to repurchase from all shareholders of the
Holding Company for cash (which cash shall have been provided by HSI for
convertible debentures having terms substantially similar to the terms of the
Debentures), up to 857,284 shares of New Common Stock at a per share price of
$21.43.
o After January 1, 1999, but prior to May 31, 1999, HSI will initiate an
offer to the Holding Company's shareholders pursuant to which all shareholders
of the Holding Company will be entitled to exchange their shares of New Common
Stock for (i) Class A Common Stock of HSI (or the common stock of a successor
corporation of HSI), or, at HSI's option, (ii) cash. The amount of
2
<PAGE>
consideration a shareholder of the Holding Company will receive for each share
of New Common Stock offered for exchange will be agreed upon by the Holding
Company and HSI, or if no such agreement can be reached, determined by an
independent appraisal of the New Common Stock; provided, however, that if the
Holding Company's revenues exceed $62,500,000 for the quarter preceding HSI's
offer, the value that a shareholder will receive for one share of New Common
Stock will, at the very least, reflect an aggregate valuation of the Holding
Company of $75,000,000.
o The Holding Company and HSI will enter into a General Administrative
Services Management Agreement pursuant to which HSI will be engaged to manage
all of the Holding Company's administrative services.
o At HSI's option, the Holding Company and HSI will enter into a
Management Information Systems and Claims Processing Services Management
Agreement pursuant to which HSI will provide claims processing, record keeping
and data processing services to all of the health plans offered, or to be
offered, by the Holding Company's subsidiaries.
o The Holding Company will amend its Certificate of Incorporation and
By-laws, and FOHP-NJ will amend its Certificate of Incorporation and By-laws as
described in this Proxy Statement under the caption "Proposed Amendments."
o Upon the filing of the Holding Company's Certificate of Incorporation,
as proposed to be amended, with the Office of the Secretary of State, State of
New Jersey, each outstanding share of Common Stock-NJ will automatically convert
into one share of New Common Stock.
Voting Securities
The voting securities entitled to vote at the Annual Meeting consist of
shares of Common Stock-NJ, with each share entitling its owner to one vote per
share. On November 13, 1996, the number of outstanding shares of Common Stock-NJ
was ___________. Only shareholders of record on the books of the Holding Company
at the close of business on November 13, 1996 will be entitled to vote at the
Meeting.
The holders of 75% of the outstanding shares of Common Stock-NJ, present
in person or by proxy and entitled to vote, will constitute a quorum at the
Meeting for purposes of acting upon the proposal to approve the Transaction and
electing directors. Abstentions and broker non-votes will be counted for
purposes of determining whether a quorum is present at the Meeting.
The proposal to approve the Transaction must be approved by the holders of
at least 75% of the outstanding shares of Common Stock-NJ. If the Transaction is
approved by the shareholders, directors will be elected by a plurality of the
votes cast at the Annual Meeting by the holders of shares of Common Stock-NJ
present in person or represented by proxy and entitled to vote. The proxy card
provides space for a shareholder to withhold votes for any or all nominees for
the Board of Directors.
All votes will be tabulated by the inspector of election appointed for the
Meeting who will separately tabulate affirmative votes, negative votes,
authority withheld for any nominee for director and any abstentions or broker
non-votes. Authority withheld will be counted toward the tabulation of total
votes cast in the election for directors and will have the same effect as a
negative vote. Any proxy submitted and containing an abstention or a broker
non-vote will not be counted as a vote cast on any matter to which it relates.
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<PAGE>
Principal Shareholders and Security Ownership of Management
The following table sets forth information as of November 1, 1996, with
respect to the beneficial ownership (as defined in Rule 13d-3 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) of the Holding Company's
Common Stock-NJ, which is the only class of the Holding Company's capital stock
with shares issued and outstanding, by each director of the Holding Company,
each nominee for director, each of the Named Officers (as defined in the section
herein captioned "Executive Compensation"), each person or group of persons
known by the Holding Company to be the beneficial owner of more than five (5%)
percent of Common Stock-NJ, and all directors, nominees for director and
executive officers of the Holding Company as a group:
Beneficially Ownership of
Common Stock-NJ
-----------------------------------
Name of Percent of
Beneficial Owner No. of Shares(1) Class
---------------- ---------------- ----------
St. Barnabas Corporation (2) .. 193,343(3) 9.21%
William Roberts (4) ........... --
John L. Adessa (5) ............ --
Michael W. Azzara (4) ......... --
Christopher Dadlez (4)(6) ..... --
Dr. Mark Engel (4)(6) ......... 7,017(7) (8)
Dr. Stephen D. Feldman (4) .... 2,000 (8)
Dr. Thomas J. Feneran (4)(6) .. 4,100 (8)
John R. Kopicki (4) ........... --
Dr. Joel F. Lehrer (4) ........ 1,717 (8)
Dr. Paul F. Low (4) ........... 12,400 (8)
Barry H. Ostrowsky (4) ........ --
Mark D. Pilla (4) ............. --
Dr. Om P. Sawhney (4)(6) ...... 5,800(9) (8)
Roger Birnbaum (6) ............ --
Dr. John F. Bonamo (6) ........ --
Sister Jane Frances Brady (6) . --
Bruce G. Coe (6) .............. --
4
<PAGE>
Beneficially Ownership of
Common Stock-NJ
-----------------------------------
Name of Percent of
Beneficial Owner No. of Shares(1) Class
---------------- ---------------- ----------
John Gantner (6) .............. --
Laurence M. Merlis (6) ........ --
John W. Rohfritch (4)(10) ..... --
Dr. Joseph Singer (10) ........ 8,000 (8)
Kenneth E. Bonaly (11) ........ --
Paul J. Kimmins (10) .......... --
Sharon Seitzman (12) .......... 266(13)
All Directors, Nominees for
Director and Executive Officers
as a Group (22 persons) ....... 37,035(7)(9) 1.8%
(13)
- ----------
(1) Except as otherwise indicated, all of the shares of Common Stock-NJ are
held beneficially and of record.
(2) St. Barnabas Corporation's principal executive offices are located at Old
Short Hills Road, Livingston, New Jersey 07039.
(3) St. Barnabas Corporation, on behalf of St. Barnabas Medical Center, owns
33,335 shares of Common Stock-NJ. In addition, St. Barnabas Corporation is
the sole member of six (6) other hospitals located in New Jersey which
provide health care services to the members of FOHP-NJ health plans and
own shares of Common Stock-NJ, either directly or through an affiliate.
The hospitals affiliated with St. Barnabas Corporation, other than St.
Barnabas Medical Center, and the number of shares of Common Stock-NJ owned
by them either directly or indirectly are as follows: Community Medical
Center - 33,335 shares; Irvington General Hospital - 13,334 shares;
Kimball Medical Center - 33,335 shares; Monmouth Medical Center - 33,335
shares; Newark Beth Israel Medical Center - 33,335 shares; and Union
Hospital - 13,334 shares. Each hospital affiliated with St. Barnabas
Corporation disclaims any beneficial interest in the shares of Common
Stock-NJ held by St. Barnabas Corporation and the other hospitals
affiliated with St. Barnabas Corporation.
(4) Such person currently serves as a director of the Holding Company.
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<PAGE>
(5) Mr. Adessa served as the President and Chief Executive Officer and as a
director of the Holding Company from its inception in May 1994 to June
1996.
(6) Such person is a nominee for director.
(7) Includes an aggregate of 417 shares of Common Stock-NJ held by Dr. Barbara
Engel, Dr. Mark Engel's wife, as to which shares he disclaims any
beneficial interest.
(8) Shares beneficially owned do not exceed 1% of the Holding Company's
outstanding Common Stock-NJ.
(9) Includes an aggregate of 500 shares of Common Stock-NJ held by Dr. Veena
Sawhney, Dr. Om Sawhney's wife, as to which shares he disclaims any
beneficial interest.
(10) Such person is an executive officer of the Holding Company.
(11) Mr. Bonaly served as Executive Vice President of the Holding Company from
June 4, 1995 to September 29, 1995 and served as President of First
Managed Care Option, Inc. ("FMCO"), a wholly-owned subsidiary of the
Holding Company, from November 1994 to September 29, 1995. In addition,
Mr. Bonaly served as Executive Vice President of FOHP-NJ from December
1993 to June 8, 1995. Mr. Bonaly passed away on September 29, 1995 while
serving as Executive Vice President of the Holding Company and President
of FMCO.
(12) Ms. Seitzman served as an Executive Vice President of the Holding Company,
and as President and a director of FOHP-NJ, from June 8, 1995 to May 1996.
(13) Represents all the shares held by Dr. Lawrence Seitzman, Ms. Sietzman's
husband, as to which shares Ms. Seitzman disclaims any beneficial
interest.
6
<PAGE>
PROPOSAL TO APPROVE THE TRANSACTION
Background and Reasons for the Transaction
The New Jersey Health Maintenance Organization Act (the "NJHMO Act")
requires HMOs such as the Holding Company's wholly-owned subsidiary, FOHP-NJ, to
maintain a minimum net worth. In addition, to operate in the State of New
Jersey, an HMO must obtain a Certificate of Authority ("COA") from the New
Jersey Departments of Banking and Insurance and Health and Senior Services. A
COA issued to an HMO may impose on the HMO requirements and conditions not
specified in the NJHMO Act. For example, FOHP-NJ's COA provides that if its net
worth is, or is expected to be, less than 125% of the minimum requirement,
FOHP-NJ is required to submit to the New Jersey Department of Banking and
Insurance ("DOI") a plan of action to address the deficiency or expected
deficiency.
During the first quarter of 1996, the Holding Company learned that
FOHP-NJ's statutory net worth as of December 31, 1995 may have been below 125%
of the minimum requirement. FOHP-NJ addressed this potential deficiency by
submitting in April 1996 a plan of action to the DOI which outlined the actions
which had been taken and measures to be used by FOHP-NJ to correct the potential
deficiency. The plan of action also outlined the actions which would be taken by
the Holding Company and FOHP-NJ to ensure that FOHP-NJ would remain in
compliance with applicable statutory net worth requirements during 1996.
The plan of action submitted by FOHP-NJ provided that in the event that
either the DOI or the New Jersey Department of Health and Senior Services
("DOH") required that FOHP-NJ obtain additional capital to remain in compliance
with the statutory net worth and other capital requirements applicable to
FOHP-NJ as an HMO licensed in New Jersey, the Holding Company would contribute
such capital to FOHP-NJ. To assure that the Holding Company would have
sufficient capital to contribute to FOHP-NJ in the event that FOHP-NJ was
required to obtain additional capital to remain in compliance with the statutory
net worth and other capital requirements applicable to it, certain directors and
shareholders of the Holding Company either (i) arranged for the issuance of
letters of credit by various banks, against which the Holding Company may draw
if required to fund the payment of its obligations to FOHP-NJ, or (ii)
guaranteed a portion of the Holding Company's capital obligation to FOHP-NJ. In
addition, pursuant to the plan of action, the Holding Company effected several
operational changes in order to increase capital in 1996, including (a) the
implementation of a modified provider reimbursement schedule which became
effective on April 1, 1996, for purposes of reducing medical costs, (b) the
implementation of a hiring freeze and suspension of bonus payments and the use
of consultants in order to control the Holding Company's administrative costs,
and (c) the implementation of a program to generate increased operating profits
by requiring certain acute care shareholders which had not met their enrollment
commitments to meet such commitments if they wanted to remain shareholders of
the Holding Company and providers in the FOHP-NJ network.
On June 12, 1996, the DOI and the DOH approved FOHP-NJ's plan of action
subject to certain reporting and other conditions. Such conditions included,
among other things: (i) a prohibition against the Holding Company and FOHP-NJ
from entering into any joint venture, acquisition, merger, inter-company related
party transaction, or other material transaction without the prior written
approval of the DOI; (ii) a prohibition against the declaration or application
by the Holding Company or FOHP-NJ of any dividends or bonuses or distributions
other than in the ordinary course of business without the prior written approval
of the DOI; (iii) a requirement that the proceeds from any sale of stock by the
Holding Company to New Jersey providers be used first to pay the payable from
the
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Holding Company to FOHP-NJ; (iv) a requirement that prior written approval
of the Commissioner of the DOI be obtained before either the Holding Company or
FOHP-NJ makes any expenditure related to activities in jurisdictions other than
New Jersey; and (v) a requirement that on or before October 1, 1996, at least
one-third of the directors serving on the Boards of Directors of the Holding
Company and FOHP-NJ, and at least one-third of the members of each committee of
the Boards of Directors of the Holding Company and FOHP-NJ, be persons who are
not affiliated with the Holding Company or FOHP-NJ or any subsidiary thereof,
and who do not have any contractual relationship with the Holding Company or
FOHP-NJ or any subsidiary thereof, including any health care provider in the
FOHP-NJ provider network. The DOI and the DOH advised the Holding Company that
the conditions described above are to continue until the DOI and the DOH issue a
written determination that (a) FOHP-NJ has had two consecutive quarters with a
net gain from operations in each quarter of at least $2,000,000, (b) FOHP-NJ
surplus equals or exceeds 125% of its minimum net worth requirement for the same
two consecutive quarters, and (c) the payable from the Holding Company to
FOHP-NJ has been paid in full.
In July and August 1996, the Holding Company was approached by various
parties interested in discussing a potential investment in the Holding Company.
On August 13, 1996, the Holding Company engaged PaineWebber Incorporated
("PaineWebber") to assist the Holding Company in soliciting investors and manage
the sale of a minority interest in the Holding Company. In August 1996, the DOI
advised PaineWebber and the Holding Company that it was imperative that a
transaction with a capital partner be consummated by December 31, 1996 to remedy
FOHP-NJ's net worth issue. In addition, the DOI advised the Holding Company and
PaineWebber that the Holding Company would be required to establish a deadline
of August 19, 1996 for potential investors to submit letter of intent proposals.
In August 1996, PaineWebber contacted 15 potential investors to discuss an
investment in the Holding Company, eight of whom entered into confidentiality
agreements with the Holding Company. By August 19, 1996, PaineWebber had
received letters of intent from six potential investors, including HSI. On
August 19, 1996, PaineWebber presented the six letters of intent which had been
received from potential investors to the Holding Company's Board of Directors.
The Board reviewed and discussed the terms of each of the letters of intent and
considered numerous factors regarding each letter of intent including (i) the
amount of capital to be contributed to the Holding Company by the potential
investor, (ii) the value attributed to the Holding Company by the potential
investor, (iii) the extent to which a potential investor could provide
management and information system expertise, (iv) the interest of the potential
investor in acquiring less than a majority position in the Holding Company, at
least initially, and (v) the similarity of views held by the potential investor
and the provider owners of the Holding Company with respect to such things as
the provision of medical services and profitability objectives. Based on such
considerations, the Board determined that management should pursue discussions
with three of the potential investors, including HSI, and to contact a fourth
potential investor should one of the other three proposals be withdrawn. On
August 19, 1996, the DOI advised the Holding Company and PaineWebber that it had
established a tentative deadline of September 20, 1996 for the submission to the
DOI of a definitive agreement between the Holding Company and one of the
potential investors.
In late August 1996, the three potential investors selected by the Board
commenced due diligence investigations of the Holding Company, including reviews
of the Holding Company's business plan, budgets and capital requirements.
Subsequent to such investigations, two of the potential investors withdrew their
proposals and, as a result, the Holding Company sent due diligence materials to
the fourth potential investor on September 6, 1996. The fourth potential
investor failed to pursue its initial interest in the Holding Company.
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On September 20, 1996, HSI submitted an outline of the terms and
conditions of its proposal to invest capital into the Holding Company. Shortly
thereafter, the Holding Company and HSI commenced negotiation of a purchase
agreement providing for, among other things, the sale by the Holding Company to
HSI of the Debentures.
On September 21, 1996, the Holding Company reviewed a new letter of intent
submitted by an investor group (the "Investor Group"). On October 3, 1996, the
Investor Group commenced a due diligence investigation of the Holding Company
and its financial advisor executed a confidentiality agreement with the Holding
Company. The Investor Group withdrew its proposal on October 11, 1996.
Although on September 25, 1996, the DOI had advised the Holding Company
that it must enter into a definitive agreement with a potential investor by
October 11, 1996, the DOI later permitted the Board of Directors of the Holding
Company to act on the proposed investment by HSI at a Special Meeting of the
Board of Directors held on October 15, 1996.
Negotiations between the Holding Company and HSI continued through October
11, 1996, leading to the preparation of the Securities Purchase Agreement. On
October 15, 1996, the Holding Company's Board of Directors met to consider the
Securities Purchase Agreement and the transactions contemplated thereby.
Representatives of PaineWebber made presentations to the Board and discussed
with the Board their views and analysis of the proposed Transaction. The Board
reviewed and considered, among other things, the background of the Transaction;
background information concerning HSI, including its financial condition, the
Holding Company's strategic alternatives; the terms of the Securities Purchase
Agreement and the potential consequences to the Holding Company if the
Securities Purchase Agreement was not consummated. At the meeting, the Board
authorized a special committee (the "Special Committee") to negotiate the final
terms of the Securities Purchase Agreement and authorized the officers of the
Holding Company to execute and deliver the Securities Purchase Agreement after
the Special Committee approved the final terms and conditions thereof. On
October 17, 1996, a shareholder of the Holding Company submitted a letter of
intent from a new investor group (the "New Investor Group"). Representatives of
PaineWebber and Holding Company management met with the representatives of the
New Investor Group on the morning of October 18, 1996. At that meeting, it was
apparent to the Holding Company that the New Investor Group did not have the
management and information expertise that the Holding Company believed was
necessary to improve the Holding Company's operating results. In any event,
after speaking with the representatives of the Holding Company, the New Investor
Group decided to withdraw its proposal because it did not believe it could
finalize such proposal and enter into definitive documents with the Holding
Company within a time frame that would allow the Holding Company to adequately
address FOHP-NJ's statutory net worth issue. On October 22, 1996, the Special
Committee approved the final terms and conditions of the Securities Purchase
Agreement. On October 24, 1996, the Holding Company, FOHP-NJ and HSI entered
into the Securities Purchase Agreement. On November ___, 1996, the Securities
Purchase Agreement was amended and restated to clarify certain provisions
contained therein and to clarify certain provisions contained in the Option
Agreement (as hereinafter defined) attached as an exhibit to the Securities
Purchase Agreement. The terms of the Transaction were determined on the basis of
arm's-length negotiations and have been approved by the DOI.
THE BOARD OF DIRECTORS OF THE HOLDING COMPANY HAS APPROVED THE TRANSACTION
AND RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE
TRANSACTION.
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The Securities Purchase Agreement
The Holding Company, FOHP-NJ and HSI have entered into the Securities
Purchase Agreement, pursuant to which, among other things, the Holding Company
has agreed to issue and sell to HSI the Debentures. Presented below is a summary
of certain provisions of the Securities Purchase Agreement, which is attached as
Appendix A to this Proxy Statement. The following description does not purport
to be complete and is qualified in its entirety by reference to the Securities
Purchase Agreement.
General The Securities Purchase Agreement provides that the Holding
Company will issue and sell, and HSI will purchase for $30,000,000, the
Debentures. The principal amount of the Debentures is subject to adjustment
pursuant to certain provisions of the Debentures. See "Description of the
Debentures."
The closing of the purchase and sale of the Debentures (the "Closing")
shall occur on (i) the later of (a) December 16, 1996 or (b) two business days
after the satisfaction or waiver of all conditions to the Closing set forth in
the Securities Purchase Agreement, or (ii) such other date as shall be agreed
upon by the Holding Company and HSI (the "Closing Date").
Standstill HSI has agreed that for a period of two years from and after
the Closing Date, it will not, without the prior written consent of the Holding
Company, purchase or acquire any New Common Stock (other than in connection with
the conversion of the Debentures, the exercise of the Option, the Exchange Offer
(as hereinafter defined), the Cash Offer (as hereinafter defined), the Purchase
Offer (as hereinafter defined), or the exercise by HSI of its rights under the
Holding Company's Certificate of Incorporation, as proposed to be amended,
including HSI's right of first refusal and preemptive rights contained therein)
(the "Standstill Agreement").
No Solicitation of Other Offers The Holding Company has agreed that
neither it nor its subsidiaries will directly or indirectly through any of their
respective officers, directors, employees, agents or anyone else solicit another
proposal to infuse capital into the Holding Company or, subject to fiduciary
obligations under applicable law as advised by counsel, participate in any
discussions or negotiations regarding, or furnish to any other person any
information with respect to, any unsolicited effort or attempt by any other
person to make such a proposal.
Amendment of Certificates of Incorporation and By-laws The Holding Company
has agreed that subject to the receipt of necessary shareholder approval, it
will (i)(a) use all reasonable efforts to file an Amended and Restated
Certificate of Incorporation in the form attached to this Proxy Statement as
Appendix F with the Office of the Secretary of State, State of New Jersey, prior
to the Closing, and (b) adopt By-laws in the form attached to this Proxy
Statement as Appendix G, and (ii) if requested by HSI, cause each of the
subsidiaries of the Holding Company to file an amended and restated certificate
of incorporation in its jurisdiction of incorporation and to adopt amended
by-laws, which amended and restated certificates of incorporation and amended
by-laws shall in no way breach, violate or conflict with the transactions
contemplated by the Securities Purchase Agreement. In addition, FOHP-NJ has
agreed that, prior to the Closing, it will (i) use all reasonable efforts to
file an Amended and Restated Certificate of Incorporation in the form attached
to this Proxy Statement as Appendix H, and (ii) adopt By-laws in the form
attached to this Proxy Statement as Appendix I.
Healthcare Contracts The Holding Company and FOHP-NJ have agreed that
prior to and after the Closing they will use all reasonable efforts to
renegotiate their provider contracts so that (i)
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with regard to physician providers, the aggregate rate of reimbursement is
reduced to an average of 120% of Medicare's RBRVS, and (ii) with respect to
hospital providers, the aggregate rate of reimbursement is reduced by 4% for
inpatient costs and 10% for outpatient costs. The Holding Company and FOHP-NJ
have also agreed to use all reasonable efforts to, in the case of any physician
or hospital providers with which FOHP-NJ has contracts containing terms not
competitive with terms offered by other providers in the same markets, pursue
additional modifications to such contracts to make the terms contained therein
competitive.
HSII Agreement The Holding Company has agreed to allow HSI to evaluate the
Holding Company's current Managed Care Management Information Services Agreement
(the "HSII Agreement") between the Holding Company and Health Systems
Integration, Inc. ("HSII"), and has agreed to terminate such agreement at or
subsequent to the Closing if (i) HSI so requests and (ii) the Holding Company is
presented the opportunity to enter into an agreement with HSI or a third party
pursuant to which the Holding Company would be provided services substantially
similar to those set forth in the HSII Agreement for a fee no higher than that
set forth in the HSII Agreement.
Letters of Credit; Guarantees The Holding Company and FOHP-NJ have agreed
that prior to the Closing they shall not draw any amounts under any letter of
credit, or incur any obligations under any other reimbursement or other
agreement relating to credit support therefor unless so required by either the
DOI or the DOH, in which event all amounts so drawn or received by the Holding
Company or FOHP-NJ shall be placed and maintained in a separate and segregated
account from which funds shall be used to satisfy in full all obligations
relating to such letters of credit or reimbursement or other agreement, as the
case may be.
Required Capital Call The Holding Company and HSI have agreed that, based
on reasonable projections prepared by HSI of net worth requirements, as are
determined by the DOI and the DOH, from time to time, if it is determined that
the Holding Company needs capital to satisfy such net worth requirements ("Net
Capital Shortfall"), then the Board of Directors of the Holding Company shall
have the right to initiate a pro rata offering of New Common Stock to all the
then-current shareholders of the Holding Company to raise capital to satisfy the
Net Capital Shortfall. If the Board of Directors does not, within seven days of
the receipt of projections from HSI, determine to initiate such a pro rata New
Common Stock offering, HSI shall have the right to advance funds to the Holding
Company so that the Holding Company will satisfy the Net Capital Shortfall in
exchange for subordinated debentures, in form substantially similar to the
Debentures, except that (i) no such debentures shall be convertible sooner than
two years after the issuance thereof, (ii) to the extent that the Net Capital
Shortfall is determined to be due to general business conditions, only 50% of
the principal amount of such debentures would be convertible after such two year
period, and (iii) to the extent that the Net Capital Shortfall is determined to
be due to management problems and difficulties after the Closing Date, no
portion of the principal amount of such debentures shall be convertible.
Sierra Contract For a period of one year from and after the Closing Date,
HSI shall have the right to attempt to negotiate a termination of the Agreement
dated January 16, 1995 (the "Sierra Agreement"), between Sierra Health
Corporation ("Sierra") and FOHP-NJ or have it assigned (including, without
limitation, the right to receive payments thereunder) to HSI.
New York Subsidiary The Holding Company and HSI have agreed to work
cooperatively and in good faith to pursue a mutually agreeable capitalization
plan with respect to First Option Health Plan of New York, Inc. ("FOHP-NY"), a
New York corporation and wholly-owned subsidiary of the Holding Company. In the
event that no such capitalization plan is developed and implemented prior to
March 31, 1997, HSI shall have the right to effect a transaction with respect to
FOHP-NY at the fair market value thereof, pursuant to which FOHP-NY would become
a stand-alone company no
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longer affiliated as a subsidiary of the Holding Company so long as there is
presented to those directors of the Holding Company not affiliated with HSI a
valuation or appraiser report or fairness opinion, delivered by an independent
nationally recognized valuation firm, evidencing that the transaction is to be
effected for fair market value consideration or otherwise opining as to the
fairness, from a financial point of view, of the transaction to the Holding
Company.
Worker's Compensation Business The Holding Company has agreed to use all
reasonable efforts to sell FMCO prior to the Closing. If such sale is not
consummated prior to the Closing, (i) HSI's Allocable Share (as defined below)
of any operating losses attributable to FMCO shall be added to the principal
amount of the Debentures, and (ii) HSI's Allocable Share of operating gains
attributable to FMCO shall be subtracted from the principal amount of the
Debentures, in each case on a cumulative basis from time to time as HSI's
Allocable Share increases from and after the Closing. The term "HSI's Allocable
Share" shall mean the percentage of the aggregate number of outstanding shares
of the Holding Company held by HSI from time to time.
If FMCO has an operating loss for the three month period ending 90 days
from the date of Closing, HSI may demand, at its option, that FMCO be dissolved.
If FMCO has an operating gain for the three month period ending 90 days from the
date of Closing, HSI and the Holding Company will mutually agree as to whether
to dissolve FMCO or allow FMCO to continue to operate; provided, however, if
FMCO's operations continue, no further operating gains attributable to FMCO will
be subtracted from the Debentures.
Post-Closing Limited Offer to Shareholders HSI has agreed that prior to
the later of the date that is (i) three months after the Closing Date, or (ii)
30 days after the receipt of consents from all parties having the right under
any agreement or instrument to consent to any redemption of New Common Stock or
the termination or expiration of all such agreements and instruments, it will
either (a) make a pro rata offer (the "Purchase Offer") to all shareholders of
the Holding Company to purchase, for consideration consisting of cash or HSI
Common Stock valued at the Purchase Stock Market Value (as defined below), up to
857,284 shares of a New Common Stock at a per share value of $21.43, or, at
HSI's option, (b) require the Holding Company to offer (the "Holding Company
Offer") to repurchase from all shareholders of the Holding Company, for cash
(which cash shall have been provided by HSI for convertible debentures
containing terms substantially similar to those of, and otherwise in
substantially the form of, the Debentures), up to 857,284 shares of New Common
Stock at a per share price of $21.43.
Exchange/Cash Offer for Shares HSI has agreed that after January 1, 1999
and prior to May 31, 1999, it will make an offer (referred to herein as the
"Exchange Offer") to share holders of the Holding Company to exchange shares of
Class A Common Stock of HSI (or the common stock of any successor corporation of
HSI) (in either case referred to herein as "HSI Common Stock") or, at HSI's
option, make an offer (referred to herein as the "Cash Offer") to pay cash for
the shares of New Common Stock of the Holding Company held by the Holding
Company's shareholders. Prior to making the Exchange Offer or Cash Offer, HSI is
required to furnish the Holding Company with 10 days written notice of its
intention to promptly make such Exchange Offer or Cash Offer, as the case may be
(the date of such notification to be referred to herein as the "Offer Notice
Date"). In the Exchange Offer, HSI will agree to exchange, for each share of New
Common Stock of the Holding Company, the number of shares of HSI Common Stock as
shall have a Purchaser Stock Market Value equal to the Holding Company Stock
Value (as defined below) of the share of New Common Stock of the Holding Company
that is being exchanged. In the Cash Offer, HSI will agree to pay each Holding
Company shareholder, for each share of New Common Stock held by him, her or it,
a purchase price equal to the Holding Company Stock Value of the share of New
Common Stock being purchased.
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The term "Purchaser Stock Market Value" means the average closing sales
price of the HSI Common Stock on the New York Stock Exchange, Inc. (or, if such
HSI Common Stock is not at such time listed on the New York Stock Exchange,
Inc., on such other national securities exchange as the HSI Common Stock shall
at such times be listed or quoted) for the five consecutive trading days
immediately preceding the date on which the Exchange Offer or the Purchase
Offer, as the case may be, is commenced by HSI; provided, however, that, in the
event HSI Common Stock shall at such times not be listed or quoted on any
national securities exchange, "Purchaser Stock Market Value" shall be determined
in accordance with the procedures for the determination of Holding Company Stock
Value as described below.
The "Holding Company Stock Value" shall be determined as follows: (i) if
the Holding Company and HSI agree on a Holding Company Stock Value after good
faith negotiations, the Holding Company Stock Value shall be the agreed upon
amount; (ii) if the Holding Company and HSI have not agreed on a Holding Company
Stock Value within 15 days after the Offer Notice Date, HSI and the Holding
Company (through its directors who are unaffiliated with HSI) shall each select
an independent qualified appraiser to appraise the Holding Company Stock Value,
and, if the two independent qualified appraisers agree on an appraisal for the
Holding Company Stock Value, the Holding Company Stock Value shall be the agreed
upon amount; or (iii) if the two independent qualified appraisers cannot agree
upon a Holding Company Stock Value, the two independent qualified appraisers
shall select a third independent qualified appraiser to appraise the Holding
Company Stock Value, and the Holding Company Stock Value shall be determined by
taking the average of the two appraisals which are closest to each other;
provided, however, that if the appraisal amount which is less than the highest
appraisal and greater than the lowest appraisal is greater or less than the
average amount of the other appraisals by an amount representing no more than
7.5%, then the average of all three appraisals will be the Holding Company Stock
Value. The following is an example of the valuation method described in
subparagraph (iii) above: assuming that HSI's independent qualified appraiser
valued the aggregate Holding Company Stock Value at $150,000,000, the Holding
Company's independent qualified appraiser valued the aggregate Holding Company
Stock Value at $50,000,000 and the third independent qualified appraiser valued
the aggregate Holding Company Stock Value at $125,000,000, the aggregate Holding
Company Stock Value would be $137,500,000 (the average of the two closest
appraisals); if, however, the third independent qualified appraiser appraised
the Holding Company Stock Value at $105,000,000 (greater than $100,000,000 by an
amount less than 7.5% of $100,000,000), the aggregate Holding Company Stock
Value would be approximately $100,000,000 (the average of all three). After
determining the aggregate Holding Company Stock Value, the value of each share
of New Common Stock will be determined by dividing the Holding Company Stock
Value by the number of then outstanding shares of New Common Stock.
Notwithstanding the foregoing, in the event that the revenues of the
Holding Company exceed $62,500,000 during the calendar quarter immediately
preceding the commencement of the Exchange Offer or the Cash Offer, the per
share "Holding Company Stock Value" shall, at the very least, reflect an
aggregate valuation of the Holding Company of $75,000,000.
Post Exchange/Cash Offer Merger. Subsequent to the consummation of the
Exchange Offer or Cash Offer, as the case may be, HSI may effect a merger,
business combination or consolidation transaction involving the Holding Company
for the purpose of obtaining 100% of the then outstanding equity of the Holding
Company (the "Merger"), subject to the following terms and conditions:
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(a) the amount of consideration to be paid or distributed to the
shareholders of the Holding Company in connection with the Merger will either be
(i) determined by a nationally recognized independent appraiser selected by HSI
and approved by a majority of the members of the Holding Company's Board of
Directors who were not designated by HSI (which approval will not be
unreasonably withheld), or (ii) deemed to be fair from a financial point of view
in a fairness opinion delivered by a nationally recognized independent
investment banking firm selected by HSI and approved by a majority of the
Holding Company's Board of Directors who were not designated by HSI (which
approval will not be unreasonably withheld); provided, however, that, if the
Merger takes place within six (6) months of the Exchange Offer or Cash Offer, in
no event shall the consideration to be paid or distributed to the shareholders
of the Holding Company for their shares of New Common Stock be less than the per
share consideration paid or distributed by HSI for shares of New Common Stock in
the Exchange Offer or Cash Offer, as the case may be;
(b) the shareholders of the Holding Company, other than HSI, shall
be offered dissenters' rights in the same manner and under the same terms and
conditions as is provided under Chapter 11 of the New Jersey Business
Corporation Act, regardless of whether such shareholders would otherwise have
been entitled to such rights under the New Jersey Business Corporation Act;
(c) the Holding Company, or any successor thereto, shall provide in
its By-laws indemnification provisions substantially similar to those currently
contained in the Holding Company's By-laws for the period ending six (6) years
from the date of the Merger, or, if earlier, for the period ending on the date
on which the statute of limitations has expired with respect to the Holding
Company's Board of Directors' approval of the Securities Purchase Agreement and
the Merger contemplated thereby; and
(d) the Holding Company, or any successor thereto, shall maintain
officer and director insurance with terms and conditions substantially similar
to those contained in the officer and director insurance currently maintained by
the Holding Company for the period ending six (6) years from the date of the
Merger, or, if earlier, for the period ending on the date on which the statute
of limitations has expired with respect to the Holding Company's Board of
Directors' approval of the Securities Purchase Agreement and the Merger
contemplated thereby, which insurance shall provide coverage for former
directors of the Holding Company.
Certain Pre-Closing Covenants Each of the Holding Company and FOHP-NJ has
agreed that between the date of the Securities Purchase Agreement and the
Closing, unless HSI shall have consented in writing thereto and except as
otherwise provided for in the Securities Purchase Agreement, the Holding
Company, FOHP-NJ and each other subsidiary of the Holding Company (i) shall not
take any action that would cause the representations and warranties contained in
the Securities Purchase Agreement to be untrue in any material respect; (ii)
shall not authorize for issuance, issue or deliver any additional shares of any
stock of any class or securities convertible into shares of stock or issue or
grant any right, option, warrant or other commitment for the issuance of shares
of stock or securities, or any stock appreciation rights, other than under the
terms of the Securities Purchase Agreement; (iii) shall not amend its
certificate of incorporation or by-laws, except as provided for in the
Securities Purchase Agreement; (iv) shall not split, combine or reclassify any
shares of its capital stock or declare, set aside or pay any dividend (whether
in cash, stock or property) in respect of its capital stock or redeem or
otherwise acquire any of its capital stock; (v) shall not sell marketable
securities owned by it, if any, or purchase marketable securities, except in the
ordinary course of business; (vi) shall not prepay its expenses or obligations
except in accordance with the terms of applicable contracts, commitments and
arrangements and in the ordinary course of business (and in any case, not to
exceed $50,000); (vii) shall not increase compensation or benefits for, or pay
any bonuses to, or enter into any severance or change of control arrangements
with, any of its directors, officers, employees,
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consultants or agents outside of the ordinary course of business; (viii) shall
not offer employment to or employ any person not currently employed by it other
than on an at will basis in the ordinary course of business or enter into any
written employment contract or any collective bargaining agreement; (ix) shall
not create, amend, extend, renew, assume, incur or guarantee any indebtedness
either involving amounts in excess of $50,000 individually or in excess of
$100,000 in the aggregate, or not in the ordinary course of its business; (x)
shall not, except as otherwise permitted in the Securities Purchase Agreement,
enter into or amend any contract, commitment or arrangement or engage in any
transaction which is not in the ordinary course of its business; (xi) shall not
create any stock option or other stock-based incentive plan or grant any stock
option, phantom stock, stock appreciation right or other similar security or
instrument; (xii) shall not acquire any other business or interest therein;
(xiii) shall not enter into any contract, commitment or arrangement or engage in
any transaction with any of its affiliates, shareholders, directors, officers or
employees which is not in the ordinary course of business and consistent with
past practices; (xiv) shall not make any change in its accounting practices
other than as required by the Financial Accounting Standards Board (in which
event such change shall be reported promptly to HSI in writing); (xv) shall not,
except as otherwise specifically disclosed in the Securities Purchase Agreement,
fail to comply with any laws and regulations applicable to it or the conduct of
its business, the noncompliance with which would, individually or in the
aggregate, have a material adverse effect on the business, conditions,
prospects, properties, or results of operations of the Holding Company and its
subsidiaries taken as a whole ("Material Adverse Effect"); and (xvi) shall not
enter into any contract, commitment or arrangement to do any of the things
described in clauses (ii) through (xv) above.
In addition, each of the Holding Company and FOHP-NJ has agreed that
between the date of the Securities Purchase Agreement and the Closing it will
(a) promptly notify HSI of any Material Adverse Effect or any material
litigation or material governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), affecting, as the
case may be, the Holding Company or any of its subsidiaries; (b) promptly
deliver to HSI true and correct copies of any press release, and any report,
statement or schedule filed with the Securities and Exchange Commission ("SEC")
subsequent to the date of the Securities Purchase Agreement; and (c) confer on a
regular basis with one or more representatives of HSI to report operational
matters of materiality and any proposals to engage in material transactions.
Further, each of the Holding Company and FOHP-NJ has agreed that between
the date of the Securities Purchase Agreement and the Closing, unless HSI shall
have consented in writing thereto and except as otherwise provided for in the
Securities Purchase Agreement, it will, among other things, use all reasonable
good faith efforts to (i) conduct its operations only according to its usual,
regular and ordinary course in substantially the same manner as heretofore
conducted, and (ii) preserve intact its business organization and goodwill, keep
available the services of its officers and employees and maintain satisfactory
relationships with those persons having business relationships with it. The
Holding Company also has agreed to use all reasonable efforts to cause the
consummation of the transactions contemplated by the Securities Purchase
Agreement and to secure, as soon as practicable, all necessary approvals and
consents of third parties, including without limitation, the DOH and the DOI, to
the consummation of the transactions contemplated by the Securities Purchase
Agreement.
Representations and Warranties The Securities Purchase Agreement
contains various representations and warranties of the Holding Company, FOHP-NJ
and HSI, certain of which are qualified as to materiality. The representations
and warranties of the Holding Company and FOHP-NJ relate to, among other things,
due organization and good standing of the Holding Company and its subsidiaries;
corporate power and authority; enforceability of the Securities Purchase
Agreement, the
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Debentures, the Option Agreement (as defined below), and the Management
Agreements (as defined below); capitalization; financial statements; compliance
with law and other instruments; litigation; governmental proceedings or
litigation; compliance with laws; material contracts; consents; licenses,
permits and governmental approvals; certain Exchange Act reports supplied to
HSI; environmental matters; title to properties and assets; taxes; DOI reports;
certain business practices and regulations; insurance; labor issues; employment
and severance matters; absence of certain undisclosed liabilities; intellectual
property; employee benefit plans; brokers; and the accuracy of information
furnished.
The representations and warranties of HSI relate to, among other things,
due organization and good standing of HSI; corporate power and authority;
investment intent; limitations on disposition of securities to be acquired;
access to data; brokers; availability of funds required to purchase the
Debentures; litigation; and the quality of HSI's claims processing system.
The representations and warranties of the Holding Company, FOHP-NJ and HSI
shall survive until the date that is the earlier of (i) eighteen months
following the Closing Date (except for certain representations and warranties by
the Holding Company and FOHP-NJ with respect to environmental matters and taxes
which will survive for a period of six years from the Closing Date) or (ii) such
time as at least 50% of the initial principal amount of the Debentures shall
have been converted into shares of New Common Stock. Notwithstanding the
foregoing, the rights and obligations of the Holding Company and HSI (other than
rights and obligations with respect to the Exchange Offer, Cash Offer,
Standstill Agreement, Purchase Offer, indemnification and certain other
post-closing agreements) shall cease and terminate at such time as at least 50%
of the initial principal amount of the Debentures have been converted into
shares of New Common Stock.
Conditions Precedent to Closing HSI's obligation to consummate the
transactions contemplated by the Securities Purchase Agreement is subject to the
satisfaction of the following conditions, any of which may be waived by HSI in
writing: (i) the Holding Company shall have delivered to HSI the Debentures;
(ii) the representations and warranties of the Holding Company and FOHP-NJ
contained in the Securities Purchase Agreement shall be true and correct in all
material respects as of the Closing Date; (iii) all corporate and other
proceedings required to be taken by the Holding Company in connection with the
transactions contemplated by the Securities Purchase Agreement, including, but
not limited to, approval by the shareholders of the Holding Company, shall have
been taken or obtained; (iv) the Amended and Restated Certificates of
Incorporation of the Holding Company and FOHP-NJ shall have been filed with the
Office of the Secretary of State, State of New Jersey, and the amended By-laws
of the Holding Company and FOHP-NJ shall have been adopted; (v) HSI shall have
received a copy of the Holding Company's Certificate of Incorporation certified
by the Secretary of State of the State of New Jersey and certificates as of a
recent date of the Secretary of State of each state in which the Holding Company
or any subsidiaries organized or qualified to do business as a foreign
corporation to the extent that such corporation is in existence and otherwise is
in good standing to transact business in such state; (vi) HSI shall have
received certificates of the Secretary of each of the Holding Company and
FOHP-NJ certifying the accuracy of the By-laws of each of the Holding Company
and FOHP-NJ and the names and signatures of each officer of the Holding Company
and FOHP-NJ authorized to execute and deliver the Securities Purchase Agreement;
(vii) the Holding Company shall have entered into the Management Agreements;
(viii) the Holding Company shall have entered into the Option Agreement; (ix)
the Holding Company shall have received from 80% of the hospitals which own
shares of Common Stock-NJ certain comfort letters; (x) the Holding Company shall
have entered into the agreement (the "Investors Agreement") described in this
Proxy Statement under the caption "Certain Voting Arrangements;" (xi) HSI shall
have received an opinion of counsel from counsel to the Holding Company and
FOHP-NJ; (xii) all authorizations, approvals, consents and waivers of any
governmental authority necessary for the consummation of any or all of the
transactions contemplated in the Securities Purchase Agreement shall have been
obtained on terms satisfactory to HSI and remain in full force and effect; and
consents or waivers from parties other than
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governmental bodies (including shareholders of the Holding Company) that are
required in connection with the consummation of the transactions contemplated by
the Securities Purchase Agreement shall have been obtained on terms satisfactory
to HSI and remain in full force and effect; (xiii) the Holding Company shall
have performed and complied in all material respects with all obligations,
agreements and covenants required to be performed by it pursuant to the
Securities Purchase Agreement prior to or on the Closing Date; (xiv) the waiting
period under the HSR Act (as defined below) shall have expired or terminated;
(xv) no injunction or similar order shall be effective which enjoins, prohibits
or restrains the purchase and sale of the Debentures or the transactions
contemplated by the Securities Purchase Agreement; and (xvi) there shall not be
any action or proceeding by or before any court or any other governmental body
seeking to restrain, prohibit or invalidate the transactions contemplated by the
Securities Purchase Agreement or any action or proceeding seeking a material
amount of damages by reason of the consummation of the Securities Purchase
Agreement or any of the transactions contemplated thereby.
The Holding Company's obligation to consummate the transactions
contemplated by the Securities Purchase Agreement shall be subject to the
satisfaction of the following conditions, any of which may be waived by the
Holding Company in writing: (i) the Holding Company shall have received payment
of the aggregate purchase price for the Debentures; (ii) the representations and
warranties of HSI contained in the Securities Purchase Agreement shall be true
and correct in all material respects as of the Closing Date; (iii) all corporate
and other proceedings required to be taken by HSI in connection with the
transactions contemplated by the Securities Purchase Agreement shall have been
taken or obtained; (iv) HSI shall have performed or complied in all material
respects with all obligations, agreements and covenants required to be performed
by it under the Securities Purchase Agreement prior to or on the Closing Date;
(v) the waiting period under the HSR Act shall have expired or terminated; (vi)
no injunction or similar order shall be effective which enjoins, prohibits or
restrains the purchase and sale of the Debentures or the transactions
contemplated by the Securities Purchase Agreement; (vii) all authorizations,
approvals, consents and waivers of shareholders of the Holding Company or any
governmental authority or third party, shall have been obtained and shall not be
terminated, suspended or withdrawn as of the Closing Date; (viii) the Holding
Company shall have received an opinion of counsel from counsel to HSI; and (ix)
HSI shall have entered into the Investors Agreement.
Indemnification The Holding Company and FOHP-NJ have agreed, jointly and
severally, to indemnify, defend and hold HSI and its directors, officers, agents
and affiliates harmless from and against all losses, claims, obligations,
demands, assessments, penalties, liabilities, costs, damages, attorneys' fees
and expenses (collectively, "Damages"), asserted against or incurred by such
indemnitees by reason of or resulting from a breach of any representation,
warranty or covenant of the Holding Company or FOHP-NJ contained in the
Securities Purchase Agreement, in any exhibit, schedule, certificate or
financial statement delivered under the Securities Purchase Agreement, or in any
agreement executed in connection with the transactions contemplated thereby.
Neither the Holding Company nor FOHP-NJ shall have any obligation to
indemnify HSI and its directors, officers, agents and affiliates in respect of
any Damages unless the aggregate amount of such Damages exceeds $250,000 (the
"Minimum Threshold Requirement"), and then the Holding Company and FOHP-NJ shall
be liable only to the extent that the aggregate amount of such Damages exceeds
$250,000.
HSI has agreed to indemnify, defend and hold the Holding Company and FOHP
and their respective directors, officers, agents and affiliates harmless from
and against all Damages asserted against or incurred by any such indemnitees by
reason of or resulting from a breach of any
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representation, warranty or covenant of HSI contained in the Securities Purchase
Agreement, or in any exhibit, schedule or certificate delivered pursuant to the
Securities Purchase Agreement, or in any agreement executed in connection with
the transactions contemplated thereby. HSI shall have no obligation to indemnify
the Holding Company or FOHP-NJ and their respective directors, officers, agents
and affiliates in respect of any Damages unless the aggregate amount of such
Damages exceeds the Minimum Threshold Requirement, in which case HSI shall be
liable only to the extent that the aggregate amount of such Damages exceeds
$250,000.
Termination Provisions The Securities Purchase Agreement may be terminated
at any time prior to the Closing (i) by the mutual written consent of the
parties, (ii) by HSI, if any conditions set forth in the Securities Purchase
Agreement to be performed by the Holding Company or FOHP-NJ have not been
satisfied or waived on or before the Closing, or if there has been a material
breach on or before the Closing of any of the representations and warranties of
the Holding Company and FOHP-NJ contained in the Securities Purchase Agreement;
provided, however, that HSI shall during the 20 day period following receipt of
any written update furnished by the Holding Company to HSI pursuant to the
Securities Purchase Agreement, with respect to certain Material Contracts (as
defined in the Securities Purchase Agreement) entered into in the ordinary
course of business subsequent to the date of the Securities Purchase Agreement
and with respect to any changes in representations and warranties of the Holding
Company relating to regulatory compliance resulting from regulatory action
occurring after the date of the Securities Purchase Agreement, consider in good
faith whether it will ultimately in any case be willing to proceed with the
transactions contemplated by the Securities Purchase Agreement in light of the
information provided in such update, in which case HSI may inform the Holding
Company in writing that such written update is not satisfactory (in which case
the Securities Purchase Agreement will terminate if the Holding Company fails to
cure such written update to HSI's satisfaction within two business days of the
delivery of such written notice), (iii) by the Holding Company if any conditions
set forth in the Securities Purchase Agreement to be performed by HSI have not
been satisfied or waived on or before the Closing, or if there has been a
material breach on or before the Closing of any of HSI's representations or
warranties contained in the Securities Purchase Agreement; provided, however,
that the Holding Company shall, during the 20 day period following receipt of
any written update furnished by HSI to the Holding Company pursuant to the
Securities Purchase Agreement, consider in good faith whether it will ultimately
in any case be willing to proceed with the transactions contemplated by the
Securities Purchase Agreement in light of the information provided in such
written update, in which case the Holding Company may inform HSI that such
written notice is not satisfactory (in which case the Securities Purchase
Agreement will terminate if HSI fails to cure such written update to the Holding
Company's satisfaction within two business days of the delivery of such written
notice), or (iv) by either party if the transactions contemplated by the
Securities Purchase Agreement are not consummated before April 30, 1997.
The Holding Company has agreed that if HSI terminates the Securities
Purchase Agreement as a result of the failure of the Holding Company to satisfy
a condition to the Closing or either the Holding Company or HSI terminates the
Securities Purchase Agreement pursuant to the provision which permits either
party to terminate the agreement if the Closing has not occurred prior to April
30, 1997, and, in either case a Competing Transaction (as such term is defined
below) is entered into at any time within twelve months after the date of the
Securities Purchase Agreement and then consummated within twelve months of its
commencement, then on the Payment Date (as such term is defined below), the
Holding Company shall be liable to pay to HSI an amount equal to the greater of
(i) $2,500,000 or (ii) the actual costs incurred by HSI in connection with the
transactions contemplated by the Securities Purchase Agreement prior to the
termination thereof. The "Payment Date" is the date 10 days following the
consummation of a Competing Transaction.
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A "Competing Transaction" shall mean any of the following, or any
agreement or widely disseminated public announcement or communication by the
Holding Company or FOHP-NJ or any other person of a proposed plan or intention
to do any of the following (other than the transactions contemplated by the
Securities Purchase Agreement): (a) any merger, consolidation, share exchange
functionally equivalent to a merger, business combination or other similar
transaction; (b) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 20% or more of the assets of the Holding Company and its
subsidiaries, taken as a whole, in a single transaction or a series of related
transactions; (c) any tender offer or exchange offer for 20% or more of the
outstanding shares of capital stock of the Holding Company, in the event the
Board of Directors of the Holding Company shall have changed its recommendation
to shareholders of the Holding Company to approve the Securities Purchase
Agreement, whether or not the transactions contemplated thereby are consummated;
(d) the filing of a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), registering 20% or more of the outstanding
shares of capital stock of the Holding Company, whether or not consummated; or
(e) any other transaction, in the event the Board of Directors of the Holding
Company shall have changed its recommendation to the shareholders of the Holding
Company to approve the Securities Purchase Agreement, by which any person or
group becomes the beneficial owner of or has the right to acquire 20% or more of
the outstanding capital stock of the Holding Company and such person or group
infuses cash or other capital into the Holding Company or any of its
subsidiaries (or provides guarantees) of at least $2,500,000.
The Holding Company and HSI have agreed that the payment described in the
preceding paragraph shall be the sole and exclusive remedy of the parties upon
any termination of the Securities Purchase Agreement followed by the occurrence
or existence of a Competing Transaction, and such remedies shall be limited to
the sum described in that paragraph; provided, however, that with respect to any
termination of the Securities Purchase Agreement followed by the occurrence or
existence of a Competing Transaction as a direct result of a material,
intentional breach by the Holding Company of any of its representations,
warranties, covenants or agreements contained in such agreement, all remedies
available to HSI either in law or equity shall be preserved and survive the
termination of the Securities Purchase Agreement.
Description of the Debentures
Presented below is a summary of certain provisions of the Debentures, a
form of which is attached as Appendix B to this Proxy Statement. The following
description does not purport to be complete and is qualified in its entirety by
reference to the form of Debentures.
General The Debentures will be issued in the initial principal amount of
$30,000,000 (the "Initial Principal Amount"). The principal amount of the
Debentures (the "Principal Amount") will be increased by the aggregate amount of
Defaulted Interest (as defined below), the aggregate amount of Unpaid Management
Fees (as defined below) and Indemnification Obligations (as defined below) and
such other amounts as shall become additional Principal Amount pursuant to the
terms of the Debentures, plus accrued and unpaid interest thereon. The Principal
Amount and the interest thereon shall be payable on ___________, 200_____,
subject to the provisions described below under the caption "Ranking of
Debentures" (the "Maturity Date").
Interest The Principal Amount shall bear interest at an annual rate equal
to the rate charged to HSI under its credit facility issued by a consortium of
commercial banks led by Bank of America, National Trust & Savings Association
(the "Rate"), which Rate shall be subject to adjustment at the beginning of each
calendar quarter and shall become due and payable, subject to the provisions of
the Debentures, with respect to any given calendar quarter within 10 days after
the end of such quarter.
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Any such interest not paid when due and payable shall be considered "Defaulted
Interest" and shall be included in the Principal Amount.
Conversion The Principal Amount shall be convertible at any time (i)
subsequent to the New Debenture Conversion Time (as defined below) and (ii) on
or before the Maturity Date, at the option of HSI or any subsequent holder
thereof, in whole or in part, into such number of shares (referred to herein as
"Conversion Shares") of New Common Stock of the Holding Company that are
consistent with the following calculations. If the Option shall have been
exercised for shares of New Common Stock prior to the date of conversion of all
the Initial Principal Amount of the Debentures into Conversion Shares, the
number of Conversion Shares issuable to the holder thereof upon conversion of
the Initial Principal Amount of the Debentures will be 1,926,323, which is equal
to 40% of the total equity of the Holding Company (i.e., at the rate of
approximately $15.57 of Principal Amount per Conversion Share (the "Post-Option
Ratio")) as of the date of the Debentures (taking into account the conversion of
the Initial Principal Amount of the Debentures, the exercise of all of the
outstanding options, including the Option, and warrants exercisable for shares
of New Common Stock and the conversion of all other securities convertible into
shares of New Common Stock).
If the Option has not been exercised for shares of New Common Stock prior
to the date of conversion of all of the Initial Principal Amount of the
Debentures into Conversion Shares, the number of Conversion Shares issuable to
the holder upon conversion of the Initial Principal Amount of the Debentures
will be 1,400,116 (i.e., at the rate of approximately $21.43 of Principal Amount
per Conversion Share (the "Pre-Option Ratio")) which is equal to 40% of the
total equity of the Holding Company as of the date of the Debentures (taking
into account the conversion of the Initial Principal Amount of the Debentures,
the exercise of all options, other than the Option, and warrants exercisable for
shares of New Common Stock and the conversion of all other securities
convertible into shares of New Common Stock). In the event the Initial Principal
Amount of the Debentures is converted in part, the holder shall receive a pro
rata portion of the Conversion Shares, calculated in accordance with either the
Post-Option Ratio (in the event the Option has been exercised) or the Pre-Option
Ratio (in the event the Option has not been exercised). In the event of any
inaccuracy in certain representations and warranties of the Holding Company set
forth in the Debentures with respect to the outstanding equity securities of the
Holding Company or any subsequent issuance of securities by the Holding Company
without the consent of the holder of the Debentures in contravention of the
terms thereof, the number of shares of New Common Stock into which the Principal
Amount of the Debentures is convertible shall be increased according to a
formula described in the Debentures (See Appendix B). In order to exercise its
conversion right, the holder of the Debentures will surrender the Debentures,
together with a notice of conversion indicating the portion of the Principal
Amount converted into Conversion Shares, to the Holding Company.
The Debentures shall have been deemed to have been surrendered for
conversion and converted at the close of business on the date on which the
Debentures and notice of conversion from the holder thereof are received by the
Holding Company, and on such receipt the Holding Company will issue and deliver
at its sole expense, as soon as practicable after such date, a certificate or
certificates of its New Common Stock evidencing the number of shares into which
the Debentures have been converted to the holder thereto.
No fractional shares shall be issued on conversion of the Debentures. If
upon any conversion of the Debentures the holder thereof would be entitled to
recover a fraction of a share of New Common Stock, such fraction of a share
shall be rounded up or down, as the case may be, to the nearest whole number of
shares of New Common Stock.
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In the event of any change in New Common Stock by reason of a stock
dividend, stock split, merger, recapitalization, combination, exchange of
shares, issuer tender offer or share repurchase or other similar transaction,
the type and number of shares or securities into which the Debentures are
convertible shall be adjusted appropriately; provided, however, that no such
adjustment shall occur by reason of consummation of the Exchange Offer, the Cash
Offer, the Purchase Offer or the Holding Company Offer.
Ranking of Debentures The obligation of the Holding Company to repay the
Principal Amount and accrued interest under the Debentures is subordinated to
all other indebtedness of the Holding Company and its subsidiaries. No payments
may be made, in respect of all or any portion of the Principal Amount or
interest thereon, except with the prior approval of the DOI. Such approval may
not be withheld if the Holding Company or HSI provides the DOI with notice at
least 10 business days in advance of any such payments that the Holding
Company's minimum statutory surplus exceeds 125% of the Holding Company's
minimum net worth requirement, unless the DOI reasonably determines that the
Holding Company's financial condition would be impaired as a result of such
payment. The Principal Amount shall be suspended and shall not mature to the
extent the Holding Company's minimum net worth requirement as determined by the
DOI and the DOH is inadequate to make interest payments on the Debentures.
The Holding Company and HSI have agreed that only the $30,000,000 Initial
Principal Amount shall initially be considered statutory surplus under relevant
regulations promulgated by the DOI, and any additional amounts of the Principal
Amount shall be considered such statutory surplus only upon the approval of the
DOI.
Upon any bankruptcy, dissolution or liquidation of the Holding Company,
the Debentures shall thereupon be deemed to be converted into Conversion Shares
and shall thereupon be treated as pari passu with then-outstanding shares of
capital stock of the Holding Company.
Additional Principal In the event that any deferred amounts owed to HSI
under the General Administrative Services Management Agreement become no longer
subject to such deferral as a result of the attainment of the minimum statutory
surplus requirements set forth in the General Administrative Services Management
Agreement, and such amounts are not paid despite the inapplicability of such
deferral (other than as a direct result of the actions of HSI thereunder), such
amounts (referred to herein as the "Unpaid Management Fees") may, at the option
of the holder thereof by notice provided to the Holding Company, be added to,
and shall thereupon become part of, the Principal Amount.
In the event the Holding Company becomes obligated to make one or more
indemnification payments to HSI under the Securities Purchase Agreement, whether
due to breach of a representation or warranty or otherwise, then the amount of
such indemnification payment or indemnification payments (referred to herein as
the "Indemnification Obligations") may, at the option of the holder thereof by
notice provided to the Holding Company, be added to, and shall thereupon become
part of, the Principal Amount; provided, however, that in no event may the
holder thereof cause the amount of such indemnification payment to be so added
to the Principal Amount until the date that is the later of (i) one year from
the time HSI first made its claim under the Securities Purchase Agreement with
respect to such indemnification payment, or (ii) six months after adjudication
of such claim.
In the event that HSI elects to require the Holding Company to make the
Holding Company Offer, the amount of the loan provided to the Holding Company by
HSI to effect such repurchase may, at the option of the holder of the
Debentures, be, and shall thereupon become, part of the Principal
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Amount with appropriate and mutually-agreed upon tax-effected interest rate
adjustments so that the Holding Company is not economically disadvantaged by
such election of HSI together with appropriate undertakings of the Holding
Company to indemnify HSI for any adverse tax consequences resulting from such
interest rate adjustment; provided, that the increased Principal Amount of the
Debentures must be converted into New Common Stock at the earlier of (i)
immediately prior to the New Debenture Conversion Time (as defined below) or
(ii) one day prior to the Maturity Date. "New Debenture Conversion Time" shall
mean the time of conversion into New Common Stock of the increased principal
amount added to the Debentures, or new convertible subordinated surplus
debentures (if any) issued to HSI pursuant to the Securities Purchase Agreement.
Affirmative Covenants From and after the date of the Debentures until the
Maturity Date or the conversion of the Debentures, whichever comes first, the
Holding Company shall comply with and perform each of the following covenants
and agreements: (i) the Holding Company will furnish to HSI copies of certain
financial statements, reports and information; (ii) the Holding Company will
duly pay and discharge, as they become due and payable, all taxes, assessments
and governmental and other charges, levies or claims levied or imposed, which
are, or which if unpaid might become, a lien or charge upon the properties,
assets, earnings or business of the Holding Company or any of its subsidiaries;
provided, however, that nothing contained in the Debentures shall require the
Holding Company to pay and discharge, or cause to be paid and discharged, any
such tax, assessment, charge, levy or claim so long as the Holding Company in
good faith shall contest the validity thereof and shall set aside on its books
adequate reserves with respect thereto; (iii) as long as the Debentures are
outstanding, the holder thereof shall have the right to approve the accounting
firm retained or to be retained by the Holding Company to render accounting
advice thereto (such approval not to be unreasonably withheld); (iv) the Holding
Company will, and will cause each of its subsidiaries to, at all times do or
cause to be done all things necessary to maintain, preserve and renew its
corporate charter and its rights, and comply in all material respects with all
related laws applicable to the Holding Company and such subsidiary; provided,
however, that nothing contained in the Debentures shall (x) require the Holding
Company or such subsidiary to maintain, preserve or renew any right not material
in the conduct of the business of the Holding Company or such subsidiary, (y)
prevent the termination of the corporate existence of any subsidiary of the
Holding Company if, in the reasonable opinion of the Board of Directors of the
Holding Company, such termination is not disadvantageous to the holder thereof
or (z) require the Holding Company or such subsidiary to comply with any law so
long as the validity or applicability thereof shall be contested in good faith
by appropriate proceedings; (v) the Holding Company will as soon as practicable
give written notice to the holder thereof of any litigation, arbitration or
governmental investigation or proceeding, which has been instituted or, to the
knowledge of the Holding Company, is threatened against the Holding Company or
any of its subsidiaries, or any of their respective properties, which (x)
involves or is likely to involve a claim or claims for damages, penalties or
awards in excess of $100,000 in the case of claims for which the Holding Company
is not adequately insured or in excess of $300,000 in the case of claims for
which the Holding Company is adequately insured, (y) if determined adversely to
the Holding Company or such subsidiary would have a material adverse effect
thereon, or (z) relates to the Securities Purchase Agreement or any documents
executed pursuant thereto; (vi) the Holding Company will provide or cause to be
provided for itself and its subsidiaries insurance against loss or damage of the
kinds customarily insured against by corporations similarly situated, with
reputable insurers, in such amounts, with such deductibles and by such methods
as shall be adequate, and in no event involving material differences from the
insurance currently generally maintained; (vii) the Holding Company will keep
true books of records and accounts in which full and correct entries in all
material respects will be made of all its business transactions and the business
transactions of its subsidiaries, and will reflect in its financial statements
adequate accruals and appropriations to reserves, all in accordance with
generally accepted accounting principles ("GAAP") (subject to
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customary and reasonable year-end adjustments) and as otherwise required by the
DOI; (viii) the Holding Company will, and will cause each of its operating
subsidiaries to, comply with all applicable statutes, rules, regulations, orders
and restrictions relating to federal, state and local laws and of any
governmental department, commission, board, regulatory authority, bureau, agency
and instrumentality with respect thereto, and of any court, arbitrator or other
body with jurisdiction and authority, in respect of the conduct of the
respective businesses thereof and the ownership of their respective properties,
except those, the violations of which would not have a material adverse effect
thereon and except such as are being contested in good faith; and (ix) the
Holding Company shall have an immediate obligation to report to the holder
thereof the occurrence of any Event of Default (as defined below) or any event
which with the giving of notice or the passage of time, or both, would
constitute any such Event of Default.
Board Position Prior to full conversion of the Debentures and while they
are outstanding, HSI shall be permitted to designate directors representing (i)
no less than 15% of the directors on the Board of Directors of the Holding
Company and the boards of directors of each of the Holding Company's
subsidiaries or (ii) such greater percentage of the directors as the Board of
Directors of the Holding Company and the boards of directors of each of the
Holding Company's subsidiaries as is equal to the percentage ownership by HSI of
all outstanding New Common Stock in the event such percentage exceeds 15%. Upon
conversion of the entire Principal Amount, HSI, through its ownership of
Conversion Shares, shall be permitted to designate and elect such number of the
directors on the Board of Directors of the Holding Company and the boards of
directors of each of the Holding Company's subsidiaries as is equal to HSI's
percentage ownership of all outstanding New Common Stock, with such number of
directors to be increased as such ownership may be increased from time to time
notwithstanding any "staggered term" or other conflicting provision. In no event
shall the number of directors of the Board of Directors of the Holding Company
or the board of directors of any of the Holding Company's subsidiaries exceed 12
without the prior written consent of the holder thereof (subject to the
requirements set forth in the proposed By-laws of the Holding Company that,
during the period specified therein, there are at least three directors on the
Board who are not designees of HSI).
Letters of Credit The Holding Company shall not draw any amounts under any
letter of credit during the period when the Debentures are outstanding unless so
required by either the DOI or the DOH. In such event, all amounts so drawn shall
be placed and maintained in a separate and segregated account from which the
funds shall be used to satisfy in full all the obligations relating to letters
of credit.
Negative Covenants From and after the date of the Debentures, the Holding
Company shall not, and shall cause its operating subsidiaries to not, do any of
the following: (i) sell, lease, transfer or otherwise dispose of all or a
substantial portion of its assets (other than in connection with the sale of
securities issued by the United States government the proceeds of which are used
to purchase additional securities of the United States government); (ii) without
the prior written consent of the holder of the Debentures, consolidate with or
merge into any other person or entity or permit any other person or entity to
consolidate with or merge into it; provided, however, that a subsidiary of the
Holding Company may consolidate with or merge into the Holding Company or a
wholly-owned subsidiary of the Holding Company; (iii) acquire, by asset or stock
purchase, merger or otherwise, the assets or stock of any other corporation or
partnership without the prior written consent of the holder thereof; (iv)
create, incur, assume or suffer to exist any indebtedness for borrowed money
("Borrowed Money") after the date of the Debentures except for (a) Borrowed
Money evidenced by the Debentures, (b) other Borrowed Money, incurred with the
consent of the holder thereof, the proceeds of which are used in the ordinary
course of business of the Holding Company or a subsidiary, as the case may be;
(v) cause or permit any of its assets or properties, whether now owned or
hereafter
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acquired, to be subject to any liens or encumbrances except in the ordinary
course of business of the Holding Company or a subsidiary, as the case may be;
(vi) become liable as a guarantor, or otherwise, without the prior written
consent of the holder of the Debentures, except for guarantees provided as to
obligations of a wholly-owned subsidiary of the Holding Company; or (vii)
without the prior written consent of the holder of the Debentures (a) except as
otherwise expressly contemplated by the Option Agreement, declare or pay any
dividend or make any other distributions on any shares of the Holding Company's
capital stock, (b) except as otherwise permitted by the Securities Purchase
Agreement, redeem, purchase or otherwise acquire for value any shares of the
Holding Company's capital stock or any warrants, rights or other options to
purchase such capital stock, or (c) except as otherwise permitted by the
Securities Purchase Agreement, permit its ownership of voting capital stock of
any subsidiary of the Holding Company to be less than 100%.
In addition, except as otherwise expressly contemplated by the Debentures
or by the Option Agreement, the Holding Company will not, without the prior
written consent of the holder of the Debentures, issue any additional shares of
New Common Stock or any other capital stock of the Holding Company, or any
options, stock appreciation rights, warrants or other rights to acquire the New
Common Stock or any interest therein, or other rights to acquire authorized and
unissued shares of capital stock of the Holding Company, or modify terms of
existing securities so as to in any manner dilute the existing conversion rights
of the holder thereof. Further, neither the Holding Company nor any of its
subsidiaries shall take any of the following actions or engage in any of the
following transactions without the prior written consent of the holder thereof:
(i) amend its certificate of incorporation or bylaws; (ii) make capital
expenditures (including such expenditures made by the Holding Company and its
subsidiaries) exceeding, in the aggregate, $1,000,000 during any calendar year;
(iii) make any material change in the scope of the business of the Holding
Company; (iv) file for receivership, dissolution, liquidation or bankruptcy; (v)
acquire equity securities (other than pursuant to a buy back or repurchase of
equity securities issued by the Holding Company) or assets of any other person
or entity involving payments aggregating in excess of $1,000,000 during any
calendar year; (vi) file a registration statement with respect to the public
sale of securities of the Holding Company under the Securities Act; or (vii)
enter into, assume or become bound by any agreement to do any of the foregoing
or otherwise attempt to do any of the foregoing.
Events of Default An "Event of Default" shall exist if any of the
following occurs and is continuing:
(i) Default is made by the Holding Company on a payment of the Principal
Amount or interest on the Debentures, when and as such Principal Amount and
interest shall become due and payable;
(ii) Default is made in the performance or observance of any covenant,
condition, undertaking or agreement contained in the Debentures or in the
Securities Purchase Agreement (other than any defaults relating to actions taken
by, or omissions of, HSI in connection with the performance of its obligations
under the Management Agreements (as hereinafter defined)), and such default
shall continue for 20 days without being cured after the holder thereof provides
to the Holding Company written notice of such default;
(iii) Any warranty, representation or other statement made by or on behalf
of the Holding Company contained in the Debentures or in the Securities Purchase
Agreement is false or misleading in any material respect at the time such
warranty, representation or other statement, as the case may be, was made;
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(iv) The Holding Company or any of its subsidiaries shall (a) files a
petition seeking relief for itself under the United States Bankruptcy Code, as
now constituted or hereafter amended from time to time, or files an answer
consenting to, admitting the material allegations of or otherwise not
controverting, or fails timely to controvert, a petition filed against the
Holding Company seeking relief under the United States Bankruptcy Code, or (b)
files a petition or answer with respect to relief under the provisions of any
other now-existing or future applicable bankruptcy, insolvency or other similar
law of the United States or any state thereof or of any other country or
province thereof or jurisdiction providing for the reorganization, winding-up or
liquidation of corporations or an arrangement, composition, extension or
adjustment with creditors;
(v) (a) An order for relief is entered against the Holding Company or any
of its subsidiaries under the United States Bankruptcy Code, which order is not
stayed and remains unstayed for a period of 45 days, (b) the entry of an order,
judgment or decree by operation of law or by a court or by the DOI having
jurisdiction in the premises which is not stayed and remains unstayed for a
period of 45 days (1) adjudging the Holding Company bankrupt or insolvent under,
or ordering relief against the Holding Company under, or approving a
properly-filed petition seeking relief against the Holding Company or under, the
provisions of any other now existing or future applicable bankruptcy, insolvency
or other similar law of the United States or any state thereof or of any other
country or province thereof or jurisdiction providing for the reorganization,
winding-up or liquidation of corporations or any arrangement, composition,
extension or adjustment with creditors, (2) appointing a receiver, supervisor,
liquidator, assignee, sequestrator, trustee or custodian of the Holding Company
or any of its subsidiaries or of any substantial portion of the property of the
Holding Company or any such subsidiaries, or (3) ordering the reorganization,
winding-up or liquidation of the affairs of the Holding Company or any of its
subsidiaries, or (c) the expiration of 60 days after the filing of any
involuntary petition against the Holding Company or any of its subsidiaries
seeking any of the relief specified in paragraph (iv) above or this paragraph
(v) without dismissal of such petition; or
(vi) The Holding Company or any of its subsidiaries shall (a) makes a
general assignment for the benefit of creditors, (b) consent to the appointment
of, or taking possession of all or a substantial part of the property of the
Holding Company or any such subsidiary by, a receiver, supervisor, liquidator,
assignee, sequestrator, trustee or custodian of the Holding Company or any such
subsidiary, (c) admits its insolvency or inability to pay its debts generally as
such debts become due, (d) fails generally to pay its debts as such debts become
due or (e) takes any action (including such actions taken by the Holding
Company's directors or a majority of the Holding Company's shareholders)
regarding the dissolution or liquidation of the Holding Company or any such
subsidiary.
Remedies In case any one or more of the Events of Default shall have
occurred and be continuing, the holder of the Debentures shall have the right to
accelerate payment of the entire Principal Amount, and all interest accrued
thereon, and, upon such acceleration, such Principal Amount and interest shall
thereupon become immediately due and payable, without any presentment, demand,
protest or other notice of any kind, and the Holding Company shall forthwith pay
to the holder of the Debentures the entire then outstanding Principal Amount,
and interest accrued thereon, due pursuant to the Debentures; provided, however,
that any such payment by the Holding Company must be in accordance with the
provisions described above under the caption "Ranking of Debentures."
The Option Agreement
HSI's obligation to consummate the Closing is conditioned upon, among
other things, the Holding Company entering into the Option Agreement attached as
Appendix C to this Proxy Statement (the "Option Agreement"). Presented below is
a summary of certain provisions of the
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Option Agreement. The summary does not purport to be complete and is qualified
in its entirety by reference to the Option Agreement.
Under the terms of the Option Agreement, HSI will be entitled to purchase
a number of shares (the "Option Shares") of New Common Stock that shall be
determined as follows: If all of the Initial Principal Amount of the Debentures
have been converted into shares of New Common Stock prior to the date of
exercise of the Option for Option Shares, the number of Option Shares issuable
to HSI upon exercise of the Option will be 785,779, which shall be equal to 11%
of the New Common Stock of the Holding Company on a fully diluted basis as of
the date of the Option Agreement (assuming the exercise of the Option, and all
of the outstanding options and warrants exercisable for shares of New Common
Stock and the conversion of all other securities, including the Debentures,
convertible into shares of New Common Stock). If none of the Debentures have
been converted into shares of New Common Stock prior to the date of exercise of
the Option for Option Shares, the number of Option Shares issuable to HSI upon
exercise of the Option will be 259,572, which shall be equal to 11% of the total
equity of the Holding Company as of the date of the Option Agreement (taking
into account the exercise of the Option, all of the outstanding options and
warrants exercisable for shares of New Common Stock and the conversion of all
other securities convertible into shares of New Common Stock other than the
Initial Principal Amount of the Debentures). Under the terms of the Option
Agreement, the Holding Company will represent and warrant that all of the
foregoing numbers of Option Shares into which the Option is convertible shall
represent the percentages of total equity of the Holding Company as set forth
above. In the event the Initial Principal Amount of the Debentures is converted
into New Common Stock, HSI shall receive, upon exercise of the Option, an
appropriately adjusted number of Option Shares calculated in accordance with the
applicable formula set forth in this paragraph so that the conversion of the
Initial Principal Amount of the Debentures pursuant to the Post-Option Ratio
would enable HSI to own such number of shares of New Common Stock (without
taking into account New Common Stock acquired by HSI other than pursuant to
exercise of the Option or conversion of the Initial Principal Amount of the
Debentures) as represents 51% of the New Common Stock of the Holding Company, on
a fully diluted basis, as of the date of the Option Agreement. In the event of
any subsequent issuance of securities of the Holding Company without the prior
written consent of HSI, the number of Option Shares which may be purchased under
the Option Agreement shall be increased such that the right of HSI to purchase
such New Common Stock takes into account the securities subsequently issued by
the Holding Company; provided, however, that no such adjustment shall be made if
HSI shall have previously made a claim for indemnification or declared an event
of default under the Securities Purchase Agreement or the Debentures.
The Option shall represent the right to acquire the Option Shares at a
purchase price (the "Purchase Price") determined in accordance with either of
the following, at the option of HSI:
(i) $8,250,000 minus the product of $3.93 multiplied by the number of
shares of New Common Stock purchased by HSI in the Purchase Offer or redeemed by
the Holding Company in the Holding Company Offer, as the case may be. Such
amount shall be distributed to the Holding Company's shareholders (other than
HSI) as soon as practicable upon exercise of the Option in the event that HSI
enters into an agreement with Sierra for an assignment to HSI (the "Sierra
Assignment") of Sierra's rights (including, without limitation, rights to
receive payments) under the Sierra Agreement; or
(ii) in the event that HSI does not enter into the Sierra Assignment, then
either (A) $8,250,000 minus the product of $3.93 multiplied by the number of
shares of New Common
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Stock purchased by HSI in the Purchase Offer or redeemed by the Holding Company
in the Holding Company Offer, as the case may be, which amount shall be
distributed to the Company's shareholders (other than HSI) as soon as
practicable following the accumulation of retained earnings by the Holding
Company from and after the Closing in excess of (x) the amount required for full
satisfaction of all payments due to Sierra under the Sierra Agreement or (y) the
amount of a reserve established by the Holding Company and HSI for payments due
to Sierra under the Sierra Agreement, or (B) $11,250,000 minus the product of
$3.93 multiplied by the number of shares of New Common Stock purchased by HSI in
the Purchase Offer or redeemed by the Holding Company in the Holding Company
Offer, as the case may be, which amount less (x) an amount paid by the Holding
Company to satisfy in full Sierra's rights to payment under the Sierra Agreement
or, if such rights are not satisfied in full, (y) an amount equal to a reserve
established by the Holding Company and HSI for payments due to Sierra under the
Sierra Agreement, may be distributed to the Holding Company's shareholders
(other than HSI) as soon as practicable following such payment in full or
reserve establishment.
The Option may be exercised at any time (a) subsequent to the later of (1)
the New Debenture Conversion Time or (2) the second consecutive calendar quarter
in which administrative costs incurred by the Holding Company (including the
Management Fee (as such fee is defined in the General Administrative Services
Management Agreement)) represent less than the SG&A Target (as such term is
hereinafter defined) and (b) on or before five years from the Closing of the
Securities Purchase Agreement. HSI may elect to (i) reduce the amount of the
Management Fee otherwise payable (or refund all or a portion of the Management
Fees previously paid) or (ii) agree in writing to reduce future Management Fee
payments required under the General Administrative Services Management Agreement
in the next two succeeding calendar quarters for purposes of calculation of the
administrative costs incurred by the Holding Company described above; provided,
however, that no such reduction in the Management Fee shall exceed an amount
equal to 0.5% of full-risk medical premium revenue. For purposes of the Option
Agreement, SG&A Target shall mean 12.5% of the ratio of administrative expenses
to medical premiums. The following cost categories shall be excluded for
purposes of calculating administrative expenses: (i) administrative expenses for
non-risk business (which are estimated to be 90% of ASO/TPA/PPO access/other
non-risk revenue ("Non-Risk Revenue")), (ii) medical affairs, quality
management, utilization management and other clinical functions, (iii) broker
commissions, (iv) interest expense, (v) premium tax and (vi) extraordinary
administrative expense items approved by the Holding Company. The SG&A Target
shall be calculated based on full-risk medical premium revenue (exclusive of
interest and Non-Risk Revenue) and net of broker commissions. The SG&A Target
shall be increased by .1% for every $10,000,000 reduction in annualized
full-risk medical premiums below $250,000,000.
The Option may be exercised in whole but not in part. If HSI wishes to
exercise the Option, it shall, during the Option Period, deliver written notice
to the Holding Company (the date of such notice being referred to herein as the
"Notice Date"), specifying a date not earlier then the fifth business day
immediately following the Notice Date nor later than thirty (30) business days
from the Notice Date for the exercise of the Option and the purchase of shares
of New Common Stock as a result of such exercise.
In the event of any change in New Common Stock by reason of a stock
dividend, stock-split, merger, recapitalization, combination, exchange of shares
or the like, the type and number of shares or securities subject to the Option
shall be adjusted appropriately; provided, however, that no such adjustment
shall occur by reason of the Exchange Offer, the Cash Offer, the Purchase Offer
or the Holding Company offer.
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The Management Agreements
HSI's obligation to consummate the Closing is conditioned upon, among
other things, the Holding Company entering into (i) the General Administrative
Services Management Agreement ("Administrative Management Agreement") with HSI,
and, at HSI's option, (ii) the Management Information Systems and Claims
Processing Services Management Agreement ("MIS Management Agreement") (together,
the "Management Agreements") with HSI. Presented below is a summary of certain
provisions of the Management Agreements, which are attached hereto as Appendices
D and E to this Proxy Statement. This summary does not purport to be complete
and is qualified in its entirety by reference to the Management Agreements.
General Each of the Management Agreements provides that HSI will employ
the business executives in charge of the Holding Company and each of its
subsidiaries, and each executive in charge of a principal business division,
unit or function (including, but not limited to finance, legal, operations,
sales and marketing, information systems, medical management, and provider
contracting and relations) (collectively, the "Executives"). Each of the
Executives will report to HSI's senior management. All the Executives shall be
appointed by the Holding Company's Board of Directors to the offices requested
by HSI; provided, however, that the Board may reject any proposed appointee it
reasonably finds to be of insufficient ethical character for such office; and
provided further, that the Board may, after due consultation with HSI, based on
a reasonable determination of intentional and material unethical behavior or
insubordination or wilful misconduct or gross negligence, remove any such
Executive. Further, each of the Management Agreements provides that the Holding
Company will continue to employ an internal auditor who will report directly to
the Board of Directors and who will perform functions consistent with those
performed thereby prior to the Closing Date.
Terms Each of the Management Agreements shall have an initial term of 5
years, subject to automatic one year renewal terms unless either party provides
written notice of non-renewal to the other party at least two years prior to the
then current term of the agreement. Each of the Management Agreements will
terminate if (i) either party is in material breach of the agreement (subject to
certain rights to cure any such breach); (ii) either party (a) becomes
insolvent, (b) voluntarily seeks, consents to or acquiesces in the benefit or
benefits of any Debtor Relief Law (as defined in the Management Agreements) or
(c) becomes a party to (or be made the subject of) any proceeding provided by
any Debtor Relief Law, other than as a creditor or claimant (unless, in the
event the proceeding is voluntary, the petition instituting the voluntary
proceeding is dismissed within 45 days of the date it was filed).
The Administrative Management Agreement will not become effective prior to
the receipt of all necessary government approvals; provided, however, that in
the event the Closing of the Securities Purchase Agreement occurs prior to or on
January 31, 1997, the Administrative Management Agreement shall be deemed to be
effective for purposes of the Holding Company's obligation to pay fees under
such agreement to HSI as of January 1, 1997. The MIS Management Agreement shall
not become effective until the later of (i) the receipt of all necessary
government approvals, (ii) the receipt by the Holding Company from HSI of notice
of effectiveness of such agreement and (iii) the termination of the HSII
Agreement.
Compensation Under the Administrative Management Agreement As compensation
under the Administrative Management Agreement, HSI will receive a monthly
management fee (the "Management Fee") equal to the sum of:
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(i) (a) Year one - 2% total revenue of the Holding Company and its
subsidiaries (collectively, the "FOHP Health Plans"), less investment income
earned by the FOHP Health Plans (such net amount being referred to herein as
"Net Revenue"), and
(b) Year two and thereafter - (1) for that portion of Net Revenue of
the FOHP Health Plans which does not exceed $300,000,000, an amount equal to the
product of (A) the difference between (x) the SG&A Target (i.e., 12%) and (y)
the FOHP Actual SG&A Amount (as defined below), but in no event a percentage
higher than 2% or lower than 1.5%, multiplied by (B) the portion of Net Revenue
of the FOHP Health Plans which does not exceed $300,000,000, (2) for that
portion of Net Revenue of the FOHP Health Plans which exceeds $300,000,000 but
is no greater than $500,000,000, an amount equal to the product of (A) the
difference between (x) the SG&A Target (i.e., 12%) and (y) the FOHP Actual SG&A
Amount, but in no event a percentage higher than 2% or lower than 1%, multiplied
by (B) the portion of Net Revenue of the FOHP Health Plans which exceeds
$300,000,000 but is not greater than $500,000,000, and (3) for that portion of
Net Revenue of the FOHP Health Plans which exceeds $500,000,000, an amount equal
to the product of (A) the difference between (x) the SG&A Target (i.e., 12%) and
(y) the FOHP Actual SG&A Amount, but in no event a percentage higher than 1.75%
or lower than 1%, multiplied by (B) the portion of Net Revenue of the FOHP
Health Plans which exceeds $500,000,000 plus
(ii) reimbursement for (a) direct expenses incurred by third parties and
(b) salaries and benefits of the Executives employed by HSI in accordance with
the Administrative Management Agreement.
The "SG&A Target" shall mean a ratio of administrative expenses to
full-risk medical premiums equal to 12%. The "FOHP Actual SG&A Amount" shall
mean the ratio of FOHP's actual administrative expenses (exclusive of the
Management Fee described above) to its actual full-risk medical premiums. The
following cost categories shall be excluded for purposes of calculating
administrative expenses: (i) administrative expenses for non-risk business
(which are estimated to be 90% of Non-Risk Revenue, (ii) medical affairs,
quality management, utilization management and other clinical functions, (iii)
broker commissions, (iv) interest expense, (v) premium tax and (vi)
extraordinary administrative expense items approved by the Board. The SG&A
Target and FOHP Actual SG&A Amount shall be calculated based on full-risk
medical premium revenue (exclusive of interest and Non-Risk Revenue) and net of
broker commissions.
At the end of each month during the term of the Administrative Management
Agreement, HSI shall provide the Holding Company with statements setting forth
the Management Fee for such month supported by HSI's estimate of the annualized
Net Revenue, FOHP Actual SG&A Amount and the SG&A Target for such month. The
Management Fee for any month shall become payable within 10 days after receipt
by the Holding Company from HSI of the statements for such month; provided,
however, that payments of the Management Fee would be deferred at any point at
which the FOHP Health Plan's minimum statutory surplus falls beneath 125% of the
Holding Company's minimum net worth requirement as determined by the DOI and the
DOH. The amount of the deferral shall bear interest thereon at an annual rate
equal to the rate charged to HSI under its credit facility issued by a
consortium of commercial banks led by Bank of America NT & SA, which rate shall
be subject to adjustment at the beginning of each calendar quarter. The amount
of the deferral and such interest shall become due and payable with respect to
any given calendar quarter within 10 days after the end of such quarter but
shall be similarly so deferred in the event and to the extent that the Holding
Company fails to satisfy FOHP-NJ's statutory net worth requirement. Upon
completion of the audit of the Holding Company for each calendar year, the
monthly Management Fee payments shall be reconciled with the audited financial
statements, and an appropriate adjustment payment shall be made to or from the
Holding Company as soon as reasonably practicable.
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In the event that HSI establishes a regional or centralized multi-entity
system relating to functions ordinarily and customarily handled at the plan
level and not described in the MIS Management Agreement (such as plan level
accounting and membership services), HSI shall have the right to transfer such
functions performed by the FOHP Health Plans to such regional system, in which
case the Holding Company shall be obligated to pay to HSI the share of such
regional systems costs incurred by HSI with respect to such function which is
allocable to the FOHP Health Plans; provided however, the regionalization or
centralization of functions by HSI must result, in the aggregate, in cost
savings to the FOHP Health Plans and any data processing functions performed
under such regionalization or centralization shall not cost more than what is
contemplated under the HSII Agreement.
In the event compensation and accumulated interest under the
Administrative Management Agreement become due and payable, but is not timely
paid by the Holding Company to HSI (other than as a result of a deferral due to
failure to satisfy the net worth requirement described above), at HSI's option
such unpaid compensation and accumulated interest may be added to the Principal
Amount of the Debentures.
Compensation Under MIS Management Agreement As compensation under the MIS
Management Agreement, the Holding Company will (i) pay HSI fees and charges to
be specified by HSI upon the effectiveness of the agreement, which fees and
charges shall be no greater than the compensation currently paid to HSII
pursuant to the HSII Agreement and (ii) reimburse HSI for such costs and
expenses as to which HSII is entitled to reimbursement under the HSII Agreement
and documents related thereto.
Services Provided Under Administrative Management Agreement HSI is
required to provide and perform the following services, subject to the direction
of the FOHP Health Plans and consistent with the manner in which HSI provides
such services to its own subsidiaries, without disadvantage to the Holding
Company or the FOHP Health Plans: (i) manage the diagnosis and assessment of the
information/operating systems of the FOHP Health Plans and provide support for
all necessary conversions, supplements and enhancements to such systems; (ii)
manage the FOHP Health Plans in their provider contracting efforts and provider
relations matters, including the establishment of appropriate provider
reimbursement structures; (iii) provide human resources and employee benefit
corporate management services to the FOHP Health Plans in recruiting employees
and in implementing personnel policies and procedures and employee benefit
programs; (iv) provide consultation and assistance to the FOHP Health Plans in
connection with governmental relations and legislative activities (including
regulatory compliance matters) affecting the FOHP Health Plans; (v) provide
consultation and assistance to the FOHP Health Plans in conducting analyses of
the marketplace in which they operate and in developing an appropriate strategic
plan; (vi) provide consultation and assistance to the FOHP Health Plans in
connection with the development and dissemination of enrollment and disclosure
materials for enrollees thereof, employers and other groups contracting with any
of the FOHP Health Plans and other third parties; (vii) provide administrative
support to the FOHP Health Plans in the formulation, review and implementation
of the utilization review and quality assurance programs thereof; (viii) provide
consultation and assistance to the FOHP Health Plans in connection with
protecting the confidentiality of the records thereof and ensuring compliance
with all applicable federal, state and local laws and regulations relating to
the records thereof; (ix) consult with and assist the FOHP Health Plans in
support of the medical management policies and procedures thereof, in preparing
and negotiating contracts with participating providers, subscriber groups,
vendors and other third parties; (x) provide consultation and assistance to the
FOHP Health Plans in the preparation of the annual budget thereof, which will
set forth their major operating objectives, anticipated revenues, expenses, cash
flow and capital expenditures; (xi) provide oversight management to the FOHP
Health Plans in recording and analyzing the financial condition thereof,
including financial review and
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analysis of health care costs incurred thereby and assist in the preparation of
appropriate federal, state and local tax returns and provide the FOHP Health
Plans with advice as to appropriate tax accruals; (xii) provide consultation and
assistance to the FOHP Health Plans in the establishment, review and
modification of collection policies and programs designed to minimize the number
and amount of outstanding accounts receivable thereof; (xiii) provide
consultation and assistance in implementing the FOHP Health Plans' premium
structures, which premium structures shall take into account the financial
obligations of the FOHP Health Plans, the importance of providing quality health
care at a reasonable cost and competition of the FOHP Health Plans and the
service areas; (xiv) give advice to the FOHP Health Plans concerning various
business insurance programs, including but not limited to, professional
liability insurance, directors and officers liability insurance, reinsurance and
workers' compensation insurance; (xv) provide consultation and assistance to the
FOHP Health Plans in connection with the sales and marketing efforts of the FOHP
Health Plans, including assistance with regard to the selection of advertising
agencies, the conduct of surveys respecting the satisfaction of subscriber
groups and enrollees of the FOHP Health Plans and the FOHP Health Plans' sales
programs and techniques; (xvi) provide to the FOHP Health Plans actuarial and
data analysis services, and assistance in the development of underwriting
standards; (xvii) assist the Boards of Directors of the Holding Company and its
subsidiaries in reviewing the short, medium and long range objectives of the
FOHP Health Plans and in formulating recommendations with respect thereto; and
(xviii) provide such other services, not specifically mentioned herein, that are
mutually agreed upon between the parties.
Services Provided Under MIS Management Agreement HSI shall provide and
perform the following services under the MIS Management Agreement: (i) provide
all claims processing, record keeping and data processing services to the FOHP
Health Plans that are currently provided by HSII pursuant to the HSII Agreement;
and (ii) provide such other related services as are mutually agreed upon between
the parties.
Indemnification Under each of the Management Agreements, HSI will defend,
indemnify and hold the FOHP Health Plans and, among others, their respective
officers, directors, shareholders, employees and agents, from and against any
and all claims, actions, damages, obligations, losses, liabilities, costs and
expenses, including attorneys' fees, other professional fees, costs of
collection and other costs of defense ("Management Agreement Damages"),
resulting from HSI's gross negligence or willful misconduct. In addition, the
Holding Company has agreed to defend, indemnify and hold HSI and, among others,
its officers, directors, shareholders, employees and agents, from and against
any and all Management Agreement Damages resulting from HSI's execution of the
Management Agreements or performance of services thereunder, provided that no
such indemnification shall be provided to the extent that such Management
Agreement Damages result from HSI's gross negligence or willful misconduct.
Certain Voting Arrangements
The Holding Company and HSI have entered into an the Investors
Agreement pursuant to which HSI has agreed not to, and to cause its designees
appointed to the Holding Company's Board of Directors ("HSI Designees") in
accordance with the Debentures not to, take any action to nominate any persons
who are not HSI Designees or who were not nominated by a majority of the
directors who are not HSI Designees ("Independent Designated Non-HSI
Designees"). During the term of the Investors Agreement, HSI shall not vote any
of its shares of New Common Stock of the Holding Company or any other voting
securities of the Holding Company over which HSI has voting control, for any
nominees to the Holding Company's Board of Directors other than the HSI
Designees and the Independent Designated Non-HSI Designees. The Investors
Agreement will terminate at the earlier
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of (i) such time as HSI shall own no New Common Stock of the Holding Company and
no securities of the Holding Company exercisable or convertible into shares of
New Common Stock of the Holding Company and (ii) such time as Article III of the
Holding Company's By-laws has been amended to delete the requirement that
directors be elected to the Holding Company's Board of Directors who are not
designees of HSI.
Consequences if Transaction is Not Approved
If a New Jersey HMO fails to meet the statutory net worth requirements
applicable to it, the DOI has the power to suspend or revoke the HMO's COA.
Without a COA, an entity cannot conduct business as an HMO in New Jersey.
FOHP-NJ is approximately $24,000,000 below 125% of the statutory net worth
requirement applicable to it, and approximately $21,000,000 below 100% of its
statutory net worth requirement. If the Transaction is not consummated, the DOI
has indicated that it will require the Holding Company to draw against the
letters of credit made available to it for purposes of contributing to FOHP-NJ
such monies for net worth purposes. If the Holding Company were to draw against
each letter of credit made available to it, and each guarantor paid the amount
of the Holding Company's capital obligation to FOHP-NJ which it guaranteed, the
Holding Company would receive approximately $11,300,000, which would leave
FOHP-NJ with a statutory net worth deficit of approximately $12,500,000 at 125%
of the statutory net worth requirement applicable to it and approximately
$8,000,000 at 100% of such statutory net worth requirement. The Board of
Directors believes that the DOI would then suspend or revoke FOHP-NJ's COA to
operate as an HMO in New Jersey and would place FOHP-NJ into rehabilitation or
liquidation. If FOHP-NJ is placed into rehabilitation or liquidation, it is
possible that none of the shareholders of the Holding Company will receive any
distribution on the shares of Common Stock-NJ held by them since all the assets
of the Holding Company will be used to pay the liabilities and other debts of
FOHP-NJ and the Holding Company before any distributions are made to the
shareholders.
Use of Proceeds
If the Transaction is consummated, all $30,000,000 received by the Holding
Company in connection with the sale of the Debentures to HSI (less fees and
expenses incurred by the Holding Company in connection with the Transaction),
will be contributed to FOHP-NJ to ensure that FOHP-NJ meets the statutory net
worth requirements applicable to it.
Arrangements with Financial Advisor
The Holding Company selected PaineWebber to be its financial advisor in
connection with the Transaction because PaineWebber is a prominent investment
banking and financial advisory firm with experience in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and valuations for corporate purposes.
Pursuant to an engagement letter between the Holding Company and
PaineWebber dated as of August 13, 1996, as amended, PaineWebber has earned a
retention fee of $100,000 (which would be credited against a transaction fee
calculated as described below). In addition, PaineWebber will receive a fee,
payable upon completion of the Transaction, equal to $800,000 (less the
retainer) and will be reimbursed for certain of its related expenses.
PaineWebber will not be entitled to any additional fees or compensation in the
event the Transaction is not approved by the shareholders of the
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Holding Company or otherwise consummated. The Holding Company also has agreed,
under separate agreement, to indemnify PaineWebber, its affiliates and each of
its directors, officers, agents and employees and each person, if any,
controlling PaineWebber or any of its affiliates against certain liabilities,
including liabilities under federal securities laws.
Regulatory Filings
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), and the rules promulgated thereunder, consummation of the
Transaction is subject to the expiration or prior termination of a specified
waiting period. At any time before or after the Closing, the Federal Trade
Commission or the Antitrust Division of the Department of Justice or any third
party could seek to delay, enjoin or rescind the Transaction on antitrust or
other grounds. The Holding Company believes that the Transaction would be in
compliance with federal antitrust laws, but there can be no assurance that a
challenge, if made, would be unsuccessful. If such a challenge occurs or is
threatened prior to the Closing, such event could relieve the Holding Company
and HSI of their respective obligations to consummate the Transaction.
Effect of Conversion of Debentures and Exercise of Option on Holders of Common
Stock
The issuance of New Common Stock upon the conversion of the Debentures and
the exercise of the Option will have no effect on the rights or privileges of
existing shareholders of the Holding Company except to the extent that the
interest of each shareholder in the economic results and voting rights of the
Holding Company are diluted pro rata based on the number of shares owned by
existing shareholders prior to any issuance.
Upon the exercise of the Option and conversion of the Debentures, HSI will
be the owner of approximately 51% of the Holding Company's outstanding New
Common Stock. As a result, HSI will be able to exert significant influence over
the determination of significant corporate actions. Under the provisions of the
New Jersey Shareholders Protection Act, the Holding Company will be prohibited
from engaging in a "business combination" (as such term is defined therein) with
HSI for a period of five years from the date of the Closing. HSI is not,
however, prohibited from acquiring all or a portion of the outstanding shares of
New Common Stock by tender offer or as otherwise contemplated by the Securities
Purchase Agreement during such five year period, subject to the Standstill
Agreement.
Information Concerning HSI
HSI is one of the largest managed health care companies in the United
States, with more than 1.9 HMO and administrative services only ("ASO") members.
HSI provides a comprehensive range of health care services through HMOs located
in the following four regions: California, the Northeast (Connecticut,
Pennsylvania and New Jersey), the Northwest (Washington, Oregon and Idaho) and
the Southwest (Colorado and New Mexico). Health Net, HSI's HMO subsidiary in
California, with approximately 1.33 million members, is the second largest
provider of managed health care services in the state. HSI operates a Preferred
Provider Organization network, which provides access to health care services to
over 4.6 million persons in 38 states, and also owns two health and life
insurance companies licensed to sell insurance in 33 states and the District of
Columbia.
HSI's HMOs market their traditional HMO products to employer groups and
their Medicare and Medicaid products directly to eligible individuals. Health
care services that are provided to HSI's members include primary and specialty
physician care, hospital care, laboratory and radiology
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services, pharmacy services, dental and vision care, skilled nursing care,
physical therapy and mental health care. HSI's HMO service networks include
approximately 17,500 primary care physicians, 40,500 specialists and 614
hospitals. HSI utilizes sophisticated medical management systems to reduce
excess utilization of health care services. HSI is also developing a new medical
management system which will utilize clinical protocols and triage procedures to
direct members to the most appropriate provider. HSI believes that this new
system, which it calls "Fourth Generation Medical Management," will represent a
major advance in applying sophisticated information systems to the practice of
medicine.
HSI's growth strategy is focused on increasing enrollment and
profitability through (i) continued commercial and Medicare risk enrollment
expansion in existing markets, (ii) membership and revenue growth from
acquisitions in both new and existing markets and (iii) improving medical
management of health plans in new markets and continued refinement of medical
management in existing markets. HSI actively seeks to increase growth in its
existing markets by increasing penetration of its existing product line through
continued investment in its sales and marketing capabilities and by introducing
new products that both increase plan flexibility and reach new potential
customers, including Medicare and Medicaid recipients. HSI intends to expand on
its recent success with its Medicare risk products, which products have
experienced rapid enrollment and premium growth throughout the last three years.
HSI also plans to capitalize on the breadth and quality of its provider network
and its high quality, affordable products to drive enrollment growth in existing
markets.
HSI plans to continue its expansion into geographic areas which HSI
believes can benefit from more efficient medical management. In this regard, HSI
has targeted the Northeastern United States as an attractive service market and
in 1995 began a strategy of acquiring significant HMO plans in the Northeast
with the acquisition of M.D. Health Plan, operating in Connecticut, and Greater
Atlantic, operating in Pennsylvania and New Jersey. These acquisitions, which
accounted for 359,389 members at September 30, 1996, have provided HSI with a
platform in the Northeast which it intends to utilize in bringing FOHP-NJ to a
profitable level.
HSI believes it has established a reputation as a leader in medical
management through optimizing the utilization of health care services among the
members of its health plans. HSI believes it can have a direct impact on health
care utilization (and resulting profitability) of FOHP-NJ through the
application of its medical management techniques. As evidence of this impact, at
the time HSI acquired M.D. Health Plan, this plan's acute hospital days per
thousand commercial members was approximately 300. In December 1995, after HSI's
medical management system had been installed, hospital days per thousand had
decreased to below 200, a level consistent with HSI's Southwest and Northwest
plans. HSI is attempting to further decrease utilization through the
implementation of its new medical management procedures.
In October of 1996, HSI announced its intention to merge with Foundation
Health Corporation. The merger, expected to close in January 1997, will create
the nation's fourth largest publicly traded managed health care company. For
five years in a row, HSI or QualMed, Inc., a predecessor company to HSI, has
been included on Fortune Magazine's list of America's 100 fastest growing
companies.
Proposed Amendments
General During the summer of 1996, as a result of FOHP-NJ's statutory net
worth deficiency, the Board of Directors discontinued the Holding Company's
expansion efforts in states other than New Jersey, including New York,
Pennsylvania and Maryland. In addition, the Board recognized the
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need for the Holding Company to obtain additional equity so as to enable FOHP-NJ
to meet the statutory net worth requirements applicable to it. The Board also
recognized that, to attract potential investors it was necessary to make certain
amendments to the Certificate of Incorporation and By-laws of the Holding
Company, including the deletion of the existing classes of Holding Company
Common Stock and the substitution therefor of one class of common stock, the
reduction of the number of directors on the Board and the inclusion of persons
on the Board who are not Practitioners, representatives of Acute Care
Institutions or management of the Holding Company. The terms "Practitioners" and
"Acute Care Institutions" are defined in the section of this Proxy Statement
captioned "Description of Securities."
In August 1996, the Holding Company began negotiating with HSI with
respect to a possible sale of securities to HSI in order for the Holding Company
to raise capital so that FOHP-NJ could meet the statutory net worth requirements
applicable to it. As a result of these negotiations, the Holding Company and HSI
entered into the Securities Purchase Agreement, which contemplates, among other
things, certain amendments to the Holding Company's Certificate of Incorporation
and By-laws and certain amendments to the Certificate of Incorporation and
By-laws of FOHP-NJ. The Certificate of Incorporation and By-laws of the Holding
Company are proposed to be amended to provide that, for so long as HSI owns the
Debentures, HSI will be entitled to designate 15% of the Board or such greater
percentage as is commensurate with the number of outstanding shares of New
Common Stock held by HSI. In the event HSI no longer holds any Debentures, the
percentage of the Board which HSI will be able to designate will be based solely
on the number of shares of New Common Stock held by it. The Board recognizes
that the sale of the Debentures to HSI will affect the governance structure of
the Holding Company, and, therefore, in negotiating the Securities Purchase
Agreement required that the composition of the Board include NJ Practitioners
(as defined below) and representatives of NJ Acute Care Institutions (as defined
below) for so long as any health care provider to FOHP-NJ owns shares of New
Common Stock.
As used herein, the term "NJ Acute Care Institutions" shall mean hospitals
or acute care institutions, licensed by the DOH, which have entered into
provider agreements with FOHP-NJ to provide health care related services to the
members of FOHP-NJ's health care benefits plans, and the term "NJ Practitioners"
shall mean the members of the medical staff of a NJ Acute Care Institution, or
physicians designated by a NJ Acute Care Institution, who (i) are licensed to
practice medicine or osteopathy in the State of New Jersey, and (ii) have
entered into provider agreements with FOHP-NJ to provide health care services to
the members of FOHP-NJ's health care benefits plans.
The proposed amendments described below affect many provisions of the
Certificate of Incorporation of the Holding Company, the By-laws of the Holding
Company, the Certificate of Incorporation of FOHP-NJ and the By-laws of FOHP-NJ.
While a description of the proposed amendments is set forth below, that
description is qualified in its entirety by reference to the full text of the
amendments as contained in the Amended and Restated Certificate of Incorporation
of the Holding Company annexed hereto as Appendix F, the By-laws of the Holding
Company annexed hereto as Appendix G, the Amended and Restated Certificate of
Incorporation of FOHP-NJ annexed hereto as Appendix H, and the By-laws of
FOHP-NJ annexed hereto as Appendix I. In addition, the description of the
Proposed Amendments set forth below describes the effect the amendments will
have on Common Stock-NJ and the holders thereof, inasmuch as Common Stock-NJ is
the only class of the Common Stock of the Holding Company ("Holding Company
Common Stock") currently outstanding.
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Amended and Restated Certificate of Incorporation of the Holding Company
Capital Stock of the Holding Company - If the Transaction is approved by
the shareholders of the Holding Company, the Certificate of Incorporation of the
Holding Company will be amended by deleting each class of Holding Company Common
Stock currently authorized thereunder, and, substituting therefor, 110,000,000
shares of capital stock consisting of 100,000,000 shares to be classified as
Common Stock, par value $.01 per share, and 10,000,000 shares to be classified
as Preferred Stock, par value $1.00 per share ("Preferred Stock"). The Board
believes that the several classes of Holding Company Common Stock currently
contained in the Holding Company's Certificate of Incorporation are no longer
necessary inasmuch as the Holding Company has, for the time being, discontinued
its expansion in other states. Even if the Holding Company were to decide to
continue its expansion into other states, the primary purpose of the various
classes of Holding Company Common Stock authorized in the Holding Company's
Certificate of Incorporation was to ensure that each subsidiary of the Holding
Company which operates, or has been formed to operate, as an HMO (collectively,
the "Operating Subsidiaries," and individually an "Operating Subsidiary"), had
adequate representation on the Board and to facilitate the election of directors
to serve on the Board. Since the subsidiaries of the Holding Company will not
designate the directors to be elected to the Board of Directors of the Holding
Company if the Transaction is consummated, the Board does not believe that the
various classes of Holding Company Common Stock will provide any meaningful
benefit to the Holding Company or its shareholders in the future.
The Certificate of Incorporation of the Holding Company, as proposed to be
amended, authorizes 10,000,000 shares of Preferred Stock, and authorizes the
Board of Directors to issue shares of Preferred Stock in one or more series with
such dividend, liquidation, conversion, redemption and other rights as the Board
of Directors may establish from time to time. The Board believes that the
authorization of Preferred Stock provides the Holding Company with an
alternative means of raising capital. Currently, the Board of Directors has no
intention of issuing any shares of Preferred Stock.
Voting Rights - Pursuant to the Certificate of Incorporation of the
Holding Company now in effect, the holders of Common Stock-NJ are entitled to
special voting rights with respect to matters such as mergers, consolidations,
sales of all or substantially all the assets of the Holding Company, and any
alteration, repeal or amendment of the Holding Company's Certificate of
Incorporation or By-laws or the certificate or articles of incorporation of any
subsidiary of the Holding Company. If the Transaction is approved by the
shareholders, the Holding Company's Certificate of Incorporation will be amended
to delete the special voting rights. Accordingly, certain actions which
currently require approval of the holders of Common Stock-NJ could be effected
by the Board of Directors of the Holding Company after the consummation of the
Transaction without first being approved by the providers to FOHP-NJ who are
shareholders of the Holding Company. In addition, except for issuances of New
Common Stock to persons not named in the Certificate of Incorporation as
proposed to be amended, matters that are voted upon by the shareholders of the
Holding Company will be approved by such shareholders if a majority of the votes
cast are voted for the matter. Consequently, if HSI were to acquire a
significant percentage of outstanding New Common Stock, HSI could either
influence or control the vote on any matter voted on by the shareholders. The
Board believes that the preservation of the special voting rights is unnecessary
given the expansive protections provided to the Holding Company's shareholders
under New Jersey corporate law and applicable federal and state securities laws
and the provisions in the proposed By-laws of the Holding Company which would
require that certain actions to be approved by the Board of Directors must be
approved by 80% of the directors, or, in certain circumstances, by a majority of
the directors who were not designated by HSI. See "By-laws of the Holding
Company."
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Preemptive Rights - The Certificate of Incorporation of the Holding
Company, as proposed to be amended, includes a provision with respect to
preemptive rights. The preemptive rights provision provides that any holder of
New Common Stock shall have preemptive rights to subscribe for or purchase any
capital stock proposed to be issued by the Holding Company, other than shares of
the Holding Company's capital stock issuable upon exercise of any option or
conversion of any convertible subordinated debenture granted or issued by the
Holding Company to HSI. Prior to the proposed issuance of capital stock by the
Holding Company, the Holding Company shall provide to each holder of New Common
Stock a written notice of the opportunity to purchase the shares of capital
stock being issued on a pro rata basis in relation to their then current
ownership, on a fully-diluted basis, of New Common Stock (assuming, among other
things, the exercise of all the then outstanding options and warrants
exercisable for New Common Stock and the conversion of all other securities
convertible into New Common Stock). The preemptive rights to be included in the
Holding Company's Certificate of Incorporation will afford the shareholders of
the Holding Company an opportunity to protect against dilution in their
percentage ownership of New Common Stock.
In addition to the preemptive rights to be afforded HSI upon its
acquisition of New Common Stock, HSI shall have the right to acquire any shares
of capital stock proposed to be issued by the Holding Company which are not
purchased by the shareholders of the Holding Company who have not exercised
their preemptive rights. Therefore, not only will HSI be able to maintain its
ownership interest in the Holding Company, if any, upon any issuance of Holding
Company capital stock, but may increase such ownership interest in the event
that other shareholders do not exercise their preemptive rights which will
thereby cause dilution in the percentage ownership of New Common Stock of such
shareholders.
Quorum - The Certificate of Incorporation of the Holding Company, as
proposed to be amended, does not include the one-third (1/3) quorum requirement
for shareholder meetings (which requirement is in the Certificate of
Incorporation currently in effect). If the Transaction is approved by the
shareholders, the holders of issued and outstanding shares of New Common Stock
entitled to cast a majority of the votes at a meeting of shareholders, present
in person or by proxy, shall constitute a quorum for the transaction of business
at any meeting of shareholders. The Board believes that a majority quorum
requirement will ensure that any action to be acted upon by the shareholders
will not be acted upon by a small percentage of such shareholders.
Voting Agreement - The provision in the Certificate of Incorporation of
the Holding Company currently in effect, which requires that holders of shares
of Holding Company Common Stock vote for the nominees to the Board of Directors
as designated by the Boards of Directors of the Operating Subsidiaries, is
proposed to be deleted. The Board believes that such provision is no longer
necessary since the Operating Subsidiaries will not be designating the nominees
for election to the Board of Directors of the Holding Company if the Transaction
is approved by the shareholders. Instead, the Board will be elected directly by
the shareholders, subject to certain rights afforded to HSI, NJ Practitioners
and NJ Acute Care Institutions. See "By-laws of the Holding Company."
Dividends; Distributions Upon Dissolution; Other Rights - Since the
Certificate of Incorporation of the Holding Company, as proposed to be amended,
only provides for one class of common stock, the provisions in the current
Certificate of Incorporation with respect to the treatment of all classes of
Holding Company Common Stock, as one class, for purposes of dividends and
distributions, have been deleted.
Restrictions on Issuance - The provisions regarding restrictions on
issuance contained in the Certificate of Incorporation of the Holding Company
currently in effect are proposed to be amended to permit HSI to purchase shares
of capital stock issued by the Holding Company.
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Restrictions on Transfer - The restrictions on transfer provisions in the
current Certificate of Incorporation of the Holding Company are proposed to be
amended to allow a shareholder, other than HSI, to sell or transfer his, her or
its shares of New Common Stock to HSI (in addition to any provider to any
Operating Subsidiary), provided that HSI is not prohibited from purchasing any
such shares pursuant to a contractual agreement with the Holding Company.
Moreover, pursuant to the Certificate of Incorporation of the Holding Company,
as proposed to be amended, HSI shall be prohibited from selling or transferring
any shares of New Common Stock except to (i) any provider to an Operating
Subsidiary, regardless of whether such person or entity owns shares of New
Common Stock at the time of transfer or sale, (ii) any subsidiary of HSI,
successor of HSI or subsidiary of a successor of HSI, (iii) the Holding Company,
or (iv) any other person approved by majority of the directors of the Board who
are not designated by HSI. Generally, the existing restrictions on transfer
provisions contained in the Certificate of Incorporation will be modified to
allow provider shareholders to sell shares of New Common Stock to any provider
or HSI without first having to offer such shares to specific providers.
Rights of First Refusal - The Certificate of Incorporation of the Holding
Company, as proposed to be amended, provides HSI and the Holding Company with
certain rights of first refusal with respect to the offer and sale of shares of
Holding Company capital stock by the holders thereof. More specifically, the
proposed Certificate of Incorporation of the Holding Company provides that
subsequent to the earlier of the conclusion of the Exchange Offer or the
conversion of any portion of the Debentures issued to HSI by the Holding
Company, HSI shall hold a right of first refusal to purchase any and all shares
of New Common Stock, or any other class of capital stock proposed to be sold by
a selling shareholder, for the price to be paid by a bona fide proposed
purchaser of the shares offered. Any selling shareholder shall cause any offer
from a bona fide proposed purchaser to be reduced to writing and shall deliver
notice to HSI and the Holding Company of such written offer. HSI shall have 30
calendar days to purchase all of the shares of capital stock being offered by
the selling shareholder. If HSI does not respond to such notice within the 30
day period, the Holding Company shall have 15 calendar days from the date of
expiration of HSI's right of first refusal to purchase all of the shares being
offered by the selling shareholder under the same terms and the same price per
share specified in the written offer by the bona fide proposed purchaser to the
selling shareholder. If the Holding Company does not purchase all of the shares
being offered by the selling shareholder within the prescribed period, the
selling shareholder may sell the number of shares as was offered to the bona
fide proposed purchaser. HSI's right of first refusal ensures that HSI will be
able to prevent any existing holder of New Common Stock or any provider to
FOHP-NJ from acquiring a significant amount of New Common Stock.
Covenants of NJ Institutional Shareholders - The provisions in the
Certificate of Incorporation of the Holding Company with respect to the
covenants of the NJ Acute Care Institutions which own shares of Common Stock-NJ
or of affiliates of NJ Acute Care Institutions which own shares of Common
Stock-NJ (collectively referred to herein as "NJ Institutional Shareholders,"
and individually as a "NJ Institutional Shareholder") are proposed to be amended
to provide that, if, upon the termination of such covenants as they relate to a
specific NJ Institutional Shareholder, the NJ Institutional Shareholder or its
affiliated NJ Acute Care Institution proposes to offer to its employees any
health benefits plan similar to a health benefits plan offered by FOHP-NJ, such
NJ Institutional Shareholder shall provide prior written notice to FOHP-NJ of
the material terms of the Bona Fide Offer (as defined below) by such other
health benefits plans. In the event FOHP-NJ offers to provide an FOHP-NJ plan
containing terms at least as favorable in all material respects to the employees
of the NJ Institutional Shareholder or its affiliated NJ Acute Care Institution
as those contained in the Bona Fide Offer, such NJ Institutional Shareholder or
its affiliated NJ Acute Care Institution shall offer such FOHP-NJ plan to its
employees on the same basis as it would have been obligated under
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the covenants if such covenants had not terminated. In the event a NJ
Institutional Shareholder or its affiliated NJ Acute Care Institution (i) elects
not to offer to its shareholders a FOHP-NJ health benefits plan which contains
terms at least as favorable as any Bona Fide Offer received by the NJ
Institutional Shareholder or its NJ Acute Care Institution, or (ii) fails to
provide reimbursement rates comparable to those of other NJ Institutional
Shareholders or their affiliated NJ Acute Care Institutions, and sufficiently
favorable to the Holding Company so as to enable FOHP-NJ to market its products
at market competitive rates, then the Holding Company shall have the option to
purchase all of the New Common Stock held by the NJ Institutional Shareholder at
a purchase price equal to the lesser of the Book Value (as defined in the
section of this Proxy Statement captioned "Description of Securities") or the
original purchase price of such shares. Consequently, a NJ Institutional
Shareholder which breaches the covenants in the proposed Certificate of
Incorporation of the Holding Company which are applicable to it could have its
shares of New Common Stock redeemed by the Holding Company at less than fair
market value.
A "Bona Fide Offer" shall mean an offer of a health benefits plan which is
prepared with the objective of covering the offeror's (i) health care costs and
administrative expenses in the case of risk products, and (ii) costs of
performing administrative services and any risk assumed (e.g., reinsurance) in
the case of self funded products. An offer by any health benefits plan below the
offeror's costs for the purpose of achieving market share increases shall not
constitute a Bona Fide Offer.
Cumulative Voting - The Certificate of Incorporation of the Holding
Company, as proposed to be amended, provides for cumulative voting in connection
with the election of directors. Pursuant to the proposed Certificate of
Incorporation, each shareholder of the Holding Company entitled to vote at any
election of directors of the Holding Company would have the right to cumulate
votes and allocate to one candidate for such election a number of votes equal to
the number of directors to be so elected multiplied by the number of votes to
which the shares held by such shareholder are normally entitled, or to
distribute such number of votes on the same principle among as many candidates
for such election as the shareholder would desire; provided, however, that no
shareholder shall be entitled to cumulate votes with respect to any named
candidate or candidates for director unless such candidate's name or candidates'
names have been placed in nomination for such election in accordance with the
Holding Company's By-laws and such cumulation of votes complies with the terms
of any agreement between the shareholder and the Holding Company. The Board
believes that a cumulative voting provision is in the best interest of the
Holding Company to effect better representation of the shareholders' interest.
Such voting could permit the minority shareholders holding sufficient shares to
obtain Board representation. For example, if 10 persons are to be elected to the
Board of Directors, and a minority shareholder owns, or a group of minority
shareholders own, 10% of the outstanding shares of the New Common Stock, such
shareholder or shareholders can vote all the shares of New Common Stock held by
the shareholder or shareholders for the election of one director, thus ensuring
that such person be elected to the Board.
Composition of the Board of Directors - Inasmuch as the Boards of
Directors of the Operating Subsidiaries will not designate the number of
directors to serve on the Holding Company if the Transaction is consummated, the
provisions in the Certificate of Incorporation of the Holding Company currently
in effect, with respect to the composition of the Board of Directors, shall be
deleted in their entirety.
Provisions of the Proposed Certificate of Incorporation of the Holding
Company Affecting Acquisition of the Holding Company - Article IV ("Article IV")
of the Certificate of Incorporation of the Holding Company, as proposed to be
amended, provides that a Business Combination (as defined below) involving the
Holding Company may be effected only if approved by the affirmative
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vote of the holders of at least 66-2/3% of the voting power of the Holding
Company's capital stock voting together as one class. In the absence of such a
provision, the vote required by New Jersey law to effect a Business Combination
involving the Holding Company is the affirmative vote of the majority of votes
cast by holders of the outstanding voting stock of the Holding Company.
A "Business Combination" shall mean (i) any merger or consolidation of the
Holding Company with or into any other corporation, except where shareholder
approval is not required for such merger or consolidation; (ii) any merger of
any other corporation with or into the Holding Company, except where shareholder
approval is not required for such merger; (iii) the sale, lease, exchange or
other disposition of all or substantially all of the assets of the Holding
Company if not in the usual and regular course of business as conducted by the
Holding Company; (iv) the acquisition in exchange for shares, obligations or
other securities of the Holding Company, of some or all of the shares of another
corporation or some or all of the assets of another entity if such acquisition
requires shareholder approval; (v) the adoption of any plan or proposal for
liquidation or dissolution of the Holding Company; and (vi) the adoption of any
agreement, contract or other arrangement providing for any one or more of the
actions specified in the foregoing clauses (i) through (v).
Article IV would make it more difficult to effect a Business Combination
even if the Business Combination is advantageous and favored by the Board of
Directors or a majority of the shareholders of the Holding Company because of
the higher voting standard it imposes. Article IV creates the possibility of a
veto power in the minority over any Business Combination. For example, if a
shareholder were to acquire approximately 34% of the outstanding shares of New
Common Stock, such shareholder could prevent a Business Combination not favored
by him, her or it, even though favored by a majority of the shareholders of the
Holding Company and a majority of the Board of Directors.
Miscellaneous Provisions - It is anticipated that each Operating
Subsidiary of the Holding Company will be controlled by the Holding Company and
will not have the autonomy contemplated when the Board was considering expansion
into states such as New York and Pennsylvania. Therefore, the Board of Directors
does not believe that the provisions in the Certificate of Incorporation of the
Holding Company currently in effect, with respect to mandatory distributions by
an Operating Subsidiary to the Holding Company, powers vested in the Holding
Company with respect to the operations of the Operating Subsidiaries, and the
election of the president and chief executive officer of an Operating
Subsidiary, are necessary. Accordingly, such provisions have not been included
in the Certificate of Incorporation of the Holding Company as proposed to be
amended.
By-laws of the Holding Company
Notice to HSI of any Action to be Approved by Written Consent of the
Shareholders - The By-laws of the Holding Company, as proposed to be amended,
would require that so long as HSI owns shares of the New Common Stock or is the
holder of the Debentures, the Holding Company shall provide HSI notice of any
action to be approved by the shareholders of the Holding Company by written
consent at least 10 days prior to delivering such written consent to the
shareholders.
Board of Directors - The By-laws of the Holding Company, as proposed to be
amended, include the following provisions with respect to the Board of
Directors:
(i) Number of Directors on the Board. The number of directors which
shall constitute the entire Board shall not be less than 6 nor more than 50
directors. The exact number of directors which shall constitute the entire Board
shall be established by resolution of the Board.
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(ii) HSI Designees to the Board. For so long as HSI holds shares of
New Common Stock, HSI shall have the right to designate such number of directors
on the Board as equals at least the same percentage of all directors on the
Board as is represented by the percentage ownership by HSI of all of the then
outstanding shares of New Common Stock. In addition, for so long as HSI holds
the Debentures, HSI shall be entitled to designate not less than 15% of the
directors serving on the Board.
(iii) Directors on the Board not Designated by HSI. The directors
serving on the Board who are not HSI designees shall be constituted as follows:
for so long as FOHP-NJ is a subsidiary of the Holding Company, at least two
thirds of the directors serving on the Board who are not HSI designees shall be
NJ Practitioners and representatives of NJ Acute Care Institutions. In addition,
at all times, the number of NJ Practitioners serving on the Board and the number
of representatives of NJ Acute Care Institutions serving on the Board shall be
equal; provided, however, that at no time shall the Board be comprised of (a)
two or more representatives of a single NJ Acute Care Institution or an
affiliated group of NJ Acute Care Institutions, or (b) two or more NJ
Practitioners who are affiliated with the same NJ Acute Care Institution or the
same affiliated group of NJ Acute Care Institutions. In addition, for so long as
any of the shares of New Common Stock are held by any NJ Practitioner, NJ Acute
Care Institution, affiliate to a NJ Acute Care Institution or other health care
provider to FOHP-NJ, the Board shall include as directors not less than three
persons who are not HSI designees, one of whom shall be a NJ Practitioner and
another a representative of a NJ Acute Care Institution.
(iv) Nominations to the Board. Nominations for election of directors
may be made by the Board of Directors or a committee appointed by the Board of
Directors or by a shareholder entitled to vote in the election of directors
provided that such shareholder follows the procedure set forth in the Holding
Company's By-laws. In addition, the nominees for director designated by the
Board or a committee appointed by the Board shall include such number of
designees of HSI as HSI shall have the right to designate under the By-laws, and
if practicable, (a) one NJ Practitioner who practices in the southern part of
New Jersey, one NJ Practitioner who practices in the central part of New Jersey,
and one NJ Practitioner who practices in the northern part of New Jersey; and
(b) one representative of a NJ Acute Care Institution which is located in the
southern part of New Jersey, one representative of a NJ Acute Care Institution
which is located in the central part of New Jersey, and one representative of a
NJ Acute Care Institution which is located in the northern part of New Jersey.
In addition, to ensure that the directors on the Board who have not been
designated by HSI are representatives of the providers to FOHP-NJ, the members
of the Board or the nominating committee who were not designated by HSI shall
select, by majority vote, the non-HSI nominees to the Board.
(v) Governance. Any of the following transactions be approved by at
least 80% of the directors of the Board, thus insuring that the directors on the
Board representing minority shareholders will have input on any such actions
until such time as any one shareholder owns more than 80% of the outstanding
capital stock of the Holding Company:
(a) any amendment to the Certificate of Incorporation or
By-laws of the Holding Company;
(b) any capital expenditures by the Holding Company, which
together with capital expenditures of its subsidiaries, exceed, in the
aggregate, $1,000,000 during any calendar year;
(c) any material change in the scope of the business of the
Holding Company;
(d) any merger, consolidation or sale, mortgage, lease,
transfer or other disposition of all or substantially all of the assets of the
Holding Company;
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(e) any filing for receivership, dissolution or bankruptcy by
the Holding Company;
(f) the declaration or payment of any dividend or other
distribution to the shareholders of the Holding Company on a non-ratable basis;
(g) the issuance or sale of any shares of capital stock,
warrants, convertible instruments or other rights to acquire authorized and
unissued shares of capital stock of the Holding Company, other than the issuance
of the Option and the Debentures contemplated in the Securities Purchase
Agreement and the shares of capital stock issuable upon exercise of the Option
and conversion of the Debentures;
(h) the borrowing by the Holding Company, other than borrowing
in the ordinary course of business, of amounts which, together with amounts
borrowed by subsidiaries of the Holding Company, exceed, in the aggregate,
$1,000,000 during any calendar year;
(i) the creation of any security interest or lien on all or
substantially all of the assets of the Holding Company;
(j) any acquisition by the Holding Company of equity
securities (other than pursuant to a buyback or repurchase of equity securities
issued by the Holding Company) or assets of any person or entity involving
amounts which, together with amounts involved in acquisitions of equity by
subsidiaries of the Holding Company, exceed, in the aggregate, $1,000,000 during
any calendar year, except for the transactions contemplated by the Securities
Purchase Agreement;
(k) a decision to file a registration statement for the public
sale of securities of the Holding Company under the Securities Act;
(l) any loan of money to, or guarantee of any obligation of,
any officer, director or employee of the Holding Company or any subsidiary
thereof; or
(m) entering into, assuming or becoming bound by any agreement
to do any of the foregoing or otherwise attempt to do any of the foregoing.
In addition, the Board may not approve any of the following corporate
transactions or actions without the approval of a majority of the directors not
designated by or affiliated with HSI: (a) any transaction by the Holding Company
involving a contractual or other arrangement with HSI or any subsidiary or
affiliate thereof or successor thereto, or any subsidiary or affiliate of any
successor to HSI, which is new or modified from the then existing contractual
arrangements between the Holding Company and HSI; (b) the issuance to HSI or any
subsidiary or affiliate thereof or successor thereto, or any subsidiary or
affiliate of any successor to HSI, of any additional shares of the Holding
Company's capital stock, or options, stock appreciation rights, warrants or
other rights to acquire the capital stock of the Holding Company; or (c) any
intentional act by HSI to cause the transfer of the members of the health plans
offered by FOHP-NJ or any subsidiary of the Holding Company to HSI or any
subsidiary or affiliate thereof or successor thereto, or any subsidiary or
affiliate of any successor to HSI; provided, however, that no such approval
shall be required with respect to any trans action contemplated by the
Securities Purchase Agreement.
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The Board believes that the provisions outlined in the above paragraphs
will provide that for so long as any shares of New Common Stock are held by a NJ
Practitioner, NJ Acute Care Institution, affiliate to an NJ Acute Care
Institution or other health care provider to FOHP-NJ, the representatives of
such health care providers serving on the Board will have significant influence
over certain decisions of the Board with respect to the operations of the
Holding Company.
Committees Established Pursuant to the By-laws - The Holding Company's
By-laws are proposed to be amended to delete any reference to specific
committees other than an audit committee (the "Audit Committee"). The Board of
Directors may, by one or more resolutions passed by a majority of the directors
then in office, establish such other committees as it shall determine necessary
for the operations of the Holding Company; provided, however, HSI shall have a
right to designate to any committee, other than the Audit Committee, that number
of committee members as is commensurate with its representation on the Board.
Amendments to By-laws - The By-laws of the Holding Company, as proposed to
be amended, provide that certain sections of Article III of the By-laws with
respect to the composition of the Board, nomination of nominees to the Board,
vacancies in the Board, governance by the Board and committees of the Board may
only be altered, amended, or repealed by the shareholders of the Holding
Company, excluding HSI or any subsidiary or affiliate thereof or successor
thereto, and any new By-laws which may be adopted by the Board, without
shareholder approval, must contain the provisions found in those sections of the
By-laws for so long as any shares of the Holding Company's New Common Stock is
held by a NJ Practitioner, NJ Acute Care Institution, affiliate to a NJ Acute
Care Institution or other health care provider to FOHP-NJ.
Certificate of Incorporation of FOHP-NJ
If the Transaction is approved by the shareholders of the Holding Company,
the Certificate of Incorporation of FOHP-NJ will be amended by deleting the
provisions with respect to the composition of the Board of Directors currently
contained therein. The provisions of the Certificate of Incorporation of
FOHP-NJ, as currently in effect, with respect to the composition of the Board of
Directors will not be necessary if the Transaction is consummated since the
Board of Directors of FOHP-NJ will be comprised of persons who are elected to
the Board of Directors of the Holding Company ("FOHP Board Members"); provided,
however, that the number of directors serving on the Board of Directors of
FOHP-NJ may be increased by the Board of Directors of FOHP-NJ to include persons
other than FOHP Board Members if so required under applicable law or by any
governmental agency or department which has the authority to regulate the
business of FOHP-NJ. As a result of the proposed amendments to the Certificate
of Incorporation of FOHP-NJ, individual shareholders or groups of shareholders
will not be entitled to designate directors to serve on the Board of Directors
of FOHP-NJ as currently provided in the Certificate of Incorporation of FOHP-NJ.
By-laws of FOHP-NJ
If the Transaction is approved by the shareholders of the Holding Company,
the By-laws of FOHP-NJ will be amended with respect to Board representation as
follows: (i) the Board of Directors of FOHP-NJ shall be comprised of the persons
who are elected to the Board of Directors of the Holding Company; (ii) 80% of
the directors on the Board of Directors of FOHP-NJ shall be required to approve
the corporate transactions described under the By-laws of the Holding Company;
(iii) the specific committee provisions contained in the By-laws now in effect
will be deleted (except for an audit committee) and, in their place, a general
provision will be included which will provide that committees may be formed by
resolution of the Board of Directors of FOHP-NJ; and (iv) any proposed
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amendment to Article III of the By-laws relating to Board representation and
voting and committee membership shall require the approval of a majority of the
non-HSI designees to the Board of Directors of FOHP-NJ.
Conversion of Common Stock-NJ into New Common Stock
Each outstanding share of Common Stock-NJ will automatically be converted
into one share of New Common Stock at the time (the "Effective Time") the
Certificate of Incorporation of the Holding Company, as proposed to be amended,
is filed with the Office of the Secretary of State, State of New Jersey, without
the necessity of the holders of shares of Common Stock-NJ surrendering
certificates representing such shares for exchange. At the time Effective Time,
certificates representing a number of shares of Common Stock-NJ will be deemed
to represent certificates for the same number of shares of New Common Stock
(i.e., a certificate representing 1,000 shares of Common Stock-NJ will
automatically become a certificate representing 1,000 shares of New Common Stock
at the Effective Time without the holders of Common Stock-NJ having to take any
action). Certificates representing Common Stock-NJ presented for transfer
following the Effective Time will be replaced with certificates representing New
Common Stock. When the Transaction is consummated, holders of Common Stock-NJ
who wish to exchange their certificates of Common Stock-NJ for certificates of
New Common Stock may do so by submitting their Common Stock-NJ certificates to
the Holding Company's transfer agent with a request for such exchange.
The transfer agent and registrar for the New Common Stock will be the
American Stock Transfer and Trust Company.
Resales of New Common Stock
New Common Stock to be issued to shareholders of the Holding Company in
connection with the proposed amendments described herein will be issued pursuant
to an exemption from registration provided by Section 3(a)(9) of the Securities
Act. Subject to the conditions and transfers set forth in the Certificate of
Incorporation of the Holding Company, as proposed to be amended, New Common
Stock received by shareholders of the Holding Company at the Effective Time will
be freely transferable, except for shares held by any person who may be deemed
to be an affiliate of the Holding Company within the meaning of Rule 144 of the
Securities Act.
DESCRIPTION OF SECURITIES
The following is a summary of the securities of the Holding Company,
including their rights, powers, preferences and limitations, which would be
available for issuance if the Holding Company's Certificate of Incorporation is
amended to give effect to the proposed amendments described herein.
New Common Stock
The Certificate of Incorporation of the Holding Company, as proposed to be
amended, authorizes one hundred million (100,000,000) shares of New Common
Stock. The rights, powers, preferences and limitations of the New Common Stock
will be as follows:
(i) Restrictions on Issuance Unless the affirmative vote of not less
than 75% of the issued and outstanding shares of New Common Stock is received,
no share of New Common Stock shall be permitted to be issued by the Holding
Company or subscribed for, except to:
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(a) a hospital or acute care institution which has entered
into a provider agreement with an Operating Subsidiary and which is duly
licensed by the appropriate authorities in the state where it is located
(referred to herein as an "Acute Care Institution"), or to an affiliate of an
Acute Care Institution which (1) solely controls, (2) is solely controlled by,
or (3) is under common control with the Acute Care Institution (referred to
herein as an "Eligible Affiliate") (Acute Care Institutions and Eligible
Affiliates which own shares of New Common Stock are sometimes collectively
referred to herein as "Institutional Shareholders" and individually referred to
herein as an "Institutional Shareholder");
(b) (1) a member of the medical staff of an Acute Care
Institution, or (2) a physician designated by an Acute Care Institution, who is
licensed to practice medicine by the appropriate state authorities and who has
entered into a provider agreement with an Operating Subsidiary (referred to
herein as a "Practitioner") (Practitioners who own shares of New Common Stock
are sometimes collectively referred to herein as "Practitioner Shareholders" and
individually referred to herein as a "Practitioner Shareholder");
(c) a dentist who is licensed to practice dentistry by the
appropriate state authorities and who has entered into a provider agreement with
an Operating Subsidiary (referred to herein as a "Dentist") (Dentists who own
shares of New Common Stock are sometimes collectively referred to herein as
"Dentist Shareholders" and individually referred to herein as a "Dentist
Shareholder");
(d) a health care provider or professional, licensed,
certificated or authorized to operate or practice in a state where an Operating
Subsidiary has been formed, other than a Practitioner, Acute Care Institution,
Dentist or Organizational Provider (as defined below), provided, such provider
or professional has entered into a provider agreement with an Operating
Subsidiary (referred to herein as an "Other Provider") (Other Providers who own
shares of New Common Stock are sometimes collectively referred to herein as
"Other Shareholders" and individually referred to herein as an "Other
Shareholder");
(e) an Individual Practice Association ("IPA") or Physician
Hospital Organization ("PHO") which has entered into a provider agreement with
an Operating Subsidiary (referred to herein as an "Organizational Provider"),
provided that no shares of New Common Stock shall be offered or sold to an IPA
or PHO unless (1) any such offer or sale is in full compliance with applicable
federal and state securities laws, (2) the IPA or PHO purchasing shares of New
Common Stock is in full compliance with any federal or state securities laws
applicable to such organization, and (3) the purchasing IPA or PHO agrees to
indemnify the Holding Company and any of its subsidiaries or affiliates, and the
officers, directors, employees and agents of the Holding Company or any of its
subsidiaries or affiliates, from any and all damages suffered and expenses
incurred by any such person or entity as a result of the purchasing IPA or PHO
failing to comply or remain in compliance with any applicable federal or state
securities laws (Organizational Providers which own shares of New Common Stock
are sometimes collectively referred to herein as "Organizational Shareholders"
and individually referred to herein as an "Organizational Shareholder"); or
(f) HSI.
(ii) Preemptive Rights A holder of any share of New Common Stock
shall have preemptive rights to subscribe for or purchase any capital stock
proposed to be issued by the Holding Company, other than the shares of the
Holding Company's capital stock issuable upon the exercise of the Option or the
conversion of any convertible subordinated debenture granted to or issued by the
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Holding Company to HSI. Any shares of the Holding Company's capital stock issued
upon the exercise of the Option or conversion of any convertible subordinated
debenture issued by the Holding Company to HSI shall have the preemptive rights
set forth above. Prior to any proposed issuance of capital stock by the Holding
Company, the Holding Company will provide to each holder of New Common Stock
written notice of the opportunity to subscribe for or purchase the shares of
capital stock being issued on a pro rata basis in relation to their then current
ownership, on a fully-diluted basis, of New Common Stock (assuming, among other
things, the exercise of all the then outstanding options and warrants
exercisable into New Common Stock and the conversion of all other securities
convertible into New Common Stock). HSI shall have the right to purchase any
shares of capital stock proposed to be issued by the Holding Company which have
not been subscribed for or purchased by the holders of New Common Stock.
(iii) Restrictions on Transfer Shares of New Common Stock of the
Holding Company are not permitted to be sold, pledged, hypothecated or otherwise
transferred by a provider to an Operating Subsidiary or HSI, except that shares
of New Common Stock may be sold or transferred;
(a) by a provider to an Operating Subsidiary to:
(1) any provider to an Operating Subsidiary regardless of
whether such person or entity owns shares of New Common Stock at the time of the
transfer or sale,
(2) HSI, provided that HSI is not prohibited from purchasing
any such shares pursuant to a contractual agreement with the Holding Company, or
(3) the Holding Company;
(b) by HSI to:
(1) any provider to an Operating Subsidiary regardless of
whether such person or entity owns shares of New Common Stock at the time of
transfer or sale,
(2) any subsidiary of HSI, successor of HSI or subsidiary of
a successor of HSI,
(3) the Holding Company, or
(4) any other person approved by a majority of the directors
on the Board of Directors who were not designated by HSI; and
(c) by any holder thereof in connection with any Business
Combination.
(iv) Right of First Refusal After the earlier of the conclusion of
the Exchange Offer or the conversion into New Common Stock of any portion of the
convertible subordinated debentures issued to HSI by the Holding Company, HSI
shall hold a right of first refusal to purchase any and all shares of New Common
Stock, or any other class of capital stock proposed to be sold by a selling
shareholder, for the price to be paid by a bona fide proposed purchaser of the
shares offered. HSI shall have 30 days to notify the selling shareholder of its
intention to purchase all of the shares of New Common Stock being offered by the
selling shareholder. If HSI does not purchase the shares of New Common Stock
being offered by the selling shareholder, the Holding Company shall have 15 days
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from the date of expiration of HSI's right to purchase all of the shares being
offered by the selling shareholder under the same terms and same price per share
specified in the written offer by the bona fide proposed purchaser to the
selling shareholder. If the Holding Company does not purchase all the shares
being offered by the selling shareholder within such 15 day period, the selling
shareholder may sell the number of shares as was originally offered to the bona
fide proposed purchaser.
(v) Cumulative Voting Each shareholder of New Common Stock entitled
to vote at any election of directors of the Holding Company shall have the right
to cumulate votes and allocate to one candidate for such election a number of
votes equal to the number of directors to be so elected multiplied by the number
of votes to which the shares held by such shareholder are normally entitled, or
to distribute such number of votes on the same principle among as many
candidates for such election as the shareholder shall desire; provided, however,
that no shareholder shall be entitled to cumulate votes for any named candidate
or candidates for director unless such candidate's name or candidates' names
have been placed in nomination for such election in accordance with the Holding
Company's By-laws, as proposed to be amended, and such cumulation of votes
complies with the terms of any agreement between the shareholder and the Holding
Company.
(vi) Repurchases of New Common Stock The Holding Company may, but is
not required to, repurchase the shares of New Common Stock from any Practitioner
Shareholder, Institutional Shareholder, Organizational Shareholder, Other
Shareholder or Dentist Shareholder whose provider agreement with an Operating
Subsidiary terminates for any reason, at a purchase price per share equal to the
lesser of Book Value or Alternate Value (as such terms are defined below);
provided, however, that if the Alternate Value is zero the purchase price per
share shall be 50% of Book Value. The purchase price shall be payable in cash
within 90 days of the date of termination of his, her or its provider agreement
with an Operating Subsidiary, or, in the discretion of the Holding Company, over
a period of three years in equal annual installments commencing one year from
the date of purchase with interest at a rate of 7% per annum, accrued and
payable annually.
The term "Book Value" shall mean the shareholder equity reflected on the
Holding Company's balance sheet prepared in accordance with GAAP for the most
recently completed fiscal year as audited by the Holding Company's independent
accountants divided by the number of outstanding shares of New Common Stock
determined on a fully diluted basis. The term "Alternate Value" shall mean six
times the average net income per share before taxes determined in accordance
with GAAP on a fully diluted basis for the prior three completed fiscal years of
the Holding Company, or such less number of fiscal years if the Holding Company
has not yet completed three fiscal years, with 1995 considered a fiscal year for
the purposes of this calculation.
In the event a Practitioner relocates his or her practice outside the
geographic areas covered by the Operating Subsidiaries or ceases to practice
medicine for whatever reason including retirement or death, the Holding Company
may, but is not obliged to, repurchase the shares of New Common Stock held by
such Practitioner; provided, that before the Holding Company may purchase the
shares held by the Practitioner who relocates or ceases to practice medicine,
such Practitioner or his or her personal representative or beneficiary may offer
for sale the shares of New Common Stock held by him or her to another provider,
subject to HSI's right of first refusal, or directly to HSI after the earlier of
the conclusion of the Exchange Offer or the conversion into New Common Stock of
any portion of the convertible subordinated debentures issued to HSI by the
Holding Company. If all offered shares are not sold within 45 days from the date
the Practitioner relocates or ceases to practice medicine, the Holding Company
may purchase the remaining shares at a purchase price per share equal to the
greater of Book Value or Alternate Value. Such purchase price shall be payable
in cash within 90 days following the date the Practitioner relocates or ceases
to practice, or, in the discretion of the
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Holding Company, over a period of two years in equal annual installments
commencing one year from the date of purchase with interest at a rate of 7% per
annum, accrued and payable annually. The Holding Company may purchase the shares
of New Common Stock held by a Dentist for the same reasons, in a similar manner
and under the same conditions as set forth above.
In the event of (a) a merger involving an Acute Care Institution or
Organizational Shareholder (except if the merger is between Acute Care
Institutions or Organizational Shareholders which are both providers to
Operating Subsidiaries), or (b) the sale of a majority of the stock or assets
of, or change in the majority of membership in, an Acute Care Institution or
Organizational Shareholder, the Holding Company may, but is not required to,
repurchase the New Common Stock held directly or indirectly by such Acute Care
Institution or Organizational Shareholder. The purchase price in such
circumstances is the lesser of Book Value or Alternate Value and is payable in
cash within 90 days following the date of the event allowing for such
repurchase, or, in the discretion of the Holding Company, over a period of 3
years in equal annual installments commencing 1 year from the date of repurchase
with interest at a rate of 7% per annum, accrued and payable annually. In the
event the Holding Company elects not to purchase the shares of New Common Stock
held by an Acute Care Institution, either directly or through an Eligible
Affiliate, or an Organizational Shareholder, the affected Organizational
Shareholder or Acute Care Institution, or successor thereto, shall be permitted
to retain the shares of New Common Stock held by it and remain a provider to the
Operating Subsidiary with which it is or its predecessor was affiliated.
Additionally, the Holding Company may, but is not required to, purchase
the shares of New Common Stock held by an Acute Care Institution, either
directly or through an Eligible Affiliate thereof, if (a) the Acute Care
Institution does not meet the membership enrollment requirements provided in any
agreement between the Operating Subsidiary and the Acute Care Institution, (b)
the Acute Care Institution's license pursuant to applicable state health care
laws is suspended or revoked or curtailed, (c) the Acute Care Institution's
accreditation as a hospital is suspended or revoked or curtailed, (d) the Acute
Care Institution is dissolved (whether voluntarily or involuntarily), liquidated
or becomes insolvent, or, if applicable, (e) the Acute Care Institution fails to
perform its obligations under Article V of the Certificate of Incorporation of
the Holding Company, as proposed to be amended. The purchase price in such
circumstances is the lesser of Book Value or the purchase price paid for such
shares and shall be payable in cash within 90 days following the date of the
event allowing for such repurchase, or, in the discretion of the Holding
Company, over a period of three years in equal annual installments commencing
one year from the date of purchase with interest at a rate of 7% per annum,
accrued and payable annually.
The Holding Company may, but is not required to, purchase the shares of
New Common Stock held by an Organizational Shareholder if the Organizational
Shareholder breaches or fails to comply with any federal or state securities law
applicable to the Organizational Shareholder or the Organizational Shareholder
is dissolved (whether voluntarily or involuntarily), liquidated or becomes
insolvent. The Holding Company may purchase such shares at a purchase price per
share equal to the lesser of Book Value or the purchase price paid for such
shares. Such purchase price shall be payable in cash within 90 days following
the date of the event allowing for such repurchase, or, in the discretion of the
Holding Company, over a period of three years in equal annual installments
commencing one year from the date of purchase with interest at the rate of 7%
per annum, accrued and payable annually.
The repurchase of shares of New Common Stock by the Holding Company is
subject to applicable federal and state securities and other laws, including
laws affording creditors certain rights. Repurchases of New Common Stock by the
Holding Company may be deemed to be a tender offer
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under federal and state securities laws. The Holding Company contemplates only
occasional isolated repurchases; however, if any such repurchases were deemed to
be a tender offer, the repurchase could not be effected until the Holding
Company provided the requisite information to shareholders and complied with
other requirements of such laws, including, without limitation, holding any
tender offer open for a specified period of time. Compliance with such laws
could delay the Holding Company's ability to effect any such repurchases. The
payment by the Holding Company in connection with the repurchase of any of its
securities is also subject to corporate law requiring that such repurchase shall
not render a corporation insolvent.
(vii) Covenants of NJ Institutional Shareholders For so long as any
NJ Institutional Shareholder holds shares of New Common Stock, it agrees and
covenants to effect the following: (a) if the only existing health benefits plan
of the NJ Institutional Shareholder or its affiliated NJ Acute Care Institution
is self-insured, the NJ Institutional Shareholder or its affiliated NJ Acute
Care Institution, as the case may be, shall offer a FOHP-NJ plan to its
employees as its exclusive plan in accordance with a timetable determined by
FOHP-NJ to be feasible, but in no event later than January 1, 1996; (b) if the
NJ Institutional Shareholder or its affiliated NJ Acute Care Institution offers
multiple non-union health plans in addition to one or more self-insured plans to
its employees, the NJ Institutional Shareholder or its affiliated NJ Acute Care
Institution, as the case may be, is obliged to offer a FOHP-NJ plan to its
employees and 50% of such employees are required to be covered by a FOHP-NJ plan
by January 1, 1996, and 75% of such employees are required to be covered by a
FOHP-NJ plan by January 1, 1997; or (c) if the NJ Institutional Shareholder or
its affiliated NJ Acute Care Institution offers a plan to its employees pursuant
to a collective bargaining agreement as well as other existing plans, the NJ
Institutional Shareholder or its affiliated NJ Acute Care Institution, as the
case may be, must (1) use its best efforts to offer a FOHP-NJ plan to its
non-union employees on a non-exclusive basis, (2) use its best efforts to
qualify a FOHP-NJ plan as the union designated plan, and (3) pay reasonable
deductibles or other costs to qualify a FOHP-NJ plan as the union designated
plan.
The covenants of a NJ Institutional Shareholder shall terminate on the
second anniversary of the date the FOHP-NJ plan is first offered to the
employees of the NJ Institutional Shareholder or, if the NJ Institutional
Shareholder is not a NJ Acute Care Institution, to the employees of its
affiliated NJ Acute Care Institution; provided, however that prior to an NJ
Institutional Shareholder or its affiliated NJ Acute Care Institution offering
to its employees any health benefits plan similar to a health benefits plan
offered by FOHP-NJ, such NJ Institutional Shareholder shall provide prior
written notice to FOHP-NJ of the material terms of any Bona Fide Offer (as
defined herein under the caption "Proposed Amendments") offered by such other
health benefits plan, and, should FOHP-NJ offer a FOHP-NJ plan containing terms
at least as favorable in all material respects to the employees of the NJ
Institutional Shareholder or its affiliated NJ Acute Care Institution, the NJ
Institutional Shareholder or affiliated NJ Acute Care Institution shall be
required to offer such FOHP-NJ plan to its employees on the same basis as if the
covenants had not been terminated.
If a NJ Institutional Shareholder breaches any covenant or fails to
provide reimbursement rates to FOHP-NJ comparable to those of other NJ
Institutional Shareholders or their affiliated NJ Acute Care Institutions, and
sufficiently favorable so as to enable FOHP-NJ to market its products at
market-competitive rates, then the Holding Company shall have the right to
purchase, but shall not be obligated to purchase, and the NJ Institutional
Shareholder shall be obligated to sell to the Holding Company at the Holding
Company's option, all the New Common Stock held by the NJ Institutional
Shareholder at a purchase price equal to the lesser of Book Value or the
original purchase price of such shares. The purchase price shall be payable in
cash within 90 days following the date of the purchase, or, in the discretion of
the Holding Company, over a period of three years in equal annual installments
commencing one years from the date of purchase with interest at the rate of 7%
per annum, accrued and payable annually.
49
<PAGE>
Preferred Stock
The Certificate of Incorporation of the Holding Company, as proposed to be
amended, authorizes 10,000,000 shares of Preferred Stock, and authorizes the
Holding Company's Board of Directors to issue shares of Preferred Stock in one
or more series with such dividend, liquidation, conversion, redemption and other
rights as the Board of Directors may establish from time to time. The Board has
no present intention of issuing any shares of Preferred Stock.
Vote Required
Approval by the Holding Company's shareholders of the proposal to approve
the Transaction requires the affirmative vote of the holders of at least 75% of
the outstanding Holding Company Common Stock-NJ.
ELECTION OF DIRECTORS
If the Transaction is approved by the shareholders, the Holding Company's
By-laws will be amended to provide that the Board of Directors shall consist of
not fewer than six nor more than fifty members. In addition, if the Transaction
is approved by the shareholders, the Board of Directors has fixed the number of
directors to serve on the Board at ten.
Currently, the Board of Directors consists of the following thirteen
persons: Mr. Michael Azzara, Mr. Christopher Dadlez, Dr. Mark Engel, Dr. Stephen
D. Feldman, Dr. Thomas J. Feneran, Mr. John R. Kopicki, Dr. Joel F. Lehrer, Dr.
Paul F. Low, Mr. Barry H. Ostrowsky, Mr. Mark D. Pilla, Mr. William B. Roberts,
Mr. John W. Rohfritch and Dr. Om P. Sawhney.
Mr. Dadlez, Dr. Engel, Dr. Feneran and Dr. Sawhney have been nominated for
reelection to the Board. The other six nominees to the Board are named below.
It is the intention of the persons named in the accompanying proxy to
vote, unless otherwise instructed, in favor of the ten nominees named
hereinafter for their election as directors of the Holding Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES FOR DIRECTOR.
If any of the nominees should be unavailable for election, the proxies
will be voted for the election of such other person or persons as shall be
determined by the persons named in the proxies in accordance with their
judgment. All nominees have consented to be named herein and have indicated
their intent to serve if elected. The Holding Company is not aware of any reason
why any of the nominees should become unavailable for election, or if elected,
should be unable to serve as a director.
50
<PAGE>
Nominees
The nominees, their ages and their principal occupations or employment,
are as follows:
Principal Occupation
Nominee Age or Employment
------- --- ------------------------------
Mr. Roger W. Birnbaum 60 President of Princeton Health-
1460 Route 9 North Care Group
Woodbridge, NJ 07095
Dr. John F. Bonamo 44 Obstetrician and Gynecologist
94 Northfield Avenue
West Orange, NJ 07052
Sister Jane Frances Brady 61 President of St. Joseph's
St. Joseph's Hospital and Hospital and Medical Center
Medical Center
703 Main Street
Paterson, NJ 07503
Mr. Bruce G. Coe 66 President Emeritus of New
41 Lambert Lane Jersey Business and Industry
Lamberville, NJ 08530 Association
Mr. Christopher M. Dadlez 43 President of Monmouth Medical
Monmouth Medical Center Center, Executive Vice
300 Second Avenue President of Saint Barnabas
Long Branch, NJ 07740 Health Care System, and a
Director of FOHP
Dr. Mark Engel 49 President of Ophthalmic
733 North Beers Street Physicians of Monmouth and
a Director of FOHP Holmdel, NJ 07733
Dr. Thomas J. Feneran 48 Urologist and a Director of
53 Nautilus Drive FOHP
Manahawkin, NJ 08050
51
<PAGE>
Principal Occupation
Nominee Age or Employment
------- --- ------------------------------
Mr. John Gantner 44 Senior Vice President of
Robert Wood Johnson Finance and Treasurer of the
University Hospital Robert Wood Johnson University
One Robert Wood Johnson Place Hospital
New Brunswick, NJ 08903
Mr. Laurence M. Merlis 42 President and Chief Executive
Riverview Medical Center Officer of Riverview Medical
One Riverview Plaza Center
Red Bank, NJ 07701
Dr. Om P. Sawhney 59 Plastic Surgeon and a Director
1550 Park Avenue of FOHP
South Plainfield, NJ 07080
- --------------------------
Each director will hold office until the next annual meeting of
shareholders or until his or her successor is elected and qualifies. There are
no family relationships among the current directors, executive officers or
persons nominated by the Holding Company to become directors. Except as set
forth below, none of the officers or directors of the Holding Company are
directors of any company registered pursuant to Section 12 of the Exchange Act
or subject to the requirements of Section 15(d) of the Exchange Act or any
company registered as an investment company under the Investment Company Act of
1940.
Roger W. Birnbaum has served as the President of the Princeton HealthCare
Group since October 1991. From July 1972 to September 1991, Mr. Birnbaun served
as the President and Chief Executive Officer of HIP/Rutgers Health Plan, Inc.
Mr. Birnbaum has been a Professor of Health Care at Rutgers State University of
New Jersey since July 1972 and Adjunct Associate Professor at the University of
Medicine and Dentistry of New Jersey since January 1974. Mr. Birnbaum is on the
Board of Directors of Caldwell B. Esselstyn Foundation and the Board of Trustees
of Rutgers Community Health Foundation.
Dr. John F. Bonamo has been an obstetrician and gynecologist in private
practice since 1981. He is Treasurer of the Department of OB/GYN of Saint
Barnabas Medical Center. Dr. Bonamo serves on the Board of Directors of
Metrowest I.P.A.
Sister Jane Frances Brady has served as the President of St. Joseph's
Hospital and Medical Center since November 1972. She also serves as Treasurer of
St. Joseph's Hospital and Medical Center and the Paterson Economic Development
Corporation. She serves as a trustee of both St. Joseph's Hospital and Medical
Center Foundation, Health Care Insurance Company and Princeton Insurance
Company. In addition, she serves as the President of Hospital Alliance of New
Jersey. She has served as a director of FOHP-NJ since January 1994.
Mr. Bruce G. Coe is currently serving as President Emeritus of the New
Jersey Business and Industry Association. From 1982 to 1996 he served as
President of the New Jersey Business and Industry Association. He is Chairman
and a director of the New Jersey Resources Corporation. Mr. Coe serves on the
Board of Directors of Core-States-New Jersey National Bank and New Jersey
Manufacturers Insurance Company. He serves on the Boards of Trustees of New
Jersey Future and New Jersey Historical Society.
52
<PAGE>
Mr. Christopher M. Dadlez, FACHE, has been Executive Vice President of the
Saint Barnabas Health Care System since June 1996 and President of Monmouth
Medical Center since March 1992. From March 1992 to June 1996, Mr. Dadlez also
served as Chief Executive Officer of Monmouth Medical Center. From January 1995
to May 1996, Mr. Dadlez served as the President of Mid-Atlantic Health Group.
From June 1974 to March 1992, he was Executive Vice President and Chief
Operating Officer of Sinai Hospital, Baltimore, Maryland. Mr. Dadlez serves on
the Board of Trustees of the New Jersey Hospital Association and Ronald McDonald
House. He serves as Chairman of Long Branch Tomorrow and is on the Board of
Trustees of the Greater Long Branch Chamber of Commerce. He has served as a
director of FOHP-NJ since January 1994, and as a director of the Holding Company
since June 8, 1995.
Dr. Mark Engel has served as President of Ophthalmic Physicians of
Monmouth since August 1975. From January 1989 through December 1990 he served as
President of the Bayshore Hospital Medical Staff. Dr. Engel is a trustee of
Ophthalmic Physicians of Monmouth and Trust Optical. He has served as a director
of the Holding Company since June 8, 1995 and has also served as a director of
FOHP-NJ since January 1994, and as Chairman of the Board of FOHP-NJ since June
1995.
Mr. John Gantner has served as Treasurer of the Robert Wood Johnson
University Hospital since May 1995. In 1993, he joined Robert Wood Johnson
University as Senior Vice President of Finance. From October 1988 to December
1992, Mr. Gantner was a partner in the New York/New Jersey office of Ernst &
Young. Mr. Gantner is a Certified Public Accountant and a Certified Managerial
Accountant.
Dr. Thomas J. Feneran has been a physician in private practice since June
1983. He is a urologist, associated in Drs. Feneran & Fernicola, P.C. Dr.
Feneran serves as a physician representative to the Board of Trustees of
Southern Ocean County Hospital. He has served as a director of the Holding
Company since June 8, 1995 and has also served as a director of FOHP-NJ since
January 1994.
Laurence M. Merlis has served as the President and Chief Executive Officer
of Riverview Medical Center since May 1993. From January 1986 through May 1993
he served as President of East Orange General Hospital. Mr. Merlis serves on the
Board of Directors of Monmouth-Ocean Hospital Corporation. He is a member of the
Board of Trustees of the New Jersey Hospital Association, Voluntary Hospital of
America and Eastern Monmouth Chamber of Commerce. He has served as a director of
FOHP-NJ since January 1994.
Dr. Om P. Sawhney has been a practicing physician in Plastic Surgery &
Rehabilitation Medicine Associates since February 1974. Dr. Sawhney is Chairman
of the Audit Committee - Medical Inter Insurance Exchange and the Board of
Managers of Associates in Medical Service at Muhlenburg, L.L.C. He is on the
Board of Directors of the Muhlenberg Foundation and the Central Jersey I.P.A.
Dr. Sawhney is also President of Associates in Medicine and Surgery, P.A. He has
served as a director of the Holding Company since June 8, 1995, and has also
served as a director of FOHP-NJ since January 1994.
Meetings of the Board of Directors; Committees
During the fiscal year ended December 31, 1995, the Board of Directors of
the Holding Company held five regular meetings and acted on nine occasions by
written consent. During fiscal 1995, each director attended at least 75% of the
meetings of the Board of Directors and each of the committees on which he served
that were held during the period such person served as a director and, if
applicable, a committee member.
53
<PAGE>
The Holding Company currently has a standing Compensation Committee which
is comprised solely of members of the Board.
Compensation Committee
The members of the Compensation Committee of the Board of Directors (the
"Compensation Committee" or "Committee") are Mr. Roberts, Mr. Kopicki and Dr.
Engel. The Compensation Committee has been empowered by the Board to make
decisions relating to the compensation of the officers, directors and employees
of the Holding Company. During the fiscal year ended December 31, 1995, the
Compensation Committee held three meetings. If the Transaction is approved by
the shareholders and the nominees for directors named herein are elected, the
composition of the Compensation Committee will change inasmuch as Mr. Roberts
and Mr. Kopicki are not standing for reelection to the Board.
Executive Officers
The name, age and position of each person serving as an executive officer
of the Holding Company is set forth below and brief summaries of their business
experience and certain other information with respect to each of them is set
forth in the information which follows the table:
Name Age Position
- ---- --- --------
John W. Rohfritch 50 President and Chief
Executive Officer
Dr. Joseph Singer 39 Executive Vice President
and Chief Medical Officer
Paul J. Kimmins 50 Executive Vice President
Klas Arne Booth, III 44 Executive Vice President
Donald Parisi 40 Secretary and General Counsel
- ---------------------
John W. Rohfritch has served as President and Chief Executive Officer of
the Holding Company since June 25, 1996. Prior thereto, Mr. Rohfritch served as
Executive Vice President of the Holding Company from June 8, 1995 to June 25,
1996, and as President of FOHP-NY from March 1, 1995 to June 25, 1996. Mr.
Rohfritch served as Executive Vice President and Chief Operating Officer of
FOHP-NJ from April 1994 to March 1, 1995. From March 1993 through March 1994, he
served as Senior Vice President, Managed Care for Allscrips Pharmaceuticals,
Inc. From June 1992 through March 1993, Mr. Rohfritch was President of John W.
Rohfritch & Associates, a managed care consulting firm. From October 1974 to
June 1992, he held various management positions with Cigna Corp., including that
of Senior Vice President.
Dr. Joseph Singer has served as Executive Vice President and Chief Medical
Officer of the Holding Company since June 8, 1995. Dr. Singer also has served as
Executive Vice President, Medical Affairs and Medical Director of FOHP-NJ since
February, 1995. Prior to joining FOHP-NJ, Dr. Singer was a practicing physician
in Moorestown and Medford, New Jersey, with a family practice and specialty
in geriatrics.
54
<PAGE>
Paul J. Kimmins is a Certified Public Accountant who has served as
Executive Vice President of the Holding Company since June 8, 1995. Mr. Kimmins
served as Executive Vice President, Operations of FOHP-NJ from February 1995 to
June 8, 1995. From 1988 to February 1995, he was Vice President and Chief
Financial Officer of CareAmerica Health Plans, Inc., a health care company based
in Southern California.
Klas Arne Booth, III has served as an Executive Vice President of the
Holding Company since March 18, 1996. Prior thereto, Mr. Booth served as Vice
President of Sales and Marketing for Cost Care Inc., headquartered in Newport
Beach, California. From 1986 to 1993, Mr. Booth served as the Vice President of
Sales and Marketing for Health Risk Management Inc., headquartered in
Minneapolis, Minnesota.
Donald Parisi has served as the Secretary and General Counsel of the
Holding Company since June 8, 1995. Prior thereto, Mr. Parisi served as Vice
President, Legal Affairs and General Counsel of FOHP-NJ from August 1994 to June
8, 1995. From 1992 to 1994 he was a partner in the law firm of Donington,
Karcher, Leroe, Salmond, Ronan & Rainone and from 1988 to 1992 he served as a
Deputy Attorney General for the State of New Jersey.
Executive Compensation
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to the Holding Company and
its subsidiaries for the fiscal years ended December 31, 1995, 1994 and 1993, of
the Chief Executive Officer of the Holding Company during the fiscal year ended
December 31, 1995, and the next five highest paid executive officers of the
Holding Company in fiscal 1995 (collectively, the "Named Officers"):
55
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------------------- -------------------------------------------------
Awards Payouts
------------------------ -------
Other Securities
Annual Restricted Underlying All Other
Compensa- Stock Options/ LTIP Compensa-
Name and Principal Position Year Salary($) Bonus($) tion($) Award(s)($) SARs(#) Payouts($) tion($)(1)
- --------------------------- ---- --------- -------- ------- ----------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John W. Rohfritch 1995 $186,254 $ 43,000 -- -- -- -- $25,581(2)
President and 1994 118,846 -- -- -- -- -- --
Chief Executive Officer 1993
John L. Adessa (3) 1995 250,000 593,720(4) -- -- -- -- 24,047(5)
Former President and 1994 215,369 75,000 -- -- -- -- --
Chief Executive Officer 1993 75,887(6) -- -- -- -- -- --
Joseph Singer 1995 177,217 -- -- -- -- -- 4,620
Executive Vice President 1994
and Chief Medical Officer 1993
Kenneth E. Bonaly (7) 1995 134,360 19,197 -- -- -- -- 3,295
Former Executive Vice 1994 141,150 -- -- -- -- -- --
President 1993 2,596(8) -- -- -- -- -- --
Paul Kimmins 1995 124,731 15,000 -- -- -- -- 48,924(9)
Executive Vice President 1994
1993
Sharon Seitzman (10) 1995 122,777 25,113 -- -- -- -- 4,184
Former Executive Vice 1994 99,140 21,205 -- -- -- -- --
President 1993 19,874(11) -- -- -- -- -- --
</TABLE>
- ----------
(1) Includes amounts contributed by the Holding Company under its 401(K) Plan.
All full-time employees who have completed thirty (30) days of service
with the Holding Company or any of its subsidiaries are eligible to
participate in the 401(K) Plan which allows eligible employees to save up
to 15% of their pre-tax compensation (subject to a maximum amount per year
established annually pursuant to the Internal Revenue Code (the "Code"))
through a payroll deduction. Subject to the discretion of the Board of
Directors, the Holding Company may make matching contributions to the
401(K) Plan. Amounts contributed by the Holding Company to the accounts of
the Named Officers for fiscal 1995 are as follows: Mr. Rohfritch - $455;
Mr. Adessa - $4,043; Dr. Singer - $4,620; Mr. Bonaly - $3,346; Mr. Kimmins
- $4,620; and Ms. Seitzman - $4,184.
(2) Includes relocation expenses of $25,126 which were paid by the Holding
Company.
(3) Mr. Adessa served as President and Chief Executive Officer of the Holding
Company from its inception in May 1994 to June 1996.
(4) Of this amount, $500,000 represents the initial valuation bonus
contemplated in the Adessa Employment Agreement (as defined below) that
was accrued and recognized by the Holding Company in 1995, but which was
not paid to Mr. Adessa until April 1996 when certain conditions in the
Adessa Employment Agreement were satisfied.
(5) Of this amount, $20,004 represents life insurance premiums paid by the
Holding Company on the life of Mr. Adessa for his benefit for the year
ended December 31, 1995.
56
<PAGE>
(6) Represents the period from May 1993 through December 31, 1993.
(7) Mr. Bonaly passed away on September 29, 1995 while serving as Executive
Vice President of the Holding Company and President of FMCO.
(8) Represents the period from December 13, 1993 through December 31, 1993.
(9) Includes relocation expenses of $44,309 which were paid by the Holding
Company.
(10) Ms. Seitzman served as Executive Vice President of the Holding Company,
and as President and a director of FOHP-NJ, from June 8, 1995 to May 1996.
(11) Represents the period from September 27, 1993 through December 31, 1993.
Employment Agreements
John W. Rohfritch, President and Chief Executive Officer of the Holding
Company, is employed by the Holding Company pursuant to an agreement, dated
December 27, 1994 (the "Rohfritch Employment Agreement"). The Rohfritch
Employment Agreement is for a term of two (2) years, ending December 31, 1996.
Mr. Rohfritch received approximately $185,000 as base salary in the first year
of the Rohfritch Employment Agreement and will receive a base salary of either
$195,000 or $175,000 in the second year of the Rohfritch Employment Agreement,
depending upon the development and capitalization of the provider network of
FOHP-NY. Mr. Rohfritch is also eligible for bonuses that can total as much as
twenty 20% of his base salary. Bonuses will be awarded to Mr. Rohfritch based
upon the success of FOHP-NY. The Rohfritch Employment Agreement provides that
Mr. Rohfritch shall receive the same health benefits as the other executives of
FOHP-NJ and he shall be provided with a leased automobile.
Paul J. Kimmins, Executive Vice President, Financial and Business Services
of the Holding Company is employed pursuant to an agreement dated July 17, 1995
and effective as of July 1, 1995 (the "Kimmins Employment Agreement"). The term
of Mr. Kimmins' employment under the Kimmins Employment Agreement will end July
1, 1997; provided, that such term will be automatically extended annually unless
terminated by either party.
Pursuant to the Kimmins Employment Agreement, Mr. Kimmins will receive an
annual salary of $150,000, which may be increased by the Board of Directors of
the Holding Company. Mr. Kimmins is eligible to receive an annual bonus of up to
20% of his base annual salary. In the event that Mr. Kimmins remains
continuously employed by the Holding Company from July 1, 1995 to July 1, 1997,
the Holding Company will pay him a deferred incentive payment equal to 7% of the
total amount of base compensation and annual bonuses paid to him during the term
of the Kimmins Employment Agreement. This deferred incentive payment will be
paid to Kimmins no later than July 31, 1997. In addition, Mr. Kimmins is
entitled to the use of an automobile and to participate in any employee benefit
plans which the Holding Company makes available to its employees and senior
management.
During the term of the Kimmins Employment Agreement, Mr. Kimmins is
subject to immediate termination for egregious misconduct. In the event that Mr.
Kimmins is terminated for reasons other than egregious misconduct, he will be
paid the greater of the amount of monies remaining and due under the Kimmins
Employment Agreement or a one (1) year salary payment plus bonuses and benefits.
If the Holding Company does not renew the Kimmins Employment Agreement, Mr.
Kimmins will receive in lump sum, on or about September 15, 1997, an amount
equal to one-half (1/2) times the base compensation in effect for the employment
year ending July 31, 1997. Further, in the event his employment with the Holding
Company or its successor is involuntarily terminated, Mr. Kimmins will receive
professional outplacement support at the expense of the Holding Company or its
successor.
57
<PAGE>
Joseph Singer, M.D., pursuant to an agreement between the Holding Company
and Alliance Medical Group, Inc. ("Alliance") dated November 30, 1994 (the
"Singer Employment Agreement"), is employed as an Executive Vice President and
as the Chief Medical Officer of the Holding Company. The term of employment is
for an indefinite period, ending no less than two (2) years after date of
employment. At the conclusion of the initial two (2) year period on or about
November 30, 1996, the Singer Employment Agreement shall automatically renew
itself for periods of two years and thereafter unless either Holding Company or
Alliance gives the other written notice of nonrenewal at least twelve months
prior to the expiration of the initial two (2) year period.
Pursuant to the Singer Employment Agreement, Dr. Singer will receive an
annual salary of $240,000 and similar benefits as provided to the other
executive officers of the Holding Company. Further, Dr. Singer is provided, at
the expense of the Holding Company, with an automobile, gasoline credit card,
automobile insurance and is reimbursed for the cost of maintaining the
automobile.
Finally, under the terms of the Singer Employment Agreement, Dr. Singer is
subject to immediate termination for egregious acts or loss of medical license.
Effective October 27, 1995, the Holding Company entered into an employment
agreement with John L. Adessa, the Holding Company's former President and Chief
Executive Officer (the "Adessa Employment Agreement"). On June 25, 1996, Mr.
Adessa's employment with the Holding Company terminated. As a result, Mr. Adessa
is to receive approximately $700,000 as severance under the Adessa Employment
Agreement. In accordance with the terms of the Adessa Employment Agreement, the
severance to be paid Mr. Adessa is the sum of the following amounts: (i) the
amount equal to two (2) times his salary in effect on the date of severance;
(ii) the amount equal to the annual bonus earned by Mr. Adessa for the full
fiscal year last ended before the date of severance; and (iii) the amount equal
to 20% of the sum of all salary and annual bonuses earned from July 1, 1994
through the date of severance. The severance payment will be made by the Holding
Company as soon as such payment is permitted by the DOI. The DOI has prohibited
the Holding Company from making such payment until the Holding Company resolves
FOHP-NJ's statutory net worth deficiency.
The Adessa Employment Agreement contains a covenant not to compete which
provides that in the event the Adessa Employment Agreement is terminated for any
reason, Mr. Adessa will not, for a one (1) year period, accept employment from
any other health maintenance organization, insurance company, preferred provider
organization or any other entity which competes with the Holding Company within
any state in which the Holding Company or any of its affiliates is licensed to
conduct business or has filed an application for such license.
Directors' Compensation
The members of the Holding Company's Board of Directors and any committee
thereof may be paid their expenses, if any, relating to their attendance at
Board or committee meetings, and directors who are not full-time employees of
the Holding Company may be paid a fixed sum for attendance at Board or committee
meetings or paid a stated salary as a director. Currently, the members of the
Holding Company's Board of Directors and any committee thereof do not receive
any compensation for services rendered to the Holding Company, except that in
October 1996 the Board awarded Dr. Engel $12,500 and Dr. Sawhney $10,000 for
services performed by such directors in connection with the Transaction. The
Board of Directors of the Holding Company may in the future consider the
appropriateness of compensation to outside directors as well as to individuals
who serve on committees and who are not employees of the Holding Company or any
of its subsidiaries.
58
<PAGE>
Members of the Board of Directors of FOHP-NJ currently do not receive any
compensation for their services to FOHP-NJ. The Board of Directors of FOHP-NJ
may in the future consider the appropriateness of compensation to outside
directors. Effective January 1, 1994, physician members of any of the following
committees of FOHP-NJ are entitled to receive a $250 payment for each committee
meeting attended by such member: the Executive Committee, the Strategic Planning
Committee, the Finance Committee, the Utilization Management Committee, the
Quality Assurance Committee, the Credentialling Subcommittee of the Quality
Assurance Committee and the Reimbursement Committee.
FOHP-NJ paid a total of approximately $70,000 during the fiscal year ended
December 31, 1995 to physician directors.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1995, the Compensation Committee
consisted of Mr. Roberts, Mr. Kopicki and Dr. Engel.
Effective December 31, 1995, William B. Roberts, the Chairman of the Board
of Directors of the Holding Company, guaranteed the payment of up to six million
dollars of the Holding Company's capital obligation to FOHP-NJ. The guaranty
terminated on March 27, 1996. Mr. Roberts was paid $10,000 for providing this
guaranty.
Simultaneously with the termination of Mr. Roberts' six million dollar
guaranty, Mr. Roberts secured from Chemical Bank a three million dollar letter
of credit which may be drawn upon by the Holding Company in the event the
Holding Company is required to contribute capital to FOHP-NJ so that FOHP-NJ
remains in compliance with the statutory net worth and other capital
requirements applicable to it. The Chemical Bank letter of credit expires on
January 2, 1997. The Holding Company paid $48,500 in bank fees in connection
with the letter of credit issued by Chemical Bank. Contemporaneously with the
issuance of the letter of credit by Chemical Bank, the Holding Company and Mr.
Roberts entered into a reimbursement agreement pursuant to which Mr. Roberts
will be reimbursed by the Holding Company for any amounts he is required to pay
Chemical Bank in connection with any draw against the letter of credit by the
Holding Company. Under the terms of the reimbursement agreement between Mr.
Roberts and the Holding Company, Mr. Roberts is entitled to a fee of $10,000 per
month through May, 1996 and $20,000 per month thereafter until the Chemical Bank
letter of credit terminates.
Prior to making any draw against the Chemical Bank letter of credit, the
following conditions must be satisfied: (i) the Holding Company must furnish
written evidence to Mr. Roberts that the DOI and/or the DOH have required
FOHP-NJ to obtain additional capital to remain in compliance with the statutory
net worth and other capital requirements applicable to FOHP-NJ; and (ii) the
Holding Company must not have sufficient capital to contribute to FOHP-NJ so
that FOHP-NJ is able to satisfy the request of the DOI and/or the DOH and remain
in compliance with the statutory net worth and other capital requirements
applicable to FOHP-NJ, and provides Mr. Roberts with written representation to
that effect. In addition, the Holding Company has agreed not to make any draw
against the Chemical Bank letter of credit until the Holding Company exhausts
all its rights against any other letter of credit or guaranty made available to
the Holding Company for purposes of providing the Holding Company with capital
so that it can fund its capital obligation to FOHP-NJ, other then the let ter of
credit secured by Mr. Adessa. See "Related Party Transactions."
59
<PAGE>
Any amount to be reimbursed to Mr. Roberts under the reimbursement
agreement will be evidenced by a promissory note. Interest on the note will be
payable monthly at a rate equal to the prime rate of Chemical Bank plus 4%. The
principal amount of any note issued by the Holding Company pursuant to the
reimbursement agreement plus all accrued interest thereon will be payable 90
days from the date the note is issued. In the event that the principal amount of
the note plus all accrued interest is not paid within 90 days from the date the
note is issued, the note will then become payable on demand and bear an interest
rate on any amount outstanding after the initial 90 day period equal to the
lesser of: (i) 20%; or (ii) the highest rate permitted by law. Furthermore, if,
at the time the note is issued by the Holding Company, or at any time during the
period the note is outstanding, Mr. Roberts is eligible to own shares of the
Holding Company's Common Stock-NJ, Mr. Roberts, at his sole option, may convert
the principal amount of the note into shares of Common Stock-NJ at a conversion
rate of fifteen dollars per share (as adjusted to give effect to any stock
splits, stock dividends or any other adjustments occurring after December 31,
1995); provided, however, that if Mr. Roberts is eligible to own shares of
Common Stock-NJ, and chooses not to convert the note into shares of Common
Stock-NJ, any amount owed under the note will accrue interest at a rate equal to
the prime rate of Chemical Bank plus 4% for so long as the note remains
outstanding. Currently, Mr. Roberts is not a provider to any subsidiary of the
Holding Company and, therefore, is not permitted under the Holding Company's
Certificate of Incorporation to own shares of Common Stock-NJ. Consequently, Mr.
Roberts will not have an opportunity to convert any note issued to him, pursuant
to his reimbursement agreement with the Holding Company, into Common Stock-NJ
unless the Certificate of Incorporation of the Holding Company is amended to
allow persons who are not providers to a subsidiary of the Holding Company to
own Common Stock-NJ. The conversion feature to be included in any note issued to
Mr. Roberts pursuant to his reimbursement agreement with the Holding Company
will not survive any assignment of the note by Mr. Roberts.
For so long as the Chemical Bank letter of credit is in effect, the
Holding Company will not, without the prior written consent of Mr. Roberts: (i)
merge into any other entity; (ii) sell, lease, transfer, convey or otherwise
dispose of more than 50% of its assets during any 6 month period; (iii) make
loans to any person, firm or entity; (iv) sell, assign, transfer, discount, or
otherwise dispose of any accounts receivables or any promissory note payable to
it, except in the ordinary course of business; or (v) declare or pay any cash
dividends or make any distributions on, or redeem, retire or otherwise acquire
directly or indirectly, any share of its stock, other than pursuant to
redemptions by the Holding Company of its stock in accordance with the
provisions of its Certificate of Incorporation.
During the fiscal year ended December 31, 1995, no executive officer of
the Holding Company, other than James S. Vaccaro, served as a member of the
compensation committee or as a director of another entity, except for FOHP-NJ,
FOHP-NY, First Option Health Plan of Pennsylvania, Inc., First Option Health
Plan of Delaware, Inc., First Option Health Plan of Maryland, Inc., FOHP Agency,
Inc. and FMCO, each of which is a wholly-owned subsidiary of the Holding
Company. James S. Vaccaro, former Executive Vice President, Chief Financial
Officer and Chief Operating Officer of the Holding Company, served on the Board
of Trustees of Monmouth Medical Center, a provider in the FOHP-NJ network which
is affiliated with a shareholder of FOHP-NJ, whose President and Chief Executive
Officer, Christopher Dadlez, has served on the Board of Directors of the Holding
Company since June 7, 1995 and on the Board of Directors of FOHP-NJ since
January, 1994.
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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Compensation Objectives
In determining the amount and components of executive compensation, the
Committee's objective is to provide a compensation package that will enable the
Holding Company to attract and retain talented executives, reward outstanding
performance and more closely link the interests of the Holding Company's
executives with that of the shareholders. In determining actual compensation
levels, the Committee generally evaluates the Holding Company's performance and
the officers' contribution to that performance. Although the overall results of
the Holding Company and the compensation paid or awarded to officers of the
Holding Company are closely linked, an officer may be awarded an increase in
base compensation or bonus based solely on individual merit.
The Committee recognizes that the tremendous growth of FOHP-NJ and the
Holding Company over a short time period has highlighted the need to attract and
retain talented and qualified executives. Accordingly, the Committee has
selected a professional compensation consulting firm to assist it in evaluating
the Holding Company's executive compensation package. The Committee believes
that the professional compensation consulting firm retained by the Holding
Company has provided the Committee with (i) information with respect to the form
and amount of compensation offered to executives by its competitors, and (ii)
professional guidance on how to ensure that the Holding Company's executive
compensation package is consistent with those which are offered by the Holding
Company's competitors.
The Committee also recognizes that if the Transaction is consummated,
certain executive officers of the Holding Company, including the President and
Chief Executive Officer, will be designated and employed by HSI. Since the
Holding Company will be responsible for the payment of the salaries of the
officers of the Holding Company designated and employed by HSI, the Compensation
Committee will consult with HSI regarding the salaries and benefits paid or
awarded to those officers.
Principal Components of Executive Compensation
The Holding Company's executive compensation program has two principal
components: base salary and incentive compensation. Inasmuch as most of the
officers of the Holding Company are not providers to FOHP-NJ, they are not
eligible to own stock in the Holding Company. Accordingly, the Holding Company
has not implemented any plan or program which would allow officers to directly
participate in the growth of the Holding Company by owning or having the
opportunity to own an equity interest in the Holding Company. However, the
Committee has noted that stock option and other stock incentive type plans are
commonly used as performance based incentives in other public companies and,
therefore, is reviewing with the professional compensation consulting firm
engaged by the Holding Company, whether to include, as a component of the
executive compensation program, a plan which would allow officers to participate
in any increase in the value of New Common Stock or Common Stock-NJ, if the
Transaction is not consummated and the Holding Company continues as a going
concern, without actually owning shares of New Common Stock or Common Stock-NJ,
as the case may be, such as a stock appreciation rights plan.
Base Salary A key component of the Holding Company's executive
compensation program is base salary. Factors considered when determining the
base salary for an officer of the Holding Company include the position of the
officer, the amount of responsibility associated with the position, past
performance, dedication to the pursuit of achieving individual and Holding
Company goals, and the overall results of the Holding Company. The Committee
believes that the base salaries of the
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Holding Company's executive officers are generally below or similar to the
amounts paid to comparable officers at other companies of the same or similar
size as the Holding Company and, therefore, incentive compensation in the form
of annual bonuses and other rewards is a key component of the total compensation
paid to an officer of the Holding Company.
Incentive Compensation Currently, the Holding Company has a bonus plan in
effect. Pursuant to this bonus plan, an Executive or Senior Vice President of
the Holding Company can be awarded a bonus of up to 20% of his or her annual
base salary and a Vice President or Assistant Vice President can be awarded a
bonus of up to 10% of his or her annual base salary. Currently, the DOI has
prohibited the Holding Company from paying any bonuses to any employee of the
Holding Company until the Holding Company resolves FOHP-NJ's statutory net worth
deficiency.
Compensation of the Chief Executive Officer
Pursuant to the Rohfritch Employment Agreement, Mr. Rohfritch will receive
a base salary of between $175,000 and $195,000 in 1996. The Rohfritch Employment
Agreement expires on December 31, 1996. The Holding Company has decided to wait
until the Transaction is voted on by the shareholders before addressing the
issue of whether to enter into a new employment agreement with Mr. Rohfritch.
For the year ended December 31, 1995, Mr. Adessa, the former President and
Chief Executive Officer of FOHP, was paid a salary of $250,000. Moreover,
pursuant to the Adessa Employment Agreement, Mr. Adessa was entitled to receive
an initial valuation bonus of $500,000 if (i)(a) the number of enrollees in the
health plans offered by the Holding Company's subsidiaries exceeded 100,000 by
January 1, 1996, or (b) the Holding Company and its affiliates had achieved
$150,000,000 in annual premiums as of January 1, 1996, and (ii) Mr. Adessa
remained employed with the Holding Company until April 1, 1996. The
aforementioned conditions were satisfied and, accordingly, Mr. Adessa was paid
$500,000 in April 1996. The Committee believes that the initial valuation bonus
not only rewarded Mr. Adessa for the tremendous growth of FOHP-NJ and the
Holding Company during 1995, but also rewarded him for past services and his
unwavering dedication in the pursuit of the founding principle of both FOHP-NJ
and the Holding Company (i.e., that physicians and acute care institutions could
work together in providing quality and affordable health care services). In
reaching its decision to include the initial valuation bonus in the Adessa
Employment Agreement, the Committee placed great emphasis on the fact that Mr.
Adessa was precluded from receiving any shares of stock or stock options in
either FOHP-NJ or the Holding Company and, therefore, would not be able to
benefit from the success of FOHP-NJ and the Holding Company other than by
receiving monetary compensation.
The Compensation Committee believes that the overall program it has
adopted serves to focus the efforts of the Holding Company's executives on the
attainment of a sustained high rate of growth for the benefit of the Holding
Company, its employees and its shareholders.
Section 162(m) of the Code ("Section 162(m)"), which was enacted in 1993
for taxable years beginning on or after January 1, 1994, generally disallows a
tax deduction to public companies for compensation over $1,000,000 paid to a
corporation's highest paid officers. Qualifying performance-based compensation
is not subject to the deduction limit if certain requirements are met. This
limitation is not a significant issue for the Holding Company at the present
time. However, the Compensation Committee plans to review and possibly
restructure the annual incentive bonus and long-term equity based compensation
programs for its most senior executives so that such bonuses should constitute
qualifying performance-based compensation under Section 162(m). Furthermore,
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the Compensation Committee may from time to time award compensation that is
non-deductible under Section 162(m) when, in the exercise of the Compensation
Committee's business judgment, such award would be in the best interests of the
Holding Company.
COMPENSATION COMMITTEE
Mr. William Roberts
Dr. Mark Engel
Mr. John R. Kopicki
CORPORATE PERFORMANCE
The graph below compares the cumulative total shareholder return on the
Common Stock-NJ of the Holding Company and the Common Stock, $.01 par value, of
FOHP-NJ (the "FOHP-NJ Stock"), (which, pursuant to the reorganization of FOHP-NJ
into a holding company structure in June 1995, was exchanged by the holders
thereof, on a one for one basis, for shares of Common Stock-NJ) from October 31,
1994, the closing date of FOHP-NJ's initial public offering of FOHP-NJ Stock, to
December 31, 1995, with the cumulative total return on two broad market indices
over the same period (assuming an investment of $100 in the FOHP-NJ Stock/Common
Stock-NJ and in each of the indices on the date of FOHP-NJ's initial public
offering, and reinvestment of all dividends in the two broad market indices).
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Comparison of Five Year-Cumulative Total Returns
Performance Graph for
FOHP, Inc.
Prepared by the Center for Research in Security Prices
Produced on 06/12/96 including data to 12/29/95
[GRAPH]
Shown here in the printed document is a line graph depicting the following
plot points:
Date Company Index Market Index Peer Index
12/31/90 60.218 33.962
01/31/91 63.341 39.523
02/28/91 68.166 44.761
03/28/91 70.255 52.564
04/30/91 70.458 51.393
05/31/91 73.359 58.350
06/28/91 70.090 54.076
07/31/91 73.354 58.457
08/30/91 75.384 59.079
09/30/91 74.579 61.581
10/31/91 75.855 65.882
11/29/91 73.034 65.444
12/31/91 81.069 75.593
01/31/92 80.940 77.552
02/28/92 82.024 77.358
03/31/92 80.159 71.391
04/30/92 81.268 67.000
05/29/92 81.767 68.579
06/30/92 80.156 64.006
07/31/92 83.396 68.761
08/31/92 81.660 67.278
09/30/92 82.788 68.097
10/30/92 83.744 69.186
11/30/92 87.334 77.543
12/31/92 88.898 78.311
01/29/93 89.998 84.313
02/26/93 90.381 68.008
03/31/93 92.661 70.157
04/30/93 90.136 69.815
05/28/93 92.838 74.691
06/30/93 93.373 73.865
07/30/93 93.303 77.130
08/31/93 96.973 73.455
09/30/93 97.135 79.343
10/29/93 98.697 79.978
11/30/93 97.028 86.619
12/31/93 98.857 90.352
01/31/94 101.912 99.235
02/28/94 99.554 98.024
03/31/94 94.991 92.085
04/29/94 95.879 88.395
05/31/94 96.811 90.341
06/30/94 94.208 83.869
07/29/94 97.043 85.893
08/31/94 101.191 94.274
09/30/94 99.229 100.239
10/31/94 100.768 101.607
11/01/94 100.000 100.000 100.000
11/30/94 100.000 97.144 98.852
12/30/94 100.000 98.371 96.940
01/31/95 100.000 100.570 101.854
02/28/95 100.000 104.546 100.938
03/31/95 100.000 107.232 106.217
04/28/95 100.000 109.973 90.003
05/31/95 100.000 113.726 89.459
06/30/95 100.000 117.278 91.427
07/31/95 100.000 122.106 100.838
08/31/95 100.000 123.360 101.065
09/29/95 100.000 127.949 105.978
10/31/95 100.000 126.650 104.444
11/30/95 100.000 132.074 117.377
12/29/95 100.000 134.140 123.015
<TABLE>
<CAPTION>
Legend
<S> <C> <C> <C> <C> <C> <C>
Symbol CRSP Total Returns Index for: 12/31/92 12/31/92 12/31/93 12/30/94 12/29/95
- ------ ----------------------------- -------- -------- -------- -------- --------
______ * FOHP, Inc. 100.0 100.0
...-- ** NYSE/AMEX/Nasdaq Stock Market (US Companies) 81.1 88.9 98.9 98.4 134.1
- ------ *** Nasdaq Health Services Stocks 75.6 78.3 90.4 96.9 123.0
SIC 8000-8099 US & Foreign
</TABLE>
Notes:
A: The lines represent monthly index levels derived from compounded daily
returns that include all dividends.
B: The indexes are reweighed daily, using the market capitalization on the
previous trading day.
C: If the monthly interval, based on the fiscal year-end, is not a trading
day, the preceding trading day is used.
D: The index level for all series was set to $100.0 on 11/01/94.
E: No Trading activity recorded for FOHP, Inc. from 11/01/94 to 12/29/95.
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In interpreting the results depicted on the above graph with respect to
the Holding Company and FOHP-NJ, it is important to note that there is no public
market for Common Stock-NJ nor was there a public market for FOHP-NJ Stock. The
lack of a public market for shares of Common Stock-NJ is attributable to the
restrictions on transfer imposed on Common Stock-NJ by the Holding Company's
Certificate of Incorporation. Likewise, the lack of a public market for shares
of FOHP-NJ Stock was attributable to the restrictions on transfer imposed on the
FOHP-NJ Stock by FOHP-NJ's Certificate of Incorporation. More specifically, no
share of Common Stock-NJ may be held by or transferred to any person or entity
who or which is not a provider to an Operating Subsidiary and no share of
FOHP-NJ Stock was permitted to be held by or transferred to any person or entity
who or which was not a health care provider to FOHP-NJ.
In addition, neither the Holding Company nor FOHP-NJ has ever sold any
shares of Common Stock-NJ or FOHP-NJ Stock, whichever the case may be, for any
price other than $15 and, of those resales of Common Stock-NJ and FOHP-NJ Stock
which have occurred, neither the Holding Company nor FOHP-NJ is aware of any
resale by one provider to another for any price other than $15. Therefore, in
interpreting the graph depicted above, it is important to note that all sales of
Common Stock-NJ and FOHP-NJ Stock have been for $15 per share and that neither
the Holding Company nor FOHP-NJ has ever paid any dividends on Common Stock-NJ
or FOHP-NJ Stock, whichever the case may be. Consequently, the line used in the
above graph to chart the growth rate of Common Stock-NJ and FOHP-NJ Stock is
flat and reflects no growth.
If the Transaction is consummated, the New Common Stock will be subject to
substantially the same resale restrictions as Common Stock-NJ is currently
subject. However, the Holding Company expects to have its New Common Stock
valued by an independent consultant periodically and intends to use such
valuations in future proxy statements when charting the growth rate, if any, of
New Common Stock.
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RELATED PARTY TRANSACTIONS
The following directors of the Holding Company are executive officers of
NJ Acute Care Institutions which have purchased, either directly or through an
Eligible Affiliate, shares of Common Stock-NJ: Mr. Azzara, President and Chief
Executive Officer of The Valley Hospital; Mr. Dadlez, President and Chief
Executive Officer of both Monmouth Medical Center and its holding company,
Mid-Atlantic Health Group; Mr. Kopicki, President and Chief Executive Officer of
Muhlenberg Regional Medical Center; Mr. Ostrowsky, Senior Vice President and
General Counsel of St. Barnabas Medical Center; and Mr. Pilla, President of
Community Memorial Health Services Corporation, an affiliate of Community
Medical Center and Kimball Medical Center. In addition, a large percentage of
the revenues of FOHP-NJ is generated from NJ Acute Care Institutions who have
enrolled employees in FOHP-NJ plans as required by the Certificate of
Incorporation of the Holding Company.
Effective December 31, 1995, William B. Roberts, the Chairman of the Board
of Directors of the Holding Company, guaranteed the payment of up to six million
dollars of the Holding Company's capital obligation to FOHP-NJ. The guaranty
terminated on March 27, 1996. Mr. Roberts was paid $10,000 for providing this
guaranty. Simultaneously with the termination of Mr. Roberts' six million dollar
guaranty, Mr. Roberts secured from Chemical Bank a three million dollar letter
of credit which may be drawn upon by the Holding Company in the event the
Holding Company is required to contribute capital to FOHP-NJ so that FOHP-NJ
remains in compliance with the statutory net worth and other capital
requirements applicable to it. See "Compensation Committee Interlocks and
Insider Participation."
On March 29, 1996, certain NJ Practitioners, each a shareholder of the
Holding Company, secured from Carnegie Bank a three million four hundred and
seventy-five thousand dollar letter of credit which may be drawn upon by the
Holding Company in the event the Holding Company is required to contribute
capital to FOHP-NJ so that FOHP-NJ remains in compliance with the statutory net
worth and other capital requirements applicable to it. The NJ Practitioners who
secured the Carnegie Bank letter of credit are: Dr. Chris Anayiotos, Dr. Tun
Chu, Dr. Miguel Damien, Dr. Shirley Hoh, Dr. Renny Lin, Dr. Carl Raso, Dr.
Donato Santangelo, III, Dr. Mohammed A. Sarraf, Dr. Mohammed Shafi, Dr. Kishori
P. Shah, Dr. Gary Siemons, Dr. John Sutherland, Dr. Kock-Yen Tsang, Dr. Lewis
Wetstein, Dr. Renato Ynaya and Dr. Henry Yu.
The Holding Company paid $52,125 in bank fees in connection with the
letter of credit issued by Carnegie Bank. Contemporaneously with the issuance of
the letter of credit by Carnegie Bank, the Holding Company entered into a
separate reimbursement agreement with each NJ Practitioner who secured the
letter of credit, pursuant to which the NJ Practitioner will be reimbursed by
the Holding Company for any amounts he or she is required to pay Carnegie Bank
in connection with any draw against the letter of credit by the Holding Company.
Under the terms of the reimbursement agreements, the Holding Company paid to the
NJ Practitioners who secured the Carnegie Bank letter of credit an aggregate fee
of $173,750 or 2.5% of the aggregate amount of the guaranties furnished by the
NJ Practitioners to secure the Carnegie Bank letter of credit.
Prior to making any draw against the Carnegie Bank letter of credit, the
Holding Company must furnish to each NJ Practitioner securing the letter of
credit the same written evidence and representations as the Holding Company is
required to furnish Mr. Roberts in connection with any draw against the Chemical
Bank letter of credit. See "Compensation Committee Interlocks and Insider
Participation." Moreover, under its reimbursement agreements with the NJ
Practitioners who secured the Carnegie Bank letter of credit, the Holding
Company is obligated to reimburse the NJ Practitioners for any amounts such
persons have paid to Carnegie Bank in connection with any draw by the
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Holding Company against the letter of credit. Interest on the Holding Company's
reimbursement obligation to a NJ Practitioner securing the Carnegie Bank letter
of credit will be payable monthly at a rate equal to the prime rate of a
national bank chosen by the Holding Company plus 4%. The principal amount of the
obligation plus all accrued interest will be payable to the NJ Practitioner, to
whom the obligation was owed, within 9 months from the date the obligation is
first incurred by the Holding Company.
For so long as the Carnegie Bank letter of credit is in effect, the
Holding Company will not, without the prior written consent of each NJ
practitioner securing the letter of credit: (i) merge into any other entity;
(ii) sell, lease, transfer, convey or otherwise dispose of more than 50% of its
assets during any 6 month period; (iii) make loans to any person, firm or
entity; (iv) sell, assign, transfer, discount, or otherwise dispose of any
accounts receivables or any promissory note payable to it, except in the
ordinary course of business; or (v) declare or pay any cash dividends or make
any distributions on, or redeem, retire or otherwise acquire directly or
indirectly, any share of its stock, other than pursuant to redemptions by the
Holding Company of its stock in accordance with the provisions of its
Certificate of Incorporation.
In March and April 1996, Dr. Randall Krakauer, a member of the Board of
Directors of FOHP-NJ and a shareholder of the Holding Company, and John L.
Adessa, former President and Chief Executive Officer of the Holding Company,
each secured from CoreStates Bank a separate letter of credit which may be drawn
upon by the Holding Company in the event the Holding Company is required to
contribute capital to FOHP-NJ so that FOHP-NJ remains in compliance with the
statutory net worth and other capital requirements applicable to it. Dr.
Krakauer secured a three hundred thousand dollar letter of credit and Mr. Adessa
secured a three hundred twenty three thousand dollar letter of credit. The
Holding Company paid $7,199 in bank fees in connection with the letters of
credit issued by CoreStates Bank. In connection with the issuance of the letters
of credit by CoreStates Bank, the Holding Company entered into a reimbursement
agreement with each of Dr. Krakauer and Mr. Adessa pursuant to which the Holding
Company will reimburse Dr. Krakauer and Mr. Adessa for any amounts they are
required to pay CoreStates Bank in connection with any draw by the Holding
Company against the letters of credit secured by them. In all material respects,
the terms and conditions of the reimbursement agreements entered into by Dr.
Krakauer and Mr. Adessa are similar to the terms and conditions of the
reimbursement agreements between the NJ Practitioners who secured the Carnegie
Bank letter of credit and the Holding Company, except that the Holding Company
has agreed not to make any draw against the letter of credit secured by Mr.
Adessa from CoreStates Bank until the Holding Company exhausts all its rights
against any other letter of credit or guaranty made available to the Holding
Company for purposes of providing the Holding Company with capital so that it
can fund its capital obligation to FOHP-NJ. As consideration for securing a
letter of credit, the Holding Company paid Dr. Krakauer $7,500 and Mr. Adessa
$8,075, or 2.5% of the amount of the letter of credit secured by each
individual.
In September 1996, the amount of the letter of credit secured by Mr.
Adessa from CoreStates Bank was reduced from $323,000 to $100,000.
In March and April, 1996, certain NJ Acute Care Institutions and certain
affiliates of NJ Acute Care Institutions executed guarantees on behalf of the
Holding Company and in favor of FOHP-NJ which guaranty the payment of the
Holding Company's capital obligation to FOHP-NJ. The name of each NJ Acute Care
Institution and Eligible Affiliate which guaranteed the Holding Company's
capital obligation to FOHP-NJ and the amount guaranteed by each such entity is
as follows: Community-Kimball Health Care Systems, Inc. (an affiliate of Kimball
Medical Center and Community Medical Center) -
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$250,000; St. Barnabas Corporation (an affiliate of St. Barnabas Medical Center)
- - $250,000; Monmouth Medical Center - $250,000; Barnert Hospital - $100,000;
Bayshore Community Hospital - $100,000; Burdette Tomlin Memorial Hospital -
$100,000; Chilton Memorial Hospital - $100,000; C.H. Management Corp. (an
affiliate of Christ Hospital) - $250,000; Comprehensive Health & Education Corp.
(an affiliate of Muhlenberg Regional Medical Center) - $250,000; JFK Medical
Center - $250,000; Memorial Health Alliance (an affiliate of Memorial Hospital
of Burlington County) - $250,000; Mercer Medical Center - $100,000; Newton
Memorial Hospital - $100,000; Our Lady of Lourdes Health Care Services, Inc. (an
affiliate of Our Lady of Lourdes Hospital) - $100,000; Beth Israel Hospital
(Passaic) - $100,000; The Valley Hospital - $250,000; Riverview Health
Affiliates (an affiliate of Riverview Medical Center) - $250,000; West Hudson
Hospital - $100,000; St. Joseph's Hospital and Medical Center - $250,000;
Morristown Memorial Hospital - $250,000; Elizabeth General Health Services Corp.
(an affiliate of Elizabeth General Medical Center) - $100,000; Englewood
Healthcare Ent. (an affiliate of Englewood Hospital and Medical Center) -
$250,000; MidJersey Health Corporation (an affiliate of Hunterdon Medical
Center) - $100,000; and Robert Wood Johnson University Hospital - $250,000.
In addition, in July and August 1996, Holy Name Hospital guaranteed
$150,000 of the Holding Company's capital obligation to FOHP-NJ, and The Valley
Hospital and West Hudson Hospital guaranteed an additional $50,000 and $25,000
of such obligation, respectively.
Pursuant to the terms of the guarantees furnished by certain NJ Acute Care
Institutions (the "Institutional Guarantees"), a guarantor will not be required
to make any payment under an Institutional Guaranty until: (i) the Holding
Company furnishes written evidence to the guarantor that the DOI and/or the DOH
have required FOHP-NJ to obtain additional capital to remain in compliance with
the statutory net worth and other capital requirements applicable to FOHP-NJ,
and (ii) the Holding Company does not have sufficient capital to contribute to
FOHP-NJ so that FOHP-NJ is able to satisfy the request of the DOI and/or the DOH
and remain in compliance with the statutory net worth and other capital
requirements applicable to FOHP-NJ, and the Holding Company provides the
guarantor with a written representation to that effect.
Pursuant to the terms of the Institutional Guarantees, the Holding Company
is required to reimburse a guarantor for any amounts paid by the guarantor under
an Institutional Guaranty. Interest on such obligation will be payable monthly
at a rate equal to the prime rate of a national bank chosen by the Holding
Company plus 4%. The principal amount of the obligation plus all accrued
interest will be payable to the guarantor within nine (9) months from the date
the obligation is first incurred by the Holding Company.
A guarantor's liability under an Institutional Guaranty shall expire on
the earlier of: (i) the completion of a public offering of Common Stock-NJ by
the Holding Company and the receipt by the Holding Company of sufficient capital
in such offering of Common Stock-NJ to ensure that FOHP-NJ will remain in
compliance with the statutory net worth requirements applicable to FOHP-NJ
without the need of the Institutional Guarantees or any letter of credit issued
to secure the payment of the Holding Company's capital obligations to FOHP-NJ,
or (ii) January 1, 1997.
For so long as an Institutional Guaranty is in effect, the Holding Company
will not, without the prior written consent of the guarantor: (i) merge into any
other entity; (ii) sell, lease, transfer, convey or otherwise dispose of more
than 50% of its assets during any six (6) month period; (iii) make loans to any
person, firm or entity; (iv) sell, assign, transfer, discount, or otherwise
dispose of any accounts receivables or any promissory note payable to it, except
in the ordinary course of business; or (v) declare or pay any cash dividends or
make any distributions on, or redeem, retire or otherwise acquire directly or
indirectly, any share of its stock, other than pursuant to redemptions by the
Holding
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Company of its stock in accordance with the provisions of its Certificate of
Incorporation. In the event that the Holding Company effects any of the
aforestated actions without the prior written consent of the guarantor or
breaches certain other covenants contained in the Institutional Guaranty to
which the guarantor is a party, such Institutional Guaranty will be void and of
no further effect unless such breach is cured by the Holding Company within
thirty (30) days of its receipt of written notification from the guarantor of
such breach.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Holding Company's executive
officers and directors, and persons who own more than 10% of a registered class
of the Holding Company's equity securities, to file reports of ownership and
changes in ownership on Forms 3, 4 and 5 with the SEC. Executive officers,
directors and greater than 10% shareholders are required by the SEC's
regulations to furnish the Holding Company with copies of all Forms 3, 4 and 5
that they file.
Based solely on the Holding Company's review of the copies of such forms
it has received, the Holding Company believes that all its executive officers,
directors and greater than 10% beneficial owners complied with all filing
requirements applicable to them with respect to events or transactions during
fiscal 1995 except for the Form 4 required to be filed by Dr. Feldman for the
month of December 1995, as a result of the sale of shares of Common Stock-NJ by
Dr. Feldman in that month. Dr. Feldman, however, did promptly file a Form 4 when
informed of the inadvertent omission.
69
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Holding Company, a New Jersey corporation, was formed in May 1994 to
effect the reorganization of FOHP-NJ into a holding company structure (the
"Reorganization"). The Reorganization was consummated on June 8, 1995. Pursuant
to the Reorganization, FOHP-NJ and FMCO became wholly-owned subsidiaries of the
Holding Company. Prior to the Reorganization, the Holding Company did not
conduct any business nor did it have any significant assets or liabilities.
Except for providing limited administrative assistance and consulting services
to prepaid health service plans affiliated with providers to the Operating
Subsidiaries, the Holding Company does not conduct, nor does management believe
that it will conduct, any business other than to provide management and
consulting services to its subsidiaries. All health care benefit products and
services are, and will be, provided by the Holding Company's subsidiaries.
FOHP-NJ, a New Jersey corporation, was formed in May 1993 to operate as an
HMO in the State of New Jersey. FOHP-NJ received its COA in June 1994 to operate
as an HMO in the service area encompassing the entire State of New Jersey and
commenced operations on July 1, 1994. Pursuant to the Reorganization, FOHP-NJ
became a wholly-owned subsidiary of the Holding Company on June 8, 1995.
Currently, it is the Holding Company's principal subsidiary.
FOHP-NJ markets a comprehensive range of health care benefit plan products
pursuant to contractual arrangements with physicians, hospitals and other health
care providers. As of November 1, 1996, FOHP-NJ had entered into provider
agreements with fifty-one (51) NJ Acute Care Institutions, approximately ten
thousand (10,000) NJ Practitioners and approximately seventy-five (75) other
health care providers. The provider agreements have an initial term of one year
and are renewable annually. Such agreements with NJ Acute Care Institutions and
NJ Other Providers may be terminated by mutual consent or, after the initial one
year term, by either party upon ninety (90) days notice; agreements with NJ
Practitioners may be terminated by either party upon sixty (60) days notice. The
agreements also may be terminated for breaches specified therein.
FOHP-NJ's agreements with NJ Acute Care Institutions provide for, among
other things, a reimbursement schedule setting the amounts to be paid to the NJ
Acute Care Institutions by FOHP-NJ for services provided to members. Agreements
with participating NJ Acute Care Institutions prohibit the NJ Acute Care
Institutions from billing a member of a FOHP-NJ plan for any services paid for
under such plan except for any applicable co-payment.
NJ Practitioners are paid pursuant to a fee schedule established by
FOHP-NJ and are prohibited from billing members of a FOHP-NJ plan except for
co-payments and non-covered services, if any. Copayments, in amounts approved by
FOHP-NJ, are collected directly by the NJ Practitioner from the member.
Subscriber contracts are entered into with large employer groups (50 or
more employees) and small employer groups (less than 50 employees). Such
contracts are generally for a term of one year, but may be cancelled by the
employer group upon thirty (30) days written notice. Under these contracts,
FOHP-NJ has agreed to provide the employer groups with health coverage in return
for a monthly premium. FOHP-NJ utilizes a system of community rating by class,
adjusted (with respect to employer groups of 50 or more employees) by age, sex
and industry classification, in determining its rates for various employers in
the proposed service area. Premium revenue generated from
70
<PAGE>
subscriber contracts is recorded as revenue in the month in which subscribers
are entitled to service. Premiums collected in advance are reported as unearned
premium revenue.
Results of Operations
For the six months ended June 30, 1996 and 1995
Premium Revenue For the six-month period ended June 30, 1996, medical
premium revenue totaled $104,871,000 or $67,652,000 more than the $37,219,000 of
medical premium revenue generated during the same period in 1995. Medical
premium revenue generated by the Holding Company during the period ended June
30, 1996 was substantially greater than the medical premium revenue generated by
FOHP-NJ during the same period in 1995 due to the significant subscriber growth
experienced since the end of the second quarter of 1995. Approximately 65% of
medical premium revenue generated in the first six months of 1996 and
approximately 84% of medical premium revenue generated in the first six months
of 1995 was attributable to NJ Acute Care Institutions which are obligated to
enroll their employees in FOHP-NJ plans. The Holding Company believes that the
percentage of medical premium revenue attributable to NJ Acute Care Institutions
will continue to decrease as FOHP-NJ's operations grow and FOHP-NJ begins to
fully benefit from current marketing efforts focused on individuals and
businesses who or which are not providers to FOHP-NJ.
Other Revenue Other revenue, principally administrative fees for the
six-month period ended June 30, 1996 was $3,881,000 compared to $3,833,000 of
other revenue for the same period of the prior year. Interest income for the
first six months of 1996 was $751,000, a $256,000 increase from the $495,000
generated in the first six months of 1995. The increase in interest income was
due to the larger cash reserves maintained by the Holding Company in the first
six months of 1996.
Medical and Hospital Service Expenses Total expenses versus total costs
attributable to medical and hospital services for the six-month period ended
June 30, 1996 were $93,386,000 or $61,415,000 higher than such expenses incurred
for the same period in 1995. The increase in medical and hospital service
expenses from 1995 to 1996 was primarily attributable to an increase in
enrollees in FOHP-NJ plans.
Selling, General and Administrative Expenses Selling, general and
administrative expenses versus costs totaled $26,455,000 during the first six
months of 1996 compared to $13,063,000 incurred for the same period in 1995.
This increase was the result of the significant growth of FOHP-NJ and the
expansion activities of the Holding Company during 1996.
Other Expenses Depreciation and amortization expenses for the six-month
period ended June 30, 1996 increased by $125,000 from the $291,000 incurred
during the same period in 1995. This increase was a result of the significant
investment in capital equipment in the end of 1995 and the beginning of 1996.
Interest expense decreased in the first six months of 1996 to $3,000 from the
$77,000 incurred for the same period in 1995. This decrease was primarily the
result of the repayment of the short-term financing for the acquisition of FMCO.
For the years ended December 31, 1995 and 1994
Premium Revenue For the year ended December 31, 1995, medical premium
revenue totalled $102,500,000 or $95,000,000 more than the $7,400,000 of medical
premium revenue generated in 1994. Medical premium revenue generated by the
Holding Company during the year ended December 31, 1995 was substantially
greater than the medical premium revenue generated by FOHP-NJ
71
<PAGE>
during the year ended December 31, 1994, due to the limited operations of
FOHP-NJ during 1994 and significant subscriber growth experienced during 1995.
Approximately 62% of medical premium revenue generated in 1995 and approximately
76% of medical premium revenue generated in 1994 was attributable to NJ Acute
Care Institutions which are obligated to enroll their employees in FOHP-NJ
plans. The Holding Company believes that the percentage of medical premium
revenue attributable to NJ Acute Care Institutions will continue to decrease as
FOHP-NJ's operations grow and FOHP-NJ begins to fully benefit from current
marketing efforts focused on individuals and businesses who or which are not
providers to FOHP-NJ.
Other Revenue Other revenue for the year ended December 31, 1995 was
$7,600,000 compared to $700,000 of other revenue for the prior year. Interest
income increased by $800,000 from $400,000 in 1994 to $1,200,000 in 1995. The
increase in other revenue is primarily attributable to administrative service
fees received in connection with the administrative services provided by the
Holding Company to self-insured employer groups. The increase in interest income
was due to the larger cash reserves maintained by the Holding Company in 1995.
Medical Claims Costs Total costs attributable to medical claims during
1995 was $91,600,000 or $84,900,000 higher than such costs in 1994. The increase
in medical claims costs from 1994 to 1995 was primarily attributable to an
increase in enrollees in FOHP-NJ plans. Moreover, the increase in medical claims
costs in 1995 is a direct function of the significant increase in medical
premium revenue generated in 1995.
Selling, General and Administrative Costs Selling, general and
administrative costs totalled $32,600,000 during 1995 compared to $10,600,000
incurred for the year ended December 31, 1994. This increase was the result of
the significant growth of FOHP-NJ and the expansion activities of the Holding
Company during 1995. For example, to accommodate such growth and expansion, the
Holding Company and its subsidiaries hired 193 additional employees in 1995 and
leased additional office space in New Jersey and New York.
Other Expenses Depreciation and amortization expenses in 1995 increased by
$443,000 from the $231,000 incurred in the year ended December 31, 1994, due to
significant investment in 1995 in capital equipment. Interest expense also
increased in 1995 to $90,000 from the $9,000 incurred in the year ended December
31, 1994. This increase was primarily the result of the short-term financing of
the acquisition of FMCO discussed below.
In November 1994, FOHP-NJ acquired all the stock of Individualized
Rehabilitation Programs, Inc. ("IRP"), which was later renamed FMCO. In December
1995, management determined that due to the recent loss of business volume from
certain FMCO customers and because of current and projected operating losses of
FMCO, the recoverability of the cost of FMCO in excess of the net assets
acquired could not be assured. Accordingly, the net carrying value of FMCO of
$986,782 was written-off in 1995 and included in other expenses for that year.
For the years ended December 31, 1994 and 1993
Premium Revenue For the year ended December 31, 1994, medical premium
revenue was $7,400,000. FOHP-NJ was not authorized to conduct business as an HMO
until June 1994. Accordingly, no medical premium revenue was generated by
FOHP-NJ in the year ended December 31, 1993.
72
<PAGE>
Other Revenue For the year ended December 31, 1994, FOHP-NJ generated
$700,000 in other revenue. Other revenue for 1994 was attributable to
administrative services provided to self-insured employer groups. Inasmuch as
FOHP-NJ was in its development stage in 1993, no revenue was generated in such
year.
Medical Claims Costs For the year ended December 31, 1994, medical claims
costs incurred by FOHP-NJ amounted to $6,700,000 or 38% of total costs and
expenses incurred for that year. FOHP-NJ did not conduct any operations in 1993
and, consequently, no medical claims costs were incurred in that year.
Selling, General and Administrative Costs Selling, general and
administrative costs increased in 1994 by $8,600,000 from the $2,000,000
incurred in the year ended December 31, 1993. The $8,600,000 increase in
selling, general and administrative costs from 1993 to 1994 resulted from the
commencement of operations by FOHP-NJ in July 1994.
Other Expenses Depreciation and amortization expenses increased to
$231,000 from $18,000 incurred in the year ended December 31, 1993, due to the
build up of capital equipment in response to infrastructure needs. Interest
expense totalled $9,000 in 1994 compared to $23,000 incurred in fiscal 1993.
Liquidity and Capital Resources
Gross proceeds of approximately $12,400,000, received by FOHP-NJ from the
private offering and sale of 826,708 shares of common stock in 1993, were
sufficient to cover the expenses incurred by FOHP-NJ in connection with the
formation and development of its business. In order to fund its continuing
development activities, FOHP-NJ sold 744,445 shares of common stock in a public
offering which closed on October 31, 1994. Gross proceeds received by FOHP-NJ as
a result of the sale of stock in the public offering amounted to $11,166,675.
Further, in order to fund its continuing development of HMOs in New York,
Pennsylvania and several other states, the Holding Company sold 529,120 shares
of Common Stock-NJ to NJ Practitioners in an offering which ended on September
1, 1995. Gross proceeds received by the Holding Company as a result of the sale
of Common Stock-NJ in the offering to NJ Practitioners amounted to $7,937,000.
FOHP-NJ is required by the DOI to maintain a minimum statutory net worth.
In addition, if FOHP-NJ's statutory net worth is, or is expected to be, less
than 125% of the minimum requirement, FOHP-NJ is required to submit to the DOI a
plan of action to address the deficiency or expected deficiency. During the
first quarter of 1996, the Holding Company learned that FOHP-NJ's statutory net
worth as of December 31, 1995 may have been below the 125% of the minimum
requirement. FOHP-NJ addressed this potential deficiency by submitting in April
1996 a plan of action to the DOI which outlined the actions which had been taken
and measures to be used by FOHP-NJ to correct the potential deficiency. The plan
of action also outlined the actions to be taken by the Holding Company and
FOHP-NJ to ensure that FOHP-NJ remained in compliance with applicable statutory
net worth requirements in 1996.
The plan of action submitted by FOHP-NJ provides that in the event that
either the DOI or the DOH requires that FOHP-NJ obtain additional capital to
remain in compliance with the statutory net worth and other capital requirements
applicable to FOHP-NJ as an HMO licensed in New Jersey, the Holding Company will
contribute such capital to FOHP-NJ. To assure that the Holding Company has
sufficient capital to contribute to FOHP-NJ in the event that FOHP-NJ is
required to obtain additional capital to remain in compliance with the statutory
net worth and other capital requirements applicable
73
<PAGE>
to it, certain officers, directors, and shareholders of the Holding Company
either (i) arranged for the issuance of letters of credit by various banks,
against which the Holding Company may draw if required to fund the payment of
its obligations to FOHP-NJ so as to allow FOHP-NJ to remain in compliance with
the statutory net worth and other capital requirements applicable to it, or (ii)
guaranteed a portion of the Holding Company's capital obligation to FOHP-NJ. In
addition, pursuant to the plan of action, the Holding Company effected several
operational changes in order to increase capital in 1996. The operational
changes made by the Holding Company included (a) the implementation of a
modified provider reimbursement schedule which became effective on April 1,
1996, for purposes of reducing medical costs, (b) the implementation of a hiring
freeze and suspension of bonus payments and the use of consultants in order to
control the Holding Company's administrative costs, and (c) the implementation
of a program to generate increased operating profits by requiring certain acute
care shareholders which had not met their enrollment commitments to meet such
commitments if they want to remain shareholders of the Holding Company and
providers in the FOHP-NJ network.
On June 12, 1996, the DOI and the DOH approved FOHP-NJ's plan of action,
subject to certain reporting and other conditions. Such conditions include: (i)
the submission of a monthly report to the DOI which is to contain a comparison
of actual results for the month just ended to the budgeted results for such
month; (ii) the administrative expenses saving measures specified in the plan of
action including the hiring freeze and the suspension of bonuses and consultant
use, shall not be discontinued or modified unless the DOI has received written
notice of any such proposed discontinuance or modification and has not objected
to the proposed discontinuance or modification within five (5) days of receiving
such notice; (iii) the submission to the DOI of the minutes of any meeting of
the Board of Directors of the Holding Company or the Board of Directors of
FOHP-NJ and the minutes of certain committee meetings of such corporations
within thirty (30) days of the date of any such meeting; (iv) neither the
Holding Company nor FOHP-NJ shall enter into any joint venture, acquisition,
merger, intercompany related party transaction, or other material transaction
(defined as one half of one percent or greater of net admitted assets as of the
prior year) without the prior written approval of the DOI; (v) neither the
Holding Company nor FOHP-NJ shall declare or apply any dividends or bonuses or
make any distributions other than in the course of ordinary business without the
prior written approval of the DOI; (vi) any proceeds from the sale of Holding
Company stock to New Jersey providers must first be used to pay the payable from
the Holding Company to FOHP-NJ; (vii) a claim reserve lag study shall be
provided to the DOI on a quarterly basis in a format prescribed by the DOI;
(viii) prior written approval of the Commissioner of the DOI must be obtained
before either the Holding Company or FOHP-NJ makes any expenditure related to
activities in jurisdictions other than New Jersey; (ix) on or before October 1,
1996, at least one third of the members of each committee of the Boards of
Directors of the Holding Company and FOHP-NJ shall be persons who are not
affiliated with the Holding Company or FOHP-NJ or any subsidiaries thereof, and
who do not have any contractual relationship with the Holding Company or FOHP-NJ
or any subsidiaries thereof, including any health care provider in the FOHP-NJ
provider network; and (x) on or before October 1, 1996, FOHP-NJ shall establish
an Audit Committee comprised solely of outside independent directors. The
aforementioned conditions are to continue until the DOI and the DOH issue a
written determination that (a) FOHP-NJ has had two (2) consecutive quarters with
a net gain from operations in each quarter of at least $2,000,000, (b) FOHP-NJ
surplus equals or exceeds 125% of its minimum net worth requirement for the same
two consecutive quarters, and (c) the payable from the Holding Company to
FOHP-NJ has been paid in full. If the Transaction is consummated, the Holding
Company believes that a sufficient amount of capital will be infused into
FOHP-NJ so that FOHP-NJ will be in compliance with the statutory net worth
requirements applicable to it.
74
<PAGE>
ANNUAL REPORT
The annual report to shareholders for the fiscal year ended December 31,
1995 was mailed to the shareholders of the Holding Company in July 1996. Such
annual report is not incorporated in this Proxy Statement and is not deemed to
be a part of the proxy soliciting material.
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
Selection of the independent public accountants for the Holding Company is
made by the Board of Directors. The Holding Company's independent public
accountants for the fiscal year ended December 31, 1995 were Ernst & Young LLP.
The Board of Directors has selected Ernst & Young LLP to serve as the Holding
Company's independent public accountants for the current fiscal year.
A representative of Ernst & Young LLP will be present at the Meeting and
will have an opportunity to make a statement if the representative desires to do
so. Said representative will also be available to respond to appropriate
questions from shareholders of the Holding Company.
SHAREHOLDER PROPOSALS
Shareholder proposals for presentation at the Holding Company's next
annual meeting of shareholders must be received by the Holding Company at its
principal executive offices for inclusion in its proxy statement and form of
proxy relating to that meeting no later than December 31, 1996. The Holding
Company's By-Laws contain certain procedures which must be followed in
connection with shareholder proposals.
MANAGEMENT OF THE HOLDING COMPANY RECOMMENDS THAT THE SHAREHOLDERS VOTE
FOR THE PROPOSAL TO APPROVE THE TRANSACTION AND THE NOMINEES TO THE BOARD OF
DIRECTORS NAMED HEREIN.
THE HOLDING COMPANY SUBMITS TO THE SEC AN ANNUAL REPORT ON FORM 10-K.
COPIES OF THE REPORT WILL BE FURNISHED WITHOUT CHARGE UPON WRITTEN REQUEST
RECEIVED FROM ANY HOLDER OF RECORD OR BENEFICIAL OWNER OF SHARES OF COMMON
STOCK-NJ OF THE HOLDING COMPANY. REQUESTS SHOULD BE DIRECTED TO SHAREHOLDER
RELATIONS, FOHP, INC., BUILDING 6, 2 BRIDGE AVENUE, RED BANK, NEW JERSEY
07701-1106.
ALL SHAREHOLDERS ARE URGED TO FILL IN, SIGN AND SEND IN THEIR PROXIES
WITHOUT DELAY TO AMERICAN STOCK TRANSFER AND TRUST COMPANY, 40 WALL STREET, NEW
YORK, NEW YORK 10005. PROMPT RESPONSE IS HELPFUL AND YOUR COOPERATION WILL BE
APPRECIATED.
By Order of the Board of Directors
/s/ John W. Rohfritch
---------------------
JOHN W. ROHFRITCH
President and
Chief Executive Officer
November _____, 1996
<PAGE>
Consolidated Financial Statements
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Contents
December 31, 1995
Report of Independent Auditors.............................................F-2
Consolidated Balance Sheets................................................F-4
Consolidated Statements of Operations......................................F-5
Consolidated Statements of Shareholders' Equity............................F-6
Consolidated Statements of Cash Flows......................................F-7
Notes to Consolidated Financial Statements.................................F-8
June 30, 1996
Condensed Consolidated Balance Sheets......................................F-22
Condensed Consolidated Statements of Operations............................F-23
Condensed Consolidated Statements of Shareholders' Equity..................F-24
Condensed Consolidated Statements of Cash Flows............................F-25
Notes to Consolidated Financial Statements.................................F-26
F-1
<PAGE>
[Letterhead of Ernst & Young LLP]
Report of Independent Auditors
The Board of Directors
FOHP, Inc.
We have audited the accompanying consolidated balance sheets of FOHP, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of FOHP, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company has incurred a 1995 net loss of $14,740,945
and has an accumulated deficit of $25,790,452 at December 31, 1995. Also, in
order for the Company's principle operating subsidiary, First Option Health Plan
of New Jersey, Inc. ("FOHP-NJ"), to meet its 1996 statutory net worth
requirements pursuant to its Certificate of Authority granted by the New Jersey
Departments of Insurance and Health (the "Departments"), the Company must
generate sufficient operating profits and/or obtain additional equity financing.
As discussed in Note 2, the Company anticipates raising additional capital
through the sale of common stock. In addition, the Company has obtained certain
financial commitments and guarantees which, in management's
F-2
<PAGE>
opinion, provide the capital necessary for FOHP-NJ to meet the Departments'
statutory net worth requirements in 1996. However, the financial commitments and
guarantees and the Company's plans to meet the statutory net worth requirements
are subject to the approval of the Departments, which approvals are currently
being sought. Accordingly, these matters raise substantial doubt about the
Company's ability to continue as a going concern. (Management's plans in regard
to these matters are further described in Note 2.) The 1995 consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
April 12, 1996, except for Note 12,
to which the date is November 5, 1996.
/s/ Ernst & Young LLP
---------------------
F-3
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1995 1994
---------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 23,882,286 $ 13,030,295
Accounts receivable from owners/providers (Note 8) 6,341,092 1,801,863
Other accounts receivable, net (Note 2) 3,252,639 1,176,814
Prepaids and other current assets 534,751 767,275
---------------------------
Total current assets 34,010,768 16,776,247
---------------------------
Long-term assets:
Restricted cash (Note 2) 1,200,801 307,191
Furniture and equipment, net (Note 10) 1,859,131 1,401,907
Costs in excess of net assets acquired, net (Note 3) 1,097,446
Other assets 291,133 498,269
---------------------------
Total assets $ 37,361,833 $ 20,081,060
===========================
Liabilities and shareholders' equity Current liabilities:
Medical claims payable (primarily to owners/providers) $ 26,960,273 $ 5,472,975
Accounts payable and accrued expenses 4,291,102 2,503,531
Unearned premium 341,092 124,899
Other 890,327
---------------------------
Total current liabilities 32,482,794 8,101,405
Commitments and contingencies (Note 11)
FOHP-NJ Practitioner Provider Common Stock, $.01 par
value, 511,800 shares issued and outstanding (Note 5) 7,677,000
Shareholders' equity:
Common Stock (1995 - 100,000,000 FOHP, Inc. shares
authorized and 1994 - 10,000,000 FOHP-NJ shares
authorized, $.01 par value) (Note 4):
FOHP, Inc. Common Stock-NJ, 2,100,173 shares
issued and outstanding 21,002
FOHP-NJ Institutional Provider Common Stock,
1,020,051 shares issued and outstanding 10,201
FOHP-NJ Other Provider Common Stock, 40,002
shares issued and outstanding 400
Additional paid-in capital 30,648,489 15,341,561
Accumulated deficit (25,790,452) (11,049,507)
---------------------------
Total shareholders' equity 4,879,039 4,302,655
---------------------------
Total liabilities and shareholders' equity $ 37,361,833 $ 20,081,060
===========================
</TABLE>
See accompanying notes.
F-4
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Period May
19, 1993
(date of
inception) to
Year ended December 31 December
1995 1994 31, 1993
--------------------------------------------
<S> <C> <C> <C>
Revenue:
Premiums from owners/providers (Note 8) $ 63,630,797 $ 5,639,724
Other premium revenue 38,819,206 1,803,624
Other, principally administrative service fees 7,621,790 749,817
Interest income 1,222,246 427,354 $ 22,151
------------------------------------------
Total revenue 111,294,039 8,620,519 22,151
Expenses:
Medical services (primarily to owners/providers) 55,867,854 4,132,869
Hospital services (primarily to owners/providers) 35,706,158 2,590,940
Selling, general and administrative 32,638,106 10,624,261 2,063,239
Depreciation and amortization 674,433 231,057 17,808
Interest 90,048 8,964 23,039
Write-off of intangible asset (Note 3) 986,782
------------------------------------------
Total expenses 125,963,381 17,588,091 2,104,086
------------------------------------------
Net loss before provision for income taxes (14,669,342) (8,967,572) (2,081,935)
Provision for income taxes (Note 7) 71,603
------------------------------------------
Net loss $ (14,740,945) $ (8,967,572) $(2,081,935)
==========================================
Net loss per common share $ (8.65) $ (8.40) $ (2.52)
==========================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock
----------------------- Additional Common Total
Par Paid-In Stock Accumulated Shareholder's
Shares Value Capital Subscribed Deficit Equity
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 19, 1993 (date of
inception) -- $ -- $ -- $ -- $ -- $ --
FOHP-NJ Common Stock subscribed
(826,708 shares at $15 per share) 12,400,000 12,400,000
Net loss for the period May 19, 1993
(date of inception) to December 31,
1993 (2,081,935) (2,081,935)
--------------------------------------------------------------------------------------
Balance at December 31, 1993 -- -- -- 12,400,000 (2,081,935) 10,318,065
FOHP-NJ Common Stock issued (at
$15 per share):
FOHP-NJ Institutional Provider 1,020,051 10,201 14,741,961 (12,400,000) 2,352,162
FOHP-NJ Other Provider 40,002 400 599,600 600,000
Net loss (8,967,572) (8,967,572)
--------------------------------------------------------------------------------------
Balance at December 31, 1994 1,060,053 10,601 15,341,561 -- (11,049,507) 4,302,655
Reclassification of FOHP-NJ
Practitioner Provider Common
Stock from temporary equity 511,800 5,118 7,671,882 7,677,000
Redemption of FOHP-NJ Practitioner
Provider Common Stock (100) (1) (1,499) (1,500)
Conversion of following outstanding
shares of FOHP-NJ Common Stock
to FOHP, Inc. Common Stock-NJ:
FOHP-NJ Institutional Provider (1,020,051) (10,201) (10,201)
FOHP-NJ Other Provider (40,002) (400) (400)
FOHP-NJ Practitioner Provider (511,700) (5,117) (5,117)
FOHP, Inc. Common Stock-NJ
issued (at $15 per share) 2,100,173 21,002 7,931,516 7,952,518
Payment of issue costs (294,971) (294,971)
Net loss (14,740,945) (14,740,945)
--------------------------------------------------------------------------------------
Balance at December 31, 1995 2,100,173 $ 21,002 $ 30,648,489 $ -- $(25,790,452) $ 4,879,039
======================================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Period May
19, 1993
(date of
inception) to
Year ended December 31 December
1995 1994 31, 1993
------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(14,740,945) $ (8,967,572) $ (2,081,935)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for bad debts 232,604
Depreciation 563,769 221,835 17,808
Amortization of cost in excess of assets acquired 110,664 9,222
Write-off of intangible asset 986,782
Loss (gain) on sale of furniture and equipment 5,877 (15,185)
Changes in operating assets and liabilities:
Increase in accounts receivable from owner/providers (4,539,229) (1,801,863)
Increase in other accounts receivable (2,308,429) (677,897)
Decrease (increase) in prepaids and other current assets 232,524 (661,038) (79,272)
Increase in restricted cash (893,610) (307,191)
Decrease (increase) in other assets 207,136 (410,283) (72,471)
Increase in medical claims payable 21,487,298 4,735,630
Increase in accounts payable and accrued expenses 1,787,571 1,835,586 501,079
Increase in unearned premium 216,193 124,899
Increase in other liabilities 890,327
------------------------------------------
Net cash provided by (used in) operating activities 4,238,532 (5,913,857) (1,714,791)
Cash flows from investing activities
Purchases of furniture and equipment (1,039,891) (1,353,790) (181,984)
Sale of furniture and equipment 13,021
Purchase of FMCO, net of cash acquired (834,445)
------------------------------------------
Net cash used in investing activities (1,026,870) (2,188,235) (181,984)
Cash flows from financing activities
Issuance of common stock 7,640,329 10,629,162 12,400,000
------------------------------------------
Net cash provided by financing activities 7,640,329 10,629,162 12,400,000
------------------------------------------
Increase in cash and cash equivalents 10,851,991 2,527,070 10,503,225
Cash and cash equivalents at beginning of period 13,030,295 10,503,225 --
------------------------------------------
Cash and cash equivalents at end of period $ 23,882,286 $ 13,030,295 $ 10,503,225
==========================================
Interest paid for the period $ 75,123 $ 9,057 $ 22,946
==========================================
</TABLE>
See accompanying notes.
F-7
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements
December 31, 1995
1. General
The Holding Company is a New Jersey corporation which was formed in May 1994.
The Holding Company was formed to effect the Reorganization of FOHP-NJ which was
consummated on June 8, 1995. The Reorganization was completed through an
exchange of FOHP-NJ's outstanding common stock for shares of the Holding
Company's Common Stock-NJ. In connection with the Reorganization, FOHP-NJ
distributed, as a dividend, all of the outstanding common stock of FMCO to the
Holding Company. Pursuant to the Reorganization, FOHP-NJ and FMCO became
wholly-owned subsidiaries of FOHP. Prior to the Reorganization, the Holding
Company did not conduct any business nor did it have any significant assets or
liabilities. The primary purpose of the Reorganization was to facilitate the
formation of additional health maintenance organizations in states other than
New Jersey.
The 1994 consolidated financial statements represent the consolidated financial
statements of FOHP-NJ and subsidiary prior to the Reorganization. The change in
reporting entity had no effect on net loss or related per share amounts reported
in the 1994 consolidated financial statements.
The Holding Company serves as the holding company for its wholly-owned
subsidiaries to which it provides management and consulting services. The
Holding Company's principle operating subsidiaries are FOHP-NJ and FMCO which
was acquired by FOHP-NJ in November 1994. FOHP-NJ, a New Jersey corporation
formed in May 1993, received its COA to operate as an HMO in New Jersey in June
1994. FMCO performs independent case management services for workers'
compensation claims. Other wholly-owned subsidiaries of the Holding Company,
each formed in 1995, include First Option Health Plan of New York, Inc.
("FOHP-NY"), a New York corporation, First Option Health Plan of Pennsylvania,
Inc. ("FOHP-PA"), a Pennsylvania corporation, First Option Health Plan of
Maryland, Inc. ("FOHP-MD"), a Maryland corporation, First Option Health Plan of
Delaware, Inc. ("FOHP-DE"), a Delaware corporation, and FOHP Agency, Inc. ("FOHP
Agency"), a New Jersey corporation. These newly formed subsidiaries are in the
start-up phase. Each of FOHP-NY and FOHP-PA has filed an application for a COA
to operate as an HMO in its state of incorporation.
The Holding Company raised equity capital from various New Jersey health care
providers to fund its operations. Health care providers investing in the Holding
Company
F-8
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
1. General (continued)
are required to enter into provider agreements (the "Provider Agreements") with
the Holding Company. The Provider Agreements have an initial term of one year
and are renewable annually. Such agreements with acute care institutions and
certain other health care providers may be terminated either by mutual consent
of both parties or, after the initial one year term, by either party upon 90
days written notice; agreements with physicians may be terminated by either
party upon 60 days written notice. Provider Agreements also may be terminated
for breaches specified therein. The Provider Agreements, among other things,
establish covered services, billing and payment procedures, and reimbursement
methods.
2. Basis of Presentation and Significant Accounting Policies
The Holding Company has incurred a 1995 net loss of $14,740,945 and has an
accumulated deficit of $25,790,452 at December 31, 1995. Also, in order for the
Holding Company's principle operating subsidiary FOHP-NJ to meet its 1996
statutory net worth requirements pursuant to its COA granted by the DOI and the
DOH (collectively, the "Departments"), the Holding Company must generate
sufficient operating profits and/or obtain additional equity financing.
Management's plans include a program to generate operating profits by
implementing enrollment mandates from owner/provider hospitals that have not met
their membership commitments, by reducing the Holding Company's administrative
cost structure and by reducing medical costs and statutory net worth
requirements through the implementation of a reduced provider fee schedule and
premium sharing arrangements. The Holding Company also anticipates raising
additional capital through the sale of common stock. In addition, the Holding
Company has obtained certain financial commitments and guarantees which, in
management's opinion, provide the capital necessary for FOHP-NJ to meet the
Departments' requirements for 1996 (see Note 11). The satisfactory completion of
these efforts and negotiations is essential in order for FOHP-NJ to meet its
statutory net worth requirement through the year ending December 31, 1996. In
addition, the financial commitments and guarantees and the Holding Company's
plans to meet the statutory net worth requirements are subject to the approval
of the Departments, which approvals are currently being sought. Accordingly,
these matters raise substantial doubt about the Holding Company's ability to
continue as a going concern.
These consolidated financial statements have been prepared assuming the Holding
Company will continue as a going concern and do not include any adjustments that
might result from the outcome of this uncertainty.
F-9
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
2. Basis of Presentation and Significant Accounting Policies (continued)
The following are significant accounting policies of the Holding Company:
Principles of Consolidation
The consolidated financial statements include the accounts of the Holding
Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include money market funds and U.S. Treasury
Bills with original maturities of three months or less when purchased.
Fair market values of the U.S. Treasury Bills approximate carrying value.
Cash and cash equivalents at December 31, 1995 were on deposit with two
commercial banks.
Restricted Cash
FOHP-NJ is required to maintain, at a minimum, $1,000,000 on deposit with
the DOI.
Furniture and Equipment
Furniture and equipment are recorded at cost. Depreciation is calculated
on the straight-line method over the lesser of the useful lives of
depreciable assets (3 to 5 years) or the lease terms.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions
that affect the reported amounts of assets and liabilities at the date of
the financial statements. Estimates also affect the reported amounts of
revenues and expense during the reporting period. Actual results could
differ from those estimates.
F-10
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
2. Basis of Presentation and Significant Accounting Policies (continued)
Other Accounts Receivable
Other accounts receivable are reported at estimated net realizable value
by including a provision for an estimate of uncollectible amounts. At
December 31, 1995 and 1994, other accounts receivable are recorded net of
allowance for uncollectible amounts totalling $332,904 and $100,300,
respectively.
Costs in Excess of Net Assets Acquired
Costs in excess of net assets acquired related to the acquisition of FMCO
in 1994. Amortization was being charged to operations over 10 years and in
1995 and 1994 amounted to $110,664 and $9,222, respectively. The carrying
value of this intangible asset was written off in 1995 (see Note 3).
Stock Issue Costs
Stock issue costs are accounted for using the offset method and represent
legal, accounting, and other costs incurred for the stock offering. Under
this method, stock issue costs are treated as a reduction of the amount
received from the sale of the related common stock.
Premium Revenue
Subscriber contracts for commercial managed care products are on a yearly
basis subject to cancellation by the employer group upon 30 days written
notice. Premium revenue is recorded as revenue in the month in which
subscribers are entitled to service. Premiums collected in advance are
reported as unearned premium revenue.
Certain premium revenue is earned under a contract between FOHP-NJ and the
State of New Jersey Department of Human Services, Division of Medical
Assistance and Health Services ("NJDHS-DMAHS"). The contract with
NJDHS-DMAHS has an initial term of 18 months and may be renewed for
successive one year terms. The contract can be suspended (by NJDHS-DMAHS)
or terminated (by either party) upon the occurrence of certain events.
Premiums are earned monthly on a per capita basis, based on the number of
eligible members enrolled in FOHP-NJ. Certain Medicaid eligible recipients
are eligible to enroll with FOHP-NJ, under this contract. Members may
disenroll at any time other than months 2 through 6 of membership and
eligibility is determined by NJDHS-DMAHS.
F-11
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
2. Basis of Presentation and Significant Accounting Policies (continued)
Other Revenue
Other revenue consists principally of fees for administrative service only
contracts which are recognized in income as services are rendered.
Medical and Hospital Service Expenses
Medical and hospital service expenses are accrued in the period the
services are provided to enrollees, based in part on estimates for
hospital and other health care services which have been incurred but not
reported ("IBNR"). Such estimates are continually monitored and reviewed
and, as settlements are made or estimates adjusted, the resulting
differences are reflected in the current period of operations. Since
FOHP-NJ recently began operations and lacks its own historical experience,
the estimate for IBNR is in part based on currently available industry
ratios of claims expense to premiums earned. Despite the variability
inherent in such estimates, management believes that the liability for
medical claims payable is adequate, however, actual results may vary from
the estimated amount.
FOHP-NJ's arrangements for commercial products with hospitals are
primarily on a per diem reimbursement basis and with physicians on a
discounted fee for service basis. Under the contract with the NJDHS-DMAHS,
providers are reimbursed for health care services provided to Medicaid
eligible members on a per member, per month capitation basis for primary
care services, fee for service basis for specialty services and per diem
arrangement for inpatient services. Payments to providers are subject to a
withhold of up to 15% of the reimbursement rate. The withholds are
segregated into geographically designated risk pools. Payments from the
risk pool are settled annually with the participating providers based on
annual incurred costs. At settlement, if there is a surplus in any of the
risk pools, such surplus is first used to fund deficits in other risk
pools, after which any remaining surplus will be distributed among all
providers. There were no distributions required to be made from the risk
pools at December 31, 1995.
FOHP-NJ also contracts with another party for the arrangement of mental
health services provided to enrollees in its health plans. FOHP-NJ pays
for such services on a capitated basis. If the costs of such services are
less than the capitation payments, the amount of any savings is shared
equally by FOHP-NJ and the servicer. If costs are greater than the
capitation payments, any short-fall must be funded equally by FOHP-NJ and
the servicer. In 1995, medical services expenses are net of the savings
under this arrangement which totalled approximately $265,000. There were
no excess costs or savings related to this arrangement in 1994 or 1993.
F-12
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
2. Basis of Presentation and Significant Accounting Policies (continued)
Advertising Costs
Advertising costs are charged to operations when the advertising first
takes place and approximated $1,692,000 and $758,000 for the years 1995
and 1994, respectively. There were no advertising costs incurred for the
period May 19, 1993 (date of inception) to December 31, 1993.
Income Taxes
The Holding Company provides for income taxes based on income recognized
for financial statement purposes. The Holding Company recognizes a
deferred tax asset or liability for the expected future tax effects
attributable to the temporary differences between the tax and financial
statement bases of assets and liabilities. Deferred tax assets and
liabilities are adjusted to reflect changes in tax rates or other
provisions of applicable federal and state tax laws in the period in which
such changes are enacted. Deferred tax assets are recognized unless it is
more likely than not that some portion or all of the deferred tax assets
will not be recovered.
Per Share Data
Per share data are based on the weighted average number of shares of all
classes of common stock outstanding during the period (1,703,908 in 1995,
1,067,997 in 1994 and 826,708 in 1993).
Reclassification
Certain reclassifications have been made to the 1994 and 1993 financial
statements to conform with the current year presentation.
3. Acquisition
Pursuant to a Stock Purchase and Sale Agreement (the "Agreement"), FOHP-NJ
purchased in November 1994, all of the outstanding common stock of IRP, renamed
FMCO, for cash totaling $900,000, plus contingent consideration which was
dependent upon FMCO's ability to meet certain revenue goals for calendar 1995
and 1994, as defined in the Agreement. Since these revenue goals were met for
calendar year 1994, additional consideration of $600,000 was payable to the
sellers of the stock (the "Sellers").
F-13
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
3. Acquisition (continued)
Each of the Sellers entered into a consulting agreement with FMCO, and the
additional consideration was deemed payable for services performed by the
Sellers and included in expenses in 1994.
In August 1995, FOHP-NJ and the Sellers agreed to terminate their existing
relationships and entered into a Settlement Agreement and General Release (the
"Settlement Agreement"). Pursuant to this Settlement Agreement, the consulting
agreements between the Sellers and FMCO were terminated and, in connection
therewith, the Sellers were paid, in the aggregate, $218,000 which is included
in the Holding Company's 1995 selling, general and administrative expenses.
The acquisition was accounted for using the purchase method. The fair market
value of the assets acquired approximated their net book value. The allocation
of the purchase price was as follows:
Purchase price $ 900,000
Liabilities in excess of net assets acquired 206,668
----------
Cost in excess of net assets acquired $1,106,668
==========
In December 1995, management determined that due to the recent loss of business
volume from certain FMCO customers and because of current and projected
operating losses of FMCO, the recoverability of this intangible asset could not
be assured. Accordingly, the net carrying value of $986,782 was written-off in
1995.
The unaudited pro forma operating results for the Holding Company for the years
ended December 31, 1994 and 1993, which reflects the operating results of the
Holding Company as if the Holding Company acquired IRP on January 1, 1993, are
as follows:
1994 1993
--------------------------------------
Revenue $12,105,805 $3,716,492
Expense 22,142,064 6,331,253
Net loss (10,036,259) (2,614,761)
Net loss per share (9.40) (3.17)
F-14
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
4. Holding Company Common Stock
At December 31, 1995, the authorized common stock of the Holding Company
totalled 100 million shares. The authorized Common Stock of the Holding Company
is comprised of the following classes of Common Stock, $.01 par value: Common
Stock-NJ, Common Stock-NY, Common Stock-PA, Common Stock-DE and unclassified
common stock which may be classified by the Board of Directors as provided in
the Certificate of Incorporation of the Holding Company. During 1995, the
Holding Company issued 2,100,173 shares of Common Stock-NJ.
At December 31, 1994, the authorized common stock of FOHP-NJ, the predecessor to
the Holding Company, totalled 10 million shares. The authorized Common Stock of
FOHP-NJ, was comprised of the following classes of Common Stock, $.01 par value:
Institutional Provider Common Stock; Practitioner Provider Common Stock and
Other Provider Common Stock. During 1994, FOHP-NJ issued 1,020,051 shares of
Institutional Provider Common Stock, 511,800 shares of Practitioner Provider
Common Stock, and 40,002 shares of Other Provider Common Stock.
The Certificate of Incorporation and By-Laws of the Holding Company include
significant restrictions on the issuance and transfer of shares of Holding
Company Common Stock. The Certificate of Incorporation of the Holding Company
requires that only health care providers who enter into and maintain a Provider
Agreement with a subsidiary of the Holding Company may purchase shares of
Holding Company Common Stock. Acute care institutions which enter into a
Provider Agreement with a subsidiary of the Holding Company may purchase shares
of Holding Company Common Stock directly or through an affiliate.
The Holding Company may, but is not obligated to, repurchase shares of Holding
Company Common Stock from any shareholder whose Provider Agreement terminates
for any reason or upon the occurrence of certain other events, as described in
the Certificate of Incorporation. The determination of the repurchase price of
the shares is also described in the Certificate of Incorporation.
5. Practitioner Provider Common Stock of FOHP-NJ
Prior to the effective date of the Reorganization, the holders of FOHP-NJ
Practitioner Provider Common Stock issued during 1994 had certain redemption
privileges, therefore, such stock was classified outside of shareholders'
equity. The redemption privileges were eliminated in connection with the
Reorganization. At December 31, 1994, Practitioner Provider Common Stock was
recorded at fair value on the date of issuance and the redemption value was
based on book value which was approximately $3,900,000.
F-15
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
6. Defined Contribution Plan
Beginning in 1994, the Holding Company maintained two defined contribution
(401[k]) plans covering substantially all of its employees. In 1995, the Holding
Company combined the two plans into one plan. Employees may contribute to the
plans after completing certain service requirements. Effective February 1995,
the Holding Company is required to match 50% of employee contributions not to
exceed (i) limits established under Section 415 of the Code or (ii) the lesser
of 25% of compensation or $30,000. Total plan expense for 1995 and 1994 amounted
to $211,800 and $1,000, respectively.
7. Income Taxes
The Holding Company and its subsidiaries file a consolidated federal income tax
return. No federal income taxes have been provided for or paid since the Holding
Company and its subsidiaries have incurred operating losses for financial
statement and income tax reporting purposes. For state purposes, each entity
files separately and $72,000 of current state taxes have been provided. At
December 31, 1995, net operating loss ("NOL") carryforwards for federal and
state income tax reporting purposes (which may be subject to certain
limitations) approximate $14,890,000 and $17,052,000 for federal and New Jersey
purposes, respectively. These losses will be available to offset future taxable
income. Such NOL's expire through 2010 for federal purposes and through 2002 for
state purposes.
The tax effects of temporary differences that give rise to deferred tax assets
are as follows:
December 31
1995 1994
---------------------------------
Capitalization of start-up costs and
organization costs $ 2,630,000 $ 2,189,000
Net operating loss carryforwards 6,209,000 1,956,000
Amortization of acquired intangibles 553,000 245,000
Reserve discounting 574,000 102,000
Other 349,000 46,000
---------------------------------
Total deferred tax assets 10,315,000 4,538,000
Valuation allowance for deferred tax assets (10,315,000) (4,538,000)
---------------------------------
Net deferred tax assets $ - $ -
=================================
F-16
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
The valuation allowance has been recorded due to the uncertainty of the
realization of the deferred tax asset since the realization of such asset is
dependent on future operating profits.
The effective income tax rate for 1995, 1994 and 1993 varied from the statutory
federal income tax rate as follows:
1995 1994 1993
Statutory federal income tax rate 35% 35% 35%
State income taxes 6 6 6
-------------------------
Subtotal 41 41 41
Valuation allowance (41) (41) (41)
Effective income tax rate -% -% -%
=========================
8. Related Party Transactions
Approximately $63,600,000 of 1995 premium revenue and $5,600,000 of 1994 premium
revenue was generated from subscribers who are also owners of the Holding
Company and providers to FOHP-NJ. At December 31, 1995 and 1994, $6,341,092 and
$1,801,863, respectively, of accounts receivable is due from owners/providers.
Substantially all of the medical claims costs are due to owners/providers.
9. Line of Credit
At December 31, 1994, FOHP-NJ maintained a $5 million secured and a $1 million
unsecured line of credit arrangement with a local bank at a variable rate based
on prime (8.50% at December 31, 1994). No amounts were outstanding at December
31, 1994. The credit lines expired in 1995 and were not renewed.
F-17
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
10. Furniture and Equipment
Furniture and equipment consists of the following:
1995 1994
----------------------------
Leasehold improvements $ 58,504 $ 16,555
Furniture and fixtures 906,294 643,677
Equipment 1,664,793 973,174
----------------------------
Total 2,629,591 1,633,406
Less accumulated depreciation and amortization (770,460) (231,499)
----------------------------
Total deferred tax assets $1,859,131 $1,401,907
============================
11. Commitments and Contingencies
Leases
The Holding Company leases office space under noncancelable lease arrangements.
The leases are for terms of 5 years and generally provide for renewal options of
up to 5 additional years. Total rent expense for 1995, 1994 and 1993 was
approximately $1,103,000, $200,000 and $20,000, respectively.
The following is a schedule of minimum future payments on long-term operating
leases at December 31, 1995:
1996 $1,905,524
1997 1,462,870
1998 1,439,393
1999 297,843
2000 40,536
----------
$5,146,166
==========
Employment Contracts
The Holding Company has entered into employment arrangements with certain of its
key employees. These arrangements provide for compensation in the form of
salary, annual bonus and reimbursement of certain expenses. As of December 31,
1995, these contracts expire within 1 to 3 years and provide for minimum
compensation of approximately $1,015,750, $290,000 and $125,000 for the years
ending 1996, 1997 and 1998, respectively.
F-18
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
11. Commitments and Contingencies (continued)
Service Agreement
FOHP-NJ entered into an agreement with a claims processing company to provide
recordkeeping and data processing functions to FOHP-NJ on a fee for services
basis. The agreement expires March 31, 1998. FOHP-NJ has the right to terminate
this agreement without cause upon not less than 180 days prior written notice
provided that FOHP-NJ does so by acquiring a license for the system used by the
service bureau processor. The current cost for the system license is
approximately $800,000 and is subject to reduction as long as the Holding
Company continues the agreement.
Medicare Consulting Agreement
In January 1995, FOHP-NJ entered into an agreement with another company to
assist FOHP-NJ in obtaining approval from the Health Care Financing
Administration ("HCFA") to offer health care products to Medicare beneficiaries
in New Jersey. Such approval was obtained in December 1995. Fees paid by
FOHP-NJ, including specified bonus payments, under the agreement totalled
$392,000 and $62,000 in 1995 and 1994, respectively. In addition, a variable
percentage (.5% to 1%) of any Medicare revenue generated by FOHP-NJ for a total
of eight years after FOHP-NJ enters into a Medicare Risk Contract with HCFA will
be payable to the other company. The minimum payment for each year, pursuant to
such variable percentage, is $1,000,000 and the maximum for any such payment is
$3,500,000.
Reinsurance Arrangements
FOHP-NJ has entered into reinsurance contracts to limit its losses on individual
claims. The reinsurance contract in effect through December 31, 1994, provided
for reimbursement of eligible hospital claims per enrollee which exceeded
$50,000 per enrollee up to a $2,000,000 maximum lifetime reimbursement per
enrollee. Per diem arrangements with hospitals were also subject to maximum
limits dependent upon length of stay, and claims per enrollee which exceeded
$50,000 were subject to coinsurance provisions.
The reinsurance contract effective January 1, 1995, and renewed on January 1,
1996, provides for reimbursement of eligible hospital claims per enrollee which
exceed $75,000 for commercial and Medicaid enrollees and $100,000 for Medicare
enrollees, within a calendar year up to a maximum reimbursement per enrollee of
$1,000,000 per calendar year and $2,000,000 per lifetime. Per diem arrangements
with hospitals are also subject to maximum limits dependent upon length of stay,
and claims per enrollee which exceed $50,000 are subject to coinsurance
provisions.
F-19
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
11. Commitments and Contingencies (continued)
Reinsurance expense, net of recoveries, was $694,660 in 1995 and $101,436 in
1994 and is included in medical and hospital services expense. There was no
reinsurance policy in force for 1993.
Statutory Net Worth and Dividend Restrictions
FOHP-NJ, pursuant to its COA to operate an HMO in New Jersey, is required to
maintain a minimum statutory net worth. The minimum statutory net worth
requirement at December 31, 1995 amounted to $5,523,000. In addition, under the
terms of its COA, if statutory net worth is less than 125% of the minimum
required ($6,904,000 at December 31, 1995), FOHP-NJ is required to submit a plan
of action to the DOI to remedy the shortfall. Statutory net worth at December
31, 1995 approximated $2,048,000, which was $4,856,000 below the 125%
requirement. FOHP-NJ's plan (the "Plan") to meet its COA net worth requirements
was presented to the Departments, which approvals are currently being sought.
The Plan includes mandating enrollments from owners/providers, reducing
administrative costs, and reducing medical costs and statutory net worth
requirements through the implementation of a reduced physician fee schedule and
premium sharing arrangements. In addition, the Holding Company has obtained
certain financial commitments and guarantees which, in management's opinion,
when combined with the other elements of the Plan, enable FOHP-NJ to meets its
statutory net worth requirements as of December 31, 1995 and throughout 1996. A
summary of the terms of the financial commitments and guarantees follows:
o Effective as of December 31, 1995, a $6 million guarantee of the Holding
Company's capital was issued by the Chairman of the Board of the Holding
Company for which he was paid $10,000. The guarantee terminated on March
27, 1996. Simultaneously with the termination of the guarantee, the
Chairman personally secured a $3 million letter of credit from a
commercial bank which may be drawn upon by the Holding Company. The letter
of credit expires January 2, 1997, unless earlier terminated by the
Holding Company. All costs and fees related to the letter of credit will
be paid by the Holding Company. The Holding Company will also pay the
Chairman $10,000 per month through May 1996 and $20,000 per month
thereafter until the letter of credit terminates. The Holding Company will
issue a 90 day term note to the Chairman for the amount drawn, if any,
against the letter of credit. Interest on the term note will be prime plus
4%. If the term note is not paid within 90 days, interest on any
outstanding amount will be equal to the lesser of 20% or the highest rate
permitted by law. In addition, should non-health care providers be
permitted to own Holding Company Common Stock (see Note 4), the Chairman
would have the option to convert any outstanding balance of the term note
to shares of Common Stock-NJ at
F-20
<PAGE>
FOHP, Inc. and Subsidiaries (Successor to
First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
11. Commitments and Contingencies (continued)
a conversion rate of $15 per share. The Holding Company has agreed not to
make any draw against this letter of credit until the Holding Company
exhausts all of its rights against any other letters of credit or other
guarantees (see below).
o In March and April 1996, certain institutional owners/providers have
executed corporate guarantees on behalf of the Holding Company totaling
$4,350,000. The guarantees continue through January 1, 1997, unless
sufficient capital is obtained by the Holding Company through the sale of
Holding Company Common Stock to ensure compliance with statutory net worth
requirements. If any amount is drawn under a guarantee, the Holding
Company will issue to the guarantor a note in the amount of the draw with
a term of less than 9 months at an interest rate of prime plus 4%.
o In March and April 1996, letters of credit totalling $4,098,000 were
issued by certain commercial banks and personally secured to the banks by
certain physician shareholders and the Chief Executive Officer of the
Holding Company for the benefit of the Holding Company. The letters of
credit expire January 1, 1997, unless earlier terminated by the Holding
Company. All costs and fees related to the letters of credit will be paid
by the Holding Company. If any amounts are drawn, the Holding Company will
reimburse, within 9 months, any physician shareholder or the Chief
Executive Officer who funded the draw at an interest rate of prime plus
4%. The Holding Company will pay the Chief Executive Officer and each
participating physician shareholder a fee equal to 2.5% of the amount of
their respective letter of credit guaranteed by such physician shareholder
or Chief Executive Officer.
In addition to the minimum statutory net worth requirements, FOHP-NJ may not pay
dividends to its parent without prior approval of the Commissioner of Insurance.
12. Subsequent Event
During 1996, FOHP-NJ's statutory net worth deficiency increased. In connection
with FOHP-NJ's plan to remedy the deficiency, the Board of Directors of the
Holding Company approved a $30 million investment by Health Systems
International, Inc., a California based managed health care organization, into
the Holding Company in October, 1996. At closing, which is expected by year end
1996, HSI will purchase $30 million of debentures convertible into 40% of the
Holding Company's outstanding equity and HSI will receive an option to acquire
another 11% ownership. After closing, HSI will have the option to acquire up to
an additional 20% of the outstanding equity of the Holding Company, or the
Holding Company will repurchase that amount with HSI financing. The transaction
requires approval from New Jersey regulatory authorities and the shareholders of
the Holding Company.
F-21
<PAGE>
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------------------------
(unaudited) (audited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 33,575,197 $ 23,882,286
Accounts receivable from owners/ providers 7,642,216 6,341,092
Other accounts receivable (net of allowance for doubtful accounts
of $176,048 and $332,904, respectively) 2,285,531 3,252,639
Prepaid expenses 403,571 534,751
---------------------------
Total current assets 43,906,515 34,010,768
Long-term Assets:
Restricted Cash 1,232,665 1,200,801
Furniture and equipment (at cost, net of accumulated depreciation
and amortization of $1,182,791 and $770,460, respectively) 2,304,285 1,859,131
Other assets 232,858 291,133
===========================
Total Assets $ 47,676,323 $ 37,361,833
===========================
Liabilities and Shareholders' Equity
Current Liabilities:
Medical claims payable $ 44,676,694 $ 26,960,273
Accrued expenses 3,887,237 3,284,971
Accounts payable 3,058,900 935,907
Unearned premium revenue 539,945 341,092
Other 1,390,731 960,551
---------------------------
Total current liabilities 53,553,507 32,482,794
Shareholders' Equity:
Common Stock, $.01 par value, 100,000,000 shares authorized,
Common Stock-NJ, 2,100,173 shares issued and outstanding 21,002 21,002
Additional paid-in capital 30,648,489 30,648,489
Accumulated deficit (36,546,675) (25,790,452)
---------------------------
Total shareholders' (deficiency) equity (5,877,184) 4,879,039
---------------------------
Total liabilities and shareholders' equity $ 47,676,323 $ 37,361,833
===========================
</TABLE>
See accompanying notes
F-22
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
----------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue:
Premiums-hospitals/physicians $ 33,627,616 $ 16,897,439 $ 67,978,469 $ 31,442,671
Other premiums 21,182,170 3,898,477 36,892,839 5,776,892
Other, principally administrative fees 2,374,189 2,043,871 3,881,484 3,834,916
Interest income 413,265 290,932 751,179 494,503
----------------------------------------------------------------
Total Revenue $ 57,597,240 23,130,719 109,503,971 41,548,982
----------------------------------------------------------------
Expenses:
Medical and hospital services 50,257,395 18,133,874 93,385,616 31,971,205
Selling, general and administrative 14,903,597 7,071,755 26,455,026 13,062,689
Depreciation and amortization 227,015 151,830 416,223 291,247
Interest 1,436 58,131 3,329 77,150
----------------------------------------------------------------
Total Expenses 65,389,443 25,415,590 120,260,194 45,402,291
----------------------------------------------------------------
Net loss $ (7,792,203) $ (2,284,871) $ (10,756,223) $ (3,853,309)
============================= ==============================
Net loss per common share $ (3.71) $ (1.45) $ (5.12) $ (2.45)
============================= ==============================
</TABLE>
See accompanying notes
F-23
<PAGE>
FOHP, Inc and Subsidiaries (Successor to First Option
Health Plan of New Jersey, Inc.)
Condensed Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock
--------------------- Additional Total
Par Paid-In Accumulated Shareholders
Shares Value Capital Deficit Equity
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 1,060,053 10,601 15,341,561 (11,049,507) 4,302,655
Reclassification of FOHP-NJ Practitioner Provider
Common Stock from temporary equity 511,800 5,118 7,671,882 7,677,000
Redemption of FOHP-NJ Practitioner Provider
Common Stock (100) (1) (1,499) (1,500)
Conversion of following outstanding shares of
FOHP-NJ Common Stock to FOHP, Inc. Common Stock - NJ:
FOHP-NJ Institutional Provider (1,020,051) (10,201) (10,201)
FOHP-NJ Other Provider (40,002) (400) (400)
FOHP-NJ Practitioner Provider (511,700) (5,117) (5,117)
FOHP, Inc. Common Stock - NJ
issued (at $15 per share) 2,100,173 21,002 7,931,516 7,952,518
Payment of issue costs (294,971) (294,971)
Net loss (14,740,945) (14,740,945)
------------------------------------------------------------------------
Balance at December 31, 1995 2,100,173 21,002 30,648,489 (25,790,452) 4,879,039
Net loss for the period January 1, 1996 to
June 30, 1996 (10,756,223) (10,756,223)
------------------------------------------------------------------------
Balance at June 30, 1996 (unaudited) 2,100,173 $ 21,002 $ 30,648,489 $(36,546,675) $ (5,877,184)
========================================================================
</TABLE>
See accompanying notes
F-24
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the period For the period
January 1, 1996 January 1, 1995
to June 30, 1996 to June 30, 1995
------------------------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss $(10,756,223) $ (3,853,309)
Adjustments to reconcile net loss to cash flows from (used in) operating
activities:
Depreciation and amortization 416,223 291,247
Amortization of investment discounts (31,864) (14,427)
Changes in operating assets and liabilities:
Increase in accounts receivable, net (334,016) (1,397,008)
Decrease in prepaids and other current assets 131,180 222,675
Decrease (increase) in other assets 58,275 (760,119)
Increase (decrease) in accounts payable and
accrued expenses 2,725,259 (553,664)
Increase in medical claims payable 17,716,421 8,889,332
Increase in unearned premium revenue 198,853 46,132
Increase (decrease) in other current liabilities 430,180 (8,670)
--------------------------------
Net cash flows from operating activities 10,554,288 2,862,189
Cash flows from investing activities
Increase in restricted cash (100,000)
Purchases of furniture and fixtures (861,377) (414,249)
--------------------------------
Net cash used in investing activities (861,377) (514,249)
Cash flows from financing activities
Proceeds from short-term loan 1,000,000
Redemption of common stock (1,500)
Payment of stock issue costs (19,638)
--------------------------------
Net cash provided by financing activities 0 978,862
Net increase in cash and cash equivalents
at the end of the period 9,692,911 3,326,802
Cash and cash equivalents at the beginning of the period 23,882,286 13,030,295
--------------------------------
Cash and cash equivalents at the end of the period $ 33,575,197 $ 16,357,097
================================
Interest paid for the period $ 3,329 $ 26,811
================================
State income taxes paid for the period $ 1,090 $ 1,266
================================
</TABLE>
See accompanying notes
F-25
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements
1. General
The Holding Company is a New Jersey corporation which was formed in May 1994.
The Holding Company was formed to effect the Reorganization of FOHP-NJ which was
consummated on June 8, 1995. The Reorganization was completed through an
exchange of FOHP-NJ's outstanding common stock for shares of the Holding
Company's Common Stock-NJ. In connection with the Reorganization, FOHP-NJ
distributed, as a dividend, all of the outstanding common stock of FMCO to the
Holding Company. Pursuant to the Reorganization, FOHP-NJ and FMCO became
wholly-owned subsidiaries of FOHP. Prior to the Reorganization, the Holding
Company did not conduct any business nor did it have any significant assets or
liabilities. The primary purpose of the Reorganization was to facilitate the
formation of additional health maintenance organizations in states other than
New Jersey.
The Holding Company serves as the holding company for its wholly-owned
subsidiaries to which it provides management and consulting services. The
Holding Company's principal operating subsidiaries are FOHP-NJ and FMCO which
was acquired by FOHP-NJ, in November 1994. FOHP-NJ, a New Jersey corporation
formed in May 1993, received its COA to operate as an HMO in New Jersey in June
1994. FMCO performs independent case management services for workers'
compensation claims. Other wholly-owned subsidiaries of the Holding Company,
each formed in 1995, include FOHP-NY, a New York corporation, FOHP-PA, a
Pennsylvania corporation, FOHP-MD, a Maryland corporation, FOHP-DE, a Delaware
corporation, and FOHP Agency, a New Jersey corporation. These newly formed
subsidiaries are in the start-up phase. Each of FOHP-NY and FOHP-PA has filed an
application for a COA to operate as an HMO in its state of incorporation.
The financial information for the three and six month periods ended June 30,
1996 and June 30, 1995 included herein are unaudited. Such information includes
all adjustments, including adjustments of a normal and recurring nature, which,
in the opinion of management, are necessary for a fair presentation of the
Holding Company's financial position, results of operations and cash flows.
Additionally, such information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
beginning on page ___ of the Proxy Statement.
F-26
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
2. Basis of Presentation and Significant Accounting Policies
The Holding Company has incurred a loss of $10,756,223 for the six month period
ended June 30, 1996 and has an accumulated deficit of $36,546,675 as of June 30,
1996. In order for the Holding Company's principal operating subsidiary FOHP-NJ
to meet its 1996 statutory net worth requirements pursuant to its COA granted by
the Departments, the Holding Company must generate sufficient operating profits
and/or obtain additional equity financing. In an effort to increase capital in
1996, FOHP effected several operational changes. The operational changes made by
FOHP included (a) the implementation of a program to generate increased
operating profits by requiring certain acute care shareholders which had not met
their enrollment commitments to meet such commitments if they want to remain
shareholders of FOHP and providers in the FOHP-NJ network, (b) the
implementation of a hiring freeze and suspension of bonus payments and the use
of consultants in order to control FOHP's administrative costs, and (c) the
implementation of a modified provider reimbursement schedule which became
effective on April 1, 1996, for purposes of reducing medical costs. The Holding
Company is also considering raising capital through private placement and/or
public sale of common stock. The success of the Holding Company's efforts to
increase capital in 1996 is essential in order for FOHP-NJ to meet its statutory
net worth requirement through the year ending December 31, 1996. Accordingly,
these matters raise substantial doubt about the Holding Company's ability to
continue as a going concern.
These consolidated financial statements have been prepared assuming the Holding
Company will continue as a going concern and do not include any adjustments that
might result from the outcome of this uncertainty.
The following are significant accounting policies of the Holding Company:
Principles of Consolidation. The consolidated financial statements include
the accounts of the Holding Company and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents. Includes approximately $1,074,000 that is not
currently available for operations. Such amount consists of refundable moneys
collected from third parties wanting to secure a place in the anticipated New
York provider network.
Restricted Cash. FOHP-NJ is required to maintain, at a minimum, $1,000,000
on deposit with the DOI.
F-27
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
Income Taxes. The Holding Company provides for income taxes based on
income recognized for financial statement purposes. The Holding Company
recognizes a deferred tax asset or liability for the expected future tax effects
attributable to the temporary differences between the tax and financial
statement basis of assets and liabilities. Deferred tax assets and liabilities
are adjusted to reflect changes in tax rates or other provisions of applicable
federal and state tax laws in the period in which such changes are enacted.
Deferred tax assets are recognized unless it is more likely than not that some
portion or all of the deferred tax assets will not be recovered.
Per Share Data. Per share data are based on the weighted average number of
shares of all classes of Common Stock outstanding during the comparative six
month period ended June 30, 1996 and June 30, 1995 (2,100,173 at June 30, 1996
and 1,571,753 at June 30, 1995).
3. Common Stock
At June 30, 1996, the authorized Common Stock of the Holding Company totaled 100
million shares. The authorized Common Stock of the Holding Company is comprised
of the following classes of Common Stock, $.01 par value: Common Stock-NJ,
Common Stock-NY, Common Stock-PA, Common Stock-DE and Unclassified Common Stock
which may be classified by the Board of Directors as provided in the Certificate
of Incorporation of the Holding Company. During 1995, the Holding Company issued
2,100,173 shares of Common Stock-NJ.
At December 31, 1994, the authorized common stock of FOHP-NJ, the predecessor to
the Holding Company, totaled 10 million shares. The authorized common stock of
FOHP-NJ was comprised of the following classes of common stock, $.01 par value:
Institutional Provider Common Stock; Practitioner Provider Common Stock and
Other Provider Common Stock. During 1994, FOHP-NJ issued 1,020,051 shares of
Institutional Provider Common Stock, 511,800 shares of Practitioner Provider
Common Stock, and 40,002 shares of Other Provider Common Stock.
The Certificate of Incorporation and By-Laws of the Holding Company include
significant restrictions on the issuance and transfer of shares of Common Stock.
The Certificate of Incorporation of the Holding Company requires that only
health care providers who enter into and maintain a provider agreement with a
subsidiary of the Holding Company may purchase the Holding Company's Common
Stock. Acute care institutions which enter into a provider agreement with a
subsidiary of the Holding Company may purchase shares of Common Stock directly
or through an affiliate.
F-28
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
The Holding Company may, but is not obligated to, repurchase shares of Common
Stock from any shareholder whose provider agreement terminates for any reason or
upon the occurrence of certain events, as described in the Certificate of
Incorporation. The determination of the repurchase price of the shares is also
described in the Certificate of Incorporation.
4. Statutory Net Worth & Dividend Restrictions
FOHP-NJ, pursuant to its COA to operate as an HMO in New Jersey, is required to
maintain a minimum statutory net worth. The minimum statutory net worth
requirement at June 30, 1996 amounted to $9,309,000. In addition, under the
terms of its COA, if statutory net worth is less than 125% of the minimum
required ($11,637,000 at June 30, 1996), FOHP-NJ is required to submit a plan of
action to the New Jersey Department of Insurance to remedy the shortfall.
Without consideration to financial commitments and guarantees, discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations beginning on page ___ of the Proxy Statement, statutory net
deficiency at June 30, 1996 approximated $6,655,000, which was $18,292,000 below
the 125% requirement. FOHP-NJ's plan of action to meet its COA net worth
requirements was presented in April, 1996 to the Departments for approval. The
plan of action is discussed in Management's Discussion and Analysis of Financial
Condition and Results of Operations beginning on page ___ of the Proxy
Statement. On June 12, 1996, the Departments approved the plan of action subject
to certain reporting and other conditions. Such conditions are also discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
F-29
<PAGE>
APPENDIX A
AMENDED AND RESTATED
SECURITIES PURCHASE AGREEMENT
BY AND AMONG
FOHP, INC.,
FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.
AND
HEALTH SYSTEMS INTERNATIONAL, INC.
November ___, 1996
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I SALE AND PURCHASE OF SECURITIES...................... A-1
1.1 Purchase of Debentures............................... A-1
1.2 Closing.............................................. A-1
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND FOHP-NJ.......................................... A-2
2.1 Organization; Subsidiaries; and Good Standing........ A-2
2.2 Power; Authorization; Binding Agreements............. A-2
2.3 Capitalization....................................... A-3
2.4 Financial Statements................................. A-3
2.5 Absence of Certain Developments...................... A-4
2.6 Noncontravention..................................... A-4
2.7 Litigation........................................... A-5
2.8 No Governmental Proceeding or Litigation............. A-5
2.9 Compliance with Laws................................. A-5
2.10 Material Contracts................................... A-5
2.11 Consents, Etc........................................ A-7
2.12 Licenses, Permits and Governmental Approvals......... A-7
2.13 Securities Exchange Act Reports Supplied to Purchaser A-7
2.14 Environmental Matters................................ A-8
2.15 Title to Properties and Assets........................ A-8
2.16 Taxes................................................. A-8
2.17 DOI Reports........................................... A-9
2.18 Information Supplied.................................. A-9
2.19 Certain Business Practices and Regulations............ A-9
2.20 Insurance............................................ A-10
2.21 Labor Issues......................................... A-10
2.22 Employment/Severance Matters......................... A-10
2.23 Absence of Undisclosed Liabilities................... A-11
2.24 Intellectual Property................................ A-11
2.25 Employee Benefit Plans............................... A-11
2.26 Brokerage and Other Fees............................. A-12
2.27 Accuracy of Information.............................. A-12
<PAGE>
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PURCHASER...... A-12
3.1 Organization and Good Standing....................... A-12
3.2 Authorization; Power................................. A-12
3.3 Purchase for Investment.............................. A-13
3.4 Unregistered Securities; Legend...................... A-13
3.5 Access to Data; Experience; Investment Decision...... A-13
3.6 Brokerage and Other Fees............................. A-13
3.7 No Financing Required................................ A-14
3.8 Litigation........................................... A-14
3.9 Claims Processing System............................. A-14
3.10 Securities Exchange Act Reports
Supplied to the Company............................ A-14
ARTICLE IV PRE-CLOSING COVENANTS OF THE COMPANY................. A-14
4.1 Fulfillment of Obligations........................... A-14
4.2 Access............................................... A-14
4.3 Conduct of Businesses................................ A-15
4.4 No Solicitation of Other Offers...................... A-16
4.5 Interim Financial Statements......................... A-17
4.6 Updated Disclosure; Breaches......................... A-17
4.7 Consummation of Agreement............................ A-17
4.8 Approvals of Third Parties........................... A-17
4.9 HSR Act.............................................. A-18
4.10 Restated Certificates and By-laws.................... A-18
4.11 Proxy Statement...................................... A-18
4.12 Healthcare Contracts................................. A-18
4.13 Letters of Credit; Guarantees........................ A-19
ARTICLE V COVENANTS OF THE PURCHASER........................... A-19
5.1 Consummation of Agreement............................ A-19
5.2 HSR Act.............................................. A-19
5.3 Exchange/Cash Offer for Shares....................... A-19
5.4 Claims Processing System............................. A-21
5.5 Updated Disclosure; Breaches......................... A-21
5.6 Standstill........................................... A-21
ARTICLE VI OTHER AGREEMENTS..................................... A-21
6.1 Healthcare Contracts................................. A-21
6.2 Required Capital Call................................ A-22
6.3 Sierra Contract...................................... A-22
6.4 New York Subsidiary.................................. A-22
6.5 Worker's Compensation Business....................... A-22
6.6 Additional HSR Act Filings........................... A-23
6.7 Post-Closing Limited Offer to Shareholders........... A-23
6.8 Post Exchange/Cash Offer Merger.......................A-24
<PAGE>
ARTICLE VII CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATIONS.. A-24
7.1 Delivery of Debentures............................... A-24
7.2 Representations and Warranties....................... A-24
7.3 Corporate Proceedings................................ A-25
7.4 Restated Certificates and Amended By-laws............ A-25
7.5 Good Standing Certificates........................... A-25
7.6 Secretary's Certificate.............................. A-25
7.7 Management Agreements................................ A-25
7.8 Option Agreement..................................... A-25
7.9 Hospital Agreements.................................. A-25
7.10 Investors Agreement.................................. A-25
7.11 Opinion of Counsel................................... A-25
7.12 Approvals and Consents............................... A-25
7.13 Covenants............................................ A-26
7.14 HSR Act.............................................. A-26
7.15 Injunction, Etc...................................... A-26
7.16 Action or Proceeding................................. A-26
ARTICLE VIII CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS.... A-26
8.1 Receipt of Payment................................... A-26
8.2 Representations and Warranties....................... A-26
8.3 Proceedings and Documents............................ A-26
8.4 Covenants............................................ A-26
8.5 HSR Act.............................................. A-26
8.6 Injunction, Etc...................................... A-27
8.7 Approvals............................................ A-27
8.8 Investors Agreement.................................. A-27
8.9 Opinion of Counsel................................... A-27
ARTICLE IX INDEMNIFICATION...................................... A-27
9.1 Indemnification by the Company....................... A-27
9.2 Indemnification by the Purchaser..................... A-27
9.3 Conditions of Indemnification........................ A-28
9.4 Remedies Not Exclusive............................... A-29
ARTICLE X SURVIVAL OF REPRESENTATIONS.......................... A-29
ARTICLE XI TERMINATION.......................................... A-29
11.1 (a) Termination Events.............................. A-29
(b) Termination Fees................................ A-30
<PAGE>
ARTICLE XII MISCELLANEOUS........................................ A-31
12.1 Entire Agreement; Amendments and Waivers............. A-31
12.2 Governing Law........................................ A-31
12.3 Notices.............................................. A-31
12.4 Effect of Headings................................... A-33
12.5 Severability......................................... A-33
12.6 Confidentiality; Publicity and Disclosures........... A-33
12.7 Assignment........................................... A-33
12.8 Expenses............................................. A-33
12.9 Counterparts......................................... A-33
12.10 Further Assurances................................... A-33
EXHIBITS
Exhibit A....... Form of Debentures
Exhibit B ...... Form of Amended and Restated Certificates of
Incorporation and By-laws
Exhibit C....... Forms of Management Agreements
Exhibit D....... Form of Option Agreement
Exhibit E....... Form of Letter of Comfort
Exhibit F....... Form of Investors Agreement
Exhibit G....... Form of Opinion of Outside Counsel of FOHP, Inc.
and FOHP-NJ
Exhibit H....... Form of Opinion of Counsel of Health Systems
International, Inc.
<PAGE>
AMENDED AND RESTATED
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this "Agreement"), amended and
restated as of November ___, 1996, is executed by and among FOHP, Inc., a New
Jersey corporation (the "Company"), First Option Health Plan of New Jersey,
Inc., a New Jersey corporation ("FOHP-NJ"), and Health Systems International,
Inc., a Delaware corporation ("Purchaser").
WITNESSETH:
WHEREAS, the Company desires to issue and sell, and the Purchaser desires
to purchase, convertible subordinated surplus debentures in the initial
aggregate principal amount of $30,000,000 (the "Debentures");
WHEREAS, in connection with the issuance of the Debentures and the
execution of certain Management Agreements (as such term is defined in Section
7.7 hereof), the Company and the Purchaser will enter into an option agreement
(the "Option Agreement") dated as of the Closing Date (as defined in Section
1.2), pursuant to which, among other things, the Company will grant to the
Purchaser the right (the "Option") to purchase from the Company up to such
number of shares of the common stock of the Company as is set forth in the
Option Agreement;
WHEREAS, the Company and the Purchaser desire to set forth certain
agreements and certain terms and conditions regarding the sale and purchase of
the Debentures;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and undertakings hereunder and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto hereby agree as follows:
ARTICLE I
SALE AND PURCHASE OF SECURITIES
1.1 Purchase of Debentures. In reliance upon the representations,
warranties and covenants contained in this Agreement, the Purchaser agrees to
purchase from the Company, and the Company agrees to issue and sell to the
Purchaser, the Debentures in the form set forth on Exhibit A attached hereto.
1.2 Closing. The closing of the purchase and sale of the Debentures (the
"Closing") shall occur on (a) the later of (i) December 16, 1996 or (ii) two
business days after the satisfaction or waiver of all conditions set forth in
Article VII or Article VIII hereof or (b) such other date as shall be agreed
upon by the Company and the Purchaser (the "Closing Date"). The Closing shall be
held at 10:00 a.m., New York time, at the offices of McDermott, Will & Emery, 50
Rockefeller Plaza, 11th Floor, New York, New York 10020 or such other place as
the parties may mutually agree upon in writing. At the Closing, the Company
shall deliver to the Purchaser the Debentures purchased by the Purchaser (which
* A- * Debentures shall be registered in the Purchaser's name), and the
Purchaser shall deliver to the Company the sum of $30,000,000 (the "Purchase
Price") by certified check or wire transfer of immediately available funds in
accordance with wire transfer instructions provided by the Company, denominated
in United States dollars.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND FOHP-NJ
The Company and FOHP-NJ (with respect to matters relating to itself)
represent and warrant to the Purchaser as follows:
2.1 Organization; Subsidiaries; and Good Standing.
(a) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of New Jersey. The Company has
all necessary power and authority under applicable law and its organizational
documents to own or lease its properties and to carry on its business as
presently conducted. All of the subsidiaries of the Company are identified on
Schedule 2.1A (each a "Subsidiary," and collectively the "Subsidiaries"). There
are no subsidiaries of the Subsidiaries. Each of the Subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its incorporation and has all necessary power and authority
under applicable law to own or lease its properties and to carry on its business
as presently conducted.
(b) Except as set forth on Schedule 2.1B, each of the Company and
each of the Subsidiaries, to the extent conducting business as a health
maintenance organization ("HMO"), insurance company, managed care organization,
third-party administrator or otherwise requiring any form of governmental
licensure, qualification or authorization, is duly licensed, qualified or
authorized and in good standing under the applicable laws and regulations,
respectively, of each state or territory in which the conduct of such business
so requires, except where the failure would not have a material adverse effect
on the business, conditions, prospects, properties or results of operations of
the Company and the Subsidiaries taken as a whole (a "Material Adverse Effect").
Except as set forth on Schedule 2.1B, the conduct of the respective businesses
of the Company, FOHP-NJ and the other Subsidiaries is in conformity with all
applicable federal, state and other governmental and regulatory requirements and
the forms, procedures and practices of the Company and each of the Subsidiaries
in the conduct of their respective businesses are also in compliance with all
such requirements, to the extent applicable, except where nonconformity or
noncompliance would not constitute a Material Adverse Effect.
(c) Complete and accurate copies of the certificate of incorporation
(the "Certificate") and by-laws of the Company and the certificates of
incorporation and by-laws of each of the Subsidiaries have been delivered to the
Purchaser.
2.2 Power; Authorization; Binding Agreements. The Company has the power
and authority to enter into this Agreement and to perform fully its obligations
hereunder (other than the issuance and sale of the Debentures, the issuance of
the Option, the issuance of the shares of common stock of the Company (the
"Conversion Shares") issuable upon conversion of the Debentures and the issuance
of the shares of common stock of the Company (the "Option Shares") issuable upon
exercise of the Option) and, upon approval of the shareholders of the Company as
described in Section 8.7 hereof, to issue and sell the Debentures, to issue the
Option and to issue the Conversion Shares and the Option Shares. FOHP-NJ has the
power and authority to enter into this Agreement and to perform fully its
obligations hereunder. The execution and delivery of this Agreement, the
issuance and sale of the Debentures, the issuance of the Conversion Shares upon
conversion of the Debentures, the issuance of the Option Shares upon exercise of
the Option and the consummation of the other transactions contemplated hereunder
and thereunder have been duly authorized by all necessary corporate action of
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the Company (except as disclosed in Section 8.7 hereof). This Agreement has been
duly and validly executed and delivered by, and constitutes the valid and
binding obligations of, the Company and FOHP-NJ and is enforceable in accordance
with its terms. The Debentures, the Option Agreement, the Management Agreements
and the other agreements required to consummate the transactions contemplated
thereunder and under the Purchase Agreement will be on or prior to the Closing
Date, duly and validly executed and delivered by, and constitute valid and
binding obligations of, the Company and are enforceable in accordance with their
terms. As of the Closing Date, none of the Debentures or the Conversion Shares
(when issued upon conversion of the Debentures) or the Option Shares (when
issued upon exercise of the Option) will be subject to any preemptive right or
right of first refusal.
2.3 Capitalization. The authorized capital stock of the Company consists
of 100,000,000 shares of common stock, par value $.01 per share ("Common
Stock"). The authorized Common Stock is divided into five classes: 15,000,000
shares of Common Stock-NJ ("Common Stock-NJ"), 15,000,000 shares of Common
Stock-NY, 15,000,000 shares of Common Stock-PA, 15,000,000 shares of Common
Stock-DE and 40,000,000 shares of Unclassified Capital Stock, of which 2,100,173
shares of Common Stock-NJ are issued and outstanding on the date hereof. No
shares of preferred stock of the Company are authorized. All of the presently
outstanding shares of Common Stock have been duly and validly authorized and
issued, are fully paid and non-assessable, and except as set forth on Schedule
2.3 hereto are not subject to and were not issued in violation of any preemptive
rights or rights of first refusal. The relative rights, preferences,
restrictions and other matters relating to the Common Stock are as reflected in
the Certificate and on Schedule 2.3 hereto. There are no outstanding
subscriptions, warrants, options, calls, commitments or other rights to purchase
or acquire, or securities convertible into or exchangeable for, any capital
stock of, or any stock appreciation rights, phantom stock or similar securities
or instruments issued by, the Company or any of the Subsidiaries. Except as
expressly contemplated by this Agreement, as of the Closing Date, there will be
no preemptive rights or rights of first refusal with respect to the issuance or
sale of capital stock of the Company or any Subsidiary. Except as set forth in
the Certificate and as expressly contemplated by this Agreement, there are no
outstanding contractual or other obligations of the Company or any of the
Subsidiaries to purchase, redeem or otherwise acquire any shares of its capital
stock. Except as set forth in the Certificate and as contemplated by this
Agreement, there is currently not, and as of the Closing there will not be, any
stockholders' agreement, voting trust or other agreement or understanding to
which the Company or any of the Subsidiaries is a party or bound relating to the
voting of any shares of capital stock of the Company or any of such
Subsidiaries. The Conversion Shares issuable upon conversion of the Debentures
and the Option Shares issuable upon exercise of the Option will, as of the
Closing, be duly and validly reserved and, when issued upon conversion of the
Debentures or when issued upon exercise of the Option, as the case may be, will
be duly and validly issued, fully paid and non-assessable. At the Closing, the
Purchaser will receive good title to the Debentures and, at the time of the
issuance of the Conversion Shares upon the conversion of the Debentures and at
the time of the issuance of the Option Shares upon exercise of the Option, the
Purchaser will receive good title to the Conversion Shares or the Option Shares,
as applicable, free and clear of all liens, claims or encumbrances
except those created by the Purchaser. All of the outstanding shares of capital
stock of each Subsidiary are validly issued, fully paid and nonassessable and
are owned beneficially and of record by the Company, free and clear of any
liens, claims or encumbrances.
2.4 Financial Statements.
(a) Each of the sets of financial statements (including, in each
case, any related notes thereto) contained in the SEC Reports (as defined
below), a list of which SEC Reports is
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attached as Schedule 2.4 hereto, and the Company's balance sheet as of June 30,
1996 and the related income statement for the fiscal quarter then ended
(referred to herein, collectively, as the "June 30 Statement" and together with
such financial statements contained in the SEC Reports as the "Past Financial
Statements") was prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto) and fairly presents
the consolidated financial position of the Company and the Subsidiaries as of
the respective dates thereof and the consolidated results of its operations and
cash flows for the periods indicated, except that the June 30 Statement included
in the Past Financial Statements (i) was or is subject to normal year-end audit
adjustments which were not or are not expected to be material in amount and (ii)
does not contain footnotes.
(b) Except as reflected or disclosed in the Past Financial
Statements (including any related notes and schedules), other than liabilities
incurred since June 30, 1996 in the ordinary course of their respective
businesses or liabilities incurred in connection with the proposed issuance of
the Debentures or the Option expressly contemplated or permitted by this
Agreement, neither the Company nor any of the Subsidiaries is subject to any
liabilities or obligations (whether accrued, absolute, contingent or otherwise)
that would have a Material Adverse Effect.
(c) As of August 31, 1996, the claims backlog of the Company and
FOHP-NJ consisted of 75,999 claims received but not reflected in the claims
processing system thereof and 104,543 claims received and reflected in such
claims processing system but not yet adjudicated. For purposes of this Section
2.4(c), the term "claims" means hospital, physician and ancillary provider
claims on full-risk business and does not include claims submitted for pharmacy,
dental or mental health and substance abuse.
2.5 Absence of Certain Developments. Except for this Agreement or as
described on Schedule 2.5 hereto or as disclosed on either of the Quarterly
Reports on Form 10-Q of the Company for the quarters ended March 31, 1996 or
June 30, 1996, respectively, or the Company's Reports on Form 8-K listed on
Schedule 2.5 hereto filed with the Securities and Exchange Commission (the
"SEC"), since December 31, 1995 (a) there has not been, and the Company is not
aware of any events, facts or circumstances which individually or in the
aggregate could cause, any (i) Material Adverse Effect or (ii) material
obligation, contingent or otherwise, to be directly or indirectly incurred by
the Company or any Subsidiary and (b) there has not been, and the Company is not
contemplating, any (i) transaction which is material to the Company and the
Subsidiaries on a consolidated basis or (ii) payment of dividends or
distributions of any kind.
2.6 Noncontravention. Neither the Company nor any of the Subsidiaries is
in violation or default of any provision of (a) its certificate of incorporation
or by-laws or (b) any contract, agreement, obligation, commitment, license,
indenture, mortgage, deed of trust, loan or credit agreement or any other
agreement or instrument to which the Company or any of the Subsidiaries is a
party or any of their assets are bound, except for violations with respect to
this clause (b) as are set forth on Schedule 2.6 hereto or that would not have a
Material Adverse Effect. The execution and delivery of this Agreement do not,
and the consummation of the transactions contemplated hereby will not, with or
without notice or the lapse of time, conflict with or result in a breach or
default or any material modification of, or result in the creation of a lien or
encumbrance on any of the assets of the Company or any of the Subsidiaries
pursuant to (i) any provision of the certificate of incorporation or by-laws of
the Company or any of the Subsidiaries except as set forth on Schedule 2.6, or
(ii) the terms of any material contract, agreement, obligation, commitment,
license, indenture, mortgage, deed of trust, loan or credit agreement, pledge
agreement, lease, permit, franchise, evidence of indebtedness or any other
agreement or instrument to which the Company or any of the Subsidiaries is a
party or any of
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their assets are bound (except as set forth on Schedule 2.6), or the creation of
any lien, charge or encumbrance of any nature upon any of the properties or
assets of the Company or any of the Subsidiaries or result in the revocation of
any licenses owned by the Company or any of the Subsidiaries. The execution and
delivery of this Agreement do not, and the execution and delivery of the
Debentures, the Option Agreement and the Management Agreements and the
consummation of the transactions contemplated hereby will not (A) violate or
conflict with any judgment, decree, order, writ, injunction, statute, rule or
regulation of any federal, state or local government or agency applicable to the
Company or any of the Subsidiaries or any of their respective properties or
assets or (B) result in any adverse change in any employee benefit plan of the
Company, FOHP-NJ or any of the other Subsidiaries.
2.7 Litigation. Except as set forth on Schedule 2.7, there is, to the
knowledge of the Company or FOHP-NJ, no examination, audit, review, arbitration,
litigation, action, suit, claim, proceeding or investigation pending or
threatened by or before any court, governmental authority or arbitral tribunal
to which the Company or any of the Subsidiaries is a party or otherwise involved
or to which any of the business or assets of the Company or any of the
Subsidiaries is subject which has or would reasonably be expected to have a
Material Adverse Effect. There is no action pending seeking to enjoin or
restrain the issuance and sale of the Debentures by the Company or any of the
transactions contemplated by this Agreement. Except as set forth on Schedule
2.7, neither the Company nor any of the Subsidiaries is subject to any
continuing order of, consent decree, settlement agreement or other similar
written agreement with, or, to the knowledge of the Company or FOHP-NJ, pending
or proposed investigation by, any governmental entity, or any judgment, order,
writ, injunction, decree or award of any governmental entity or arbitrator,
including, without limitation, cease-and-desist or other orders. As used in this
Agreement, the terms "to the best of the knowledge of the Company or FOHP-NJ"
and "to the knowledge of the Company or FOHP-NJ" shall mean the actual knowledge
of any of the executive officers of the Company or any of the executive officers
of FOHP-NJ.
2.8 No Governmental Proceeding or Litigation. No suit, action,
investigation, inquiry or other proceeding by any governmental body or other
person or legal or administrative proceeding has been instituted against the
Company or, to the Company's knowledge, threatened which questions the validity
or legality of the transactions contemplated hereby.
2.9 Compliance with Laws. Except as set forth on Schedule 2.9, neither the
Company nor any of the Subsidiaries is or has at any time since June 30, 1996
been in violation of, or delinquent in respect to, any decree, order or
arbitration award or law, statute or regulation of, or agreement with, or any
license or permit from, any governmental authority to which any of its
properties, assets, personnel or business activities are subject or to which any
of them is subject, including laws, rules and regulations relating to the
environment, insurance companies, HMOs, third-party administrators or other
businesses required to be licensed under Section 2.1(b) hereof, occupational
health and safety, employee benefits, wages, workplace safety, equal employment
opportunity and race, religious, sex and age discrimination which has had or
would reasonably be expected to have a Material Adverse Effect.
2.10 Material Contracts.
(a) For purposes of this Agreement, "Material Contracts" shall
mean (i) each contract, agreement or other arrangement of or involving the
Company or any of the Subsidiaries with respect to indebtedness for money
borrowed in excess of $50,000 (other than trade payables in the ordinary and
usual course of business), including, without limitation, letters of credit,
guaranties and swap and similar agreements, (ii) each contract, agreement or
other arrangement which limits or
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restricts the right or ability of the Company, or any of the Subsidiaries to
engage in, or compete with any person in, any business (including each contract,
agreement or arrangement containing exclusivity provisions restricting the
geographical area in which, or the method by which, any business may be
conducted by the Company or any such Subsidiary), or to otherwise conduct its
business in any manner or place which materially affects the Company or any
Subsidiary, (iii) each contract, agreement or other arrangement between the
Company or any of the Subsidiaries, on the one hand, and any director or
executive officer (or any affiliate of a director or executive officer) of the
Company or any of the Subsidiaries, on the other hand (other than health care
provider contracts entered into in the ordinary course of business of the
Company or such Subsidiary, as the case may be, and containing terms and
conditions standard in the industry), (iv) each mortgage, contract, license,
lease, indenture or other agreement of the Company or any of the Subsidiaries
(A) which would be required by Rule 601(b)(10) of SEC Regulation S-K to be filed
as an exhibit to an Annual Report on Form 10-K or (B) which constitutes any
other liability (including, without limitation, any guarantee, surety contract
or similar instrument), obligation or transaction and, in the case of any item
referred to in this clause, is material to the Company and the Subsidiaries or
their businesses or prospects taken as a whole, (v) for each state in which the
Company or any Subsidiary conducts business as an HMO, insurance company,
third-party administrator or otherwise requiring licensure as set forth in
Section 2.1(b) hereof, (A) the material contracts (based on gross revenues
generated thereunder) of the Company or any Subsidiary with government agencies
or employer or other groups, (B) the material contracts (based on payments made
thereunder) of the Company or any Subsidiary with physician providers of health
care services, (C) the material contracts (based on payments made thereunder) of
the Company or any Subsidiary with providers of hospital services, (D) the
material contracts (based on payments made thereunder) of the Company or any
Subsidiary with providers of non-hospital, non-physician health-care services,
and (E) the material contracts of the Company or any Subsidiary with other
customers of or vendors to the Company or any of the Subsidiaries, (vi) each
contract or agreement of the Company or any of the Subsidiaries concerning a
partnership or joint venture with, or equity or ownership investment in, another
person and (vii) each contract or agreement of the Company or any of the
Subsidiaries pursuant to which any of the business affairs thereof are managed
by a third party. Schedule 2.10 attached hereto lists each Material Contract not
referred as an exhibit to the Annual Report on Form 10-K of the Company for the
year ended December 31, 1995. True and complete copies of all Material Contracts
have been delivered to Purchaser.
(b) Each of the Material Contracts is in full force and effect and
is binding upon the Company or a Subsidiary, as the case may be, and, to the
Company's knowledge, is binding on the other parties thereto, except as limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or affecting creditors' rights generally or by general equitable
principles (regardless of whether such enforceability is considered in a
proceeding in equity or at law). Except as set forth on Schedule 2.10, no
material default by the Company or, to the knowledge of the Company or FOHP-NJ,
any of the Subsidiaries has occurred under any of the Material Contracts and (i)
to the knowledge of the Company or FOHP-NJ, no material default by any of the
other parties to such Material Contracts has occurred thereunder and (ii) no
event has occurred which with the giving of notice or the lapse of time, or
both, would constitute a material default by the Company or, to the knowledge of
the Company or FOHP-NJ, any of the Subsidiaries or any of the other parties to
such Material Contracts. There is no fact or circumstance, including, without
limitation, any pending or, to the knowledge of the Company or FOHP-NJ,
threatened termination, indicating that any Material Contract (including,
without limitation, any relationship with any customer currently accounting for
five percent or more of the consolidated revenue of the Company) will terminate
(or, to the knowledge of the Company or FOHP-NJ, will not be renewed).
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(c) The Company's New York contract with Sierra Health Services,
Inc. ("Sierra") has been terminated by the Company without requiring payment by
the Company or any Subsidiary in connection therewith and without the incurrence
of any further obligations by the Company or any Subsidiary.
2.11 Consents, Etc. Except as set forth on Schedule 2.11 hereto or as may
be required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act") and laws governing insurance companies, HMOs, and
third-party administrators or other businesses operated by the Company or the
Subsidiaries requiring licensure, qualification or authorization and, except for
the approval of the Company's shareholders of the transactions contemplated by
this Agreement, there is no requirement applicable to the Company or any of the
Subsidiaries to make any filing with, or to obtain any permit, authorization,
consent or approval of, any federal, state or local governmental or regulatory
agency, department, commission or other authority or any third party, except for
such filings, permits, authorizations, consents or approvals the failure of
which to make or obtain, as the case may be (a) would not have a Material
Adverse Effect and (b) would not adversely impact the ability of the Company to
consummate the transactions contemplated hereunder or otherwise hinder or delay
the consummation of such transactions.
2.12 Licenses, Permits and Governmental Approvals. Schedule 2.12 hereto
sets forth as to the Company and the Subsidiaries a true and complete list of
(a) all licenses, permits, franchises, authorizations and approvals (except for
those which, if not possessed, would not have a Material Adverse Effect) issued
or granted to the Company and the Subsidiaries by the United States, any state
or local government or any department, agency, board, commission, bureau or
instrumentality of any of the foregoing (the "Licenses"), and all pending
applications therefor, and (b) all contracts, agreements and other documents
containing agreements of the Company or any Subsidiary with, or undertakings of
the Company or any Subsidiary with, the United States, any state or local
government or any department, agency, board, commission, bureau or
instrumentality. Each License has been duly obtained, is valid and in full force
and effect, and is not subject to any pending or, to the Company's knowledge,
threatened administrative or judicial proceeding to revoke, cancel or declare
such License invalid in any respect except as set forth on Schedule 2.12. The
Licenses are sufficient to permit the continued lawful conduct of each of the
Company's and the Subsidiaries' respective businesses in the manner now
conducted, and none of the Company's or any Subsidiary's operations are being
conducted in any manner which violates any of the terms or conditions under
which any such License was granted except as set forth on Schedule 2.12. No
License by its terms will terminate or lapse by reason of the transactions
contemplated by this Agreement.
2.13 Securities Exchange Act Reports Supplied to Purchaser. The Company
has delivered to the Purchaser a complete and accurate copy of each report,
schedule, registration statement and definitive proxy statement filed by the
Company with the SEC on or after January 1, 1995 (the "SEC Reports"), which are
all the forms, reports and documents required to be filed by the Company with
the SEC since January 1, 1995. The SEC Reports (i) complied in all material
respects with the requirements of the Securities Act of 1933, as amended (the
"Securities Act") or the Securities Exchange of 1934, as amended (the "Exchange
Act"), as the case may be, in each case including the rules and regulations
promulgated thereunder, at and as of the times they were filed (or, if amended
or superseded by a filing prior to the date of this Agreement, then on the date
of such filing), (ii) were filed with the SEC during the 12 months preceding the
date hereof on a timely basis, and (iii) did not at and as of the time they were
filed (or, if amended or superseded by a filing prior to the date of this
Agreement, then on the date of such filing) contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
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2.14 Environmental Matters. Except as set forth on Schedule 2.14, the
premises owned or leased by the Company and the Subsidiaries for their
operations (the "Premises") and all operations conducted thereon, are now and
since the Company or any Subsidiary, as applicable, began to use such Premises,
always have been, in compliance with all federal, state and local statutes,
ordinances, regulations, rules and standards concerning or relating to the
protection of health and the environment (collectively, the "Environmental
Laws") which, if not complied with, would have a Material Adverse Effect. To the
Company's knowledge, there are no conditions on, about, beneath or arising from
the Premises which might give rise to liability, the imposition of a statutory
lien or require "Response," "Removal" or "Remedial Action" as defined herein,
under any of the Environmental Laws, which would have a Material Adverse Effect.
In addition, and without limiting the generality of the foregoing, except for
matters that would not have a Material Adverse Effect, the Company has not
received notice nor does it have knowledge of:
(i) any claim, demand, suit or other action, investigation or
regulatory action instituted or threatened against it or the Premises relating
to any Environmental Laws;
(ii) any communication to or from any governmental or regulatory
agency arising out of or in connection with Hazardous Substances or Hazardous
Materials (as defined by applicable Environmental Laws) on, about, beneath,
arising from or generated at the Premises, including, without limitation, any
notice of violation, citation, complaint, order, directive, request for
information or response thereto, notice letter, demand letter or compliance
schedule. As used herein, the terms "Response," "Removal" or "Remedial Action"
shall be defined with reference to Sections 101(23)-101(25) of the Comprehensive
Environmental Response, Compensation and Liability Act, as amended by the
Superfund Amendments and Reauthorization Act, 42 U.S.C. ss.9601(23)-9601(25); or
(iii) an existing or potential claim or enforcement action under
Environmental Laws for any cleanup costs, removal or remedial work, damage to
natural resources or personal injury related to an off-site location where
Hazardous Substances or Hazardous Materials generated, transported, recycled or
stored by the Company or any Subsidiary have been disposed.
2.15 Title to Properties and Assets. Except as set forth on Schedule 2.15
and as reflected in the June 30 Statement, the Company and the Subsidiaries have
sole and exclusive possession of, and good and marketable title to, all of their
properties and assets and such properties and assets are held by the Company and
the Subsidiaries free and clear of all mortgages, liens, claims, or
encumbrances. With respect to the real property it leases, the Company is in
compliance with such leases and holds a valid leasehold interest free of any
liens, claims, or encumbrances.
2.16 Taxes.
(a) Except as set forth on Schedule 2.16, each of the Company,
FOHP-NJ and the other Subsidiaries has filed all federal, state, county, local
and foreign income, franchise and other tax returns required to be filed thereby
through the date hereof and has paid or adequately accrued for all taxes
reflected as due thereon, other than those tax returns or taxes that, if not
filed or paid, would not have a Material Adverse Effect. There are no
outstanding agreements or waivers extending the statutory period of limitations
applicable to any Federal income tax return for any period.
(b) There is no pending dispute, audit or investigation with any
taxing authority, and neither the Company nor FOHP-NJ has any knowledge of any
proposed dispute, audit or investigation or any proposed liability for any tax
to be imposed upon any of the properties or assets of the Company or any of the
Subsidiaries for which there is not an adequate reserve reflected in the June 30
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Statement. There does not exist any issue that, if raised by any taxing
authority with respect to any fiscal period, would, individually or in the
aggregate, be expected to result in an assessment against the Company or the
Subsidiaries that would have, or is reasonably likely to have, a Material
Adverse Effect.
(c) Except as set forth in Schedule 2.16, neither the Company nor
any of the Subsidiaries is a party to any contract arrangement that has or will
result in the payment of any "excess parachute payments" within the meaning of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code").
2.17 DOI Reports. The Company has made available to Purchaser at the
Company's offices a true and complete copy of all material reports filed by the
Company or any of the Subsidiaries regarding the activities of the Company and
the Subsidiaries in the State of New Jersey and the license application filed by
the Company in the State of New York with, and all material correspondence
regarding such activities and license application sent by the Company or FOHP-NJ
or First Option Health Plan of New York, Inc., a New York corporation and a
wholly-owned subsidiary of the Company ("FOHP-NY"), to, or received by the
Company or FOHP-NY or FOHP-NJ from, applicable insurance and HMO regulatory
bodies since January 1, 1994. Each material report required to be filed by the
Company or any of the Subsidiaries with applicable insurance and HMO regulatory
bodies since January 1, 1994 (as such documents have since the time of their
filing been amended, the "DOI Reports") has been filed. As of their respective
dates, the DOI Reports complied in all material respects with the requirements
of the laws, rules and regulations applicable to such DOI Reports, and none of
the DOI Reports contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except for such statements, if any, as have been modified by
subsequent filings prior to the date hereof.
2.18 Information Supplied. All information supplied or to be supplied by
the Company or the Subsidiaries (i) soliciting approval from the shareholders of
the Company for either the issuance and sale of the Debentures or for any act of
the Company to be taken in connection with the transactions contemplated under
this Agreement will not, either at the date mailed (or otherwise disseminated)
to such shareholders or at the time of the meeting of shareholders of the
Company to be held in connection with the transactions contemplated by this
Agreement, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading or (ii) disclosed in any report or document filed with the SEC as
required under the Exchange Act or the Securities Act in connection with the
transactions contemplated hereunder will not, either at the time such report or
document (or any amendment thereto) is filed with the SEC or at the time it
becomes effective under the Securities Act or supplied to the Purchaser or to
shareholders of the Company or any of their respective representatives or
advisers in connection with the transactions contemplated by this Agreement,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading. All information disseminated by the Company or FOHP-NJ in
connection with the transactions contemplated by this Agreement will comply as
to form in all material respects with all applicable laws, including all
relevant provisions of the Securities Act and the Exchange Act and the rules and
regulations promulgated thereunder, except that no representation is made by the
Company with respect to information supplied by the Purchaser for inclusion
therein.
2.19 Certain Business Practices and Regulations. Neither the Company
nor any of the Subsidiaries, nor, to the knowledge of the Company or FOHP-NJ,
any of its or their respective executive officers, directors, or managerial
employees has (i) made or agreed to make any contribution,
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payment or gift to any customer, supplier, governmental official, employee or
agent where either the contribution, payment or gift or the purpose thereof was
illegal under any law, (ii) established or maintained any unrecorded fund or
asset of the Company, FOHP-NJ or any of the other Subsidiaries for any improper
purpose or made any false entries on its books and records for any reason, (iii)
made or agreed to make any contribution, or reimbursed any political gift or
contribution made by any other person, to any candidate for federal, state or
local public office in violation of any law, or (iv) engaged in any activity
constituting fraud or abuse under the laws relating to health care, insurance or
the regulation of professional corporations.
2.20 Insurance. All policies and binders of insurance for professional
liability, directors and officers, property and casualty, fire, liability,
workers' compensation and other customary matters held by or on behalf of the
Company or the Subsidiaries ("Insurance Policies") have been made available to
Purchaser. The Insurance Policies are in full force and effect and neither the
Company nor any of the Subsidiaries is in default with respect to any provision
contained in any Insurance Policy, which default has had or would have a
Material Adverse Effect nor, to the knowledge of the Company or FOHP-NJ, has the
Company or the Subsidiaries failed to give any notice of any claim under any
Insurance Policy in due and timely fashion, nor has any coverage for current
claims been denied, which failure or denial has had or would have a Material
Adverse Effect. Set forth on Schedule 2.20 hereto is a list of insurance
currently maintained by the Company, FOHP-NJ or any of the Subsidiaries. The
Company and each of the Subsidiaries require as part of their contractual
relationships that each individual or entity rendering professional health care
services as an employee of or contractor to the Company or the Subsidiaries
maintain professional liability insurance and neither the Company nor FOHP-NJ
has any reason to believe that such individuals and entities generally do not
comply with such policy of the Company and each of the Subsidiaries.
2.21 Labor Issues. There is no collective bargaining or other labor union
contract to which the Company or any of the Subsidiaries is a party and which is
applicable to persons employed by the Company or any of the Subsidiaries. To the
knowledge of the Company or FOHP-NJ, there are no union organization attempts
underway with respect to the employees of the Company or any of the
Subsidiaries. There is no pending or, to the knowledge of the Company or
FOHP-NJ, threatened labor dispute, strike or work stoppage against the Company
or any of the Subsidiaries which may have a Material Adverse Effect. Neither the
Company nor any of the Subsidiaries, nor, to the knowledge of the Company or
FOHP-NJ, their respective representatives or employees, has committed any unfair
labor practices in connection with the operation of the respective businesses of
the Company or the Subsidiaries, and there is no pending or, to the knowledge of
the Company or FOHP-NJ, threatened charge or complaint against the Company or
the Subsidiaries by the National Labor Relations Board or any comparable state
agency.
2.22 Employment/Severance Matters. Schedule 2.22 sets forth a list of all
written or, to the knowledge of the Company or FOHP-NJ, material oral employment
agreements, employment contracts or understandings (other than understandings
with respect to "at will" employment) relating to employment to which the
Company or any of the Subsidiaries is a party. Schedule 2.22 sets forth all
severance and change of control payments that may become payable either as a
result of the transactions contemplated hereby, any future termination of
employment of employees party to such agreements, or both. To the knowledge of
the Company or FOHP-NJ, no executive officer of the Company or any of the
Subsidiaries is subject to any secrecy or noncompetition agreement or any
agreement or restriction of any kind with any third party that would impede in
any material way the ability of such executive officer to carry out fully all
activities of such executive officer in furtherance of the business of the
Company or any of the Subsidiaries. The Company and the Subsidiaries currently
have, and have had in the past, good relationship with their respective
employees.
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2.23 Absence of Undisclosed Liabilities. Except as described in
Sections 2.4 and 2.7 hereof and Schedule 2.7 hereto, to the best of the
knowledge of the Company or FOHP-NJ, neither the Company nor the Subsidiaries
taken as a whole, nor any of their respective assets or properties, are subject
to any liabilities, claims or obligations (whether known or unknown, accrued,
absolute, contingent or otherwise) of any nature.
2.24 Intellectual Property.
(a) The Company and the Subsidiaries do not own any patents,
registered trademarks or registered copyrights. The Company and the Subsidiaries
have not been advised, nor have the Company or FOHP-NJ any reason to believe
that the Company or any Subsidiary is infringing a patent, trademark, trade name
or copyright held by another person.
(b) The Company and the Subsidiaries own or have in their possession
certain information of the sort typically considered as trade secrets in the
health care industry (the "Trade Secrets"). The Company and the Subsidiaries
have taken commercially reasonable precautions to maintain Trade Secrets in
confidence and to prevent their disclosure to unauthorized persons. To the
knowledge of the Company or FOHP-NJ, the Company and the Subsidiaries have good
title and an absolute (though not necessarily exclusive) right to use all Trade
Secrets and the use of the Trade Secrets does not infringe the rights of any
third party.
(c) To the best of the knowledge of the Company or FOHP-NJ, none of
the names (including, without limitation, the name "First Option Health Plan"),
processes or know-how used by the Company or any Subsidiary infringes any
patent, trademark, trade name or copyright of any third party. To the best of
the knowledge of the Company or FOHP-NJ, there is no intellectual property, in
any form, necessary for the operation of the Company and the Subsidiaries'
business as currently conducted which the Company or any Subsidiary does not
currently own or license on commercially reasonable terms.
2.25 Employee Benefit Plans. Neither the Company nor FOHP-NJ, in
connection with its business, is a party to any agreement requiring it to
continue to employ any of its present employees or any group of its present
employees, or continue to cover any present or former employees or any group of
present or former employees under any benefit plan. Schedule 2.25 lists each
currently effective employment, bonus, profit sharing, compensation,
termination, stock option, stock purchase, stock appreciation right, restricted
stock, phantom stock, performance unit, pension, retirement, deferred
compensation, welfare or other employee benefit plan or agreement, trust fund or
other arrangement and any union, guild or collective bargaining agreement
maintained or contributed to or required to be contributed to by the Company or
any of the Subsidiaries (such plans and arrangements being referred to herein as
the "Company Benefit Plans"). Full and complete copies of each of the Company
Benefit Plans have been delivered to Purchaser. Each of the Company Benefit
Plans is in material compliance with all applicable laws including the Employee
Retirement Income Security Act of 1974 ("ERISA") and the Code except where
noncompliance would not have a Material Adverse Effect. No condition exists that
is reasonably likely to subject the Company or any of the Subsidiaries to a
civil penalty under section 502(i) of ERISA or liability under section 4069 of
ERISA or section 4975, 4976, or 4980B of the Code or the loss of a Federal tax
deduction under section 280G of the Code or other liability with respect to the
Company Benefit Plans that would have a Material Adverse Effect and that is not
reflected on such balance sheet. None of the Company Benefit Plans is subject
to Title IV of ERISA. There are no pending or, to the knowledge of the Company
or FOHP-NJ, threatened or anticipated claims (other than routine claims for
benefits) by, on behalf of or against any of the Company Benefit Plans or any
trusts related thereto.
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2.26 Brokerage and Other Fees. Except for PaineWebber Incorporated, no
broker, finder, agent, consultant or similar intermediary has acted on behalf of
the Company or FOHP-NJ in connection with the transactions contemplated by this
Agreement and, except for fees payable to PaineWebber Incorporated, there are no
brokerage commissions, finder's fees or similar items of compensation payable in
connection therewith based on any agreement made by or on behalf of the Company
or FOHP-NJ. The Company and FOHP-NJ will, jointly and severally, indemnify and
hold the Purchaser harmless from and against any liability or expense arising
out of any such claim.
2.27 Accuracy of Information. None of the representations, warranties or
statements of the Company or FOHP-NJ contained in this Agreement or in the
schedules and exhibits hereto contains any untrue statement of a material fact
or omits to state any material fact necessary in order to make any of such
representations, warranties or statements, in light of the circumstances under
which they were made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Company and FOHP-NJ as
follows:
3.1 Organization and Good Standing.
(a) The Purchaser is a corporation, duly organized, validly existing
and in good standing under the laws of the state of Delaware, and has all
requisite corporate power and authority to carry on its business as now
conducted.
(b) Each of the Purchaser and its subsidiaries, to the extent
conducting business as an HMO, managed care organization, insurance company,
third party administrator or other entity requiring any form of governmental
licensure, qualification or authorization, is duly licensed, qualified or
authorized and in good standing under the applicable laws and regulations,
respectively, of each state or territory in which the conduct of such business
so requires, except where failure would not have a material adverse effect on
the Purchaser and its subsidiaries, taken as a whole. The conduct of the
respective businesses of the Purchaser and its subsidiaries is in conformity
with all applicable foreign, federal, state or territorial, local and other
governmental and regulatory requirements and the forms, procedures and practices
of the Purchaser and its subsidiaries in the conduct of their respective
businesses are also in compliance with all such requirements, to the extent
applicable, except where nonconformity or noncompliance would not constitute a
material adverse effect on the business of the Purchaser and its subsidiaries,
taken as a whole.
3.2 Authorization; Power. The execution, delivery and performance of this
Agreement has been duly authorized by all necessary action of the Purchaser. The
Purchaser has the full right, power and authority to enter into this Agreement
and to perform fully its obligations hereunder. This Agreement has been duly and
validly executed and delivered by, and constitutes the valid and binding
obligation of, the Purchaser, enforceable in accordance with its terms. The
execution, delivery and performance of this Agreement and the purchase of the
Debentures will not (a) conflict with, or result in a material breach of any of
the terms of, or constitute a material default under, the Certificate of
Incorporation or By-laws of the Purchaser or (b) violate any laws, regulations,
rules, judgments or orders to which the Purchaser is subject, except for any
such violation as would not have a material
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adverse effect on the business, conditions, properties, results of operations or
prospects of the Purchaser and its subsidiaries, taken as a whole.
3.3 Purchase for Investment. The Purchaser is purchasing the Debentures
for its own account or for the account of one or more of its subsidiaries, for
investment purposes and not with a view to, or for resale in connection with,
any distribution or public offering thereof within the meaning of the Securities
Act.
3.4 Unregistered Securities; Legend. The Purchaser understands that the
securities to be issued pursuant to this Agreement have not been registered
under the Securities Act and will be issued in reliance upon an exemption from
the registration requirements thereof. The Purchaser acknowledges that the
certificates representing the Debentures and the Common Stock issuable upon
conversion thereof or issuable upon exercise of the Option shall each bear a
restrictive legend substantially as follows:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 or any applicable state
securities laws and may not be offered for sale, sold, transferred
or conveyed without registration or an opinion of counsel in form
and substance reasonably satisfactory to the Company to the effect
that such registration is not required."
3.5 Access to Data; Experience; Investment Decision.
(a) The Purchaser has had an opportunity to discuss the business and
financial affairs of the Company and the Subsidiaries with the management of the
Company, and to ask questions of officers of the Company. The Purchaser is an
"accredited investor" as the term is defined in Rule 501 of Regulation D under
the Securities Act.
(b) The Purchaser acknowledges that it has had an opportunity to
evaluate all information regarding the Company and the Subsidiaries as it has
deemed necessary or desirable in connection with the transactions contemplated
by this Agreement and has independently evaluated the transactions contemplated
by this Agreement and reached its own decision to enter into this Agreement;
provided, however, that such acknowledgement shall in no way be deemed to
mitigate the effect of the representations and warranties of the Company and
FOHP-NJ set forth in Article II hereof (as such representations and warranties
may have been amended in accordance with Section 11(a)(ii) of this Agreement) or
to imply that the Purchaser is not, in entering into this Agreement, relying on
such representations and warranties; and, provided, further, that such
acknowledgement in no way affects the rights and remedies of the Purchaser
hereunder in connection with any breach of such representations and warranties
or otherwise. The Purchaser acknowledges that it is relying solely upon the
Company to disclose any and all information material to the Purchaser's decision
to enter into this Agreement and is not relying upon any statements made by
PaineWebber Incorporated regarding the Company or the transactions contemplated
by this Agreement.
3.6 Brokerage and Other Fees. Except as set forth on Schedule 3.6, no
broker, finder, agent, consultant or similar intermediary has acted on the
Purchaser's behalf in connection with the transactions contemplated by this
Agreement, and except as set forth on Schedule 3.6, there are no brokerage
commissions, finder's fees or similar compensation in connection therewith based
on any arrangement or agreement made by or on behalf of the Purchaser. The
Purchaser will indemnify and hold the Company harmless against any liability or
expense arising out of any such claim.
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3.7 No Financing Required. The Purchaser has unrestricted funds available
to pay the Purchase Price of the Debentures.
3.8 Litigation. There is no litigation, arbitration or governmental
proceeding or investigation pending or, to the knowledge of the Purchaser,
threatened in writing against the Purchaser which conflicts with the rights of
the Company hereunder or the performance of the Purchaser's obligations
hereunder or in any other agreement contemplated hereby. The Purchaser is not a
party to any litigation, arbitration, proceeding or investigation pending, or to
the knowledge of the Purchaser threatened, involving any federal, state or local
government or agency which would conflict with, or in any way impact, the
Purchaser's ability to perform its duties hereunder or in any other agreement
contemplated hereby.
3.9 Claims Processing System. The Purchaser's medical management systems
and techniques, claims processing system and related systems and procedures and
other information systems are sufficient to satisfactorily operate the Company's
business and such systems conform to industry standards.
3.10 Securities Exchange Act Reports Supplied to the Company. Each report,
schedule, registration statement and definitive proxy statement filed by the
Purchaser with the SEC on or after January 1, 1995, which are all the forms,
reports and documents required to be filed by the Purchaser with the SEC since
January 1, 1995 (a) complied in all material respects with the requirements of
the Securities Act or the Exchange Act, as the case may be, at and as of the
times they were filed (or, if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing) and (b) did not at and
as of the time they were filed (or, if amended or superseded by a filing prior
to the date of this Agreement, then on the date of such filing) contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading, except, in each
case, as would not have a material adverse effect on the Purchaser's ability to
consummate the transactions contemplated hereunder and perform its obligations
hereunder and under the Management Agreements and would not involve facts
indicative of the substantial elimination of earnings of the Purchaser and its
subsidiaries on a consolidated basis.
ARTICLE IV
PRE-CLOSING COVENANTS OF THE COMPANY
The Company covenants and agrees with the Purchaser that between the date
hereof and the Closing:
4.1 Fulfillment of Obligations. The Company shall observe and comply fully
with all of the terms, conditions and covenants of this Agreement.
4.2 Access. The Company shall permit the Purchaser and its authorized
representatives, at all reasonable times and as often as reasonably requested,
to visit and inspect, at the expense of the Purchaser, any of the properties of
the Company and the Subsidiaries, to inspect and make copies of all documents,
records and information with respect to the affairs of the Company and the
Subsidiaries as the Purchaser and its representatives may reasonably request,
and shall make available to the Purchaser and its authorized representatives the
officers and other personnel of the Company and the Subsidiaries to discuss the
affairs, finances and accounts of the Company and the Subsidiaries,
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provided that the Purchaser shall maintain the confidentiality of any material
nonpublic or proprietary information of the Company or the Subsidiaries thereby
obtained and provided further that the Purchaser shall conduct all such
inspections and discussions in a manner that is not unreasonably disruptive to
the employees or operations of the Company and the Subsidiaries.
4.3 Conduct of Businesses.
(a) Unless the Purchaser shall have consented in writing thereto and
except as otherwise provided for in this Agreement, each of the Company and
FOHP-NJ:
(i) shall promptly notify the Purchaser of any Material
Adverse Effect or any material litigation or material governmental complaints,
investigations or hearings (or communications indicating that the same may be
contemplated), affecting, as the case may be, the Company or any of the
Subsidiaries;
(ii) shall promptly deliver to the Purchaser true and correct
copies of any press release, and any report, statement or schedule filed with
the SEC subsequent to the date of this Agreement;
(iii) shall not, and shall cause each of the Subsidiaries to
not, take any action that would cause the representations and warranties
contained in Article II hereof to be untrue in any material respect; provided,
however, that any such action which is the subject of an update notice from the
Company to the Purchaser not rejected by the Purchaser in accordance with the
termination provisions hereof shall not be deemed to be a breach hereof;
(b) In addition to the foregoing (and in no way limiting the
generality of the foregoing), between the date hereof and the Closing, unless
the Purchaser shall have consented in writing thereto and except as otherwise
provided for in this Agreement, each of the Company and FOHP-NJ agrees that the
Company, FOHP-NJ and each of the other Subsidiaries:
(i) shall confer on a regular basis with one or more
representatives of the Purchaser to report operational matters of materiality
and any proposals to engage in material transactions (except that such
obligation to confer is not applicable to Subsidiaries of the Company that are
not operating Subsidiaries);
(ii) shall not, except as otherwise specifically disclosed
herein, fail to comply with any laws and regulations applicable to it or to the
conduct of its business, the noncompliance with which would, individually or in
the aggregate, have a Material Adverse Effect;
(iii) shall not authorize for issuance, issue or deliver any
additional shares of any stock of any class or securities convertible into
shares of stock or issue or grant any right, option, warrant or other commitment
for the issuance of shares of stock or such securities, or any stock
appreciation rights, other than under the terms of this Agreement;
(iv) shall not amend its certificate or incorporation or
by-laws, except as provided for in this Agreement;
(v) shall not split, combine or reclassify any shares of its
capital stock or declare, set aside or pay any dividend (whether in cash, stock
or property) in respect of its capital stock (other than dividends paid to the
Company) or redeem or otherwise acquire any of its capital stock;
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(vi) shall not sell marketable securities owned by it, if any,
or purchase marketable securities, except in the ordinary course of business;
(vii) shall not prepay its expenses or obligations except in
accordance with the terms of applicable contracts, commitments and arrangements
and in the ordinary course of business (and in any case, not to exceed $50,000);
(viii) shall not increase compensation or benefits for, or pay
any bonuses to, or enter into any severance or change of control arrangements
with, any of its directors, officers, employees, consultants or agents outside
of the ordinary course of business;
(ix) shall not offer employment to or employ any person not
currently employed by it other than on the basis of employment-at-will in the
ordinary course of business or enter into any written employment contract or any
collective bargaining agreement;
(x) shall not create, amend, extend, renew, assume, incur or
guarantee any indebtedness either involving amounts in excess of $50,000
individually or in excess of $100,000 in the aggregate, or not in the ordinary
course of its business;
(xi) shall not, except as otherwise permitted herein, enter
into or amend any contract, commitment or arrangement or engage in any
transaction which is not in the ordinary course of its business;
(xii) shall not create any stock option or other stock-based
incentive plan or grant any stock option, phantom stock, stock appreciation
right or other similar security or instrument;
(xiii) shall not acquire any other business or interest
therein;
(xiv) shall not enter into any contract, commitment or
arrangement or engage in any transaction with any of its affiliates,
shareholders, directors, officers or employees which is not in the ordinary
course of business and consistent with past practice;
(xv) shall use all reasonable, good-faith efforts to conduct
its operations only according to its usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
(xvi) shall use all reasonable, good-faith efforts to preserve
intact its business organization and goodwill, keep available the services of
its officers and employees and maintain satisfactory relationships with those
persons having business relationships with it;
(xvii) shall not make any change in its accounting practices
other than as required by the Financial Accounting Standards Board (in which
event such change shall be reported promptly to Purchaser in writing); and
(xviii) shall not enter into any contract, commitment or
arrangement to do any of the things described in clauses (iii) through (xiv) and
clause (xvii) above.
4.4 No Solicitation of Other Offers. Neither the Company nor any of the
Subsidiaries shall, directly or indirectly, through any of their respective
officers, directors, employees, agents or otherwise (i) solicit, initiate or
encourage submission of any inquiry, proposal or offer from any
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person or entity (other than the Purchaser) relating to any acquisition,
purchase or sale of all or a material amount of the respective assets of, or any
securities of, or any merger, consolidation or business combination,
liquidation, reorganization or similar transaction with, the Company or any of
the Subsidiaries (an "Alternative Transaction"), or (ii) subject to fiduciary
obligations under applicable law as advised by counsel, participate in any
discussion or negotiations regarding, or furnish to any other person any
information with respect to, any effort or attempt by any other person to do or
seek any of the foregoing. Subject to fiduciary obligations under applicable law
as advised by counsel, neither the Company nor any of the Subsidiaries shall
furnish or cause to be furnished any confidential information concerning its
business, properties or assets to any person or entity that is interested in any
Alternative Transaction. The Company shall promptly notify Purchaser if any such
inquiry, proposal or offer with respect to an Alternative Transaction, or any
inquiry or contact with any person or entity with respect thereto, is made, and
shall, in any such notice, include a description of the terms of any proposal or
offer, or the nature of any such inquiry or contact, that is made, and the
identity of the person or entity making such inquiry, proposal or offer or other
communication.
4.5 Interim Financial Statements. Within 30 days after the end of each
calendar month that ends after the date of this Agreement and before the
Closing, the Company will deliver to Purchaser unaudited consolidated balance
sheets and summaries of earnings for such calendar month and the year to date.
All such financial statements shall accurately present the financial position
and results of operations of the Company and the Subsidiaries on a consolidated
basis.
4.6 Updated Disclosure; Breaches. From and after the date of this
Agreement until the Closing, the Company shall promptly notify Purchaser hereto
by written update of (i) the occurrence or non-occurrence of any event the
occurrence or non-occurrence of which would be likely to cause any condition to
the obligations of any party to effect the transactions contemplated by this
Agreement not to be satisfied, (ii) the failure of the Company to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it pursuant to this Agreement which would be likely to result in any condition
to the obligations of any party to effect the transactions contemplated by this
Agreement not be satisfied or (iii) any representation, warranty or information
set forth in this Agreement or its schedules regarding the Company becoming
incorrect or incomplete in any material respect; provided, however, that the
delivery of any notice pursuant to this Section 4.6 shall not cure any breach of
any representation or warranty requiring disclosure prior to the date, or in
connection with the execution and delivery, of this Agreement or otherwise limit
or affect the remedies available to the Purchaser (other than with respect to
Material Contracts described in Section 2.10 hereof and entered into in the
ordinary course of business subsequent to the date hereof and any changes in
representations and warranties of the Company relating to regulatory compliance
resulting from regulatory action occurring after the date hereof).
4.7 Consummation of Agreement. The Company shall use all reasonable
efforts to cause the consummation of the transactions contemplated hereby in
accordance with their terms and conditions.
4.8 Approvals of Third Parties. The Company shall use all reasonable
efforts to secure, as soon as practicable after the date hereof, all necessary
approvals and consents of third parties, including, without limitation, the New
Jersey Department of Banking and Insurance and the New Jersey Department of
Health and Senior Services, to the consummation of the transactions contemplated
hereby.
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4.9 HSR Act. The Company shall use all reasonable efforts to file as soon
as possible and to effect early termination of all applicable waiting periods
under the HSR Act, including, without limitation, complying as promptly as
practicable with all requests thereunder for additional information.
4.10 Restated Certificates and By-laws.
(a) Subject to receipt of necessary shareholder approval as
contemplated in Section 4.11 hereof, the Company shall (i)(A) use all reasonable
efforts to file an Amended and Restated Certificate of Incorporation in the form
attached hereto as Exhibit B-1 (the "Restated Certificate") with the Secretary
of State of the State of New Jersey prior to the Closing and (B) adopt by-laws
in the form attached hereto as Exhibit B-2 and (ii) if requested by the
Purchaser, cause each of the Subsidiaries to file an amended and restated
certificate of incorporation in its jurisdiction of incorporation and to adopt
amended by-laws, which amended and restated certificate of incorporation and
amended by-laws shall in no way be breached, violated or conflict with the
transactions contemplated hereby.
(b) FOHP-NJ shall prior to the Closing (i) use all reasonable
efforts to file an amended and restated certificate of incorporation, in the
form attached hereto as Exhibit B-3, with the Secretary of the State of New
Jersey and (ii) adopt by-laws in the form attached hereto as Exhibit B-4.
4.11 Proxy Statement.
(a) Subject to the terms and conditions of this Agreement, as
promptly as practicable after the date hereof, the Company shall prepare and
file with the SEC the proxy statement (the "Proxy Statement") of the Company for
a meeting of shareholders to be held in connection with the approval of this
Agreement and the transactions contemplated hereunder (the "Meeting"). The
Company shall provide the Purchaser with a draft of the Proxy Statement a
reasonable period of time prior to filing the Proxy Statement with the SEC. The
Purchaser shall have the right to consent to and approve (which consent and
approval shall not be unreasonably withheld) the information included in the
Proxy Statement in any manner relating to the Purchaser or its subsidiaries or
affiliates or to the transactions contemplated hereby. Subject to the terms and
conditions of this Agreement, the Company shall use all reasonable efforts to
have the Proxy Statement cleared for mailing by the SEC. The Company will (i)
take appropriate action to call the Meeting to be held at the earliest
practicable date to consider and vote upon the transactions contemplated
hereunder, (ii) mail the Proxy Statement to the shareholders of the Company
entitled to receive it and otherwise comply in all material respects with all
applicable legal requirements in connection with the vote of shareholders at the
Meeting promptly after the SEC has cleared the Proxy Statement for distribution
to the shareholders of the Company, and (iii) submit this Agreement to its
shareholders with a recommendation for approval by its Board of Directors,
subject to fiduciary obligations under applicable law as advised by counsel.
(b) The Company shall promptly furnish to the Purchaser all
information concerning the Company, the Subsidiaries and its shareholders as may
be required or reasonably requested in connection with any action contemplated
by this Section 4.11.
4.12 Healthcare Contracts.
(a) The Company and FOHP-NJ shall use all reasonable efforts to
renegotiate their provider contracts so that (i) with regard to physician
providers, the aggregate rate of
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reimbursement would be reduced to an average of 120 percent of RBRVS and (ii)
with respect to hospital providers, the aggregate rate of reimbursement would
reflect a reduction of four percent in inpatient costs and an overall reduction
of 10 percent in outpatient costs. The Company and FOHP-NJ will also use all
reasonable efforts to, in the case of any physician or hospital providers with
which the Company or FOHP-NJ, as the case may be, has contracts containing terms
not competitive with terms offered by other providers in the same markets,
pursue additional modifications to such terms to make such terms so competitive.
(b) The Company agrees to allow the Purchaser to evaluate the
Company's current Managed Care Management Information Services Agreement (the
"HSII Agreement") between the Company and Health Systems Integration, Inc. and
further agrees to terminate such agreement at or subsequent to the Closing if
(i) the Purchaser so requests and (ii) the Company is presented the opportunity
to enter into an agreement with the Purchaser or a third party pursuant to which
the Company would be provided services substantially similar to those set forth
in the HSII Agreement for a fee no higher than that set forth in the HSII
Agreement.
4.13 Letters of Credit; Guarantees. Neither the Company nor FOHP-NJ shall
draw any amounts under any letter of credit, or incur any obligations under any
other reimbursement or other agreement relating to credit support therefor,
unless so required by either the New Jersey Department of Banking and Insurance
or the New Jersey Department of Health and Senior Services to so draw such
amounts under such letter of credit or so incur such obligations under such
reimbursement or other agreement, in which event all amounts so drawn, or
received by the Company or FOHP-NJ in connection with such obligation
incurrence, shall be placed and maintained in a separate and segregated account
from which funds shall be used to satisfy in full all obligations relating to
such letter of credit or reimbursement or other agreement, as the case may be.
ARTICLE V
COVENANTS OF THE PURCHASER
5.1 Consummation of Agreement. The Purchaser shall, between the date
hereof and the Closing, use all reasonable efforts to cause the consummation of
the transactions contemplated hereby in accordance with their terms and
conditions.
5.2 HSR Act. The Purchaser shall, between the date hereof and the Closing,
use all reasonable efforts to file as soon as possible and to effect early
termination of all applicable waiting periods under the HSR Act, including,
without limitation, complying as promptly as practicable with all requests
thereunder for additional information. The Purchaser shall pay to the Federal
Trade Commission (the "FTC") the appropriate filing fee totaling the full amount
required to be paid under the rules of the FTC; provided, however, that, at or
as soon as practicable after the Closing or the termination hereof (other
than the termination hereof by the Purchaser in contravention of the terms
hereof), the Company shall reimburse the Purchaser by a cash payment in the
amount of one-half of such filing fee.
5.3 Exchange/Cash Offer for Shares.
(a)(i) The Purchaser agrees that it shall, at any time after January
1, 1999 and prior to May 31, 1999, either make an offer (referred to herein as
the "Exchange Offer") to shareholders of the Company to exchange shares of the
Class A Common Stock of the Purchaser or the common stock
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of any successor corporation of the Purchaser (in either case referred to herein
as "HSI Common Stock"), or, at the Purchaser's option, make an offer (referred
to herein as the "Cash Offer") to pay cash, for the shares of Common Stock of
the Company held by such shareholders. Prior to making the Exchange Offer or the
Cash Offer, the Purchaser shall furnish the Company with 10 days' prior written
notice of its intention to promptly make such Exchange Offer or Cash Offer, as
the case may be (the date of such notification being referred to herein as the
"Offer Notice Date"). In the Exchange Offer, the Purchaser will agree to
exchange, for each share of Common Stock of the Company, such number of shares
of the HSI Common Stock as shall have a Purchaser Stock Market Value (as such
term is defined in paragraph (b) of this Section 5.3) equal to the Company Stock
Value of such share of Common Stock of the Company. In the Cash Offer, the
Purchaser will agree to pay cash, for each share of Common Stock of the Company,
equal to the Company Stock Value of such share of Common Stock of the Company.
(ii) For purposes hereof the term "Purchaser Stock Market Value"
shall mean the average closing sales price of the HSI Common Stock on the New
York Stock Exchange, Inc. (or, if such HSI Common Stock is not at such time
listed on the New York Stock Exchange, Inc., on such other national securities
exchange as the HSI Common Stock shall at such times be listed or quoted) for
the five consecutive trading days immediately preceding the date on which such
Exchange Offer is commenced by the Purchaser; provided, however, that, in the
event HSI Common Stock shall at such times not be listed or quoted on any
national securities exchange, "Purchaser Stock Market Value" shall be determined
in accordance with the procedures for the determination of Company Stock Value
set forth in paragraph (b)(i) of this Section 5.3.
(b)(i)(A) For purposes hereof, "Company Stock Value" shall be
determined as follows: (i) if the parties agree on a Company Stock Value after
good-faith negotiations, the Company Stock Value shall be the agreed upon
amount; (ii) if the parties shall not have agreed on a Company Stock Value
within 15 days after the Offer Notice Date, each of the Purchaser and the
Company (through its directors who are unaffiliated with the Purchaser) shall
select an independent qualified appraiser to appraise the Company Stock Value.
Upon completion of such appraisal by each of such appraisers, the two
independent qualified appraisers shall exchange their respective appraisals and
submit such appraisals to the Company and the Purchaser. If the two independent
qualified appraisers agree on an appraisal for the Company Stock Value, the
Company Stock Value shall be the agreed upon amount. If the two independent
qualified appraisers cannot agree upon a Company Stock Value, the two
independent qualified appraisers shall select a third independent qualified
appraiser to appraise the Company Stock Value. The third independent qualified
appraiser, upon completion of its appraisal, shall submit such appraisal to the
Company and the Purchaser. The Company Stock Value shall be determined by taking
the average of the two appraisals which are closest to each other; provided,
however, that, if the appraisal amount which is less than the highest appraisal
and greater than the lowest appraisal is greater or less than the average amount
of such other appraisals by an amount representing no more than seven and
one-half percent of such average amount, then the average of all three
appraisals will be the Company Stock Value for the purposes of this Section 5.3.
For example, if the Purchaser's independent qualified appraiser valued the
aggregate Company Stock Value at $150 million, the Company's independent
qualified appraiser valued the aggregate Company Stock Value at $50 million and
the third independent qualified appraiser valued the aggregate Company Stock
Value at $125 million, the aggregate Company Stock Value would be $137.5 million
(the average of the two closest appraisals). If, however, the third independent
qualified appraiser appraised the Company Stock Value at $105 million (greater
than $100 million by an amount less than seven and one-half percent of $100
million), the aggregate Company Stock Value for purposes of this Section 5.3
would be approximately $101.7 million (the average of all three). For purposes
of this Section 5.3(b)(i), the term "independent qualified appraiser" shall mean
any appraiser which for at
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least two years prior to the date of appointment hereunder has been in the
business of appraising health care businesses and is not affiliated with either
the Company or the Purchaser or otherwise unable to exercise independent
judgment as to the Company Stock Value determination.
(B) Notwithstanding the provisions of paragraph (A) of this Section
5.3(b)(i), in the event that revenues of the Company exceeded $62.5 million
during the calendar quarter immediately preceding the commencement of the
Exchange Offer or the Cash Offer, aggregate "Company Stock Value" shall in no
event be less than $75 million.
(ii) Each of the Company and Purchaser shall pay the fees and
expenses of any appraiser appointed thereby pursuant to paragraph (i) of this
Section 5.3(b), and such parties shall split equally the fees and expenses of
any additional appraiser so appointed.
5.4 Claims Processing System. The Purchaser shall, between the date hereof
and the Closing, use all reasonable efforts to maintain its medical management
systems and techniques, claims processing system and related systems and
procedures and other information systems in conformance and adherence to
industry standards.
5.5 Updated Disclosure; Breaches. From and after the date of this
Agreement until the Closing, the Purchaser shall promptly notify the Company
hereto by written update of (a) the occurrence or non-occurrence of any event
the occurrence or non-occurrence of which would be likely to cause any condition
to the obligations of any party to effect the transactions contemplated by this
Agreement not to be satisfied, or (b) the failure of the Purchaser to comply
with or satisfy any covenant, condition or agreement to be complied with or
satisfied by it pursuant to this Agreement which would be likely to result in
any condition to the obligations of any party to effect the transactions
contemplated by this Agreement not be satisfied, or (c) any representation,
warranty or information set forth in this Agreement or its schedules regarding
the Purchaser shall become incorrect or incomplete in any material respect;
provided, however, that the delivery of any notice pursuant to this Section 5.5
shall not cure any breach of any representation or warranty requiring disclosure
prior to the date of this Agreement or otherwise limit or affect the remedies
available to the Company (other than as described in Section 11.1(a)(iii)
hereof).
5.6 Standstill. For a period of two years from and after the Closing Date,
the Purchaser shall not, without the prior written consent of the Company,
purchase or acquire any Common Stock (other than in connection with the
conversion of the Debentures into Conversion Shares and the exercise of the
Option for Option Shares); provided, however, that the restriction on the
Purchaser set forth in this Section 5.6 shall not apply to (a) the transactions
contemplated in Section 6.7 hereof or (b) any acquisition of Common Stock by the
Purchaser pursuant to its rights of first refusal or preemptive rights under, or
as otherwise contemplated in Article III - Section (E)(4)(a) of, the Restated
Certificate.
ARTICLE VI
OTHER AGREEMENTS
6.1 Healthcare Contracts. From and after the Closing, the Company and
FOHP-NJ shall continue to use all reasonable efforts to renegotiate their
provider contracts so that (a) with regard to physician providers, the aggregate
rate of reimbursement would be reduced to an average of 120 percent of RBRVS and
(b) with respect to hospital providers, the aggregate rate of reimbursement
would reflect a reduction of four percent in inpatient costs and an overall
reduction of 10 percent in outpatient
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costs. The Company and FOHP-NJ will also continue to use all reasonable efforts
to, in the case of any physician or hospital providers with which the Company or
FOHP-NJ, as the case may be, has contracts containing terms not competitive with
terms offered by other providers in the same markets, pursue additional
modifications to such terms to make such terms so competitive.
6.2 Required Capital Call. The parties hereto agree that, based on
reasonable projections, prepared by the Purchaser, of net worth requirements, as
are determined by the New Jersey Department of Banking and Insurance and the New
Jersey Department of Health and Senior Services, from time to time, if it is
determined that the Company needs capital to satisfy such net worth requirements
("Net Capital Shortfall"), then the Board of Directors of the Company shall have
the right to initiate a pro rata offering of the Common Stock to all the
then-current shareholders to raise capital to satisfy such Net Capital
Shortfall. If the Board of Directors does not, within seven days of the receipt
of such projections from the Purchaser, determine to initiate such a pro rata
Common Stock offering, the Purchaser shall have the right to advance funds to
the Company so that the Company will satisfy the Net Capital Shortfall in
exchange for subordinated debentures, in form substantially similar to the
Debentures, except that (a) no such debentures shall be convertible sooner than
two years after the issuance thereof, (b) to the extent that the Net Capital
Shortfall is determined to be due to general business conditions, only 50
percent of the principal amount of such debentures would be convertible after
such two-year period and (c) to the extent that the Net Capital Shortfall is
determined to be due to management problems and difficulties after the Closing
Date, no portion of the principal amount of such debentures shall be
convertible.
6.3 Sierra Contract. The parties hereto agree that, for a period of one
year from and after the Closing Date, the Purchaser shall have the right to
attempt to negotiate a termination of the Agreement, dated January 16, 1995 (the
"Sierra Agreement"), between Sierra and FOHP-NJ, or assignment thereof
(including, without limitation, the right to receive payments thereunder) to the
Purchaser.
6.4 New York Subsidiary. The parties hereto agree to work cooperatively
and in good faith to pursue a mutually agreeable capitalization plan with
respect to FOHP-NY. In the event that no such capitalization plan is developed
and implemented prior to March 31, 1997, the Purchaser shall have the right to
effect a transaction with respect to FOHP-NY, at the fair market value thereof,
pursuant to which FOHP-NY would become a stand-alone company no longer
affiliated as a subsidiary of FOHP so long as there is presented to those
directors of the Company not affiliated with the Purchaser a valuation or
appraiser report or fairness opinion, delivered by an independent, nationally
recognized valuation firm, evidencing that such transaction is to be effected
for fair market value consideration or otherwise opining as to the fairness,
from a financial point of view, of such transaction to the Company.
6.5 Worker's Compensation Business.
(a) The Company shall use all reasonable efforts to sell First
Managed Care Option, Inc., a New York corporation and a wholly-owned subsidiary
of the Company ("FMCO"), prior to the Closing. If such sale is not consummated
prior to the Closing (i) the Purchaser's Allocable Share (as such term is
hereinafter defined) of any operating losses attributable to FMCO shall be added
to the principal amount of the Debentures and (ii) the Purchaser's Allocable
Share of operating gains attributable to FMCO shall be subtracted from the
principal amount of the Debentures, in such case on a cumulative basis from time
to time as Purchaser's Allocable Share increases from and after the Closing
(such as upon exercise of the Option and conversion of all or any portion of the
Debentures, which, for purposes of the calculation of Purchaser's Allocable
Share from time to time, shall be deemed to be converted immediately prior to
the actual conversion thereof). For purposes
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hereof, the term "Purchaser's Allocable Share" shall mean the percentage of the
aggregate number of outstanding shares of the Company held by the Purchaser from
time to time.
(b) If FMCO is not sold within 90 days after the Closing, the
Purchaser may require that FMCO be liquidated; provided, however, that the
Purchaser may not so require such liquidation in the event that, and there shall
be no further additions to or subtractions from the principal amount of the
Debentures as provided for in paragraph (a) of this Section 6.5 if (i) a net
operating gain shall be attributable to FMCO for the 90-day period from and
after the Closing and (ii) the Company and the Purchaser reasonably agree in
good faith, within 10 days after the end of such 90-day period, that it would
not be in the best interest of the Company for FMCO to be so liquidated.
6.6 Additional HSR Act Filings. Each of the Company and the Purchaser
agrees that, in the event that any additional filings are required under the HSR
Act, subsequent to the Closing, with respect to consummation of any of the
transactions contemplated hereunder, it shall use all reasonable efforts to file
as soon as possible and to effect early termination of all applicable waiting
periods regarding such filing under the HSR Act (including, without limitation,
complying as promptly as practicable with all requests thereunder for additional
information). Each of the Company and the Purchaser shall pay to the FTC
one-half of the appropriate filing fee required to be paid under the rules of
the FTC with respect to any such additional filing.
6.7 Post-Closing Limited Offer to Shareholders.
(a) The Purchaser shall, prior to the later of the date that is (i)
three months after the Closing Date or (ii) 30 days after the receipt of
consents from all parties having the right under any agreement or instrument to
consent to any redemption of Common Stock or the termination or expiration of
all such agreements and instruments, (A) make a pro rata offer to all
shareholders of the Company to purchase, for consideration consisting of cash or
HSI Common Stock valued at the Purchase Stock Market Value, up to 857,284 shares
of Common Stock at a per share value of $21.43, or, at the Purchaser's option,
(B) require the Company to make a pro rata offer to all shareholders of the
Company to redeem, for cash, up to 857,284 shares of Common Stock at a per share
price of $21.43.
(b) The Company agrees that, in the event the Purchaser elects to
require the Company to make an offer to repurchase from shareholders of the
Company pursuant to clause (a)(ii) of this Section 6.7, the Company shall effect
such repurchase as promptly as practicable in accordance with the provisions of
such clause (a)(ii); provided, however, that the Purchaser shall loan to the
Company the cash purchase price required to effect such repurchase (which loan
shall be evidenced by an increase in the principal amount of the Debentures or,
at the option of the Purchaser, by new convertible subordinated surplus
debentures containing terms substantially similar to those of, and otherwise in
substantially the form of, the Debentures, in either case (i) with appropriate
and mutually agreed upon tax-effected interest rate adjustments so that the
Company is not economically disadvantaged by such election of the Purchaser
under clause (a)(ii) of this Section 6.7 and appropriate undertakings of the
Company to indemnify the Purchaser for any adverse tax consequences resulting
from such interest rate adjustments (which indemnification obligation shall not
exceed $100,000 for any calendar year) and (ii) subject to the requirement that
such increased principal amount of the Debentures or new convertible
subordinated surplus debentures, as the case may be, must be converted by the
Purchaser into Common Stock at the earlier of (A) immediately prior to
conversion of the Debentures or exercise of the Option or (B) one day prior to
the maturity date thereof).
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6.8 Post Exchange/Cash Offer Merger. Subsequent to the consummation of
the Exchange Offer or Cash Offer, as the case may be, the Purchaser may effect a
merger, business combination or consolidation transaction involving the Company
for the purpose of obtaining 100% of the then outstanding equity of the Company
(the "Merger"), subject to the following terms and conditions:
(a) the amount of consideration to be paid or distributed to the
shareholders of the Company in connection with the Merger will either be (i)
determined by a nationally recognized independent appraiser selected by the
Purchaser and approved by a majority of the members of the Company's Board of
Directors who were not designated by the Purchaser (which approval will not be
unreasonably withheld), or (ii) deemed to be fair from a financial point of view
in a fairness opinion delivered by a nationally recognized independent
investment banking firm selected by the Purchaser and approved by a majority of
the Company's Board of Directors who were not designated by the Purchaser (which
approval will not be unreasonably withheld); provided, however, that, if the
Merger takes place within six (6) months of the Exchange Offer or Cash Offer, in
no event shall the consideration to be paid or distributed to the shareholders
of the Company for their shares of Common Stock be less than the per share
consideration paid or distributed by the Purchaser for shares of Common Stock in
the Exchange Offer or Cash Offer, as the case may be;
(b) the shareholders of the Company, other than the Purchaser, shall
be offered dissenters' rights in the same manner and under the same terms and
conditions as is provided under Chapter 11 of the New Jersey Business
Corporation Act, regardless of whether such shareholders would otherwise have
been entitled to such rights under the New Jersey Business Corporation Act;
(c) the Company, or any successor thereto, shall provide in its
By-laws indemnification provisions substantially similar to those currently
contained in the Company's By-laws for the period ending six (6) years from the
date of the Merger, or, if earlier, for the period ending on the date on which
the statute of limitations has expired with respect to the Company's Board of
Directors' approval of the Agreement and the Merger contemplated thereby; and
(d) the Company, or any successor thereto, shall maintain officer
and director insurance with terms and conditions substantially similar to those
contained in the officer and director insurance currently maintained by the
Company for the period ending six (6) years from the date of the Merger, or, if
earlier, for the period ending on the date on which the statute of limitations
has expired with respect to the Company's Board of Directors' approval of the
Agreement and the Merger contemplated thereby, which insurance shall provide
coverage for former directors of the Company.
ARTICLE VII
CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATIONS
The Purchaser's obligations to consummate the transactions contemplated
hereby shall be subject to the satisfaction of the following conditions, any of
which may be waived in writing:
7.1 Delivery of Debentures. The Company shall have delivered to the
Purchaser the Debentures.
7.2 Representations and Warranties. The representations and warranties
contained in Article II hereof (as such representations and warranties may have
been amended in accordance with Section 11.1(a)(ii) hereof) shall be true and
correct in all material respects on and as of the Closing Date, with the same
effect as though made on and as of the Closing Date.
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7.3 Corporate Proceedings. All corporate and other proceedings required to
be taken by the Company in connection with the transactions contemplated hereby,
including but not limited to approval by the shareholders of the Company
hereunder, shall have been taken or obtained and all documents incident thereto
shall be reasonably satisfactory in form and substance to the Purchaser. The
Purchaser shall have received all such counterpart originals or certified or
other copies of such documents of the Company relating to all corporate and
other proceedings as it shall reasonably request.
7.4 Restated Certificates and Amended By-laws. The restated certificates
of incorporation of the Company and FOHP-NJ, in the forms of Exhibits B-1 and
B-3, respectively, attached hereto, shall have been filed with the Secretary of
State of the State of New Jersey and the terms thereof shall have become
effective and the amended By-laws of the Company and FOHP-NJ, in the forms of
Exhibits B-2 and B-4, respectively, attached hereto shall have been adopted.
7.5 Good Standing Certificates. The Purchaser shall have received (a) a
copy of the Certificate certified as of a recent date by the Secretary of State
of the State of New Jersey, and (b) certificates as of a recent date of the
Secretary of State of each State in which the Company or any Subsidiary is
organized or qualified to do business as a foreign corporation, to the extent
that such corporation is in existence and otherwise is in good standing to
transact business in such State.
7.6 Secretary's Certificate. The Purchaser shall have received
certificates of the Secretary of each of the Company and FOHP-NJ certifying that
(a) attached to the certificate is a true and complete copy of the By-Laws of
the Company, as in full force and effect at the Closing Date and (b) the names
and true signatures of each officer of the Company and FOHP-NJ who has been
authorized to execute and deliver this Agreement and any other document to be
delivered by the Company at the Closing.
7.7 Management Agreements. The Company shall have entered into the
Management Agreements (the "Management Agreements"), in the forms attached as
Exhibit C hereto.
7.8 Option Agreement. The Company shall have entered into the Option
Agreement in the form attached hereto as Exhibit D.
7.9 Hospital Agreements. The Company shall have received from 80 percent
of the hospitals which own shares of Common Stock, either directly or
indirectly, a letter of comfort in the form attached hereto as Exhibit E.
7.10 Investors Agreement. The Company shall have entered into the
Investors Agreement in the form attached hereto as Exhibit F.
7.11 Opinion of Counsel. The Purchaser shall have received from Shereff,
Friedman, Hoffman & Goodman, LLP, and Giordano, Halleran & Ciesla, P.C.,
opinions of counsel, sub stantially in the form attached as Exhibit G hereto.
7.12 Approvals and Consents. All authorizations, approvals, consents and
waivers of any governmental authority necessary in the good faith judgment of
the Purchaser for the consummation of any or all of the transactions
contemplated hereby including, without limitation, the consent and approval of
the New Jersey Department of Banking and Insurance and the New Jersey Department
of Health and Senior Services with respect to the terms and provisions of this
Agreement (including Section 4.13 hereof), shall have been obtained on terms
satisfactory to the Purchaser and shall be in full force and effect; and
consents or waivers from parties other than governmental bodies (including
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shareholders of the Company) that are required in connection with the
consummation of any or all of the transactions contemplated hereby shall have
been obtained on terms satisfactory to the Purchaser and shall be in full force
and effect and signed copies thereof shall have been delivered to the Purchaser.
7.13 Covenants. The Company shall have performed or complied in all
material respects with all obligations, agreements and covenants required to be
performed by it hereunder prior to or on the Closing Date.
7.14 HSR Act. The waiting period under the HSR Act shall have expired or
terminated.
7.15 Injunction, Etc. No injunction or similar order shall be effective
which enjoins, prohibits or restrains the purchase and sale of the Debentures or
the transactions contemplated hereby.
7.16 Action or Proceeding. There shall not be any action or proceeding by
or before any court or other governmental body that shall seek to restrain,
prohibit or invalidate the transactions contemplated by this Agreement, and
there shall not be any action or proceeding seeking a material amount of damages
by reason of consummation of this Agreement or any of the transactions
contemplated hereunder, the defense of any of which would involve expense or
lapse of time that would be materially adverse to the interests of the Company.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS
The Company's obligation to consummate the transactions contemplated
hereby shall be subject to the satisfaction of the following conditions, any of
which may be waived in writing:
8.1 Receipt of Payment. The Company shall have received payment of the
Purchase Price for the Debentures as provided in Section 1.2 hereof.
8.2 Representations and Warranties. The representations and warranties
contained in Article III hereof (as such representations and warranties may have
been amended in accordance with Section 11.1(a)(iii) hereof) shall be true and
correct in all material respects on and as of the Closing Date, with the same
effect as though made on and as of the Closing Date.
8.3 Proceedings and Documents. All corporate and other proceedings
required to be taken in connection with the transactions contemplated by this
Agreement shall have been taken or obtained and all documents incident thereto
shall be reasonably satisfactory in form and substance to the Company, and the
Company shall have received all such counterpart originals or certified or other
copies of such documents as the Company reasonably requests.
8.4 Covenants. The Purchaser shall have performed or complied in all
material respects with all obligations, agreements and covenants required to be
performed by it hereunder prior to or on the Closing Date.
8.5 HSR Act. The waiting period under the HSR Act shall have expired or
terminated.
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8.6 Injunction, Etc. No injunction or similar order shall be effective
which enjoins, prohibits or restrains the purchase and sale of the Debentures or
the transactions contemplated hereby.
8.7 Approvals. All authorizations, approvals, consents and waivers of
shareholders of the Company or any governmental authority or third party,
including, without limitation, the New Jersey Department of Health and Senior
Services, each as required to permit the consummation of the transactions
contemplated by this Agreement, shall have been obtained and shall not be
terminated, suspended or withdrawn as of the Closing Date.
8.8 Investors Agreement. The Purchaser shall have entered into the
Investors Agreement in the form attached hereto as Exhibit F.
8.9 Opinion of Counsel. The Company shall have received from McDermott,
Will & Emery, an opinion of counsel, substantially in the form attached as
Exhibit H hereto.
ARTICLE IX
INDEMNIFICATION
9.1 Indemnification by the Company.
(a) Subject to the terms and conditions of this Article IX, the
Company and FOHP-NJ hereby agree, jointly and severally, to indemnify, defend
and hold Purchaser and its directors, officers, agents, and affiliates harmless
from and against all losses, claims, obligations, demands, assessments,
penalties, liabilities, costs, damages, attorneys' fees and expenses
(collectively, "Damages"), asserted against or incurred by such indemnitees by
reason of or resulting from a breach of any representation or warranty (as such
representations and warranties may have been amended in accordance with Section
11.1(a)(ii) hereof) or covenant of the Company or FOHP-NJ contained herein, in
any exhibit, schedule, certificate or financial statement delivered hereunder,
or in any agreement executed in connection with the transactions contemplated
hereby.
(b) The Company and FOHP-NJ hereby agree, jointly and severally, to
pay the costs and expenses (including reasonable attorney's fees and expenses)
incurred by any other party in successfully (i) enforcing any of the terms of
this Article IX against the Company or (ii) proving that the Company breached
any of the terms of this Agreement.
(c) Neither the Company nor FOHP-NJ shall have any obligation to
indemnify Purchaser and its directors, officers, agents and affiliates in
respect of any Damages resulting from circumstances described in clause (a)
above until the aggregate amount of such Damages exceeds $250,000 (the "Minimum
Threshold Requirement"), and then the Company and FOHP-NJ shall be liable only
to the extent the aggregate amount of such Damages exceeds $250,000.
9.2 Indemnification by the Purchaser.
(a) Subject to the terms and conditions of this Article IX, the
Purchaser hereby agrees to indemnify, defend and hold the Company and FOHP-NJ
and their respective directors, officers, agents, and affiliates harmless from
and against all Damages asserted against or incurred by any of such indemnitees
by reason of or resulting from a breach of any representation or warranty (as
such representations and warranties may have been amended in accordance with
Section 11.1(a)(iii)
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hereof) or covenant of the Purchaser contained herein or in any exhibit,
schedule or certificate delivered hereunder, or in any agreement executed in
connection with the transactions contemplated hereby.
(b) The Purchaser agrees to pay the costs and expenses (including
reasonable attorney's fees and expenses) incurred by any other party in
successfully (i) enforcing any of the terms of this Article IX against the
Purchaser or (ii) proving that the Purchaser breached any of the terms of this
Agreement.
(c) The Purchaser shall have no obligation to indemnify the Company
or FOHP-NJ and their respective directors, officers, agents and affiliates in
respect of any Damages resulting from circumstances described in clause (a) of
this Section 9.2 unless the aggregate amount of such Damages exceeds the Minimum
Threshold Requirement, in which case the Purchaser shall be liable only to the
extent the aggregate amount of such Damages exceeds $250,000.
9.3 Conditions of Indemnification. The respective obligations and
liabilities of the Company and FOHP-NJ, on the one hand, and the Purchaser (the
"indemnifying party"), on the other hand, to the other party or parties, as the
case may be (the "party to be indemnified") under Section 9.1 and Section 9.2
hereof with respect to claims resulting from the assertion of liability by third
parties shall be subject to the following terms and conditions:
(a) Promptly, but in no event later than 20 days (or such earlier
time as might be required to avoid prejudicing the indemnifying party's
position) after receipt of notice of commencement of any action evidenced by
service of process or other legal pleading, the party to be indemnified shall
give the indemnifying party written notice thereof together with a copy of such
claim, process or other legal pleading, and the indemnifying party shall have
the right to undertake the defense thereof by representatives of its own
choosing and at its own expense; provided that the party to be indemnified may
participate in the defense with counsel of its own choice, the fees and expenses
of which counsel shall be paid by the party to be indemnified unless (i) the
indemnifying party has agreed to pay such fees and expenses, (ii) the
indemnifying party has failed to assume the defense of such action or (iii) the
named parties to any such action (including any impleaded parties) include both
the indemnifying party and the party to be indemnified and the party to be
indemnified has been advised by counsel in writing that there may be one or more
legal defenses available to it that are different from or additional to those
available to the indemnifying party (in which case, if the party to be
indemnified informs the indemnifying party in writing that it elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such action on behalf of
the party to be indemnified, it being understood, however, that the indemnifying
party shall not, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of more than one separate firm of attorneys at any time for the
party to be indemnified, which firm shall be designated in writing by the party
to be indemnified).
(b) In the event that the indemnifying party, by the 30th day after
receipt of notice of any such claim (or, if earlier, by the 10th day preceding
the day on which an answer or other pleading must be served in order to prevent
judgment by default in favor of the person asserting such claim), does not elect
to defend against such claim, the party to be indemnified will (upon further
notice to the indemnifying party) have the right to undertake the defense,
compromise or settlement of such claim on behalf of and for the account and risk
of the indemnifying party and at the indemnifying party's expense, subject to
the right of the indemnifying party to assume the defense of such claims at any
time prior to settlement, compromise or final determination thereof.
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(c) Notwithstanding the foregoing, the indemnifying party shall not
settle any claim without the consent of the party to be indemnified unless such
settlement involves only the payment of money and the claimant provides to the
party to be indemnified a release from all liability in respect of such claim.
If the settlement of the claim involves more than the payment of money, the
indemnifying party shall not settle the claim without the prior consent of the
party to be indemnified.
(d) The party to be indemnified and the indemnifying party will each
cooperate with all reasonable requests of the other.
9.4 Remedies Not Exclusive. The remedies provided in this Article IX shall
not be exclusive of any other rights or remedies available to one party against
the other, either at law or in equity.
ARTICLE X
SURVIVAL OF REPRESENTATIONS
The representations and warranties made herein or in any certificates or
documents executed in connection herewith shall survive the execution and
delivery hereof and thereof and the issuance of the Debentures until the date
that is the earlier of (a) 18 months following the Closing Date (or the date
that is six years following the Closing Date, as relates to the representations
and warranties set forth in Section 2.14 and Section 2.16) or (b) such time as
at least 50 percent of the Initial Principal Amount (as such term is defined in
the Debentures) of the Debentures shall have been converted into shares of
Common Stock pursuant to the terms thereof. All statements contained in any
certificate or other document delivered hereunder or in connection herewith
shall be deemed to constitute continuing representations, warranties, covenants
and agreements made herein by the Company or the Purchaser, as the case may be.
Notwithstanding the foregoing, the parties hereto hereby agree that all rights
and obligations of the parties hereunder (other than those set forth in Section
5.3, Section 5.6, Article VI and Article IX hereof) shall immediately cease and
terminate at such time as at least 50 percent of the Initial Principal Amount of
the Debentures shall have been converted into shares of Common Stock.
ARTICLE XI
TERMINATION
11.1 (a) Termination Events. This Agreement may be terminated prior to the
Closing:
(i) by the mutual written consent of the parties;
(ii) by the Purchaser, if any condition set forth in Article
VII hereof to be performed by the Company or FOHP-NJ has not been satisfied or
waived on or before Closing or if there has been a material breach on or before
Closing of any of the representations and warranties of the Company or FOHP-NJ
(as such representations and warranties may be amended by this Section
11.1(a)(ii)) or covenants contained in this Agreement; provided, however, that
the Purchaser shall, during the 20-day period following receipt of any written
update furnished by the Company to the Purchaser pursuant to Section 4.6 hereof,
with respect to Material Contracts similar to those described in Section 2.10
hereof and entered into in the ordinary course of business subsequent to the
date hereof and any changes in representations and warranties of the Company
relating to regulatory
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compliance resulting from regulatory action occurring after the date hereof,
consider in good faith whether it will ultimately in any case be willing to
proceed with the transactions contemplated by this Agreement in light of the
information provided in such written update, in which case the Purchaser may
inform the Company in writing that such written update is not satisfactory. In
the event of written notice from the Purchaser that the written update is not
satisfactory and the failure by the Company to cure such written update to the
Purchaser's satisfaction within two business days after such delivery of written
notice, this Agreement shall terminate. The failure of the Purchaser to notify
the Company within such 20-day period shall be deemed to constitute acceptance
by the Purchaser of a modification to this Agreement;
(iii) by the Company if any condition set forth in Article
VIII hereof to be performed by the Purchaser has not been satisfied or waived on
or before Closing or if there has been a material breach on or before Closing of
any of the Purchaser's representations or warranties (as such representations
and warranties may have been amended in accordance with Section 11.1(a)(iii)
hereof) or covenants contained in this Agreement; provided, however, that the
Company shall, during the 20-day period following receipt of any written update
furnished by the Purchaser to the Company pursuant to Section 5.5 hereof,
consider in good faith whether it will ultimately in any case be willing to
proceed with the transactions contemplated by this Agreement in light of the
information provided in such written update, in which case the Company shall
inform the Purchaser in writing that such writ ten update is not satisfactory.
In the event of written notice from the Company that the written update is not
satisfactory and the failure by the Purchaser to cure such written update to the
Company's satisfaction within two business days after such delivery of written
notice, this Agreement shall terminate. The failure of the Company to notify the
Purchaser within such 20-day period shall be deemed to constitute acceptance by
the Company of a modification to this Agreement; or
(iv) by either party if the transactions contemplated
hereunder are not consummated before April 30, 1997.
(b) Termination Fees.
(i) The Company agrees that if the Purchaser shall terminate
this Agreement pursuant to Section 11.1(a)(ii) or Section 11.1(a)(iv) hereof, or
the Company shall terminate this Agreement pursuant to Section 11.1(a)(iv)
hereof, and, in either case a Competing Transaction (as such term is defined in
paragraph (iv) of this Section 11.1(b)) shall exist at any time within 12 months
after the date of this Agreement which is subsequently consummated within 12
months of its commencement, then on the Payment Date (as such term is
hereinafter defined below), the Company shall be liable to pay to the Purchaser
an amount equal to the greater of (A) $2,500,000 or (B) the actual costs
incurred by the Purchaser in connection within the transactions contemplated
hereunder prior to the termination hereof. For purposes of this Section 11.1(b),
the "Payment Date" is the date 10 days following the consummation of such
Competing Transaction.
(ii) Termination Fee as Liquidated Damages; Material
Intentional Breach. All parties agree that the payment provided for in paragraph
(i) of this Section 11.1(b) shall be the sole and exclusive remedy of the
parties upon any termination of this Agreement, followed by the occurrence or
existence of a Competing Transaction, as described in paragraph (iv) of this
Section 11.1(b) and such remedies shall be limited to the sum stipulated in such
paragraph (i); provided, however, that with respect to any such termination of
this Agreement followed by the occurrence or existence of a Competing
Transaction pursuant to Section 11.1(a)(ii) as a direct result of a material,
intentional breach by the Company of any of its representations, warranties,
covenants or agreements contained in this Agreement, all remedies available to
the Purchaser either in law or equity shall be preserved and survive the
termination of this Agreement.
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(iii) Payment Method. Any payment required to be made pursuant
to paragraph (i) of this Section 11.1(b) shall be made to the Purchaser not
later than two business days after delivery to the Company of notice of demand
for payment, and shall be made by wire transfer of immediately available funds
to an account designated by the Purchaser in a notice of demand for payment
delivered in accordance with the procedures set forth in this Agreement.
(iv) Competing Transaction. For purposes of this Agreement,
"Competing Transaction" shall mean any of the following, or any agreement or
widely disseminated public announcement or widely disseminated communication by
the Company or FOHP-NJ or any other person of a proposed plan or intention to do
any of the following (other than the transactions contemplated by this
Agreement): (A) any merger, consolidation, share exchange functionally
equivalent to a merger, business combination or other similar transaction; (B)
any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 20
percent or more of the assets of the Company and its subsidiaries, taken as a
whole, in a single transaction or a series of related transactions; (C) any
tender offer or exchange offer for 20 percent or more of the outstanding shares
of capital stock of the Company, in the event the Board of Directors of the
Company shall have changed its recommendation to shareholders of the Company
under Section 4.11 hereof for approval of the transactions contemplated
hereunder, whether or not consummated; (D) the filing of a registration
statement under the Securities Act registering 20 percent or more of the
outstanding shares of capital stock of the Company, whether or not consummated;
or (E) any other transaction, in the event the Board of Directors of the Company
shall have changed its recommendation to shareholders of the Company under
Section 4.11 hereof for approval of the transactions contemplated hereunder, by
which any person or group becomes the beneficial owner of or has the right to
acquire 20 percent or more of the outstanding capital stock of the Company and
such person or group infuses cash or other capital into the Company or any of
the Subsidiaries (or provides guarantees) of at least $2,500,000.
ARTICLE XII
MISCELLANEOUS
12.1 Entire Agreement; Amendments and Waivers. This Agreement (including
the Exhibits and Schedules) and the other agreements executed in connection with
the consummation of the transactions contemplated herein contain the entire
agreement among the parties with respect to the transactions contemplated
hereby, and supersede all prior agreements, written or oral, with respect
thereto. Changes in or additions to this Agreement may be made only upon written
consent of the Company, FOHP-NJ and the Purchaser.
12.2 Governing Law. This Agreement and the rights and obligations of the
parties hereunder are to be governed and construed in accordance with the laws
of the State of New Jersey, except for the conflicts of law principles thereof.
12.3 Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be delivered personally, telegraphed,
telexed, sent by facsimile transmission, sent by certified, registered or
express mail, postage prepaid or sent by reputable overnight courier. Any such
notice shall be deemed given when so delivered per sonally, telegraphed, telexed
or sent by facsimile transmission or, if mailed, two days after the date of
deposit in the United States mail, or if sent by overnight courier, the next
business day following the date the notice is sent, as follows:
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(i) if to the Purchaser, to:
Health Systems International, Inc.
225 North Main Street
Pueblo, Colorado 81003
Attention: Senior Vice President, General Counsel and Secretary
Fax: (719) 585-8175
(ii) if to the Company, to:
FOHP, Inc.
2 Bridge Avenue
Red Bank, New Jersey 07701
Attention: Senior Vice President, General Counsel and Secretary
Fax: (908) 842-5404
with a copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022-9998
Attention: Charles I. Weissman, Esq.
Fax: (212) 758-9526
and with an additional copy to:
Giordano, Halleran & Ciesla, P.C.
125 Half Mile Road
Post Office Box 190
Middletown, New Jersey 07748
Attention: Paul T. Colella, Esq.
Fax: (908) 224-6599
(iii) if to FOHP-NJ, to:
FOHP-NJ
2 Bridge Avenue
Red Bank, New Jersey 07701
Attention: Senior Vice President, General Counsel and Secretary
Fax: (908) 842-5404
with a copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022-9998
Attention: Charles I. Weissman, Esq.
Fax: (212) 758-9526
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<PAGE>
and with an additional copy to:
Giordano, Halleran & Ciesla, P.C.
125 Half Mile Road
Post Office Box 190
Middletown, New Jersey 07748
Attention: Paul T. Colella, Esq.
Fax: (908) 224-6599
Any party may by notice given in accordance with this section to the other party
designate another address or person for receipt of notices hereunder.
12.4 Effect of Headings. The section and paragraph headings herein are for
convenience only and shall not affect the construction hereof.
12.5 Severability. This Agreement shall be deemed severable, and the
invalidity or unenforceability of any term or provision hereof shall not affect
the validity or enforceability of this Agreement or of any other term or
provision hereof. Furthermore, in lieu of any such invalid or unenforceable term
or provision, the parties hereto intend that there shall be added as a part of
this Agreement a provision as similar in terms to such invalid or unenforceable
provision as may be possible and be valid and enforceable.
12.6 Confidentiality; Publicity and Disclosures. Each party shall keep
this Agreement and its terms confidential, and shall make no press release or
public disclosure, either written or oral, regarding the transactions
contemplated by this Agreement without the prior knowledge and consent of the
other party hereto; provided that the foregoing shall not prohibit any
disclosure made in good faith by press release, filing or otherwise that is
required by law (including, without limitation, federal securities laws),
regulation or court or administrative order or the New Jersey Department of
Banking and Insurance (in which case the disclosing party shall use best efforts
to advise the other party hereto and obtain such other party's consent and
approval, which consent and approval shall not be unreasonably withheld, prior
to making the disclosure).
12.7 Assignment. Neither this Agreement nor any right or obligation
created hereby or in any agreement entered into in connection with the
transactions contemplated hereby shall be assignable by either party hereto.
12.8 Expenses. Each party hereto shall bear its own fees for counsel and
accountants and other expenses relating to this Agreement and the transactions
contemplated hereby.
12.9 Counterparts. This Agreement may be executed in multiple
counterparts, each of which when so executed and delivered shall be an original,
but all of such counterparts shall together constitute one and the same
instrument.
12.10 Further Assurances. Subject to the terms and conditions herein
provided, each of the parties agrees to use all reasonable efforts to take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the terms of this Agreement. In case at any time
any further action is necessary or desirable to carry out the purposes of this
Agreement, the proper officers of each party to this Agreement are hereby
directed and authorized to use their best efforts to effectuate all such action.
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IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto
as of the date first set forth above.
FOHP, INC.
By:______________________________________________
Name: John W. Rohfritch
Title: Acting President and Chief Executive Officer
FIRST OPTION HEALTH PLAN
OF NEW JERSEY, INC.
By:______________________________________________
Name: John W. Rohfritch
Title: Acting President and Chief Executive Officer
HEALTH SYSTEMS INTERNATIONAL, INC.
By:______________________________________________
Name: B. Curtis Westen, Esq.
Title: Senior President, General Counsel and Secretary
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APPENDIX B
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY
MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SUCH ACT OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED.
FOHP, INC.
CONVERTIBLE SUBORDINATED SURPLUS DEBENTURES
_________ ___, 199__
FOHP, Inc., a New Jersey corporation (the "Company"), for value received,
promises to pay to Health Systems International, Inc., a Delaware corporation
("HSI"), or its registered assigns, the aggregate principal sum (such aggregate
principal sum being referred to herein as the "Principal Amount") of (i)
$30,000,000 (the "Initial Principal Amount"), (ii) the aggregate amount of
Defaulted Interest (as such term is defined in Section 1 hereof) at such time,
(iii) the aggregate amount of Unpaid Management Fees (as such term is defined in
Section 5.1 hereof) and Indemnification Obligations (as such term is defined in
Section 5.2 hereof) at such time and (iv) such other amounts as shall become
additional Principal Amount pursuant to the terms hereof, and accrued and unpaid
interest thereon. The Principal Amount hereof, and the interest thereon, shall
be payable at the main office of the Company or by mail to the registered
address of the holder hereof on _________ ___, 200__, subject to the provisions
set forth in Section 4 hereof (the "Maturity Date"). No such payment shall be
required to the extent that such Principal Amount and interest is or has been
converted into Conversion Shares (as such term is defined in Section 2 hereof)
under the terms of the Debentures evidenced by this instrument (the
"Debentures").
These Debentures have been issued pursuant to a Securities Purchase
Agreement, dated as of October 24, 1996 (the "Purchase Agreement"), between HSI,
the Company and First Option Health Plan of New Jersey, Inc ("FOHP-NJ"). HSI and
the Company have also entered into (i) the General Administrative Services
Management Agreement (the "Administrative Management Agreement"), (ii) the
Management Information Systems and Claims Processing Services Management
Agreement (together, with the Administrative Management Agreement, referred to
herein, collectively, as the "Management Agreements") and (iii) the Option
Agreement (the "Option Agreement"), each dated as of _________ ___, 199__ .
The following is a statement of the rights of the holder hereof and the
conditions to which these Debentures are subject, and to which the holder
hereof, by the acceptance hereof, agrees:
1. Interest. The Principal Amount hereof shall bear interest at an annual
rate equal to the rate charged to HSI under its credit facility issued by a
consortium of commercial banks led by Bank of America, National Trust & Savings
Association (the "Rate"), which Rate shall be subject to adjustment at the
beginning of each calendar quarter and shall become due and payable, subject to
the provisions of Section 4.1(b) hereof, with respect to any given calendar
quarter within 10 days after the
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end of such quarter. Any such interest not paid when due and payable shall be
considered "Defaulted Interest" and shall be included in the Principal Amount
hereunder.
2. Conversion. The Principal Amount hereof shall be convertible, at any
time (a) subsequent to the New Debenture Coversion Time (as such term is
hereinafter defined) and (b) on or before the Maturity Date, at the option of
HSI or any subsequent holder hereof, in whole or in part, into such number of
shares (referred to herein as "Conversion Shares") of common stock, par value
$.01 per share ("Common Stock"), of the Company that are consistent with the
following calculations. If the Option (as such term is defined in the Option
Agreement) shall have been exercised for shares of Common Stock prior to the
date of conversion of all the Initial Principal Amount of these Debentures into
Conversion Shares, the number of Conversion Shares issuable to the holder hereof
upon conversion of the Initial Principal Amount of these Debentures will be
1,926,323, which is equal to 40 percent of the total equity of the Company
(i.e., at the rate of approximately $15.57 of Principal Amount per Conversion
Share (the "Post-Option Ratio")) as of the date hereof (taking into account the
conversion of the Initial Principal Amount of these Debentures and the
conversion of all other securities convertible into shares of Common Stock and
the exercise of all outstanding options (including the Option) and warrants
exercisable for shares of Common Stock). If the Option has not been exercised
for shares of Common Stock prior to the date of conversion of all of the Initial
Principal Amount of these Debentures into Conversion Shares, the number of
Conversion Shares issuable to the holder hereof upon conversion of the Initial
Principal Amount of these Debentures will be 1,400,116 (i.e., at the rate of
approximately $21.43 of Principal Amount per Conversion Share (the "Pre-Option
Ratio")), which is equal to 40 percent of the total equity of the Company as of
the date hereof (taking into account the conversion of the Initial Principal
Amount of these Debentures, the conversion of all other securities convertible
into shares of Common Stock and the exercise of all warrants and options, other
than the Option, exercisable for shares of Common Stock). The Company hereby
represents and warrants that each of the foregoing numbers of Conversion Shares
into which these Debentures are convertible shall represent the respective
percentages of total equity of the Company as set forth in this Section 2. In
the event the Initial Principal Amount of these Debentures is partially
converted, the holder hereof shall receive a pro rata portion of the Conversion
Shares, calculated in accordance with either the Post-Option Ratio (in the event
the Option has been exercised) or the Pre-Option Ratio (in the event the Option
has not been exercised). In addition, any portion of the Principal Amount in
excess of the Initial Principal Amount (due to Defaulted Interest, Unpaid
Management Fees or Indemnification Obligations or as a result of additions to
such Principal Amount in accordance with Section 5.3 hereof) shall be
convertible into Conversion Shares at any time prior to or on the Maturity Date
either at the Post-Option Ratio (in the event the Option has been exercised) or
the Pre-Option Ratio (in the event the Option has not been exercised). In the
event of any inaccuracy in the representation and warranty of the Company set
forth in this Section 2 or any subsequent issuance of securities by the Company
without the consent of the holder hereof in contravention of the terms hereof,
the number of shares of Common Stock into which the Principal Amount hereof is
convertible shall be increased such that the conversion rights of the holder
hereof as of the date hereof on a fully diluted basis takes into account the
facts giving rise to such misrepresentation or, unless the Purchaser shall have
previously made a claim for indemnification or declared an event of default
under the Purchase Agreement or these Debentures on the basis of such issuance,
the shares so issued by the Company, as the case may be. In order to exercise
its conversion right provided under the terms of this Section 2, the holder
hereof will surrender these Debentures, together with a notice of conversion
indicating the portion of the Principal Amount converted into Conversion Shares
substantially in the form attached hereto as Exhibit A, to the Company at any
time during usual business hours at its office at 2 Bridge Avenue, Building 6,
Red Bank, New Jersey 07701-1106, Attention: President (or at such other address
as the Company may designate from time to time by written notice to the holder).
HSI shall also provide to the New Jersey Department of Banking of Insurance (the
"New
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Jersey Department") at least 30 days advance written notice of such
conversion right exercise or the consummation of any other transaction, in
either case which would result in HSI owning greater than 10 percent of the
then-issued and outstanding Common Stock at such time. For purposes hereof, the
term "New Debenture Conversion Time" shall mean the time of conversion into
Common Stock of the increased principal amount added to the Debentures, or new
convertible subordinated surplus debentures (if any) issued to the Purchaser,
pursuant to Section 6.7(b) of the Purchase Agreement.
3. Issuance of Stock on Conversion.
3.1 Delivery of Certificates. These Debentures shall have been
deemed to have been surrendered for conversion and converted at the close of
business on the date on which these Debentures and notice of conversion from the
holder hereof are received by the Company, and on such receipt the Company will
issue and deliver at its sole expense, as soon as practicable after such date, a
certificate or certificates of its Common Stock evidencing the number of shares
into which these Debentures have been converted to the holder hereto.
3.2 Lost Certificates. In the event such certificate or certificates
are lost, mutilated or destroyed, such certificate or certificates may be
replaced, provided notice is submitted by the holder of such certificate or
certificates, along with any other required supporting documentation.
3.3 No Fractional Shares. No fractional shares shall be issued on
conversion hereof. If upon any conversion of these Debentures the holder hereof
would be entitled to recover a fraction of a share of Common Stock, such
fraction of a share shall be rounded up or down, as the case may be, to the
nearest whole number of shares of Common Stock.
3.4 Adjustment upon Changes in Capitalization. In the event of any
change in Common Stock by reason of a stock dividend, stock split, merger,
recapitalization, combination, exchange of shares, issuer tender offer or share
repurchase or other similar transaction, the type and number of shares or
securities into which the Debentures is convertible shall be adjusted
appropriately; provided, however, that no such adjustment shall occur by reason
of consummation of any of the transactions contemplated by Section 5.3 or
Section 6.7 of the Purchase Agreement.
4. Ranking of Debentures.
4.1 Obligation to Repay.
(a) The obligation of the Company to repay the Principal
Amount and accrued interest under these Debentures shall be subordinated
to all other indebtedness of the Company and its subsidiaries.
(b) (i) No payments shall be made, in respect of all or any
portion of the Principal Amount or interest thereon, except with the prior
approval of the New Jersey Department. Such approval may not be withheld
if the Company or HSI provides the New Jersey Department with notice at
least 10 business days in advance of any such payments that FOHP-NJ's
minimum statutory surplus exceeds 125 percent of FOHP-NJ's minimum net
worth requirement, unless the New Jersey Department reasonably determines
that FOHP-NJ's financial condition would be impaired as a result of such
payment. The Principal Amount shall be suspended and shall not mature to
the extent FOHP-NJ's minimum net worth requirement, as determined by the
New Jersey Department, is inadequate to make interest payments on these
Debentures.
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(ii) It is acknowledged by the parties that only the $30
million Initial Principal Amount shall initially be considered statutory
surplus under relevant regulations promulgated by the New Jersey
Department, and any additional amounts of the Principal Amount shall be
considered such statutory surplus only upon the approval of the New Jersey
Department.
4.2 Bankruptcy, Dissolution and Liquidation. Upon any bankruptcy,
dissolution or liquidation of the Company, these Debentures shall thereupon be
deemed to be converted into Conversion Shares and shall thereupon be treated as
pari passu with then-outstanding shares of capital stock of the Company.
4.3 No Impairment. Nothing contained in this Section 4 shall impair,
as between the Company and the holder hereof, the obligation of the Company,
which is absolute and unconditional, to pay to the holder hereof the Principal
Amount and interest thereon (except to the extent these Debentures are converted
into Conversion Shares).
5. Additional Principal.
5.1 Unpaid Management Fees. In the event any of the amounts due and
payable to HSI under the Administrative Management Agreement but the payment of
which is deferred thereunder subsequently become no longer subject to such
deferral as a result of the attainment of the minimum statutory surplus
requirements set forth in the Administrative Management Agreement, and such
amounts are not paid despite the inapplicability of such deferral (other than as
a direct result of the actions of HSI under the Management Agreements), such
amounts (referred to herein as the "Unpaid Management Fees") may, at the option
of the holder hereof by notice provided to the Company, be added to, and shall
thereupon become part of, the Principal Amount.
5.2 Indemnification Obligations. In the event the Company becomes
obligated to make one or more indemnification payments to HSI under Section 9.1
of the Purchase Agreement, whether due to breach of a representation or warranty
or otherwise, then the amount of such indemnification payment or indemnification
payments (referred to herein as the "Indemnification Obligations") may, at the
option of the holder hereof by notice provided to the Company, be added to, and
shall thereupon become part of, the Principal Amount; provided, however, that in
no event may the holder hereof cause the amount of such indemnification payment
to be so added to the Principal Amount until the date that is the later of (a)
one year from the time HSI first made its claim under Section 9.1 with respect
to such indemnification payment, or (b) six months after adjudication of such
claim.
5.3 Post-Closing Offer Additional Principal. In the event that HSI
elects to require the Company to make an offer to repurchase Common Stock from
shareholders of the Company pursuant to Section 6.7(a)(ii) of the Purchase
Agreement, the amount of the loan provided to the Company by HSI to effect such
repurchase may, at the option of the holder hereof, be added to, and shall
thereupon become part of, the Principal Amount (a) with appropriate and mutually
agreed-upon tax-effected interest rate adjustments so that the Company is not
economically disadvantaged by such election of HSI under Section 6.7 of the
Purchase Agreement and appropriate undertakings of the Company to indemnify the
Purchaser for any adverse tax consequences resulting from such interest rate
adjustment (which indemnification obligation shall not exceed $100,000 for any
calendar year) and (b) subject to the requirement that such increased principal
amount of these Debentures must be converted by Purchaser into Common Stock at
the earlier of (i) immediately prior to the New Debenture Conversion Time or
(ii) one day prior to the maturity date hereof.
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6. Covenants.
6.1 Affirmative Covenants. From and after the date hereof until the
earlier of the Maturity Date or the conversion of these Debentures, the Company
shall comply with and perform each of the following covenants and agreements:
6.1.1 Financial Reporting. The Company will furnish to HSI
copies of the following financial statements, reports and information:
(a) as soon as available and in any event within 90 days after
the end of each fiscal year of the Company, a copy of the Company's
consolidated annual report (including audited balance sheets, statements
of operations, statements of stockholders' equity and statements of cash
flow), for the Company and its subsidiaries for such fiscal year, prepared
in accordance with generally accepted accounting principles ("GAAP")
consistent with the preceding year, certified by Ernst & Young, LLP or
such other independent public accountants as shall be approved by the
holder hereof, which approval shall not be unreasonably withheld;
(b) as soon as available and in any event within 45 days after
the end of each calendar quarter, a consolidated balance sheet, statement
of operations and statement of cash flow for the Company and its
subsidiaries, as of the end of, and for, each such quarter, prepared in
accordance with GAAP consistently applied (subject to the absence of notes
and to customary and reasonable year-end adjustments), certified by the
Company's chief financial officer as fairly and accurately representing
the financial condition of the Company and its subsidiaries as of the end
of, and for, the period covered thereby; and
(c) such other information with respect to the financial
condition and operations of the Company and its subsidiaries as the holder
hereof may reasonably request.
6.1.2 Payment of Taxes and Claims. The Company will duly pay
and discharge, as the same become due and payable, all taxes, assessments and
governmental and other charges, levies or claims levied or imposed, which are,
or which if unpaid might become, a lien or charge upon the properties, assets,
earnings or business of the Company or any of its operating subsidiaries;
provided, however, that nothing contained in this Section 6.1.2 shall require
the Company to pay and discharge, or cause to be paid and discharged, any such
tax, assessment, charge, levy or claim so long as the Company in good faith
shall contest the validity thereof and shall set aside on its books adequate
reserves with respect thereto. In the event the Company fails to satisfy its
obligations under this Section 6.1.2, HSI may, but is not obligated to, satisfy
such obligations in whole or in part and any payments made and expenses incurred
in doing so shall constitute additional indebtedness to HSI and shall be paid or
reimbursed by the Company as additional Principal Amount.
6.1.3 Selection of Accountants. As long as these Debentures
are outstanding, the holder hereof shall have the right to approve the
accounting firm retained or to be retained by the Company to render accounting
advice thereto (such approval not to be unreasonably withheld).
6.1.4 Maintenance of Corporate Existence and Properties.
(a) The Company will, and will cause each of its operating
subsidiaries to, at all times do or cause to be done all things necessary
to maintain, preserve and renew its corporate charter and its rights, and
comply in all material respects with all related laws applicable to the
Company and such operating subsidiary; provided, however, that nothing
contained
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in this paragraph shall (i) require the Company or such operating
subsidiary to maintain, preserve or renew any right not material in the
conduct of the business of the Company or such operating subsidiary, (ii)
prevent the termination of the corporate existence of any subsidiary of
the Company if, in the reasonable opinion of the Board of Directors of the
Company, such termination is not disadvantageous to the holder hereof or
(iii) require the Company or such operating subsidiary to comply with any
law so long as the validity or applicability thereof shall be contested in
good faith by appropriate proceedings.
(b) The Company will as soon as practicable give written
notice to the holder hereof of any litigation, arbitration or governmental
investigation or proceeding, which has been instituted or, to the
knowledge of the Company, is threatened against the Company or any of its
operating subsidiaries, or any of their respective properties, which (i)
involves or is likely to involve a claim or claims for damages, penalties
or awards in excess of $100,000 in the case of claims for which the
Company is not adequately insured or in excess of $300,000 in the case of
claims for which the Company is adequately insured; (ii) if determined
adversely to the Company or such operating subsidiary would have a
material adverse effect thereon; or (iii) relates to the Purchase
Agreement or any documents executed pursuant thereto.
(c) The Company will provide or cause to be provided for
itself and its operating subsidiaries insurance against loss or damage of
the kinds customarily insured against by corporations similarly situated,
with reputable insurers, in such amounts, with such deductibles and by
such methods as shall be adequate, and in no event involving material
differences from the insurance currently generally maintained.
(d) The Company will keep true books of records and accounts
in which full and correct entries in all material respects will be made of
all its business transactions and the business transactions of its
operating subsidiaries, and will reflect in its financial statements
adequate accruals and appropriations to reserves, all in accordance with
GAAP (subject to customary and reasonable year-end adjustments) and as
otherwise required by the New Jersey Department.
(e) The Company will, and will cause each of its operating
subsidiaries to, comply with all applicable statutes, rules, regulations,
orders and restrictions relating to federal, state and local laws and of
any governmental department, commission, board, regulatory authority,
bureau, agency and instrumentality with respect thereto, and of any court,
arbitrator or other body with jurisdiction and authority, in respect of
the conduct of the respective businesses thereof and the ownership of
their respective properties, except those, the violations of which would
not have a material adverse effect thereon and except such as are being
contested in good faith.
6.1.5 Notice of Event of Default. In addition to any other
reporting requirements set forth herein, the Company shall have an immediate
obligation to report to the holder hereof the occurrence of any Event of Default
(as defined in Section 7 hereof) or any event which with the giving of notice or
the passage of time, or both, would constitute any such Event of Default.
6.1.6 Board Position.
(a) Prior to full conversion of these Debentures and while
they are outstanding, HSI shall be permitted to designate directors
representing (i) no less than 15 percent of the directors on the Board of
Directors of the Company and the boards of directors of each of the
Company's subsidiaries or (ii) such greater percentage of the directors as
the Board of
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Directors of the Company and the boards of directors of each of the
Company's subsidiaries as is equal to the percentage ownership by HSI of
all outstanding Common Stock in the event such percentage exceeds 15
percent.
(b) Upon conversion of the entire Principal Amount, HSI,
through its ownership of Conversion Shares, shall be permitted to
designate and elect such number of the directors on the Boards of
Directors of the Company and the Boards of Directors of each of the
Company's subsidiaries as is equal to HSI's percentage ownership of all
outstanding Common Stock, with such number of directors to be increased as
such ownership may be increased from time to time notwithstanding any
"staggered term" or other conflicting provision.
(c) In no event shall the number of directors of the Board of
Directors of the Company or the board of directors of any of the Company's
subsidiaries exceed 12 without the prior written consent of the holder
hereof (subject to the requirements set forth in Article III Section 1 of
the Bylaws of the Company that, during the period specified therein, there
be at least 3 directors on such Board of Directors who are not designees
of HSI).
6.1.7 Letters of Credit. The Company shall not draw any
amounts under any letter of credit during the period when these Debentures are
outstanding unless so required by either the New Jersey Department or the New
Jersey Department of Health and Senior Services to so draw amounts under any
such letter of credit, in which event all amounts so drawn shall be placed and
maintained in a separate and segregated account from which funds shall be used
to satisfy in full all such obligations relating to letters of credit.
6.1.8 Use of Proceeds. The Company shall, immediately upon
receipt of the sum of $30,000,000 at the Closing (as such term is defined in the
Purchase Agreement) on the date hereof, make a capital contribution of such
amount (less fees and expenses incurred by the Company in connection with the
transactions consummated at the Closing pursuant to the Purchase Agreement) to
FOHP-NJ.
6.2 Negative Covenants. From and after the date hereof, the Company
shall not and shall cause its operating subsidiaries to not, do any of the
following:
6.2.1 Restrictions on Sale of Assets, Consolidations, Mergers
and Acquisitions.
(a) The Company will not, and will cause each of its operating
subsidiaries to not, sell, lease, transfer or otherwise dispose of all or
a substantial portion of its assets (other than in connection with the
sale of securities issued by the United States government the proceeds of
which are used to purchase additional securities of the United States
government).
(b) The Company shall not, and shall cause each of its
operating subsidiaries to not, without the prior written consent of the
holder hereof, consolidate with or merge into any other person or entity
or permit any other person or entity to consolidate with or merge into it;
provided, however, that a subsidiary of the Company may consolidate with
or merge into the Company or a wholly-owned subsidiary of the Company.
(c) The Company shall not and shall cause each of its
operating subsidiaries to not, acquire, by asset or stock purchase, merger
or otherwise, the assets or stock of any other corporation or partnership
without the prior written consent of the holder hereof.
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6.2.2 Additional Indebtedness. The Company will not, and will
cause each of its operating subsidiaries to not, create, incur, assume or suffer
to exist any indebtedness for borrowed money ("Borrowed Money") after the date
hereof except for (i) Borrowed Money evidenced by these Debentures and (ii)
other Borrowed Money, incurred with the consent of the holder hereof, the
proceeds of which are used in the ordinary course of business of the Company or
such operating subsidiary, as the case may be.
6.2.3 Liens and Encumbrances. The Company will not, and will
cause each of its operating subsidiaries to not, cause or permit any of its
assets or properties, whether now owned or hereafter acquired, to be subject to
any liens or encumbrances except in the ordinary course of business of the
Company or such operating subsidiary, as the case may be.
6.2.4 Guarantees. The Company shall not and shall cause each
of its operating subsidiaries to not, become liable as a guarantor, or
otherwise, without the prior written consent of the holder hereof, except for
guarantees provided as to obligations of a wholly-owned subsidiary of the
Company.
6.2.5 Restrictions on Dividends, Distributions and
Investments. The Company will not, without the prior written consent of the
holder hereof:
(a) except as otherwise expressly contemplated by the Option
Agreement, declare or pay any dividend or make any other distributions on
any shares of the Company's capital stock;
(b) except as otherwise permitted by the Purchase Agreement
redeem, purchase or otherwise acquire for value any shares of the
Company's capital stock or any warrants, rights or other options to
purchase such capital stock; or
(c) except as otherwise permitted by the Purchase Agreement
permit its ownership of voting capital stock of any subsidiary of the
Company to be less than 100 percent.
6.2.6 Issuance of Additional Stock. Except as otherwise
expressly contemplated herein or by the Option Agreement, the Company will not,
without the prior written consent of the holder hereof, issue any additional
shares of Common Stock or any other capital stock of the Company, or any
options, stock appreciation rights, warrants or other rights to acquire the
Common Stock or any interest therein, or other rights to acquire authorized and
unissued shares of capital stock of the Company, or modify terms of existing
securities so as to in any manner dilute the existing conversion rights of the
holder hereof.
6.2.7 Additional Prohibited Transactions. Neither the Company
nor any of its subsidiaries shall take any of the following actions or engage in
any of the following transactions without the prior written consent of the
holder hereof:
(a) amend its certificate of incorporation or bylaws;
(b) make capital expenditures (including such expenditures
made by the Company and all such subsidiaries) exceeding, in the
aggregate, $1,000,000 during any calendar year;
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(c) make any material change in the scope of the business of
the Company;
(d) file for receivership, dissolution, liquidation or
bankruptcy;
(e) acquire equity securities (other than pursuant to a
buyback or repurchase of equity securities issued by the Company) or
assets of any other person or entity involving payments aggregating in
excess of $1,000,000 during any calendar year;
(f) file a registration statement with respect to the public
sale of securities of the Company under the Securities Act of 1933, as
amended; or
(g) enter into, assume or become bound by any agreement to do
any of the foregoing or otherwise attempt to do any of the foregoing.
7. Default.
7.1 Events of Default. An "Event of Default" shall exist if any of
the following occurs and is continuing as to the Company:
(a) Default shall be made by the Company on a payment of the
Principal Amount or interest on these Debentures, when and as such
Principal Amount and interest, as the case may be, shall become due and
payable by acceleration or otherwise; or
(b) Default shall be made in the performance or observance of
any covenant, condition, undertaking or agreement contained in these
Debentures or in the Purchase Agreement (other than any defaults relating
to actions taken by, or omissions of, HSI in connection with the
performance of its obligations under the Management Agreements), and such
default shall continue for 20 days without being cured after the holder
hereof provides to the Company written notice of such default; or
(c) Any warranty, representation or other statement made by or
on behalf of the Company contained in these Debentures or the Purchase
Agreement shall be false or misleading in any material respect at the time
such warranty, representation or other statement, as the case may be, was
made; or
(d) The Company or any of its operating subsidiaries shall (i)
file a petition seeking relief for itself under the United States
Bankruptcy Code, as now constituted or hereafter amended from time to
time, or file an answer consenting to, admitting the material allegations
of or otherwise not controverting, or fail timely to controvert, a
petition filed against the Company seeking relief under the United States
Bankruptcy Code, as now constituted or hereafter amended from time to time
or (ii) file a petition or answer with respect to relief under the
provisions of any other now-existing or future applicable bankruptcy,
insolvency or other similar law of the United States or any state thereof
or of any other country or province thereof or jurisdiction providing for
the reorganization, winding-up or liquidation of corporations or an
arrangement, composition, extension or adjustment with creditors; or
(e) (i) An order for relief shall be entered against the
Company or any of its operating subsidiaries under the United States
Bankruptcy Code, as now constituted or hereafter amended from time to
time, which order is not stayed and remains unstayed for a period of 45
days, (ii) the entry of an order, judgment or decree by operation of law
or by a
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court or by the New Jersey Department having jurisdiction in the premises
which is not stayed and remains unstayed for a period of 45 days (A)
adjudging the Company bankrupt or insolvent under, or ordering relief
against the Company or by the New Jersey Department under, or approving a
properly-filed petition seeking relief against the Company or by the New
Jersey Department under the provisions of any other now-existing or future
applicable bankruptcy, insolvency or other similar law of the United
States or any state thereof or of any other country or province thereof or
jurisdiction providing for the reorganization, winding-up or liquidation
of corporations or any arrangement, composition, extension or adjustment
with creditors, (B) appointing a receiver, supervisor, liquidator,
assignee, sequestrator, trustee or custodian of the Company or any of its
operating subsidiaries or of any substantial portion of the property of
the Company or any such operating subsidiaries, or (C) ordering the
reorganization, winding-up or liquidation of the affairs of the Company or
any of its subsidiaries, or (iii) the expiration of 60 days after the
filing of any involuntary petition against the Company or any of its
operating subsidiaries seeking any of the relief specified in paragraph
(d) of this Section 7.1 or paragraph (e) of this Section 7.1 without
dismissal of such petition; or
(f) The Company or any of its operating subsidiaries shall (i)
make a general assignment for the benefit of creditors, (ii) consent to
the appointment of, or taking possession of all or a substantial part of
the property of the Company or any such operating subsidiary by, a
receiver, supervisor, liquidator, assignee, sequestrator, trustee or
custodian of the Company or any such operating subsidiary, (iii) admit its
insolvency or inability to pay its debts generally as such debts become
due, (iv) fail generally to pay its debts as such debts become due or (v)
take any action (including such actions taken by the Company's directors
or a majority of the Company's shareholders) regarding the dissolution or
liquidation of the Company or any such operating subsidiary.
7.2 Remedies. In case any one or more of the Events of Default
specified in Section 7.1 hereof shall have occurred and be continuing, the
holder hereof shall have the right to accelerate payment of the entire Principal
Amount, and all interest accrued thereon, and, upon such acceleration, such
Principal Amount and interest shall thereupon become immediately due and
payable, without any presentment, demand, protest or other notice of any kind
(which presentment demand, protest or other notice of any kind are hereby
expressly waived), and the Company shall forthwith pay to the holder hereof the
entire then outstanding Principal Amount, and interest accrued thereon, due
pursuant to these Debentures; provided, however, that any such payment by the
Company must be in accordance with Section 4.1(b)(i) hereof.
8. Miscellaneous.
8.1 Waiver and Amendment. Any provision of these Debentures
may be amended, waived or modified only upon the written consent of the Company,
the holder hereof and the New Jersey Department.
8.2 Notices. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile trans mission, sent by certified,
registered or express mail, postage prepaid or sent by reputable overnight
courier. Any such notice shall be deemed given when so delivered personally,
telegraphed, telexed or sent by facsimile transmission or, if mailed, two days
after the date of deposit in the United States mail, or if sent by overnight
courier, the next business day following the date the notice is sent, as
follows:
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(a) if to HSI, to:
Health Systems International, Inc.
225 North Main Street
Pueblo, Colorado 81003
Attention: Senior Vice President, General Counsel
and Secretary
Fax: (719) 585-8175
(b) if to the Company, to:
FOHP, Inc.
2 Bridge Avenue
Red Bank, New Jersey 07701
Attention: Senior Vice President, General Counsel
and Secretary
Fax: (908) 842-5404
with a copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022-9998
Attention: Charles I. Weissman, Esq.
Fax: (212) 758-9526
and with an additional copy to:
Giordano, Halleran & Ciesla, P.C.
125 Half Mile Road
Post Office Box 190
Middletown, New Jersey 07748
Attention: Paul T. Colella, Esq.
Fax: (908) 224-6599
Any party may by notice given in accordance with this section to the other party
designate another address or person for receipt of notices hereunder.
8.3 Governing Law. These Debentures shall be governed by, and
construed in accordance with, the laws of the State of New Jersey.
8.4 Headings. The headings herein are for purposes of
convenience and reference only, and shall not affect the construction hereof.
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IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed, issued and delivered this _______ day of ___, 199__.
FOHP, INC.
By:__________________________________
Name:
Title:
Acknowledged and Agreed:
HEALTH SYSTEMS INTERNATIONAL, INC.
By:_______________________________
Name:
Title:
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EXHIBIT A TO CONVERTIBLE SUBORDINATED SURPLUS DEBENTURES
The holder of Convertible Subordinated Surplus Debentures, dated as of
_________ ___, 199__ (the "Debentures"), issued by FOHP, Inc. (the "Company")
hereby notifies the Company, in accordance with Section 2 of the Debentures, of
its conversion of $ ___________ of the Principal Amount (as such term is defined
in the Debentures) of the Debentures into ___________ shares of common stock,
par value $.01 per share, of the Company.
Principal Amount to be Converted Number of Shares
- -------------------------------- ----------------
IN WITNESS WHEREOF, this Notice of Conversion is executed as of _________
___, 199__.
-------------------------------------
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APPENDIX C
OPTION AGREEMENT
OPTION AGREEMENT, dated as of __________________, 199__ (this
"Agreement"), by and between FOHP, Inc., a New Jersey corporation (the
"Company"), and Health Systems International, Inc., a Delaware corporation
("Purchaser").
WHEREAS, the parties hereto are among the parties to the Securities
Purchase Agreement (the "Purchase Agreement"), dated as of October 24, 1996,
pursuant to which, among other things, the Company will issue and sell to
Purchaser convertible subordinated debentures in the initial aggregate principal
amount of $30,000,000 (the "Debentures");
WHEREAS, the parties hereto are also concurrently herewith entering into a
General Administrative Services Management Agreement (the "General
Administrative Agreement") and a Management Information Systems and Claims
Processing Services Management Agreement (collectively, the "Management
Agreements"), pursuant to which, among other things, Purchaser will perform
certain management duties on behalf of and for the Company and its subsidiaries;
and
WHEREAS, it is contemplated under the Purchase Agreement that the Company
will, among other things, grant to Purchaser an option to purchase additional
securities of the Company on the terms and subject to the conditions set forth
herein;
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Grant of Option.
(a) The Company hereby grants to Purchaser an option (the "Option") to
purchase such number of shares (the "Option Shares") of common stock, par value
$.01 per share ("Common Stock"), of the Company as set forth below. The Company
hereby represents and warrants that the number of Option Shares into which the
Option is convertible as of the date hereof is as set forth in the next two
succeeding sentences. If all of the Initial Principal Amount (as such term is
defined in the Debentures) of the Debentures have been converted into shares of
Common Stock prior to the date of exercise of the Option for Option Shares, the
number of Option Shares issuable to Purchaser upon exercise of the Option will
be 785,779, which is equal to 11 percent of the Common Stock of the Company on a
fully-diluted basis as of the date hereof (assuming the exercise of the Option
and all of the other outstanding options and warrants exercisable for shares of
Common Stock and the conversion of all other securities, including the
Debentures, convertible into Common Stock). If none of the Debentures has been
converted into shares of Common Stock prior to the date of exercise of the
Option for Option Shares, the number of Option Shares issuable to Purchaser upon
exercise of the Option will be 259,572, which is equal to 11 percent of the
total equity of the Company as of the date hereof (taking into account the
exercise of the Option, and all of the other outstanding options and warrants
exercisable for shares of Common Stock, and the conversion of all securities
convertible into shares of Common Stock other than the Initial Principal Amount
of the Debentures). The Company hereby represents and warrants that each of the
foregoing numbers of Option Shares into which the Option is convertible shall
represent the percentages of total equity of the Company as set forth in this
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Section 1(a). In the event the Initial Principal Amount of the Debentures is
partially converted into Common Stock, Purchaser shall receive, upon exercise of
the Option, an appropriately adjusted number of Option Shares, calculated in
accordance with the applicable formula set forth in the two immediately
preceding sentences, so that the conversion of the remaining portion of the
Initial Principal Amount of the Debentures pursuant to the Post-Option Ratio (as
such term is defined in the Debentures) would enable Purchaser to own such
number of shares of Common Stock (without taking into account Common Stock
acquired by Purchaser other than pursuant to exercise of the Option or
conversion of the Initial Principal Amount of the Debentures) as represents 51
percent of the Common Stock of the Company, on a fully-diluted basis, as of the
date hereof. In the event of any inaccuracy in the representation and warranty
of the Company set forth in this Section 1(a), the number of Option Shares which
may be purchased under this Agreement shall be increased such that the right of
Purchaser to purchase 11 percent of the outstanding Common Stock as of the date
hereof on a fully diluted basis takes into account the facts giving rise to such
misrepresentation. In the event of any subsequent issuance of securities of the
Company without the prior written consent of Purchaser, the number of Option
Shares which may be purchased under this Agreement shall be increased such that
the right of Purchaser to purchase such Common Stock takes into account such
securities subsequently issued by the Company; provided, however, that no such
adjustment shall be made if Purchaser shall have previously made a claim for
indemnification or declared an event of default under the Purchase Agreement or
the Debentures in connection with such issuance.
(b) The Option shall represent the right to acquire the Option Shares at a
purchase price (the "Purchase Price") determined in accordance with either of
the following, at the option of the Purchaser:
(i) $8,250,000 minus the product of $3.93 multiplied by the number
of shares of Common Stock purchased by the Purchaser or redeemed by
the Company, if any, in accordance with the provisions of Section
6.7 of the Purchase Agreement. Such amount shall be distributed to
the Company's shareholders (other than Purchaser) as soon as
practicable upon exercise of the Option in the event that Purchaser
enters into an agreement with Sierra Health Corporation ("Sierra")
for an assignment to Purchaser (the "Sierra Assignment") of Sierra's
rights (including, without limitation, rights to receive payments)
under the Agreement between Sierra and First Option Health Plan of
New Jersey, Inc. (the "Sierra Agreement"), dated January 16, 1995;
or
(ii) in the event that Purchaser does not enter into the Sierra
Assignment, then either (A) $8,250,000 minus the product of $3.93
multiplied by the number of shares of Common Stock purchased by the
Purchaser or redeemed by the Company, if any, in accordance with the
provisions of Section 6.7 of the Purchase Agreement, which amount
shall be distributed to the Company's shareholders (other than
Purchaser) as soon as practicable following the accumulation of
retained earnings by the Company from and after the Closing (as such
term is defined in the Purchase Agreement) in excess of (x) the
amount required for full satisfaction of all payments due to Sierra
under the Sierra Agreement or (y) the amount of a reserve
established by the Company and the Purchaser for payments due to
Sierra under the Sierra Agreement, or (B) $11,250,000 minus the
product of $3.93 multiplied by the number of shares of Common Stock
purchased by the Purchaser or redeemed by the Company, if any, in
accordance with the provisions of Section 6.7 of the Purchase
Agreement, which amount less (x) an amount paid by the Company to
satisfy in full Sierra's rights to payment under the Sierra
Agreement or, if such rights are not satisfied in full, (y) an
amount equal to a reserve established by the Company and the
Purchaser for payments
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due to Sierra under the Sierra Agreement, may be distributed to the
Company's shareholders (other than Purchaser) as soon as practicable
following such payment in full or reserve establishment.
2. Term of Option. The Option may be exercised at any time (a) subsequent
to the later of (i) the New Debenture Conversion Time (as such term is
hereinafter defined) or (ii) the second consecutive calendar quarter in which
administrative costs incurred by the Company (including the Management Fee (as
such fee is defined in the General Administrative Agreement)) represent less
than the SG&A Target (as such term is hereinafter defined) and (b) on or before
five years from the Closing (as such term is defined in the Purchase Agreement);
provided, however, that the Purchaser may elect to (A) reduce the amount of the
Management Fee otherwise payable (or refund all or a portion of the Management
Fees previously paid) or (B) agree in writing to reduce future Management Fee
payments required under the General Administrative Agreement in the next two
succeeding calendar quarters for purposes of calculation of the administrative
costs incurred by the Company set forth in this Section 2; and provided,
further, that no such reduction in the Management Fee shall exceed an amount
equal to 0.5 percent of full-risk medical premium revenue. For purposes of this
Section 2, the term "SG&A Target" shall mean 12.5 percent of the ratio of
administrative expenses to medical premiums. The following cost categories shall
be excluded for purposes of calculating administrative expenses: (I)
administrative expenses for non-risk business (which are estimated to be 90
percent of ASO/TPA/PPO access/other non-risk revenue ("Non-Risk Revenue")), (II)
medical affairs, quality management, utilization management and other clinical
functions, (III) broker commissions, (IV) interest expense, (V) premium tax and
(VI) extraordinary administrative expense items approved by the Company. The
SG&A Target shall be calculated based on full-risk medical premium revenue
(exclusive of interest and Non-Risk Revenue) and net of broker commissions. The
SG&A Target shall be increased by .1% for every $10 million reduction in
annualized full-risk medical premiums below $250 million. For purposes hereof,
the term "New Debenture Conversion Time" shall mean the time of conversion into
Common Stock of the increased principal amount added to the Debentures, or new
convertible subordinated surplus debentures (if any) issued to the Purchaser,
pursuant to Section 6.7(b) of the Purchase Agreement.
3. Exercise of Option. The Option may be exercised in whole but not in
part. In the event Purchaser wishes to exercise the Option, it shall, during the
Option Period, deliver to the Company a written notice (the date of such notice
being herein referred to as the "Notice Date"), specifying a date not earlier
than the fifth business day immediately following the Notice Date nor later than
30 business days from the Notice Date for the consummation, with respect to any
such exercise, of such purchase. The closing for such consummation (the
"Closing") shall be held at such location as shall be agreed to by the parties
hereto.
4. Payment and Delivery of Certificates. At the Closing, Purchaser shall
pay to the Company the Purchase Price in immediately available funds by wire
transfer to a bank designated by the Company, and the Company shall deliver to
Purchaser a certificate or certificates evidencing the Option Shares and the
appropriate indicia of any distributions which have been declared by the Company
with respect to the Common Stock from and after the date hereof, in each case,
free and clear of all liens, claims, charges and encumbrances of any kind or
nature whatsoever (except as may be created by Purchaser).
5. Adjustment upon Changes in Capitalization. In the event of any change
in Common Stock by reason of a stock dividend, stock split, merger,
recapitalization, combination, exchange of shares or other similar transaction,
the type and number of shares or securities subject to the Option shall be
adjusted appropriately; provided, however, that no such adjustment shall occur
by reason of any of the transactions contemplated by Section 5.3 and Section 6.7
of the Purchase Agreement.
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6. Use of Proceeds. The Company may distribute to its shareholders the
proceeds from the sale of the Option Shares only to the extent set forth in
Section 1(b) hereof.
7. Capitalization. The Option Shares will, as of the date of exercise of
the Option, be duly and validly issued, fully paid and non-assessable.
8. Further Assurances. The Company and Purchaser agree to take, or cause
to be taken, all actions and to do, or cause to be done, all things necessary or
advisable under applicable laws and regulations to consummate and make effective
the transactions contemplated under this Agreement.
9. Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be delivered personally, telegraphed,
telexed, sent by facsimile transmission, sent by certified, registered or
express mail, postage prepaid or sent by reputable overnight courier. Any such
notice shall be deemed given when so delivered personally, telegraphed, telexed
or sent by facsimile transmission or, if mailed, two (2) days after the date of
deposit in the United States mail, or if sent by overnight courier, the next
business day following the date the notice is sent, as follows:
(a) if to the Purchaser, to:
Health Systems International, Inc.
225 North Main Street
Pueblo, Colorado 81003
Attention: Senior Vice President,
General Counsel and Secretary
Fax: (719) 585-8175
(b) if to the Company, to:
FOHP, Inc.
2 Bridge Avenue
Red Bank, New Jersey 07701
Attention: Senior Vice President,
General Counsel and Secretary
Fax: (908) 842-5404
with a copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022-9998
Attention: Charles I. Weissman, Esq.
Fax: (212) 758-9526
and an additional copy to:
Giordano, Halleran & Ciesla, P.C.
125 Half Mile Road
Post Office Box 190
Middletown, New Jersey 07748
Attention: Paul T. Colella, Esq.
Fax: (908) 224-6599
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Any party may by notice given in accordance with this section to the other party
designate another address or person for receipt of notices hereunder.
10. Entire Agreement. This Agreement, the Purchase Agreement, the
Debentures, the Management Agreements and the Company's Certificate (as such
term is defined in the Purchase Agreement) constitute the entire understanding
between the parties hereto with respect to the subject matter hereof and
supersede all prior oral and written communications, negotiations,
understandings and agreements between the parties hereto. The agreements set
forth herein may be modified or waived only by a separate writing by the parties
hereto expressly so modifying or waiving such agreement. No failure or delay by
a party hereto in exercising any right, power or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise thereof
preclude any other or further exercise of any right, power or privilege.
11. Assignment. Neither this Agreement nor any right or obligation created
hereby shall be assignable by either party hereto.
12. Counterparts. This Agreement may be executed in two counterparts, each
of which shall be deemed to be an original, but both of which shall constitute
the same agreement.
13. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New Jersey.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
FOHP, INC.
By:________________________________________
Name:
Title:
HEALTH SYSTEMS INTERNATIONAL, INC.
By:________________________________________
Name:
Title:
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APPENDIX D
GENERAL ADMINISTRATIVE SERVICES MANAGEMENT AGREEMENT
This General Administrative Services Management Agreement (this
"Agreement") is entered into this _____ day of ____________, 199__, by and
between FOHP, Inc., a New Jersey corporation ("FOHP"), and Health Systems
International, Inc., a Delaware corporation ("HSI").
RECITALS
A. FOHP is a New Jersey corporation which, together with its subsidiaries
(FOHP and such subsidiaries being referred to herein, collectively, as the "FOHP
Health Plans"), provides managed health care services in the Northeastern United
States.
B. HSI has entered into a Securities Purchase Agreement dated as of
October 24, 1996 (the "Purchase Agreement"), with FOHP and First Option Health
Plan of New Jersey, Inc. pursuant to which HSI will acquire convertible
subordinated debentures of FOHP in the initial aggregate principal amount of
$30 million (the "Debentures").
C. HSI owns, operates and manages various managed care entities throughout
the country. By entering into this Agreement, the FOHP Health Plans desire to
secure from HSI certain support services which are intended to enhance the
management information systems and claims processing capacity of the FOHP Health
Plans. The FOHP Health Plans will maintain ultimate organizational and
administrative capacity required in order to carry out its operations.
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and undertakings hereunder and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto hereby agree as follows:
AGREEMENT
SECTION 1. AUTHORITY OF THE PARTIES.
(a) The respective Boards of Directors of the FOHP Health Plans
shall retain the ultimate legal responsibility and authority over the
assets and operations of the FOHP Health Plans. HSI shall perform the
services to be performed by it hereunder in accordance, in all material
respects, with the various health maintenance organizations acts and other
applicable laws, rules and regulations (collectively, the "Applicable
Laws"). It is the intent of the parties hereto that this Agreement and the
services to be performed by HSI hereunder shall at no time serve to
interfere with the ability of the Boards of Directors of the FOHP Health
Plans to carry out their respective duties and responsibilities under the
Applicable Laws. HSI shall have the authority and responsibility described
in this Agreement and otherwise as mutually agreed upon by the parties
hereto from time to time. FOHP agrees that, during the time hereof, the
FOHP Health Plans shall provide employee staffing sufficient to perform
the functions and conduct the business and operations of the FOHP Health
Plans in a manner consistent with the current functions and conduct
of the business and operations of the FOHP Health Plans (other than the
corporate, administrative and consultative services to be performed
hereunder by HSI). HSI's services in connection with the activities shall
be strictly limited to those specifically provided for herein.
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(b) HSI shall have the right to designate and employ the business
executives in charge of FOHP and the other FOHP Health Plans and each
executive in charge of a principal business division, unit or function
(including, without limitation, finance, legal, operations, sales and
marketing, information systems, medical management, and provider
contracting and relations), all of which executives would report to HSI's
senior management. All such executives shall be appointed by the FOHP
Board of Directors to the offices requested by HSI; provided, however,
that such Board of Directors may reject any proposed appointee it
reasonably finds to be of insufficient ethical character for such office;
and provided, further, that such Board of Directors may, after due
consultation with HSI, based on a reasonable determination of intentional
and material unethical behavior or insubordination or wilful misconduct or
gross negligence, remove any such executives.
(c) HSI acknowledges that FOHP will continue to employ an internal
auditor who will report directly to the Board of Directors of FOHP and who
will perform functions consistent with those performed thereby prior to
the Closing Date (as such term is defined in the Purchase Agreement).
SECTION 2. CONDITION PRECEDENT.
This Agreement shall not become effective prior to the receipt of all
necessary government approvals; provided, however, that in the event the Closing
(as such term is defined in the Purchase Agreement) occurs prior to or on
January 31, 1997, this Agreement shall be deemed to be effective for purposes of
FOHP's obligations to HSI under Article IV hereof, as of January 1, 1997.
SECTION 3. ADMINISTRATIVE AND OTHER SERVICES.
HSI shall be responsible for the following administrative and consultative
services during the term of this Agreement, subject to the direction of the FOHP
Health Plans and consistent with the manner in which HSI provides such services
to its own subsidiaries, without disadvantage to FOHP or the FOHP Health Plans.
The parties hereto acknowledge that HSI has various subsidiaries operating as
health plans in the northeastern region of the United States. HSI agrees that it
will perform its obligations hereunder in a manner generally consistent with the
operation of such subsidiary health plans; HSI's subsidiary health plans shall
not be operated with the specific intention of causing harm to FOHP. HSI
covenants to FOHP that, in the event HSI elects to exercise the Option (as such
term is hereinafter defined) by payment in accordance with Section 1(b)(ii)(A)
of the Option Agreement dated as of the date hereof (the "Option Agreement"),
between HSI and FOHP, HSI will utilize good faith efforts in the performance of
its obligations hereunder to assist FOHP to achieve sufficient retained earnings
to allow the maximum pay-out as contemplated by Section 1(b)(ii)(A) of the
Option Agreement. As used in this Section 3, the term "Option" shall mean HSI's
right to purchase shares of Common Stock, par value $.01 per share, of the
Company pursuant to the Option Agreement.
3.1 Information Operating Systems. HSI shall manage the diagnosis and
assessment of the information and operating systems of the FOHP Health Plans and
shall provide support for all necessary conversions, supplements and
enhancements to such systems.
3.2 Provider Matters. HSI shall manage the FOHP Health Plans in their
provider contracting efforts and provider relations matters (including the
establishment of appropriate provider reimbursement structures).
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3.3 FOHP Health Plans Employees. HSI shall provide human resources and
employee benefit corporate management services to the FOHP Health Plans in
recruiting employees therefor and in implementing personnel policies and
procedures and employee benefit programs. To the extent practicable and legally
possible, HSI shall implement employee benefit programs for employees of the
FOHP Health Plans consistent with those in place at HSI's operating
subsidiaries.
3.4 Legal and Governmental Relations. HSI shall provide consultation and
assistance to the FOHP Health Plans in connection with governmental relations
and legislative activities (including regulatory compliance matters) affecting
the FOHP Health Plans.
3.5 Strategic Plan/Product Offerings. HSI shall provide consultation and
assistance to the FOHP Health Plans in conducting analyses of the marketplace in
which the FOHP Health Plans operate and in developing an appropriate strategic
plan therefor. Based upon the results of such analyses, HSI may, from time to
time, assist the FOHP Health Plans with implementation of activities related to:
(a) the products to be offered thereby, (b) the service areas in which the FOHP
Health Plans should operate or expand their activities and (c) the other
services which should be offered thereby.
3.6 Materials and Information Provided to Enrollees. HSI shall provide
consultation and assistance to the FOHP Health Plans in connection with the
development and dissemination of enrollment and disclosure materials for (a)
enrollees thereof ("Enrollees"), (b) employers and other groups contracting with
any of the FOHP Health Plans (referred to herein as "Subscriber Groups"), and
(c) other third parties.
3.7 Utilization Review and Quality Assurance Programs. HSI shall provide
administrative support to the FOHP Health Plans in the formulation, review and
implementation of the utilization review and quality assurance programs thereof.
3.8 Confidentiality of Records. HSI shall provide consultation and
assistance to the FOHP Health Plans in connection with protecting the
confidentiality of and ensuring compliance with all applicable federal, state
and local laws and regulations relating to, the records thereof.
3.9 Contract Development. HSI shall consult with and assist the FOHP
Health Plans in support of the medical management policies and procedures
thereof, in preparing and negotiating contracts with participating providers,
Subscriber Groups, vendors and other third parties.
3.10 Annual Budget. HSI shall provide consultation and assistance to the
FOHP Health Plans in the preparation of the annual budget thereof, which will
set forth their major operating objectives, anticipated revenues, expenses, cash
flow and capital expenditures.
3.11 Accounting Records/Financial Analysis/Tax Returns. HSI shall provide
oversight management to the FOHP Health Plans in recording and analyzing the
financial condition thereof, including a financial review and analysis of health
care costs incurred thereby. HSI shall assist the FOHP Health Plans in the
preparation of appropriate federal, state and local tax returns and provide the
FOHP Health Plans with advice as to appropriate tax accruals.
3.12 Accounts Receivable Management. HSI shall provide consultation and
assistance to the FOHP Health Plans in the establishment, review and
modification of collection policies and programs designed to minimize the number
and amount of outstanding accounts receivable thereof.
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3.13 Premium Development. HSI shall provide consultation and assistance to
the FOHP Health Plans in implementing the premium structures thereof, which
premium structures will take into account the financial obligations of the FOHP
Health Plans, the importance of providing quality health care at a reasonable
cost and the competition and service areas of the FOHP Health Plans.
3.14 Insurance. HSI shall give advice to the FOHP Health Plans concerning
the various business insurance programs thereof, including, without limitation,
professional liability insurance, directors' and officers' liability insurance,
reinsurance and workers' compensation insurance.
3.15 Sales and Marketing. HSI shall provide consultation and assistance to
the FOHP Health Plans in connection with the sales and marketing efforts
thereof, including assistance with respect to the selection of advertising
agencies, the conduct of surveys regarding the satisfaction of Subscriber Groups
and Enrollees of the FOHP Health Plans and the sales programs and techniques of
the FOHP Health Plans.
3.16 Actuarial and Underwriting. HSI shall provide to the FOHP Health
Plans actuarial and data analysis services and assistance in the development of
underwriting standards.
3.17 Planning. HSI shall assist the Board of Directors of the FOHP Health
Plans in reviewing the short-, medium- and long-range objectives thereof and in
formulating recommendations with respect thereto.
3.18 Other Services. HSI shall provide such other services, not
specifically set forth herein, as are mutually agreed upon between the parties
hereto.
SECTION 4. MANAGEMENT FEES.
4.1 Management Fee Amount. In consideration of the services provided by
HSI hereunder, FOHP shall pay to HSI a monthly management fee (the "Management
Fee") equal to the sum of:
(a) (i) during the first year under this Agreement, an amount
equal to the product of (A) the total revenue of the FOHP
Health Plans, less investment income earned by the FOHP Health
Plans (such net amount being referred to herein as the "Net
Revenue"), multiplied by (B) two percent; and
(ii) during the second year and thereafter,
(A) for that portion of the Net Revenue of the FOHP
Health Plans which does not exceed $300 million,
an amount equal to the product of (I) the
difference between (x) the Management Fee Target
(as such term is hereinafter defined) and (y) the
FOHP Actual SG&A Amount (as such term is
hereinafter defined), but in no event a percentage
higher than two percent or lower than one and
one-half percent, multiplied by (II) the portion
of Net Revenue of the FOHP Health Plans
which does not exceed $300 million,
(B) for that portion of the Net Revenue of the FOHP
Health Plans which exceeds $300 million but is no
greater than $500 mil-
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lion, an amount equal to the product of (I) the
difference between (x) the Management Fee Target
and (y) the FOHP Actual SG&A Amount, but in no
event a percentage higher than two percent or
lower than one percent, multiplied by (II) the
portion of Net Revenue of the FOHP Health Plans
which exceeds $300 million but is no greater than
$500 million, and
(C) for that portion of the Net Revenue of the FOHP
Health Plans which exceeds $500 million, an amount
equal to the product of (I) the difference between
(x) the Management Fee Target and (y) the FOHP
Actual SG&A Amount, but in no event a percentage
higher than one and three-quarters percent or
lower than one percent, multiplied by (II) the
portion of Net Revenue of the FOHP Health Plans
which exceeds $500 million plus
(b) reimbursement for (i) direct expenses incurred by third
parties in connection with this Agreement and (ii)
salaries and benefits of the executives employed by HSI
in accordance with Section 1(b) hereof.
For purposes of this Section 4.1, the term "Management Fee Target" shall mean a
ratio of administrative expenses to full-risk medical premiums equal to 12.0%.
For purposes of this Section 4.1, the term "FOHP Actual SG&A Amount" shall mean
the ratio of FOHP's actual administrative expenses (exclusive of the Management
Fee set forth in this Section 4.1) to its actual full-risk medical premiums. The
following cost categories shall be excluded for purposes of calculating
administrative expenses: (i) administrative expenses for non-risk business
(which are estimated to be 90% of ASO/TPA/PPO access/other non-risk revenue
("Non-Risk Revenue")), (ii) medical affairs, quality management, utilization
management and other clinical functions, (iii) broker commissions, (iv) interest
expense, (v) premium tax and (vi) extraordinary administrative expense items
approved by the FOHP Board. The Management Fee Target and FOHP Actual SG&A
Amount shall be calculated based on full-risk medical premium revenue (exclusive
of interest and Non-Risk Revenue) and net of broker commissions.
4.2 Payment Procedure. At the end of each month during the term of this
Agreement, HSI shall provide FOHP with statements setting forth HSI's Management
Fee for such month, supported by HSI's estimate of the annualized Net Revenue,
FOHP Actual SG&A Amount and Management Fee Target for such month. Such
Management Fee for any month would become payable within 10 days after receipt
by FOHP from HSI of the statements for such month; provided, however, that
payments of the Management Fee under Section 4.1 hereof shall be deferred at any
point at which the FOHP Health Plan's minimum statutory surplus falls beneath
125 percent of the Company's minimum net worth requirement as determined by the
New Jersey Department of Banking and Insurance and the New Jersey
Department of Health and Senior Services (the "Net Worth Requirement"). The
amount of such deferral shall bear interest thereon at an annual rate equal to
the rate charged to HSI under its credit facility issued by a consortium of
commercial banks led by Bank of America NT & SA, which rate shall be subject to
adjustment at the beginning of each calendar quarter; the amount of such
deferral and such interest shall become due and payable, with respect to any
given calendar quarter, within 10 days after the end of such quarter but shall
be similarly so deferred in the event and to the extent that the Company fails
to satisfy the Net Worth Requirement. Upon completion of the audit of FOHP for
each calendar year, the Management Fee payments shall be reconciled with the
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audited financial statements, and an appropriate adjustment payment shall be
made to or from FOHP, as soon as reasonably practicable.
4.3 Centralized Services. In the event that HSI establishes a regional or
centralized multi-entity system relating to functions ordinarily and customarily
handled at the plan level and not described in Section 3 of this Agreement (such
as plan level accounting, membership services and, unless and until the
Management Information Systems and Claims Processing Services Agreement between
HSI and FOHP being entered into concurrently herewith shall have become
effective pursuant to the terms thereof, claims and data processing), HSI shall
have the right to transfer such functions performed by the FOHP Health Plans to
such regional system, in which case FOHP shall be obligated to pay to HSI the
share of such regional systems costs incurred by HSI with respect to such
function which is allocable to the FOHP Health Plans. In the event of such
transfer of functions by HSI, the regionalization or centralization of functions
by HSI shall result, in the aggregate, in cost savings to FOHP; further, in the
event of such transfers of claims and data processing functions, the
regionalization or centralization by HSI shall result in such functions not
exceeding, in the aggregate, costs for such functions under the current Managed
Care Management Information Services Agreement (as amended), between FOHP and
Health Systems Integration, Inc.
4.4 Unpaid Management Fees. In the event any of the Management Fees due
and payable to HSI under this Agreement are not paid (other than as the result
of a deferral due to failure to satisfy the Net Worth Requirement described in
Section 4.2 hereof), such Management Fees may, at HSI's option, be added to the
principal amount evidenced by the Debentures.
SECTION 5. COMPLIANCE WITH APPLICABLE LAWS.
Notwithstanding any other provision of this Agreement to the contrary:
5.1 Availability of Records. Upon request of any of the FOHP Health Plans,
HSI shall make its books and records pertaining to HSI's services furnished
under the terms of this Agreement available to the FOHP Health Plans. HSI shall
have access to any and all of FOHP Health Plan's books and records reasonably
necessary to render the services contemplated to be provided by HSI under this
Agreement.
5.2 Subcontracts. HSI shall ensure that each contract between HSI and any
subcontractor performing portions of HSI's obligations hereunder contain
provisions to the following effect:
(a) that such subcontractor shall make all applicable books and
records available for inspection, examination and copying by the
FOHP Health Plans; and
(b) that the subcontractor shall retain such books and records for a
reasonable period of time following the termination of such subcontract.
The subcontracting by HSI of any of its obligations to FOHP hereunder shall not
relieve HSI of any such obligations to FOHP.
5.3 Confidentiality. HSI shall maintain the confidentiality of any of the
FOHP Health Plans enrollment information and medical records of enrollees of any
of the FOHP Health Plans as required by the Applicable Laws and shall not
disclose such information to any person without FOHP's prior consent.
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5.4 Grievance Procedures and Other Policies and Procedures. HSI shall
assist the FOHP Health Plans in complying with the grievance procedures and
other policies and procedures applicable to FOHP under the Applicable Laws.
5.5 Enrollee Responsibility for Obligations of FOHP. HSI shall under no
circumstances look to enrollees of any of the FOHP Health Plans for payment of
obligations of FOHP to HSI hereunder, regardless of the insolvency of FOHP or
the inability of FOHP to pay.
5.6 Books and Records of FOHP. FOHP and HSI shall not, and FOHP shall
cause the other FOHP Health Plans to not, remove any of the books or records of
any of the FOHP Health Plans from the relevant location unless necessary
consents under the Applicable Laws are obtained and such Applicable Laws are
otherwise complied with.
5.7 State and Federal Regulator Access. HSI and FOHP shall, and FOHP shall
cause the other FOHP Health Plans to, provide governmental agencies access to
such records as such governmental agencies may reasonably request, pursuant to
the Applicable Laws.
SECTION 6. MISCELLANEOUS.
6.1 Term. The initial term of this Agreement will commence on the date
hereof or, if later, upon the receipt of all necessary regulatory approvals, and
shall continue until (a) the fifth anniversary of the date hereof, subject to
automatic one-year renewal terms on the same terms and conditions hereof unless
either party hereto provides written notice of non-renewal to the other party
hereto at least two years prior to the expiration of the then-current term of
this Agreement; (b) either party is in material breach of this Agreement; or (c)
either party (i) becomes insolvent, (ii) voluntarily seeks, consents to or
acquiesces in the benefit or benefits of any Debtor Relief Law (as hereinafter
defined) or (iii) becomes party to (or be made the subject of) any proceeding
provided by Debtor Relief Law, other than as a creditor or claimant (unless in
the event such proceeding is involuntary, the petition instituting the same is
dismissed within 45 days of filing the same). In the event of a material breach
by either party pursuant to this Section 6.1, the non-defaulting party shall
provide written notice upon the defaulting party (the "Default Notice")
specifying the nature of the breach. In the event such breach is not cured
within 15 days after service of the Default Notice, this Agreement shall
automatically terminate with the election of the non-defaulting party upon the
giving of a written notice of termination to the defaulting party, such notice
to occur not later than 45 days after service of the Default Notice; provided,
however, that if the nature of the breach is such that it cannot be cured within
15 days, but is capable of being cured, then this Agreement cannot be terminated
by the non-defaulting party so long as the defaulting party is taking or has
taken reasonable steps within the 45 day period to cure the breach and such
steps are being diligently pursued to the reasonable satisfaction of the
non-breaching party. As used herein, "Debtor Relief Law" means the Bankruptcy
Code of the United States of America and all other applicable insolvency and
other similar laws from time to time in effect affecting the rights of creditors
generally.
6.2 Assignment.
(a) HSI shall not have the right to assign this Agreement or any
right or obligation hereunder, without the prior written
consent of FOHP, other than to a wholly-owned or
majority-owned subsidiary of HSI. FOHP may not assign
this Agreement or any right or obligation hereunder without
HSI's prior written consent. A merger or business combination
of HSI with or into another party shall not be considered an
assignment for purposes of this Section 6.2.
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(b) All of the terms of this Agreement shall be binding upon,
inure to the benefit of and be enforceable by the heirs,
personal representatives, successors and permitted assigns of
the parties hereto.
6.3 Notices. Any notice or other communication required or contemplated to
be delivered under this Agreement by either party hereto to the other party
hereto shall be in writing and shall be deemed effectively given on the date of
receipt thereof if personally delivered, telecopied or telexed to the party to
which such notice is directed, or on the third day after mailing, if mailed to
such party, by registered or certified mail, postage prepaid, addressed to the
following addresses:
(a) If to HSI: Health Systems International, Inc.
225 North Main Street
Pueblo, Colorado 81003
Attn: General Counsel
Fax: (917) 585-8175
(b) If to FOHP: FOHP, Inc.
2 Bridge Avenue
Red Bank, New Jersey 07701
Attn: Senior Vice President,
General Counsel and Secretary
Fax: (908) 842-5404
with a copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022-9998
Attn: Charles I. Weissman, Esq.
Fax: (212) 758-9526
with a copy to:
Giordano, Halleran & Ciesla, P.C.
125 Half Mile Road
P.O. Box 190
Middletown, New Jersey 07748
Attn: Paul T. Colella, Esq.
Fax: (908) 224-6599
or to such other address as either party hereto may designate in writing.
6.4 Amendments. This Agreement may not be amended other than by written
consent executed by both parties hereto.
6.5 Headings. The headings contained herein are for convenience of
reference only and are not intended to define, limit or describe the scope or
intent of any provision of this Agreement.
6.6 No Waiver. Neither the failure by an aggrieved party hereunder to
insist upon strict performance of any covenant, agreement, term or condition of
this Agreement or to exercise any remedy upon a breach thereof, nor the
acceptance of full or partial performance during the continu-
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ance of any such breach by the other party hereto, shall constitute a waiver of
any such covenant, agreement, term or condition or any such breach.
6.7 Further Instructions or Action. Each party hereto agrees that it will
execute and deliver such further instruments and will take such other actions as
may be reasonably necessary in order to effectively discharge, perform and carry
out its obligations and agreements hereunder.
6.8 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New Jersey.
6.9 Proprietary Information. It is understood that, during the term of
this Agreement, HSI will have access to certain confidential and proprietary
information concerning FOHP and the FOHP Health Plans, and FOHP shall have
access to certain confidential and proprietary information concerning HSI,
including management information system information and certain technology.
During the term of this Agreement and thereafter, FOHP shall, and FOHP shall
cause the FOHP Health Plans to, take all reasonable precautions to maintain the
confidentiality of any non-public information provided by HSI and shall not
disclose such information to any third party without HSI's prior written consent
or use such information for any purpose other than the purposes contemplated
hereby. During the term of this Agreement and thereafter, HSI shall take all
reasonable precautions to maintain the confidentiality of any non-public
information provided by FOHP and the FOHP Health Plans and shall not disclose
such information to any third party without the prior written consent of FOHP
and the FOHP Health Plans or use such information for any purpose other than the
purposes contemplated hereby. If this Agreement is terminated, both parties
shall forthwith destroy all such non-public written information supplied by the
other party hereto, together with all notes, summaries or other written material
derived from such information, and shall confirm to the other party hereto that
it has not kept copies of such information, notes, summaries or written
materials.
6.10 Relationship. It is mutually understood and agreed that, in
performing its duties and obligations under this Agreement, no relationship of
employment (other than the employment by HSI of executives of FOHP Health Plans
in accordance with Section 1(b) hereof), partnership or joint venture is created
by this Agreement.
6.11 Dispute Resolution. The parties hereto hereby waive all rights to a
trial by jury in any dispute relating to this Agreement. In the event of any
dispute, controversy, claim or difference which arises out of or relates to this
Agreement, including, without limitation, disputes about fees, services or
performance of services hereunder, either party hereto may give written notice
of an intention to submit such matter to binding arbitration unless the matter
is resolved within two weeks or such additional period of time as shall be
agreed upon by the parties hereto. If the matter cannot be resolved within such
period through correspondence and mutual consultation of the parties hereto, it
shall be finally settled by arbitration in accordance with the Rules of Civil
Arbitration of the American Arbitration Association ("AAA"). Each party shall
select an arbitrator with expertise in managed care organizations and
such arbitrators shall jointly select a third arbitrator or, if such arbitrators
cannot agree, the AAA shall select the third arbitrator; provided, however, that
such third arbitrator shall not have a residence or office in the State of New
Jersey. If either party fails to select an arbitrator within 20 days after
service of the notice of demand for arbitration, then the AAA shall select such
arbitrator. Arbitration proceedings shall be held in the State of New Jersey
unless otherwise agreed to by the parties in writing. The decision of a majority
of the arbitrators shall be final and binding upon the parties hereto, shall not
be subject to appeal and shall deal with the question of costs of the
arbitration and all matters related thereto. Judgment upon the award or decision
rendered by the arbitrator may be entered in any court having jurisdiction
thereof, or application may be made to such court for a
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judicial recognition of the arbitration award or an order of enforcement
thereof, as the case may be. The agreement to arbitrate set forth in this
Section 6.11 shall be specifically enforceable by the parties hereto, and such
parties shall acknowledge and agree that they intend that all disputes,
controversies or claims of any kind covered by this Section 6.11, including
disputes over whether and how to arbitrate, shall be arbitrated. This Section
6.11 shall survive termination of this Agreement.
6.12 Indemnification.
(a) (i) HSI agrees to defend, indemnify and hold the FOHP Health
Plans and their respective officers, directors, shareholders, employees
and agents, and their respective heirs, executors, personal
representatives, successors and permitted assigns harmless from and
against any and all claims, actions, damages, obligations, losses,
liabilities, costs and expenses, including attorneys' fees, other
professional fees, costs of collection and other costs of defense
(collectively "Damages") resulting from HSI's gross negligence or willful
misconduct. (ii) FOHP agrees to defend, indemnify and hold HSI and its
officers, directors, shareholders, employees and agents, and their
respective heirs, executors, personal representatives, successors and
permitted assigns harmless from and against any and all Damages resulting
from HSI's execution of this Agreement or performance of services
hereunder, provided that no such indemnification shall be provided to the
extent that such Damages result from HSI's gross negligence or willful
misconduct.
(b) Any person or entity seeking indemnity under this Section 6.12
(an "Indemnified Party") shall provide to the party from which indemnity
may be sought (the "Indemnifying Party") written notice, specifying in
reasonable detail the basis of the claim, (i) within 60 days after the
Indemnified Party shall have become aware of facts constituting the basis
for such claim, or (ii) in the case of any action or proceeding by a third
party, within 15 days after the service of such action or proceeding upon
the Indemnified Party; provided, however, that any failure to provide such
timely notice shall only relieve the Indemnifying Party from liability
with respect to such claim to the extent, if any, the Indemnifying Party
is precluded from effectively defending an indemnified claim or otherwise
substantially prejudiced by such delay in providing notice.
(c) The provisions of this Section 6.12 shall survive the
termination of this Agreement.
6.13 Entire Agreement. This Agreement, along with the Management
Information Systems and Claims Processing Services Management Agreement, dated
as of the date hereof, between FOHP and HSI contain the entire agreement between
the parties hereto with respect to management services, and no prior oral or
written, and no contemporaneous oral, representations or agreements between the
parties with respect to the subject matter of this Agreement shall be of any
force and effect.
6.14 Counterparts. This Agreement may be executed in multiple
counterparts, each of which when so executed and delivered shall be an original,
but all of such counterparts shall together constitute one and the same
instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
FOHP, INC.
By:________________________________________
Name:
Title:
HEALTH SYSTEMS INTERNATIONAL, INC.
By:________________________________________
Name:
Title:
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APPENDIX E
MANAGEMENT INFORMATION SYSTEMS AND CLAIMS PROCESSING SERVICES
MANAGEMENT AGREEMENT
This Management Information Systems and Claims Processing Services
Management Agreement (this "Agreement") is entered into this _____ day of
______, 199____, by and between FOHP, Inc., a New Jersey corporation ("FOHP"),
and Health Systems International, Inc., a Delaware corporation ("HSI").
RECITALS
A. FOHP is a New Jersey corporation which, together with its subsidiaries
(FOHP and such subsidiaries being referred to herein, collectively, as the "FOHP
Health Plans"), provides managed health care services in the Northeastern United
States.
B. HSI has entered into a Securities Purchase Agreement dated as of
October 24, 1996 (the "Purchase Agreement"), with FOHP and First Option Health
Plan of New Jersey, Inc. pursuant to which HSI will acquire convertible
subordinated debentures of FOHP in the initial aggregate principal amount of $30
million (the "Debentures").
C. HSI owns, operates and manages various managed care entities throughout
the country. By entering into this Agreement, the FOHP Health Plans desire to
secure from HSI certain support services which are intended to enhance the
management information systems and claims processing capacity of the FOHP Health
Plans. The FOHP Health Plans will maintain ultimate organizational and
administrative capacity required in order to carry out its operations.
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and undertakings hereunder and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto hereby agree as follows:
AGREEMENT
SECTION 1. AUTHORITY OF THE PARTIES.
(a) The respective Boards of Directors of the FOHP Health Plans
shall retain the ultimate legal responsibility and authority over the
assets and operations of the FOHP Health Plans. HSI shall perform the
services to be performed by it hereunder in accordance, in all material
respects, with the various health maintenance organizations acts and other
applicable laws, rules and regulations (collectively, the "Applicable
Laws"). It is the intent of the parties hereto that this Agreement and the
services to be performed by HSI hereunder shall at no time serve to
interfere with the ability of the Boards of Directors of the FOHP Health
Plans to carry out their respective duties and responsibilities under the
Applicable Laws. HSI shall have the authority and responsibility described
in this Agreement and otherwise as mutually agreed upon by the parties
hereto from time to time. FOHP agrees that, during the term here of, the
FOHP Health Plans shall provide employee staffing sufficient to perform
the functions and conduct the business and operations of the FOHP Health
Plans in a manner consistent with the current functions and conduct of the
business and operations of the FOHP Health Plans
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(other than the corporate, administrative and consultative services to be
performed hereunder by HSI). HSI's services in connection with the
activities shall be strictly limited to those specifically provided for
herein.
(b) HSI shall have the right to designate and employ the business
executives in charge of FOHP and the other FOHP Health Plans and each
executive in charge of a principal business division, unit or function
(including, without limitation, finance, legal, operations, sales and
marketing, information systems, medical management, and provider
contracting and relations), all of which executives would report to HSI's
senior management. All such executives shall be appointed by the FOHP
Board of Directors to the offices requested by HSI; provided, however,
that such Board of Directors may reject any proposed appointee it
reasonably finds to be of insufficient ethical character for such office;
and provided, further, that such Board of Directors may, after due
consultation with HSI, based on a reasonable determination of intentional
and material unethical behavior or insubordination or wilful misconduct or
gross negligence, remove any such executives.
(c) HSI acknowledges that FOHP will continue to employ an internal
auditor who will report directly to the Board of Directors of FOHP and who
will perform functions consistent with those performed thereby prior to
the Closing Date (as such term is defined in the Purchase Agreement).
SECTION 2. CONDITIONS PRECEDENT.
This Agreement shall not become effective until the latest of (a) the
receipt of all necessary government approvals, (b) the receipt by FOHP from HSI
of notice of effectiveness of this Agreement and (c) termination of the HSII
Agreement (as such term is defined in Section 3.1 hereof).
SECTION 3. MANAGEMENT INFORMATION SYSTEMS AND CLAIMS PROCESSING SERVICES.
3.1 Claims Processing, Record Keeping and Data Processing Services. HSI
shall provide all claims processing, record keeping and data processing services
to the FOHP Health Plans that are currently provided by Health Systems
Integration, Inc. ("HSII") pursuant to the current Managed Care Management
Information Services Agreement (as amended), between FOHP and HSII, a copy of
which is attached hereto as Exhibit A (the "HSII Agreement"). Except as
specifically herein provided to the contrary, the FOHP Health Plans shall not
bear any cost or expense with respect to the facilities, services and personnel
to be provided by HSI hereunder. HSI shall perform its obligations under this
Agreement in accordance with the performance standards required of HSII under
the HSII Agreement; provided, however, that (i) FOHP shall use all reasonable
efforts to cause HSII to provide reasonable transition assistance, and (ii)
performance requirements shall commence 90 days following the effective date of
this Agreement to the extent HSII does not provide sufficient transition
assistance in the reasonable judgment of HSI.
3.2 Other Services. In addition to the services set forth in Section 3.1
hereof, HSI shall provide such other related services as are mutually agreed
upon between the parties.
SECTION 4. COMPENSATION.
4.1 Services Fees. In consideration of the services provided by HSI
hereunder, FOHP shall (a) pay HSI the fees and charges set forth on Schedule 1
hereto which shall be delivered by HSI
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to FOHP concurrently with the notice of effectiveness to be delivered under
Section 2 hereof, which fees and charges shall be no greater than the
compensation currently paid to HSII under the HSII Agreement, and (b) reimburse
HSI for such costs and expenses as to which HSII is entitled to reimbursement
under the HSII Agreement and documents related thereto. Such compensation for
any given month shall become payable within 10 days after the end of such month,
without deferral.
SECTION 5. COMPLIANCE WITH APPLICABLE LAWS.
Notwithstanding any other provision of this Agreement to the contrary:
5.1 Availability of Records. Upon request of any of the FOHP Health Plans,
HSI shall make its books and records pertaining to HSI's services furnished
under the terms of this Agreement available to the FOHP Health Plans. HSI shall
have access to any and all of FOHP Health Plan's books and records reasonably
necessary to render the services contemplated to be provided by HSI under this
Agreement.
5.2 Subcontracts. HSI shall ensure that each contract between HSI and any
subcontractor performing portions of HSI's obligations hereunder contain
provisions to the following effect:
(a) that such subcontractor shall make all applicable books and
records available for inspection, examination and copying by the FOHP
Health Plans; and
(b) that the subcontractor shall retain such books and records for a
reasonable period of time following the termination of such subcontract.
The subcontracting by HSI of any of its obligations to FOHP hereunder shall not
relieve HSI of any such obligations to FOHP.
5.3 Confidentiality. HSI shall maintain the confidentiality of any of the
FOHP Health Plans enrollment information and medical records of enrollees of any
of the FOHP Health Plans as required by the Applicable Laws and shall not
disclose such information to any person without FOHP's prior consent.
5.4 Grievance Procedures and Other Policies and Procedures. HSI shall
assist the FOHP Health Plans in complying with the grievance procedures and
other policies and procedures applicable to FOHP under the Applicable Laws.
5.5 Enrollee Responsibility for Obligations of FOHP. HSI shall under no
circumstances look to enrollees of any of the FOHP Health Plans for payment of
obligations of FOHP to HSI hereunder, regardless of the insolvency of FOHP or
the inability of FOHP to pay.
5.6 Books and Records of FOHP. FOHP and HSI shall not, and FOHP shall
cause the other FOHP Health Plans to not, remove any of the books or records of
any of the FOHP Health Plans from the relevant location unless necessary
consents under the Applicable Laws are obtained and such Applicable Laws are
otherwise complied with.
5.7 State and Federal Regulator Access. HSI and FOHP shall, and FOHP shall
cause the other FOHP Health Plans to, provide governmental agencies access to
such records as such governmental agencies may reasonably request, pursuant to
the Applicable Laws.
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SECTION 6. MISCELLANEOUS.
6.1 Term. The initial term of this Agreement will commence on the date
hereof or, if later, upon the receipt of all necessary regulatory approvals, and
shall continue until (a) the fifth anniversary of the date hereof, subject to
automatic one-year renewal terms on the same terms and conditions hereof unless
either party hereto provides written notice of non-renewal to the other party
hereto at least two years prior to the expiration of the then-current term of
this Agreement; (b) either party is in material breach of this Agreement; or (c)
either party (i) becomes insolvent, (ii) voluntarily seeks, consents to or
acquiesces in the benefit or benefits of any Debtor Relief Law (as hereinafter
defined) or (iii) becomes party to (or be made the subject of) any proceeding
provided by Debtor Relief Law, other than as a creditor or claimant (unless in
the event such proceeding is involuntary, the petition instituting the same is
dismissed within 45 days of filing the same). In the event of a material breach
by either party pursuant to this Section 6.1, the non-defaulting party shall
provide written notice upon the defaulting party (the "Default Notice")
specifying the nature of the breach. In the event such breach is not cured
within 15 days after service of the Default Notice, this Agreement shall
automatically terminate with the election of the non-defaulting party upon the
giving of a written notice of termination to the defaulting party, such notice
to occur not later than 45 days after service of the Default Notice; provided,
however, that if the nature of the breach is such that it cannot be cured within
15 days, but is capable of being cured, then this Agreement cannot be terminated
by the non-defaulting party so long as the defaulting party is taking or has
taken reasonable steps within the 45-day period to cure the breach and such
steps are being diligently pursued to the reasonable satisfaction of the
non-breaching party. As used herein, "Debtor Relief Law" means the Bankruptcy
Code of the United States of America and all other applicable insolvency and
other similar laws from time to time in effect affecting the rights of creditors
generally.
6.2 Assignment.
(a) HSI shall not have the right to assign this Agreement or any
right or obligation hereunder, without the prior written
consent of FOHP, other than to a wholly-owned or
majority-owned subsidiary of HSI. FOHP may not assign this
Agreement or any right or obligation hereunder without HSI's
prior written consent. A merger or business combination of HSI
with or into another party shall not be considered an
assignment for purposes of this Section 6.2.
(b) All of the terms of this Agreement shall be binding upon,
inure to the benefit of and be enforceable by the heirs,
personal representatives, successors and permitted assigns of
the parties hereto.
6.3 Notices. Any notice or other communication required or contemplated to
be delivered under this Agreement by either party hereto to the other party
hereto shall be in writing and shall be deemed effectively given on the date of
receipt thereof if personally delivered, telecopied or telexed to the party to
which such notice is directed, or on the third day after mailing, if mailed to
such party, by registered or certified mail, postage prepaid, addressed to the
following addresses:
(a) If to HSI: Health Systems International, Inc.
225 North Main Street
Pueblo, Colorado 81003
Attn: General Counsel
Fax: (917) 585-8175
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(b) If to FOHP: FOHP, Inc.
2 Bridge Avenue
Red Bank, New Jersey 07701
Attn: Senior Vice President,
General Counsel and Secretary
Fax: (908) 842-5404
with a copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, NY 10022-9998
Attn: Charles I. Weissman, Esq.
Fax: (212) 758-9526
and an additional copy to:
Giordano, Halleran & Ciesla, P.C.
125 Half Mile Road
P.O. Box 190
Middletown, New Jersey 07748
Attn: Paul T. Colella, Esq.
Fax: (908) 224-6599
or to such other address as either party hereto may designate in writing.
6.4 Amendments. This Agreement may not be amended other than by written
consent executed by both parties hereto.
6.5 Headings. The headings contained herein are for convenience of
reference only and are not intended to define, limit or describe the scope or
intent of any provision of this Agreement.
6.6 No Waiver. Neither the failure by an aggrieved party hereunder to
insist upon strict performance of any covenant, agreement, term or condition of
this Agreement or to exercise any remedy upon a breach thereof, nor the
acceptance of full or partial performance during the continuance of any such
breach by the other party hereto, shall constitute a waiver of any such
covenant, agreement, term or condition or any such breach.
6.7 Further Instructions or Action. Each party hereto agrees that it will
execute and deliver such further instruments and will take such other actions as
may be reasonably necessary in order to effectively discharge, perform and carry
out its obligations and agreements hereunder.
6.8 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New Jersey.
6.9 Proprietary Information. It is understood that, during the term of
this Agreement, HSI will have access to certain confidential and proprietary
information concerning FOHP and the FOHP Health Plans, and FOHP shall have
access to certain confidential and proprietary information concerning HSI,
including management information system information and certain technology.
During the term of this Agreement and thereafter, FOHP shall, and FOHP shall
cause the FOHP Health Plans
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to, take all reasonable precautions to maintain the confidentiality of any
non-public information provided by HSI and shall not disclose such information
to any third party without HSI's prior written consent or use such information
for any purpose other than the purposes contemplated hereby. During the term of
this Agreement and thereafter, HSI shall take all reasonable precautions to
maintain the confidentiality of any non-public information provided by FOHP and
the FOHP Health Plans and shall not disclose such information to any third party
without the prior written consent of FOHP and the FOHP Health Plans or use such
information for any purpose other than the purposes contemplated hereby. If this
Agreement is terminated, both parties shall forthwith destroy all such
non-public written information supplied by the other party hereto, together with
all notes, summaries or other written material derived from such information,
and shall confirm to the other party hereto that it has not kept copies of such
information, notes, summaries or written materials.
6.10 Relationship. It is mutually understood and agreed that in performing
duties and obligations under this Agreement no relationship of employment (other
than employment by HSI of executives of the FOHP Health Plans in accordance with
Section 1(b) hereof), partnership or joint venture is created by this Agreement.
6.11 Dispute Resolution. The parties hereto hereby waive all rights to a
trial by jury in any dispute relating to this Agreement. In the event of any
dispute, controversy, claim or difference which arises out of or relates to this
Agreement, including, without limitation, disputes about fees, services or
performance of services hereunder, either party hereto may give written notice
of an intention to submit such matter to binding arbitration unless the matter
is resolved within two weeks or such additional period of time as shall be
agreed upon by the parties hereto. If the matter cannot be resolved within such
period through correspondence and mutual consultation of the parties hereto, it
shall be finally settled by arbitration in accordance with the Rules of Civil
Arbitration of the American Arbitration Association ("AAA"). Each party shall
select an arbitrator with expertise in managed care organizations and such
arbitrators shall jointly select a third arbitrator or, if such arbitrators
cannot agree, the AAA shall select the third arbitrator; provided, however, that
such third arbitrator shall not have a residence or office in the State of New
Jersey. If either party fails to select an arbitrator within 20 days after
service of the notice of demand for arbitration, then the AAA shall select such
arbitrator. Arbitration proceedings shall be held in the State of New Jersey
unless otherwise agreed to by the parties in writing. The decision of a majority
of the arbitrators shall be final and binding upon the parties hereto, shall not
be subject to appeal and shall deal with the question of costs of the
arbitration and all matters related thereto. Judgment upon the award or decision
rendered by the arbitrator may be entered in any court having jurisdiction
thereof, or application may be made to such court for a judicial recognition of
the arbitration award or an order of enforcement thereof, as the case may be.
The agreement to arbitrate set forth in this Section 6.11 shall be specifically
enforceable by the parties hereto, and such parties shall acknowledge and agree
that they intend that all disputes, controversies or claims of any kind covered
by this Section 6.11, including disputes over whether and how to arbitrate,
shall be arbitrated. This Section 6.11 shall survive termination of this
Agreement.
6.12 Indemnification.
(a)(i) HSI agrees to defend, indemnify and hold the FOHP Health
Plans and their respective officers, directors, shareholders, employees
and agents, and their respective heirs, executors, personal
representatives, successors and permitted assigns harmless from and
against any and all claims, actions, damages, obligations, losses,
liabilities, costs and expenses, including attorneys' fees, other
professional fees, costs of collection and other costs of defense
(collectively "Damages") resulting from HSI's gross negligence or willful
misconduct.
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(ii) FOHP agrees to defend, indemnify and hold HSI and its officers,
directors, shareholders, employees and agents, and their respective heirs,
executors, personal representatives, successors and permitted assigns
harmless from and against any and all Damages resulting from HSI's
execution of this Agreement or performance of services hereunder, provided
that no such indemnification shall be provided to the extent that such
Damages result from HSI's gross negligence or willful misconduct.
(b) Any person or entity seeking indemnity under this Section 6.12
(an "Indemnified Party") shall provide to the party from which indemnity
may be sought (the "Indemnifying Party") written notice, specifying in
reasonable detail the basis of the claim, (i) within 60 days after the
Indemnified Party shall have become aware of facts constituting the basis
for such claim, or (ii) in the case of any action or proceeding by a third
party, within 15 days after the service of such action or proceeding upon
the Indemnified Party; provided, however, that any failure to provide such
timely notice shall only relieve the Indemnifying Party from liability
with respect to such claim to the extent, if any, the Indemnifying Party
is precluded from effectively defending an indemnified claim or otherwise
substantially prejudiced by such delay in providing notice.
(c) The provisions of this Section 6.12 shall survive the
termination of this Agreement.
6.13 Entire Agreement. This Agreement, along with the General
Administrative Services Management Agreement, dated as of the date hereof,
between FOHP and HSI contain the entire agreement between the parties hereto
with respect to management services, and no prior oral or written, and no
contemporaneous oral, representations or agreements between the parties with
respect to the subject matter of this Agreement shall be of any force and
effect.
6.14 Counterparts. This Agreement may be executed in multiple
counterparts, each of which when so executed and delivered shall be an original,
but all of such counterparts shall together constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
FOHP, INC.
By:________________________________________
Name:
Title:
HEALTH SYSTEMS INTERNATIONAL, INC.
By:________________________________________
Name:
Title:
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APPENDIX F
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
FOHP, INC.
FOHP, Inc. (the "Corporation"), a corporation organized under the laws of
the State of New Jersey on May 24, 1994, has, since its formation, amended its
Certificate of Incorporation by an Amended and Restated Certificate of
Incorporation filed on June 8, 1995 and an Amended and Restated Certificate of
Incorporation filed on December 7, 1995.
Pursuant to N.J. Stat. Ann. 14A:9-5, the Corporation hereby (i) restates
its Certificate of Incorporation, to embody in one document its original
certificate and the subsequent amendments thereto, and (ii) further amends its
Certificate of Incorporation as set forth herein.
The Corporation hereby certifies the following which (i) sets forth in
full its Certificate of Incorporation, as of this date, and (ii) supercedes and
replaces its original Certificate of Incorporation and all amendments filed
prior to the date hereof:
ARTICLE I
CORPORATE NAME
The name of the Corporation is FOHP, Inc.
ARTICLE II
PURPOSE OF CORPORATION
The purpose of the Corporation is to engage in any activity within the
purposes for which corporations may be organized under the New Jersey Business
Corporation Act.
ARTICLE III
CAPITAL STOCK
A. Authorized Capital Stock. The total number of shares of capital stock
which the Corporation shall have authority to issue is one hundred ten million
(110,000,000) shares. Of these shares, one hundred million (100,000,000) shares
are classified as Common Stock, par value $.01 per share ("Common Stock"), and
ten million (10,000,000) shares are classified as Preferred Stock, par value
$1.00 per share ("Preferred Stock").
B. Preferred Stock. The Board of Directors of the Corporation is hereby
authorized to issue, from time to time, shares of Preferred Stock in series and
to fix the number of shares in each series; the designations, powers,
preferences and relative, participating, optional or other special rights
thereof and the qualifications, limitations, or restrictions thereon; including,
subject to any limitation hereinafter set forth but otherwise without
limitation, any of the following: (1) provisions relating to voting rights of
each share in such series, including multiple or fractional votes per share; (2)
provisions relating to the call or redemption thereof, including, without
limitation, the times and prices for such calls or redemptions and provisions
relating to sinking funds therefor and the retirement thereof, if any; (3)
provisions relating to the right to receive dividends, including, without
limitation, the rate of such dividends, whether such dividends shall be
cumulative or non-cumulative and, if
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cumulative, the conditions on which such dividends shall be accrued and paid,
and any preferential rights thereto or rights in relation to dividends payable
on any other classes or series of stock of the Corporation; (4) the rights
thereof upon the dissolution of, or upon any distribution of the assets of, the
Corporation; and (5) except as otherwise explicitly prohibited by this
Certificate of Incorporation, provisions relating to the conversion thereof
into, or the exchange thereof for, shares of any class or any other series of
the same class of stock of the Corporation or exchange for any other security of
the Corporation or any other company.
C. Preemptive Rights. A holder of any share of Common Stock of the
Corporation shall have preemptive rights to subscribe for or purchase any
capital stock proposed to be issued by the Corporation, other than the shares of
the Corporation's capital stock issuable upon the exercise of any option or the
conversion of any convertible subordinated debenture granted or issued by the
Corporation to Health Systems International, Inc. ("HSI"), a Delaware
corporation. Any shares of the Corporation's capital stock issued upon the
exercise of any option or conversion of any convertible subordinated debenture
by HSI shall have the preemptive rights afforded by this Section C. Prior to any
proposed issuance of capital stock by the Corporation, the Corporation shall
provide to each holder of Common Stock written notice ("Notice of Issuance of
Shares") of the opportunity to subscribe for or purchase the shares of capital
stock being issued on a pro rata basis in relation to their then current
ownership, on a fully-diluted basis, of Common Stock of the Corporation
(assuming, among other things, the exercise of all the then outstanding options
and warrants exercisable for Common Stock and the conversion of all other
securities convertible into Common Stock). Within the time period provided in
the Notice of Issuance of Shares and/or offering materials furnished therewith,
a shareholder may exercise his, her or its preemptive rights to purchase all or
part of the shares of capital stock being offered by the Corporation to him, her
or it by delivering to the Corporation a notice of such shareholder's intent to
exercise his, her or its preemptive rights to purchase the shares of capital
stock being offered ("Notice of Exercise"). The Corporation shall issue the
appropriate number of shares of capital stock to each shareholder who provides
timely Notice of Exercise and pays the consideration necessary to purchase the
shares. HSI shall have the right to purchase any shares of capital stock
proposed to be issued by the Corporation which have not been subscribed for or
purchased by the other holders of Common Stock.
D. Restrictions on Issuance.
1. Unless the affirmative vote of not less than seventy-five (75%)
percent of the issued and outstanding shares of Common Stock is
received, no share of capital stock, regardless of class, shall be
permitted to be issued by the Corporation or subscribed for, except
to:
(a) a hospital or acute care institution which has entered
into a provider agreement with an Operating Subsidiary (as
defined below) and which is duly licensed by the appropriate
authorities in the state where it is located (referred to
herein as an "Acute Care Institution"), or to an affiliate of
an Acute Care Institution which (i) solely controls, (ii) is
solely controlled by, or (iii) is under common control with
the Acute Care Institution (referred to herein as an "Eligible
Affiliate") (Acute Care Institutions and Eligible Affiliates
which own shares of Common Stock are sometimes collectively
referred to herein as "Institutional Shareholders" and
individually referred to herein as an "Institutional
Shareholder");
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(b) (i) a member of the medical staff of an Acute Care
Institution, or (ii) a physician designated by an Acute Care
Institution, who is licensed to practice medicine by the
appropriate state authorities and who has entered into a
provider agreement with an Operating Subsidiary (referred to
herein as a "Practitioner") (Practitioners who own shares of
Common Stock are sometimes collectively referred to herein as
"Practitioner Shareholders" and individually referred to
herein as a "Practitioner Shareholder");
(c) a dentist who is licensed to practice dentistry by the
appropriate state authorities and who has entered into a
provider agreement with an Operating Subsidiary (referred to
herein as a "Dentist") (Dentists who own shares of Common
Stock are sometimes collectively referred to herein as
"Dentist Shareholders" and individually referred to herein as
a "Dentist Shareholder");
(d) a health care provider or professional, licensed,
certificated or authorized to operate or practice in a state
where an Operating Subsidiary has been formed, other than a
Practitioner, Acute Care Institution, Dentist or
Organizational Provider (as defined below), provided, such
provider or professional has entered into a provider agreement
with an Operating Subsidiary (referred to herein as an "Other
Provider") (Other Providers who own shares of Common Stock are
sometimes collectively referred to herein as "Other
Shareholders" and individually referred to herein as an "Other
Shareholder");
(e) an Individual Practice Association ("IPA") or Physician
Hospital Organization ("PHO") which has entered into a
provider agreement with an Operating Subsidiary (referred to
herein as an "Organizational Provider"), provided that no
shares of Common Stock shall be offered or sold to an IPA or
PHO unless (i) any such offer or sale is in full compliance
with applicable federal and state securities laws, (ii) the
IPA or PHO purchasing shares of Common Stock is in full
compliance with any federal or state securities laws
applicable to such organization, and (iii) the purchasing IPA
or PHO agrees to indemnify the Corporation and any of its
subsidiaries or affiliates, and the officers, directors,
employees and agents of the Corporation or any of its
subsidiaries or affiliates, from any and all damages suffered
and expenses incurred by any such person or entity as a result
of the purchasing IPA or PHO failing to comply or remain in
compliance with any applicable federal or state securities
laws (Organizational Providers which own shares of Common
Stock are sometimes collectively referred to herein as
"Organizational Shareholders" and individually referred to
herein as an "Organizational Shareholder"); or
(f) HSI.
2. The provisions set forth in Article III, Paragraph D.1. may only
be amended or modified upon the affirmative vote of not less than
seventy-five (75%) percent of the issued and outstanding shares of
Common Stock of the Corporation in addition to any other vote
required herein or by law.
3. The term "Operating Subsidiary" shall mean any of First Option
Health Plan of New Jersey, Inc. ("FOHP-NJ"), a New Jersey
corporation which operates as a health maintenance organization in
New Jersey, First Option Health Plan of New York,
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Inc. ("FOHP-NY"), a corporation formed in New York to operate as a
health maintenance organization in that state, First Option Health
Plan of Pennsylvania, Inc. ("FOHP-PA"), a corporation formed in
Pennsylvania to operate as a health maintenance organization in that
state, First Option Health Plan of Delaware, Inc. ("FOHP-DE"), a
corporation formed in Delaware to operate as a health maintenance
organization in that state, First Option Health Plan of Maryland,
Inc. ("FOHP-MD"), a corporation formed in Maryland to operate as a
health maintenance organization in that state, and any other
subsidiary of the Corporation formed to operate as a health
maintenance organization whether or not currently existing. FOHP-NJ,
FOHP-NY, FOHP-PA, FOHP-DE, FOHP-MD and any other subsidiary of the
Corporation formed to operate as a health maintenance organization
are sometimes collectively referred to herein as "Operating
Subsidiaries." In addition, Acute Care Institutions, Practitioners,
Dentists, Other Providers and Organizational Providers are sometimes
collectively referred to herein as "Providers" and individually
referred to herein as a "Provider." Further, Institutional
Shareholders, Practitioner Shareholders, Dentist Shareholders, Other
Shareholders and Organizational Shareholders are sometimes
collectively referred to herein as "Provider Shareholders" and
individually referred to herein as a "Provider Shareholder."
E. Restrictions on Transfer.
1. Shares of Common Stock of the Corporation shall not be sold,
pledged, hypothecated or otherwise transferred by a Provider
Shareholder or HSI, except that shares of Common Stock may be sold
or transferred:
(a) by a Provider Shareholder to:
(i) any Provider regardless of whether such person or
entity owns shares of Common Stock at the time of the
transfer or sale,
(ii) HSI, provided that HSI is not prohibited from
purchasing any such shares pursuant to a contractual
agreement with the Corporation, or
(iii) the Corporation;
(b) by HSI to:
(i) any Provider regardless of whether such person or
entity owns shares of Common Stock at the time of
transfer or sale,
(ii) any subsidiary of HSI, successor of HSI or
subsidiary of a successor of HSI,
(iii) the Corporation, or
(iv) any other person approved by a majority of the
directors on the Board who were not designated by HSI;
and
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(c) by any holder thereof in connection with any Business
Combination (as defined in Article IV hereof).
2. Subsequent to the earlier of the conclusion of any Exchange Offer
(as defined in Paragraph 5. below) or the conversion into Common
Stock of any portion of the convertible subordinated debentures
issued to HSI by the Corporation, HSI shall hold a right of first
refusal to purchase any and all shares of Common Stock, or any other
class of capital stock proposed to be sold by a selling shareholder
to any party which has offered to purchase such shares, for the
price to be paid by a bona fide proposed purchaser of the shares
offered. Any selling shareholder shall cause any offer from a bona
fide proposed purchaser to be reduced to writing and shall deliver
notice to HSI and the Corporation of such written offer ("Notice of
Offer"). The Notice of Offer shall contain a copy of the written
offer from the bona fide proposed purchaser and an offer to sell the
shares being offered by the selling shareholder to HSI under the
same terms and same price per share specified in the written offer
from the bona fide proposed purchaser to the selling shareholder.
HSI shall have thirty (30) calendar days to respond to the Notice of
Offer ("Response to Notice"), and shall indicate in such Response to
Notice whether or not HSI intends to purchase all, but not less than
all, the shares offered under the Notice of Offer. If HSI does not
provide a Response to Notice to purchase all the shares being
offered by the selling shareholder within thirty (30) calendar days,
the Corporation shall have fifteen (15) calendar days from the date
of expiration of HSI's right to purchase all of the shares being
offered by the selling shareholder under the same terms and same
price per share specified in the written offer by the bona fide
proposed purchaser to the selling shareholder. If the Corporation
does not purchase all the shares being offered by the selling
shareholder within fifteen (15) calendar days after the expiration
of HSI's preemptive right, the selling shareholder may sell such
number of shares as was offered in the Notice of Offer to such bona
fide proposed purchaser.
3. For purposes of this Paragraph D., "Notice of Offer" and
"Response to Notice" means a written notice sent by overnight
courier service or certified mail, return receipt requested.
4. Notwithstanding anything to the contrary in this Article III,
Paragraph D., captioned "Restrictions on Transfer:"
(a) In the event that a Practitioner Shareholder relocates his
or her practice outside the geographic service area covered by
the Operating Subsidiaries or ceases to practice medicine for
whatever reason including retirement or death, the
Practitioner Shareholder or his or her personal representative
or beneficiary shall be permitted to offer for sale the shares
of Common Stock held by the Practitioner Shareholder to a
Provider, subject to HSI's right of first refusal provided
herein, or directly to HSI after the earlier of the conclusion
of any Exchange Offer or the conversion into Common Stock of
any portion of the convertible subordinated debentures issued
to HSI by the Corporation. If any shares are not sold within
forty-five (45) days from the date the Practitioner
Shareholder relocates or ceases to practice, as reasonably
determined by the Corporation, the Corporation may, but is not
required to, purchase such shares at a purchase price per
share equal to the greater of Book Value or Alternate Value
(as such terms are defined in Section 5 below). Such
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purchase price shall be payable in cash within ninety (90)
days following the date the Practitioner Shareholder relocates
or ceases to practice, or, in the discretion of the
Corporation, over a period of two (2) years in equal annual
installments commencing one (1) year from the date of purchase
with interest at a rate of seven (7%) percent per annum,
accrued and payable annually.
(b) In the event that a Dentist Shareholder relocates his or
her practice outside the geographic service area covered by
the Operating Subsidiaries or ceases to practice dentistry for
whatever reason including retirement or death, the Dentist
Shareholder or his or her personal representative or
beneficiary shall be permitted to offer the shares of Common
Stock held by the Dentist Shareholder for sale to a Provider,
subject to HSI's right of first refusal provided herein, or
directly to HSI after the earlier of the conclusion of any
Exchange Offer or the conversion into Common Stock of any
portion of the convertible subordinated debentures issued to
HSI by the Corporation. If any shares are not sold within
forty-five (45) days from the date the Dentist Shareholder
relocates or ceases to practice, as reasonably determined by
the Corporation, the Corporation may, but is not required to,
purchase such shares at a purchase price per share equal to
the greater of Book Value or Alternate Value. Such purchase
price shall be payable in cash within ninety (90) days
following the date the Dentist Shareholder relocates or ceases
to practice, or, in the discretion of the Corporation, over a
period of two (2) years in equal annual installments
commencing one (1) year from the date of purchase with
interest at a rate of seven (7%) percent per annum, accrued
and payable annually.
(c) The Corporation may, but is not required to, purchase the
shares of Common Stock held, either directly or through an
Eligible Affiliate, by an Acute Care Institution, if (i) the
Acute Care Institution's provider agreement with an Operating
Subsidiary terminates for any reason, (ii) the Acute Care
Institution does not meet the membership enrollment
requirements provided in any agreement between the Operating
Subsidiary and the Acute Care Institution, (iii) the Acute
Care Institution's license pursuant to applicable state health
care laws is suspended or revoked or curtailed, (iv) the Acute
Care Institution's accreditation as a hospital is suspended or
revoked or curtailed, or (v) the Acute Care Institution is
dissolved (whether voluntarily or involuntarily), liquidated
or becomes insolvent. The Corporation may purchase such shares
at a purchase price per share equal to the lesser of Book
Value or Alternate Value for purposes of Subparagraph 5.(c)(i)
hereof, provided, however, that if the Alternate Value is zero
the purchase price per share to be paid by the Corporation
shall be fifty (50%) percent of Book Value, and the lesser of
Book Value or the purchase price paid for such shares for the
purposes of Subparagraphs 5.(c)(ii), (iii), (iv) and (v)
hereof. Such purchase price shall be payable in cash within
ninety (90) days following the date of the event allowing for
such repurchase, or in the discretion of the Corporation, over
a period of three (3) years in equal annual installments
commencing one (1) year from the date of purchase with
interest at a rate of seven (7%) percent per annum, accrued
and payable annually.
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(d) The shares of Common Stock held by any Practitioner
Shareholder, Dentist Shareholder or Other Shareholder whose
provider agreement with the Corporation terminates for any
reason may be purchased by the Corporation. The Corporation
may purchase such shares at a purchase price per share equal
to the lesser of Book Value or Alternate Value; provided,
however, that if the Alternate Value is zero the purchase
price per share to be paid by the Corporation shall be fifty
(50%) percent of Book Value. Such purchase price shall be
payable in cash within ninety (90) days following the date the
provider agreement terminated, or in the discretion of the
Corporation, over a period of three (3) years in equal annual
installments commencing one (1) year from the date of purchase
with interest at a rate of seven (7%) percent per annum,
accrued and payable annually.
(e) The Corporation may, but is not required to, purchase the
shares of Common Stock held by an Organizational Shareholder
if (i) the Organizational Shareholder's provider agreement
with an Operating Subsidiary terminates for any reason, (ii)
the Organizational Shareholder breaches or fails to comply
with any federal or state securities law applicable to the
Organizational Shareholder, or (iii) the Organizational
Shareholder is dissolved (whether voluntarily or
involuntarily), liquidated or becomes insolvent. The
Corporation may purchase such shares at a purchase price per
share equal to the lesser of Book Value or Alternate Value for
purposes of Subparagraph 5.(e)(i) hereof, provided, however,
that if the Alternate Value is zero the purchase price per
share to be paid by the Corporation shall be fifty (50%)
percent of Book Value, and the lesser of Book Value or the
purchase price paid for such shares for the purposes of
Subparagraphs 5.(e)(ii) and (iii) hereof. Such purchase price
shall be payable in cash within ninety (90) days following the
date of the event allowing for such repurchase, or in the
discretion of the Corporation, over a period of three (3)
years in equal annual installments commencing one (1) year
from the date of purchase with interest at the rate of seven
(7%) percent per annum, accrued and payable annually.
(f) In the event of (i) a merger involving an Acute Care
Institution or Organizational Shareholder (except if the
merger is between Acute Care Institutions or Organizational
Shareholders which are both providers to the Corporation) or
(ii) the sale of a majority of the stock or assets of, or a
change of majority control of, or change in the majority of
membership in an Acute Care Institution or Organizational
Shareholder, the Corporation may, but it is not required to,
purchase the shares of Common Stock held by such
Organizational Shareholder or Acute Care Institution or its
Eligible Affiliate for an amount equal to the lesser of Book
Value or Alternate Value. Any election by the Corporation to
repurchase shares from an Organizational Shareholder or Acute
Care Institution or its Eligible Affiliate in accordance with
this provision must be made within ninety (90) days following
the receipt by the Corporation of written notice of the event
allowing for such repurchase. In addition, the purchase price
shall be payable in cash within ninety (90) days following the
date of the event allowing for such repurchase, or in the
discretion of the Corporation, over a period of three (3)
years in equal annual installments commencing one (1) year
from the date of purchase with interest at the rate of seven
(7%) percent per annum, accrued and payable annually. In the
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event the Corporation elects not to purchase the shares of
Common Stock held by an Acute Care Institution, either
directly or through an Eligible Affiliate, or an
Organizational Shareholder, the affected Organizational
Shareholder or Acute Care Institution, or successor thereto,
shall be permitted to retain the shares of Common Stock held
by it and remain a provider to the Operating Subsidiary with
which it is or its predecessor was affiliated; provided,
however, if any successor to an Organizational Shareholder or
Acute Care Institution chooses to remain a provider to an
Operating Subsidiary, it must agree to be subject to the terms
and conditions of the provider agreement entered into by its
predecessor and the Operating Subsidiary with which its
predecessor was affiliated.
(g) The transfer by an Acute Care Institution of shares of
Common Stock to an Eligible Affiliate or the transfer by an
Eligible Affiliate of shares of Common Stock to the Acute Care
Institution with which it is affiliated, or to another
Eligible Affiliate of such Acute Care Institution, shall not
trigger any of the repurchase provisions set forth above,
shall not be subject to HSI's right of first refusal, nor
shall be prohibited by this Certificate of Incorporation.
5. As used in this Certificate of Incorporation, (a) "Book Value"
shall mean the shareholder equity reflected on the Corporation's
balance sheet prepared in accordance with generally accepted
accounting principles for the most recently completed fiscal year as
audited by the Corporation's independent accountants divided by the
number of outstanding shares of Common Stock determined on a fully
diluted basis; (b) "Alternate Value" shall mean six (6) times the
average net income per share before taxes determined in accordance
with generally accepted accounting principles on a fully diluted
basis ("Average Net Income") for the prior three (3) completed
fiscal years of the Corporation (or such lesser number of completed
fiscal years if the Corporation has not yet completed three fiscal
years) with 1995 considered a fiscal year for the purposes of this
calculation (Average Net Income shall be determined excluding the
effects of any extraordinary items or change in accounting
principles as those terms are defined in generally accepted
accounting principles); and (c) "Exchange Offer" shall mean an offer
initiated by HSI whereby all the Provider Shareholders of the
Corporation may, but will not be obligated to, tender their shares
of Common Stock for cash or HSI stock.
6. The sale of any shares of Common Stock by a shareholder to the
Corporation pursuant to Paragraph 4. above shall not be subject to
HSI's right of first refusal.
ARTICLE IV
BUSINESS COMBINATIONS
In addition to any affirmative vote required by law, the approval of a
Business Combination requires (A) the affirmative vote, at a duly called meeting
where a quorum is present, of not less than sixty-six and two-thirds (66-2/3%)
percent of the votes cast by the holders of shares of the Corporation's capital
stock entitled to be voted in respect of the proposed Business Combination, with
all such holders voting together without regard to class, or (B) the consent of
the holders of shares of the Corporation's capital stock representing at least
sixty-six and two-thirds (66-2/3%) percent of all the votes which could be cast
on the proposed Business Combination by the holders of the
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Corporation's capital stock. The number of votes which each share of the
Corporation's capital stock shall be entitled to cast shall be determined by
this Certificate of Incorporation, or, if not determined herein, as determined
in the Corporation's By-laws.
The term "Business Combination" shall mean (1) any merger or consolidation
of the Corporation with or into any other corporation except any merger or
consolidation not requiring prior shareholder approval under the New Jersey
Business Corporation Act; (2) any merger of any other corporation with or into
the Corporation except any merger not requiring prior shareholder approval under
the New Jersey Business Corporation Act; (3) the sale, lease, exchange, or other
disposition of all, or substantially all, of the assets of the Corporation if
not in the usual and regular course of business as conducted by the Corporation;
(4) the acquisition, in exchange for shares, obligations or other securities of
the Corporation, of some or all of the outstanding shares of another
corporation, or of some or all of the assets of a corporation, a business trust,
a business proprietorship or a business partnership if such acquisition requires
prior shareholder approval under the New Jersey Business Corporation Act; (5)
the adoption of any plan or proposal for liquidation or dissolution of the
Corporation; and (6) the adoption of any agreement, contract or other
arrangement providing for any one or more of the actions specified in the
foregoing clauses (1) through (5).
A majority of the members of the Board of Directors shall have the power
and duty to determine for purposes of this Article IV, on the basis of
information known to them after reasonable inquiry, all questions arising under
this Article IV, including, without limitation, whether the assets that are the
subject of any Business Combination constitute substantially all of the assets
of the Corporation or whether any sale, lease, exchange or other disposition of
the assets of the Corporation is in the usual and regular course of business as
conducted by the Corporation. Any such determination made in good faith shall be
binding and conclusive on all shareholders.
A provision inconsistent with this Article IV of the Certificate of
Incorporation of the Corporation may be adopted only upon (A) the affirmative
vote, at a duly called meeting where a quorum is present, of not less than
sixty-six and two thirds (66-2/3%) percent of the votes cast by the holders of
shares of the Corporation's capital stock entitled to be voted in respect of a
proposed Business Combination, with all such holders voting together without
regard to class, or (B) the consent of the holders of the shares of the
Corporation's capital stock representing sixty-six and two-thirds (66-2/3%)
percent of all the votes which could be cast on the proposed Business
Combination by the holders of the Corporation's capital stock. The number of
votes which each share of the Corporation's capital stock shall be entitled to
cast shall be determined by this Certificate of Incorporation, or, if not
determined herein, as determined in the Corporation's By-laws.
ARTICLE V
COVENANTS OF NJ INSTITUTIONAL SHAREHOLDERS
A. Covenants of NJ Institutional Shareholders.
1. For so long as any NJ Institutional Shareholder (as defined in
Paragraph C. below) holds shares of the Corporation's Common Stock,
it agrees and covenants to effect the following:
(a) if the only existing health benefits plan of the NJ
Institutional Shareholder is self-insured or, if the NJ
Institutional Shareholder is not a NJ Acute Care Institution
(as defined in Paragraph C. below), the only existing
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health benefits plan of its affiliated NJ Acute Care
Institution is self-insured, the NJ Institutional Shareholder
or its affiliated NJ Acute Care Institution, as the case may
be, shall offer a FOHP-NJ plan to its employees as its
exclusive plan in accordance with a timetable determined by
FOHP-NJ to be feasible, but in no event later than January 1,
1996;
(b) if the NJ Institutional Shareholder or, if the NJ
Institutional Shareholder is not a NJ Acute Care Institution,
its affiliated NJ Acute Care Institution, offers multiple
non-union health plans, in addition to one or more
self-insured plans, to its employees, the NJ Institutional
Shareholder or its affiliated NJ Acute Care Institution, as
the case may be, is obliged to offer a FOHP-NJ plan to its
employees and fifty (50%) percent of such employees are
required to be covered by a FOHP-NJ plan by January 1, 1996,
and seventy-five (75%) percent of such employees are required
to be covered by a FOHP-NJ plan by January 1, 1997; or
(c) if the NJ Institutional Shareholder or, if the NJ
Institutional Shareholder is not a NJ Acute Care Institution,
its affiliated NJ Acute Care Institution, offers a plan to its
employees pursuant to a collective bargaining agreement as
well as other existing plans, the NJ Institutional Shareholder
or its affiliated NJ Acute Care Institution, as the case may
be, must (i) use its best efforts to offer a FOHP-NJ plan to
its non-union employees on a non-exclusive basis, (ii) use its
best efforts to qualify a FOHP-NJ plan as the union designated
plan, and (iii) pay reasonable deductibles or other costs to
qualify a FOHP-NJ plan as the union designated plan.
2. The provisions of Paragraph 1. above shall terminate with respect
to an individual NJ Institutional Shareholder on the second
anniversary of the date a FOHP-NJ plan is first offered to the
employees of the NJ Institutional Shareholder or, if the NJ
Institutional Shareholder is not a NJ Acute Care Institution, to the
employees of its affiliated NJ Acute Care Institution; provided,
however, that prior to an NJ Institutional Shareholder or its
affiliated NJ Acute Care Institution offering to its employees any
health benefits plan similar to a health benefits plan offered by
FOHP-NJ,
(a) such NJ Institutional Shareholder shall provide prior
written notice to FOHP-NJ of the material terms of any "Bona
Fide Offer" offered by such other health benefits plan, and,
in the event FOHP-NJ offers to provide to the employees of
such NJ Institutional Shareholder or, if the NJ Institutional
Shareholder is not a NJ Acute Care Institution, to the
employees of its affiliated NJ Acute Care Institution, a
FOHP-NJ plan containing terms at least as favorable in all
material respects to the employees of the NJ Institutional
Shareholder or its affiliated NJ Acute Care Institution, such
NJ Institutional Shareholder or its affiliated NJ Acute Care
Institution shall offer such FOHP-NJ plan to its employees on
the same basis as it would be obligated under Paragraph 1.
above, and, provided further that,
(b) a "Bona Fide Offer" is an offer of a health benefits plan
which is prepared with the objective of covering the offeror's
(i) health care costs and administrative expenses in the case
of risk products, and (ii) costs of performing administrative
services and any risk assumed (e.g. reinsurance) in the case
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of self-funded products. An offer by any health benefits plan
below the offeror's costs for the purpose of achieving market
share increases shall not constitute a Bona Fide Offer.
3. To the extent that an employee of a NJ Institutional Shareholder
or, if the NJ Institutional Shareholder is not a NJ Acute Care
Institution, an employee of its affiliated NJ Acute Care
Institution, resides outside New Jersey, such employee shall be
counted in calculating the percentage of employees covered by a
FOHP-NJ plan only to the extent that such employee is eligible for
coverage by a FOHP-NJ plan.
B. Corporation's Right to Repurchase. Notwithstanding anything contained
herein to the contrary, in the event that either (i) an NJ Institutional
Shareholder or its affiliated NJ Acute Care Institution, if any, fails to
perform its obligations pursuant to Paragraph A. above, or (ii) an NJ
Institutional Shareholder or its affiliated NJ Acute Care Institution, if any,
should fail to provide reimbursement rates comparable to those of other NJ
Institutional Shareholders or their affiliated NJ Acute Care Institutions, and
sufficiently favorable to the Corporation so as to enable FOHP-NJ to market its
products at market-competitive rates, then the Corporation shall have the right
to purchase (but shall not be obligated to purchase), and the NJ Institutional
Shareholder shall be obligated to sell to the Corporation at the Corporation's
option, all of the Corporation's Common Stock held by the NJ Institutional
Shareholder at a purchase price equal to the lesser of the Book Value or the
original purchase price of such shares. Any amounts payable pursuant to this
Paragraph B. shall be paid in cash within ninety (90) days from the date of
purchase or, in the discretion of the Corporation, over a period of three (3)
years in equal annual installments commencing one (1) year from the date of
purchase with interest at the rate of seven (7%) percent per annum, accrued and
payable annually.
C. Definitions. For the purposes of this Article V: "NJ Acute Care
Institution" shall mean a hospital or acute care institution, licensed by the
New Jersey Department of Health, which has entered into a provider agreement
with FOHP-NJ to provide health care services to the members of FOHP-NJ's health
care benefits plans; and (4) "NJ Institutional Shareholder" shall mean any NJ
Acute Care Institution or its affiliate which owns shares of the Corporation's
Common Stock.
ARTICLE VI
SHAREHOLDER MEETINGS
A. General. Meetings of shareholders may be held outside the State of New
Jersey, if the Corporation's By-laws so provide. The books of the Corporation
may be kept (subject to any provisions contained in applicable law) outside the
State of New Jersey at such place or places as may be designated from time to
time by the Board of Directors or in the By-laws of the Corporation.
B. Elections of Directors. Elections of directors need not be by ballot
unless the By-laws of the Corporation shall so provide. Each shareholder of the
Corporation entitled to vote at any election of directors of the Corporation
shall have the right to cumulate votes and allocate to one candidate for such
election a number of votes equal to the number of directors to be so elected
multiplied by the number of votes to which the shares held by such shareholder
are normally entitled, or to distribute such number of votes on the same
principle among as many candidates for such election as the shareholder shall
desire; provided, however, that no shareholder shall be entitled to cumulate
votes with respect to any named candidate or candidates for director unless such
candidate's name or candidates' names have been placed in nomination for such
election in accordance with the Corporation's By-laws and such
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cumulation of votes complies with the terms of any agreement between the
shareholder and the Corporation.
ARTICLE VII
AMENDMENTS
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, this Certificate of Incorporation or the
By-laws of the Corporation, and all rights conferred upon shareholders herein
are granted subject to this reservation.
ARTICLE VIII
BOARD OF DIRECTORS
The current Board of Directors of this Corporation consists of __________
(_____) directors and the names and addresses of the directors are:
[TO BE LISTED WHEN DETERMINED]
ARTICLE IX
REGISTERED OFFICE AND AGENT
The address of the Corporation's registered office in the State of New
Jersey is 820 Bear Tavern Road, 3rd Floor, West Trenton, New Jersey 08628, and
the registered agent at such address is The Corporation Trust Company.
ARTICLE X
LIMITATION ON LIABILITY OF DIRECTORS AND OFFICERS
To the fullest extent permitted by the laws of the State of New Jersey, as
they exist or may hereafter be amended, the directors and officers of the
Corporation shall not be personally liable to the Corporation or its
shareholders for damages for breach of any duty owed to the Corporation or its
shareholders, except that the provisions of this Article X shall not relieve a
director or officer from liability for any breach of duty based upon an act or
omission (a) in breach of such person's duty of loyalty to the Corporation or
its shareholders, (b) not in good faith or involving a knowing violation of law,
or (c) resulting in receipt by such person of an improper personal benefit.
ARTICLE XI
COMPLIANCE WITH LAWS
Notwithstanding anything to the contrary contained herein or in the
Corporation's By-laws, the Corporation shall at all times comply with the laws
of the State of New Jersey applicable to the Corporation and its business.
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IN WITNESS WHEREOF, FOHP, Inc. has caused this Amended and Restated
Certificate of Incorporation to be executed on the ___ day of ____________,
1996, by a duly authorized officer.
FOHP, INC.
By:____________________________________
Name: John W. Rohfritch
Title: President and Chief
Executive Officer
Filed By:
PAUL T. COLELLA, ESQ.
Giordano, Halleran & Ciesla, P.C.
125 Half Mile Road
Lincroft, New Jersey 07738
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APPENDIX G
BY-LAWS
OF
`
FOHP, INC.
ARTICLE I
OFFICES
Section 1. Principal Office. The principal office of FOHP, Inc. (the
"Corporation") shall be located at 2 Bridge Avenue, Building 6, Red Bank, New
Jersey 07701-1106 or at such other place as is determined by the Corporation's
Board of Directors (the "Board" or "Board of Directors").
Section 2. Other Offices. The Corporation may also have offices at such
other places, both within and without the State of New Jersey, as the Board of
Directors may from time to time determine or as the business of the Corporation
may require.
ARTICLE II
SHAREHOLDERS
Section 1. Place of Meeting. All meetings of the shareholders for the
election of directors and for any other purpose may be held at such time and
place, within or without the State of New Jersey, as shall be stated in the
notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meeting. Annual meetings of shareholders shall be held
in the month of April or May on such day as the Board of Directors shall
designate at which the shareholders shall elect a Board of Directors and
transact such other business as may properly be brought before the meeting.
Section 3. Notice of Annual Meeting. Notice of the annual meeting shall be
given by mailing, not more than sixty (60) days nor less than ten (10) days
prior to the date of the annual meeting, a written notice stating the date, time
and place thereof, directed to each shareholder of record entitled to vote at
the meeting at his, her or its address as the same appears upon the records of
the Corporation.
Section 4. List of Shareholders. Prior to each annual or special meeting
of the share holders, the officer who has charge of the stock ledger of the
Corporation shall prepare and make a complete list of the shareholders entitled
to vote at said meeting, which shall be arranged in alphabetical order and
include the address of and the number of shares registered in the name of each
shareholder. The list shall be produced and kept at the place of the meeting
during the whole time thereof and may be inspected by any shareholder who may be
present.
Section 5. Special Meetings. Special meetings of the shareholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the
Corporation's Certificate of Incorporation (the
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"Certificate of Incorporation"), may be called by the Chairman of the Board or
the President, and shall be called by the President or Secretary at the request
in writing of a majority of the directors then in office. Such request shall
state the purpose or purposes of the proposed meeting.
Section 6. Notice of Special Meeting. Written or telegraphic notice of a
special meeting of shareholders, stating the date, time, place and purpose
thereof, shall be given to each shareholder entitled to vote thereat, not more
than sixty (60) days nor less than ten (10) days before the date fixed for the
meeting.
Section 7. Business Transacted at a Special Meeting. Business transacted
at any special meeting of shareholders shall be limited to the purpose or
purposes stated in the notice.
Section 8. Quorum. Except as otherwise provided in the Certificate of
Incorporation, the holders of issued and outstanding shares of Corporation
capital stock entitled to cast a majority of the votes at a meeting of
shareholders, present in person or by proxy, shall constitute a quorum for the
transaction of business at any meeting of the shareholders; provided, that when
a specified matter is required to be voted on by a class or series of capital
stock, voting as a separate class, the holders of issued and outstanding shares
of such series or class entitled to cast a majority of the votes at a meeting of
the holders of shares of such series or class, present in person or by proxy,
shall constitute a quorum for the transaction of business with respect to such
matter.
Section 9. Method of Voting. Except as otherwise provided in the
Certificate of Incorporation, each shareholder shall, at every meeting of the
shareholders, be entitled to one vote for each share of capital stock held by
such shareholder.
Every shareholder entitled to vote at a meeting of shareholders or to
express consent without a meeting may authorize another person or persons to act
for him, her or it by proxy. Every proxy shall be executed in writing by the
shareholder or his, her or its agent, except that a proxy may be given by a
shareholder or his, her or its agent by telegram or cable or its equivalent. No
proxy shall be valid for more than eleven (11) months, unless a longer time is
expressly provided therein. Unless it is coupled with an interest, a proxy shall
be revocable at will. A proxy shall not be revoked by the death or incapacity of
a shareholder but such proxy shall continue in force until revoked by the
personal representative or guardian of the shareholder. The presence at any
meeting of any shareholder who has given a proxy shall not revoke such proxy
unless the shareholder shall file written notice of such revocation with the
secretary of the meeting prior to the voting of such proxy.
A person named in a proxy as the attorney or agent of a shareholder may,
if the proxy so provides, substitute another person to act in his, her or its
place, including any other person named as an attorney or agent in the same
proxy. The substitution shall not be effective until an instrument effecting it
is filed with the Secretary of the Corporation.
Section 10. Action by Shareholders Without a Meeting. Whenever the vote of
shareholders at a meeting thereof is required or permitted to be taken in
connection with any corporate action by any provision of the New Jersey Business
Corporation Act or provision of the Certificate of Incorporation, the meeting
and the vote of shareholders may be dispensed with if all the shareholders who
would have been entitled to vote upon the action if such meeting were held shall
consent in writing to such corporate action being taken, and in the case of any
action to be taken pursuant to Chapter 10 of Title 14A of the Revised Statutes
of the State of New Jersey, the Corporation provides to all other shareholders
the advance notification required by N.J.S.A. 14A:5-6(2)(b).
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Subject to the provisions of N.J.S.A. 14A:5-6(2), whenever the vote of
shareholders at a meeting thereof is required or permitted to be taken in
connection with any corporate action by any provision of the New Jersey Business
Corporation Act or provision of the Certificate of Incorporation, other than the
election of directors, the meeting and vote of shareholders may be dispensed
with and the action may be taken without a meeting upon the written consent of
shareholders who would have been entitled to cast the minimum number of votes
which would be necessary to authorize such action at a meeting at which all
shareholders entitled to vote thereon were present and voting; provided,
however, that for so long as HSI (as defined in Section 1 of Article III) owns
either shares of the Corporation's common stock or convertible subordinated
debentures which were issued by the Corporation and are convertible into shares
of the Corporation's common stock, the Corporation shall provide HSI notice of
any action to be approved by the shareholders by written consent at least ten
(10) days prior to delivering such written consents to the shareholders.
Section 11. Conduct at Meetings. At each meeting of shareholders, the
Chairman of the Board of Directors or in his or her absence the President of the
Corporation or in his or her absence any Vice President of the Corporation or in
his or her absence a chairman chosen by the vote of a majority in interest of
the shareholders present in person or represented by proxy and entitled to vote
thereat, shall act as chairman. The Secretary or in his or her absence an
Assistant Secretary or in the absence of the Secretary and all Assistant
Secretaries a person whom the chairman of the meeting shall appoint shall act as
secretary of the meeting and keep a record of the proceedings thereof. The Board
of Directors shall be entitled to make such rules or regulations for the conduct
of meetings of shareholders as it shall deem necessary, appropriate or
convenient. Subject to such rules and regulations, the chairman shall have the
authority to prescribe such rules, regulations and procedures and to do all such
acts as, in the judgement of such chairman, are necessary, appropriate or
convenient for the proper conduct of the meeting, including, without limitation,
establishing an agenda or order of business for the meeting, rules and
procedures for maintaining order at the meeting and the safety of those present,
limitations on participation in such meeting to shareholders of record of the
Corporation and their duly authorized and constituted proxies, and such other
persons as the chairman shall permit, restrictions on entry at the meeting after
the time fixed for the commencement thereof, limitations on the time allotted to
questions or comments by participants and regulations with respect to the
opening and closing of the polls for balloting on matters which are to be voted
on by ballot. The chairman shall have absolute authority over matters of
procedure and there shall be no appeal from the ruling of the chairman. The
chairman may rule that a resolution, nomination or motion not be submitted to
the shareholders for a vote unless seconded by a shareholder or a proxy for a
shareholder. The chairman may require that any person who is neither a bona fide
shareholder nor a proxy for a bona fide shareholder leave the meeting, and upon
the refusal of a shareholder to comply with a procedural ruling of the chairman
which the chairman deems necessary for the proper conduct of the meeting, may
require that such shareholder leave the meeting. The chairman may, on his or her
own motion, summarily adjourn any meeting for any period he or she deems
necessary if he or she rules that orderly procedures cannot be maintained at the
meeting. Unless, and to the extent, determined by the Board of Directors or the
chairman of the meeting, meetings of shareholders shall not be required to be
held in accordance with rules of parliamentary procedure.
Section 12. Procedure Necessary to Bring Business Before an Annual
Meeting. To be properly brought before an annual meeting of shareholders,
business must be either (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (b)
properly brought before the meeting by or at the direction of the Board, or (c)
properly brought before the meeting by a shareholder. In addition to any other
applicable requirements, for business to be properly brought before an annual
meeting by a shareholder, the shareholder must have given timely notice thereof
in writing, either by personal delivery or by United States mail, postage
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prepaid, to the Secretary of the Corporation not less than one hundred twenty
(120) days in advance of the date of the Corporation's proxy statement released
to shareholders in connection with the previous year's annual meeting of
shareholders; provided, however, that if the Corporation did not release a proxy
statement in connection with the previous year's annual meeting then the
shareholder must give such notice not later than one hundred twenty (120) days
prior to the anniversary date of the immediately preceding annual meeting. A
shareholder's notice to the Secretary shall set forth as to each matter the
shareholder proposes to bring before the annual meeting (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (ii) the name and record
address of the shareholder proposing such business, (iii) the class and number
of shares of the Corporation which are beneficially owned by the shareholder,
and (iv) any material interest of the shareholder in such business.
Notwithstanding anything in the By-laws to the contrary, no business shall
be conducted at the annual meeting except in accordance with the procedures set
forth in this Section 12 of Article II and any other applicable requirements;
provided, however, that nothing in this Section 12 of Article II shall be deemed
to preclude discussion by any shareholder of any business properly brought
before the annual meeting.
The chairman of an annual meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting in accordance with the provisions of this Section 12 of Article II or
any other applicable requirements, which determination shall be conclusive, and,
as a result, any such business shall not be transacted.
ARTICLE III
DIRECTORS
Section 1. Number and Election of Directors. The number of directors which
shall constitute the entire Board shall be not less than six (6) nor more than
fifty (50) directors. The exact number of directors which shall constitute the
whole Board shall be established by a resolution of the Board. Once established,
such number may only be increased or decreased by a resolution of the Board. The
directors shall be elected at the annual meeting of shareholders, or at a
special meeting of shareholders called for such purpose, and each director
elected shall hold office until his or her successor is elected and qualified.
For so long as Health Systems International, Inc. ("HSI"), a Delaware
corporation, shall hold shares of the Corporation's common stock, HSI shall have
the right to designate such number of directors on the Board as equals at least
the same percentage of all directors on the Board as is represented by the
percentage ownership by HSI of all then out standing shares of common stock of
the Corporation. In addition, for so long as HSI holds convertible subordinated
debentures issued by the Corporation, HSI shall be entitled to designate not
less than fifteen (15%) percent of the directors serving on the Board. The Board
shall, from time to time at HSI's request, increase the number of directors on
the Board to accommodate the number of designations to which HSI is so entitled.
The directors serving on the Board who are not HSI designees shall be
constituted as follows: so long as First Option Health Plan of New Jersey, Inc.
("FOHP-NJ") is a subsidiary of the Corporation, at least two-thirds (2/3) of the
directors serving on the Board who are not HSI designees shall be NJ
Practitioners (as defined below) and representatives of NJ Acute Care
Institutions (as defined below). In addition, at all times, the number of NJ
Practitioners serving on the Board and the number of representatives of NJ Acute
Care Institutions serving on the Board shall be equal; provided, however
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that at no time shall the Board be comprised of (a) two or more representatives
of a single NJ Acute Care Institution or of an affiliated group of NJ Acute Care
Institutions, or (b) two or more NJ Practitioners who are affiliated to the same
NJ Acute Care Institution or the same affiliated group of NJ Acute Care
Institutions. Whether a person is affiliated with either a NJ Practitioner or NJ
Acute Care Institution or whether two or more NJ Acute Care Institutions are
affiliated for purposes of the aforedescribed restrictions shall be determined
by the Board, and any such determination shall be binding on the shareholders of
the Corporation. In the event FOHP-NJ is no longer a subsidiary of the
Corporation, the composition of the Board shall not be subject to the
aforedescribed restrictions.
Notwithstanding anything herein to the contrary, for so long as any shares
of the Corporation's common stock is held by any NJ Practitioner, NJ Acute Care
Institution, affiliate to an NJ Acute Care Institution, or other health care
provider to FOHP-NJ, the Board shall include as directors not less than three
(3) persons who are not HSI designees, one (1) of whom shall be a NJ
Practitioner and another a representative of a NJ Acute Care Institution.
For purposes of these By-laws: (a) "NJ Acute Care Institution" shall mean
a hospital or acute care institution, licensed by the New Jersey Department of
Health and Senior Services, or other health care entity, licensed, certificated
or authorized to operate in the State of New Jersey, which has entered into a
provider agreement with FOHP-NJ to provide health care related services to the
members of FOHP-NJ's health care benefits plans; and (b) "NJ Practitioner" shall
mean a member of the medical staff of a NJ Acute Care Institution, or a
physician designated by a NJ Acute Care Institution, who (i) is licensed to
practice medicine or osteopathy in the State of New Jersey, and (ii) has entered
into a provider agreement with FOHP-NJ to provide health care services to the
members of FOHP-NJ's health care benefits plans.
Section 2. Nominations.
(a) General. Nominations for the election of directors may be made by the
Board of Directors or a committee appointed by the Board of Directors or by a
shareholder entitled to vote in the election of directors generally; provided,
however, that for so long as any of the shares of the Corporation's common stock
is held by any NJ Practitioner, NJ Acute Care Institution, affiliate to an NJ
Acute Care Institution, or other health care provider to FOHP-NJ, any nominating
committee shall include not less than three (3) persons who are not HSI
designees, one (1) of whom shall be a NJ Practitioner and another a
representative of a NJ Acute Care Institution.
(b) Shareholder Nominations. Any shareholder entitled to vote in the
election of directors generally may nominate one or more persons for election as
directors at a meeting only if written notice of such shareholder's intent to
make such nomination or nominations has been given either by personal delivery
or by United States mail, postage prepaid, to the Secretary of the Corporation
not less than (a) with respect to an election to be held at an annual meeting of
shareholders, one hundred twenty (120) days in advance of the date of the
Corporation's proxy statement released to shareholders in connection with the
previous year's annual meeting of shareholders; provided, however, that if the
Corporation did not release a proxy statement in connection with the previous
year's annual meeting then the shareholder must give such notice not later than
one hundred twenty (120) days prior to the anniversary date of the immediately
preceding annual meeting; and (b) with respect to an election to be held at a
special meeting of shareholders for the election of directors, the close of
business on the tenth day following the date on which notice of such meeting is
first given to shareholders. Each such notice shall set forth: (i) the name and
address of the shareholder who intends to make the nomination and of the person
or persons to be nominated; (ii) a representation that the shareholder is a
holder of record of stock of the Corporation entitled to vote at such meeting
and intends to appear in person or
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by proxy at the meeting to nominate the person or persons specified in the
notice; (iii) a description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the shareholder; (iv) such other information regarding each nominee proposed by
such shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission; and (v)
the signed consent of each nominee to serve as a director of the Corporation if
so elected. The Corporation may require any proposed nominee or shareholder
proposing a nominee to furnish such other information as may reasonably be
required by the Corporation to determine the eligibility of such proposed
nominee to serve as a director of the Corporation or to properly complete any
proxy or information statements used for the solicitation of proxies in
connection with the meeting at which directors are to be elected. The presiding
officer of the meeting may refuse to acknowledge the nomination of any person
not made in compliance with the foregoing procedure.
(c) Required Nominees. The nominees for directors designated by the Board
or a committee appointed by the Board shall include such number of designees of
HSI as HSI shall have the right to designate under Section 1 of this Article
III, and if practicable, (a) one NJ Practitioner who practices in the southern
part of New Jersey, one NJ Practitioner who practices in the central part of New
Jersey, and one NJ Practitioner who practices in the northern part of New
Jersey; and (b) one representative of a NJ Acute Care Institution which is
located in the southern part of New Jersey, one representative of a NJ Acute
Care Institution which is located in the central part of New Jersey, and one
representative of a NJ Acute Care Institution located in the northern part of
New Jersey. In addition, the members of the Board or the nominating committee
who were not designated by HSI shall select, by majority vote, the non-HSI
nominees to the Board.
Section 3. Vacancies; Newly Created Directorship. Vacancies and newly
created directorships resulting from any increase in the authorized number of
directors may be filled by a majority of the directors then in office, or by a
sole remaining director, and the directors so chosen shall hold office until
their successors are duly elected and shall qualify, unless sooner displaced. If
there are no directors in office, then an election of directors may be held in
the manner provided by statute. In filling any vacancy in the Board, the Board
must ensure that (A) so long as HSI holds any convertible subordinated
debentures issued by the Corporation, at least fifteen (15%) percent of the
directors serving on the Board shall be designees of HSI, (B) in the event HSI
holds shares of common stock of the Corporation exceeding fifteen (15%) percent
of all the then outstanding shares of the common stock of the Corporation, HSI
designees to the Board shall constitute not less than such number of directors
on the Board as equals at least the same percentage of all directors on the
Board as is represented by the percentage ownership by HSI of all then
outstanding shares of common stock of the Corporation, and (C) so long as
FOHP-NJ is a subsidiary of the Corporation, two-thirds (2/3) of the directors
serving on the Board who were not designated by HSI shall be NJ Practitioners
and representatives of NJ Acute Care Institutions, provided that the number of
NJ Practitioners and the number of representatives of NJ Acute Care Institutions
serving on the Board remains equal.
Section 4. Governance.
(a) General Business. The business of the Corporation shall be governed by
the Board. The Board of Directors may exercise all such powers of the
Corporation and do all such lawful acts and things as are not by statute or by
the Certificate of Incorporation directed or required to be exercised or done by
the shareholders.
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(b) Board Approval Requirements.
(i) Actions Requiring Super-Majority Board Approval. The Board may
not approve any of the following corporate transactions or actions without the
approval of at least eighty (80%) percent of the directors on the Board:
A. any amendment to the Certificate of Incorporation or
these By-laws;
B. any capital expenditures by the Corporation which,
together with capital expenditures of its subsidiaries,
exceed, in the aggregate, $1,000,000 during any calendar
year;
C. any material change in the scope of the business of the
Corporation;
D. any merger, consolidation or sale, mortgage, lease,
transfer or other disposition of all or substantially
all of the assets of the Corporation;
E. any filing for receivership, dissolution or bankruptcy
by the Corporation;
F. the declaration or payment of any dividend or other
distribution to shareholders of the Corporation on a
non-ratable basis;
G. the issuance or sale of any shares of capital stock, or
warrants, convertible instruments or other rights to
acquire authorized and unissued shares of capital stock
of the Corporation, other than the issuance of the
options and debentures contemplated in the Purchase
Agreement (as defined below) and the shares of capital
stock issuable upon the exercise of such options and
conversion of such debentures;
H. the borrowing by the Corporation, other than borrowing
in the ordinary course of business, of amounts which,
together with amounts borrowed by subsidiaries of the
Corporation, exceed, in the aggregate, $1,000,000 during
any calendar year;
I. the creation of any security interest or lien on all or
substantially all of the assets of the Corporation;
J. any acquisition by the Corporation of equity securities
(other than pursuant to a buyback or repurchase of
equity securities issued by the Corporation) or assets
of any person or entity involving amounts which,
together with amounts involved in acquisitions of equity
by subsidiaries of the Corporation, exceed, in the
aggregate, $1,000,000 during any calendar year, except
for the transactions contemplated by the Purchase
Agreement;
K. a decision to file a registration statement for the
public sale of securities of the Corporation under the
Securities Act of 1933, as amended;
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L. any loan of money to, or guarantee of any obligation of,
any officer, director or employee of the Corporation or
any subsidiary thereof; or
M. entering into, assuming or becoming bound by any
agreement to do any of the foregoing or otherwise
attempt to do any of the foregoing.
(ii) Non-HSI Directors. In addition to the approval requirements set
forth in paragraph (i) of this Section 4(b), the Board may not approve any of
the following corporate transactions or actions without the approval of a
majority of the directors not designated by or affiliated with HSI:
A. any transaction by the Corporation involving a
contractual or other arrangement with HSI or any
subsidiary or affiliate thereof or successor thereto, or
any subsidiary or affiliate of any successor to HSI,
which is new or modified from the then-existing
contractual arrangements between the Corporation and
HSI;
B. the issuance to HSI or any subsidiary or affiliate
thereof or successor thereto, or any subsidiary or
affiliate of any successor to HSI, of any additional
shares of the Corporation's capital stock, or options,
stock appreciation rights, warrants or other rights to
acquire the capital stock of the Corporation; or
C. any intentional act by HSI to cause the transfer of the
members of the health plans offered by FOHP-NJ or any
other sudsidary of the Corporation, to HSI or any
subsidiary or affiliate thereof or successor thereto, or
any subsidiary or affiliate of any successor to HSI;
provided, however, that no such approval shall be required in the case of any of
clause A., clause B. or clause C. of this Section 4(b)(ii) with respect to any
transaction contemplated by the Securities Purchase Agreement, dated as of
October 24, 1996 among HSI, FOHP-NJ and the Corporation (the "Purchase
Agreement"), including any issuance of securities by the Corporation to HSI
contemplated therein.
Section 5. Removal. Any director or directors may be removed from office
either with or without cause by the shareholders pursuant to Section 14A:6-6 of
the New Jersey Business Corporation Act.
Section 6. Meetings. The Board of Directors of the Corporation may hold
meetings, both regular and special, either within or without the State of New
Jersey. The first meeting of each newly elected Board of Directors shall be held
at such time and place as shall be fixed by the vote of the shareholders at the
annual meeting, and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the shareholders to fix the
time or place of such first meeting of the newly elected Board of Directors, or
in the event such meeting is not held at the time and place so fixed by the
shareholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
Board of Directors, or as shall be specified in a written waiver signed by all
of the directors, or upon the conclusion of the shareholders' meeting at which
time they were elected, without further notice. At such meeting the Board of
Directors shall elect from their own number a Chairman of the Board for the
ensuing year and until his or her successor is elected and qualifies, and
transact such other business as may come before the meeting.
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Section 7. Regular Meetings. Regular meetings of the Board may be held on
five (5) days written notice, at such time as shall be from time to time
determined by the Board. Written notice for any such meeting shall state the
place, date and time of the meeting and shall be delivered either personally or
by first class mail, facsimile or overnight courier service.
Section 8. Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman of the Board or the President, and shall be called
by the President or Secretary at the request in writing of at least one-third
(1/3) of the directors then in office. Written notice of any special meeting
shall be given, either personally or by first class mail, facsimile or overnight
courier service, to each director at least two (2) days prior to the date
thereof.
Section 9. Place of Meeting; Waiver of Notice. Meetings of the Board of
Directors shall be held at such place as shall be designated in the notice of
meeting if notice is required. Notice of any meeting, if required, need not be
given to any director who signs a waiver of notice before or after the meeting.
The attendance of any director at any meeting without the director protesting
prior to the conclusion of such meeting the lack of notice thereof shall
constitute a waiver of notice by such director.
Section 10. Quorum. Except as otherwise provided in the Certificate of
Incorporation, a majority of the directors then in office shall constitute a
quorum for the transaction of business at any meeting of the Board of Directors.
Section 11. Manner of Acting. Except as otherwise provided in the
Certificate of Incorporation or herein, the act of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors.
Section 12. Action Without a Meeting. Any action required or permitted to
be taken by the Board of Directors or by a committee thereof may be taken
without a meeting if, prior to such action, all of the members of the Board or
committee consent in writing to a resolution authorizing the action. Such
written consents may be executed in counterparts, and shall be filed with the
minutes of the Corporation.
Section 13. Telephonic Attendance at Meeting. Any or all directors may
participate in a meeting of the Board of Directors or a committee of the Board
by means of conference telephone or any means of communication by which all
persons participating in the meeting are able to hear each other.
Section 14. Committees Established Pursuant to the By-laws.
(a) Audit Committee. The Corporation shall have an audit committee (the
"Audit Committee"). The Audit Committee shall be comprised solely of directors.
In addition, the composition of the Audit Committee shall meet the requirements
of any governmental department or agency which has the authority to regulate the
business of the Corporation or its subsidiaries. The Audit Committee shall,
among other things, identify, interview and recommend to the Board of Directors
the auditors to be engaged as the Corporation's independent certified public
accountants, review the proposed plan and scope for the annual audit and the
results of such audit when completed, review the services rendered by the
auditors and the fees charged for such services, determine the effect, if any,
on the independent certified public accountants' independence in the performance
of any non-audit services, and review the plan, scope and results of the
Corporation's internal audit operations.
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(b) Other Committees. The Board of Directors may, by one or more
resolutions passed by a majority of the directors then in office, establish such
other committees as it shall determine necessary for the operations of the
Corporation; provided, however, HSI shall have the right to designate to any
committee, other than the Audit Committee, that number of committee members as
is commensurate with its representation on the Board. Such committee or
committees shall have such name or names as may be determined from time to time
by a resolution adopted by the Board. Moreover, upon a resolution passed by a
majority of the directors then in office, the Board may designate one or more
committees, comprised solely of directors of the Corporation, to exercise the
power of the Board in the management of the business and affairs of the
Corporation; provided, however, that for so long as any shares of the
Corporation's common stock is held by any NJ Practitioner, NJ Acute Care
Institution, affiliates to a NJ Acute Care Institution, or other health care
provider to FOHP-NJ, any such committee of the Board shall include as members
not less than three (3) persons who are not HSI designees to the Board, one (1)
of whom shall be a NJ Practitioner and another a representative of a NJ Acute
Care Institution. Only committees whose membership is exclusively reserved for
directors may be vested with the powers of the Board. All other committees shall
have and may exercise such authority as the Board establishes by resolution or
these By-laws permit, subject to any limitation imposed by law. The filling of
vacancies in a committee, the abolishing of a committee and the removal of
persons serving on a committee shall be as set forth in a resolution adopted by
the Board unless otherwise set forth in the provisions of these By-laws
applicable to such committee. Each committee shall keep regular minutes of its
meetings and report same to the Board of Directors when required. Except as may
otherwise be provided in a resolution adopted by the Board, committee members
and chairpersons shall serve one (1) year terms.
(c) Restrictions on Committee Members. Members of any committee of the
Corporation who are affiliated with or represent an entity, including its
officers, directors, employees and agents, that provides health care services on
behalf of the Corporation or any subsidiary or affiliate thereof pursuant to an
agreement with the Corporation or any subsidiary or affiliate thereof are
prohibited from using their participation as a committee member of the
Corporation to obtain or exchange competitive information pertaining to other
providers that provide similar health care services on behalf of the Corporation
or any subsidiary or affiliate thereof pursuant to an agreement with the
Corporation or any subsidiary or affiliate thereof. Competitive information
includes, but is not limited to, information related to an individual provider's
rates, discounts, costs, prices, salaries, terms of participation in other
health plans, or strategic or marketing plans.
(d) Quorum. A majority of the members of a committee or subcommittee shall
constitute a quorum for the transaction of business at any meeting of such
committee or subcommittee.
(e) Required Vote. The act of a majority of the members present at a
meeting at which a quorum is present shall be the act of the committee or
subcommittee.
Section 15. Compensation of Directors. The directors may be paid their
expenses, if any, relating to their attendance at meetings of the Board of
Directors, and directors who are not full-time employees of the Corporation may
be paid a fixed sum for attendance at meetings of the Board of Directors or a
stated salary as a director. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
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ARTICLE IV
OFFICERS
Section 1. Officers. The officers of the Corporation shall be chosen by
the Board of Directors and shall be a Chairman of the Board, a President, one or
more Vice-Presidents, a Treasurer and a Secretary. The Board of Directors may
also choose one or more Assistant Secretaries or Assistant Treasurers, and may
designate one or more vice-presidents to be executive or senior vice-presidents.
One person may hold two (2) or more offices, but the person serving as President
may not serve simultaneously as Secretary.
Section 2. Term; Removal. The officers of the Corporation shall hold
office until their successors are chosen and qualify. Any officer elected or
appointed by the Board of Directors may be removed or suspended at any time by
the affirmative vote of a majority of the directors at any meeting of the Board
at which there is a quorum, without the necessity of specifying any cause
therefor and without any prior notice of such action to the officer so removed
or suspended. All officers, employees and agents, other than officers elected or
appointed by the Board of Directors, may be suspended or removed by the
committee of the Board of Directors or officer appointing them.
Section 3. Chairman of the Board. The Chairman of the Board shall preside
at all meetings of the shareholders and the Board of Directors. He or she shall,
in the absence or the disability of the President, perform the duties and
exercise the powers of the President, and shall perform such other duties as may
be delegated to him or her by the Board of Directors.
Section 4. President. The President, who shall be the Chief Executive
Officer of the Corporation, shall in general, subject to the control of the
Board of Directors, supervise and control all of the business and affairs of the
Corporation. All other officers shall be subject to the authority and
supervision of the President. The President may enter into and execute in the
name of the Corporation contracts or other instruments in the regular course of
business or contracts or other instruments not in the regular course of business
which are authorized, either generally or specifi cally, by the Board of
Directors. The President shall have the general powers and duties of management
usually vested in the office of president of a corporation.
Section 5. Vice Presidents. The Board of Directors may appoint one or more
Vice Presidents who shall perform such duties and possess such powers as shall
be assigned him or her by the President or the Board.
Section 6. Treasurer and Assistant Treasurer. The Treasurer shall have
charge and custody of, and be responsible for, all funds and securities of the
Corporation, shall keep or cause to be kept regular books of account for the
Corporation and shall perform such other duties and possess such other powers as
are incident to the office of treasurer or as shall be assigned to the Treasurer
by the President or the Board. The Assistant Treasurer, or if there shall be
more than one, the Assistant Treasurers, in the order determined by the Board,
shall, in the absence or disability of the Treasurer, perform the duties and
exercise the powers of the Treasurer set forth herein and as the President or
the Board from time to time may prescribe.
Section 7. Secretary and Assistant Secretary. The Secretary shall cause
notices of all meetings to be served as prescribed in these By-laws or by
statute, shall keep or cause to be kept the minutes of all meetings of the
shareholders and of the Board of Directors, shall have charge of the corporate
records and seal of the Corporation and shall keep a register of the post-office
address of
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each shareholder which shall be furnished to the Secretary by such shareholder.
The Secretary shall perform such other duties and possess such other powers as
are incident to the office of the secretary or as are assigned by the President
or the Board. The Assistant Secretary, or if there shall be more than one, the
Assistant Secretaries, in the order determined by the Board, shall, in the
absence or disability of the Secretary, perform the duties and exercise the
powers of the Secretary set forth herein and as the President or the Board from
time to time may prescribe.
Section 8. Subordinate Officers and Agents. The Board may appoint such
other officers and agents as it shall deem necessary or desirable, who shall
hold their offices for such terms and shall exercise such powers and perform
such duties as shall be determined from time to time by the President or the
Board.
ARTICLE V
EXECUTION OF DOCUMENTS
Section 1. Commercial Paper and Contracts. All checks, notes, drafts and
other commercial paper of the Corporation shall be signed by the President or
the Treasurer of the Corporation or by such other person or persons as the Board
of Directors may from time to time designate.
Section 2. Other Instruments. All contracts, deeds, mortgages and other
instruments shall be executed by the President or any Vice President, and, if
necessary or required by law, by the Secretary or any Assistant Secretary, or
such other person or persons as the Board of Directors may from time to time
designate.
ARTICLE VI
FISCAL YEAR
The fiscal year of the Corporation shall be the calendar year.
ARTICLE VII
CERTIFICATES REPRESENTING SHARES
Certificates representing shares of capital stock of the Corporation shall
be in such form as shall be determined by the Board of Directors and shall be
executed by the President or any Vice President and by the Secretary or the
Treasurer, unless the Board of Directors shall direct otherwise.
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ARTICLE VIII
RECORD DATE
For the purpose of determining the shareholders entitled to notice of or
to vote at any meeting of shareholders or any adjournment thereof, or to express
consent to or dissent from any proposal without any meeting or for the purpose
of determining shareholders entitled to receive payment of any dividend or
allotment of any right, or in order to make a determination of shareholders for
any other purpose, the Board of Directors shall fix, in advance, a date as the
record date for any such determination of shareholders. Such date shall not be
more than sixty (60) days nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action or event to
which it relates. When a determination of shareholders of record for a
shareholders' meeting has been made as provided in this Article VIII, such
determination shall apply to any adjournment thereof, unless the Board of
Directors fixes a new record date for the adjourned meeting.
ARTICLE IX
DIVIDENDS
The Board of Directors may from time to time declare, and the Corporation
may pay, dividends or make other distributions on its outstanding shares of
capital stock in the manner and upon the terms and conditions provided by the
Certificate of Incorporation and by statute.
ARTICLE X
AMENDMENT
These By-laws may be altered, amended or repealed, or new by-laws may be
adopted by the Board of Directors, at any regular meeting of the Board of
Directors or of any special meeting of the Board of Directors in accordance with
the vote required in Article III hereof; provided, however, that (i) any
alteration, amendment or repeal of Sections 1, 2(a) and (c), 3, 4(b)(ii) and/or
14(b) of Article III of these By-laws must be approved by the shareholders of
the Corporation, excluding HSI or any subsidiary or affiliate thereof or
successor thereto, and (ii) any new by-laws which may be adopted by the Board,
without shareholder approval, must contain the provisions found in Sections 1,
2(a) and (c), 3, 4(b)(ii) and 14(b) of Article III of these By-laws for so long
as any shares of the Corporation's common stock is held by any NJ Practitioner,
NJ Acute Care Institution, affiliate to a NJ Acute Care Institution or other
health care provider to FOHP-NJ. These By-laws, or any new by-laws adopted by
the Board, may also be altered, amended or repealed, or new by-laws may be
adopted, by the shareholders, at any annual or special meeting of shareholders
if notice of such alteration, amendment, repeal or adoption of new by-laws is
contained in the notice of such meeting; provided, however, that (i) any
alteration, amendment or repeal of Sections 1, 2(a) and (c), 3, 4(b)(ii) and/or
14(b) of Article III of these By-laws must be approved by the shareholders of
the Corporation, excluding HSI or any subsidiary or affiliate thereof or
successor thereto, and (ii) any new by-laws which may be adopted by the
shareholders must contain the provisions found in Sections 1, 2(a) and (c), 3,
4(b)(ii) and 14(b) of Article III of these By-laws for so long as any shares of
the Corporation's common stock is held by any NJ Practitioner, NJ Acute Care
Institution, affiliate to a NJ Acute Care Institution or other health care
provider to FOHP-NJ.
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ARTICLE XI
INDEMNIFICATION
Section 1. The Corporation shall indemnify a Corporate Agent (as defined
in Section 8 of this Article) against his or her expenses and liabilities
actually and reasonably incurred in connection with the defense of any
proceeding involving the Corporate Agent by reason of his or her being or having
been such a Corporate Agent, other than a proceeding by or in the right of the
Corporation, if (a) such Corporate Agent acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to the best interests of the
Corporation and (b) with respect to any criminal proceeding, such Corporate
Agent had no reasonable cause to believe his or her conduct was unlawful. The
termination of any proceeding by judgment, order, settlement, conviction or upon
a plea of nolo contendere or its equivalent, shall not of itself create a
presumption that such Corporate Agent did not meet the applicable standards of
conduct set forth in subparagraphs (a) and (b) herein.
Section 2. The Corporation shall indemnify a Corporate Agent against his
or her liabilities and expenses, actually or reasonably incurred by him or her
in connection with the defense, in any proceeding, by or in the right of the
Corporation to procure a judgment in its favor which involves the Corporate
Agent by reason of his or her being or having been such Corporate Agent, if he
or she acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the Corporation. However, in such
proceeding no indemnification shall be provided in respect of any claim, issue
or matter as to which such Corporate Agent shall have been adjudged liable to
the Corporation unless and only to the extent that the New Jersey Superior Court
or the court in which such proceeding was brought shall determine upon
application that despite the adjudication of liability, but in view of all
circumstances of the case, such Corporate Agent is fairly and reasonably
entitled to indemnity for such expenses or liabilities as the New Jersey
Superior Court or such other court shall deem proper.
Section 3. The Corporation shall indemnify a Corporate Agent against
expenses (including attorneys fees) to the extent that such Corporate Agent has
been successful on the merits or otherwise in any proceeding referred to in
Sections 1 and 2 of this Article or in defense of any claim, issue or matter
therein.
Section 4. Any indemnification under Section 1 of this Article and, unless
ordered by a court, under Section 2 of this Article, may be made by the
Corporation only as authorized in a specific case upon a determination that
indemnification is proper in the circumstances because the Corporate Agent met
the applicable standard of conduct set forth in Sections 1 or 2 of this Article.
Such determination shall be made: (a) by the Board of Directors by a majority
vote of a quorum consisting of directors who were not parties to or otherwise
involved in the proceeding; (b) if such a quorum is not obtainable, or, even if
obtainable and such quorum of the Board of Directors by a majority vote of the
disinterested directors so directs, by independent legal counsel in a written
opinion, such counsel to be designated by the Board of Directors; or (c) by the
shareholders.
Section 5. Expenses incurred by a Corporate Agent in connection with a
proceeding may be paid by the Corporation in advance of the final disposition of
the proceeding, as authorized by the Board of Directors, upon receipt of an
undertaking by or on behalf of the Corporate Agent to repay such amount unless
it shall ultimately be determined that he or she is entitled to be indemnified
as provided in this Article XI.
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Section 6. The indemnification and advancement of expenses provided by or
granted pursuant to the other sections of this Article shall not exclude any
other rights to which a Corporate Agent may be entitled under the Corporation's
Certificate of Incorporation, a By-law, agreement, vote of shareholders, or
otherwise; provided, that no indemnification shall be made to or on behalf of a
Corporate Agent if a judgment or other final adjudication adverse to the
Corporate Agent establishes that his or her acts or omissions (a) were in breach
of his or her duty of loyalty to the Corporation or its shareholders, (b) were
not in good faith or involved a knowing violation of law, or (c) resulted in
receipt by the Corporate Agent of an improper personal benefit.
Section 7. The Corporation shall have the power to purchase and maintain
insurance on behalf of any Corporate Agent against any expenses incurred in any
proceeding and any liabilities asserted against him or her by reason of his or
her being or having been a Corporate Agent, whether or not the Corporation would
have the power to indemnify him or her against such expenses and liabilities
under the provisions of this section. The Corporation may purchase such
insurance from, or such insurance may be reinsured in whole or in part by, an
insurer owned by or otherwise affiliated with the Corporation, whether or not
such insurer does business with other insureds.
Section 8. For purposes of this Article XI the following definitions, as
well as all other definitions set forth in N.J.S.A. 14A:3-5 shall apply:
(a) "Corporate Agent" shall mean any person who is or was a
director, officer, employee or agent of the indemnifying corporation or of any
constituent corporation absorbed by the indemnifying corporation in
consolidation or merger and any person who is or was a director, officer,
trustee, employee or agent of any Other Enterprise, serving as such at the
request of the indemnifying corporation, or of any such constituent corporation,
or the legal representative of any such director, officer, trustee, employee or
agent. Furthermore, any Corporate Agent also serving as a "fiduciary" of an
employee benefit plan governed by the Act of Congress entitled "Employee
Retirement Income Security Act of 1974" (ERISA) as amended from time to time,
shall serve in such capacity as a Corporate Agent, if the corporation shall have
requested any such person to serve. Additionally, the corporation shall be
deemed to have requested such person to serve as a fiduciary of an employee
benefit plan, only where the performance by such person of his or her duties to
the corporation also imposes duties on, or otherwise involves services by, such
person to the plan or participants or beneficiaries of the plan.
(b) "Other Enterprise" shall mean any domestic or foreign
corporation other than the indemnifying corporation, and any partnership, joint
venture, sole proprietorship, trust or other enterprise (including employee
benefit plans governed by ERISA), whether or not for profit, served by a
Corporate Agent.
ARTICLE XII
INCONSISTENCY WITH CERTIFICATE OF INCORPORATION
In the event that any of the provisions of these By-laws is
inconsistent with any provision of the Corporation's Certificate of
Incorporation, the provision of the Certificate of Incorporation shall apply.
As Amended: _________ ______, 1996.
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APPENDIX H
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.
FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC. (the "Corporation"), a
corporation organized under the laws of the State of New Jersey on May 19, 1993,
has, since its formation, amended its Certificate of Incorporation by an
amendment filed on June 30, 1993, by an Amended and Restated Certificate of
Incorporation filed on October 22, 1993, by an Amended and Restated Certificate
of Incorporation filed on February 28, 1994, by an Amended and Restated
Certificate of Incorporation filed on March 10, 1994, by an Amended and Restated
Certificate of Incorporation filed on November 3, 1994, by an Amended and
Restated Certificate of Incorporation filed on June 8, 1995, and by an Amended
and Restated Certificate of Incorporation filed on December 7, 1995.
Pursuant to N.J. Stat. Ann. 14A:9-5, the Corporation hereby (i) restates
its Certificate of Incorporation, to embody in one document its original
certificate and the subsequent amendments thereto, and (ii) further amends its
Certificate of Incorporation as set forth herein.
The Corporation hereby certifies the following which (i) sets forth in
full its Certificate of Incorporation, as of this date, and (ii) supersedes and
replaces its original Certificate of Incorporation and all amendments filed
prior to the date hereof:
ARTICLE I
CORPORATE NAME
The name of the Corporation is First Option Health Plan of New Jersey,
Inc.
ARTICLE II
PURPOSE OF CORPORATION
The purpose of the Corporation is to arrange for basic and other health
care services, to operate and maintain a health maintenance organization and to
engage in any activity within the purposes for which corporations may be
organized under the New Jersey Business Corporation Act.
ARTICLE III
CAPITAL STOCK
The total number of shares of capital stock which the Corporation shall
have the authority to issue is one hundred thousand (100,000) shares of Common
Stock, par value $.01 per share.
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ARTICLE IV
BOARD OF DIRECTORS
The current Board of Directors of this Corporation consists of _______
(_______) directors and the names and addresses of the directors are:
[TO BE LISTED WHEN DETERMINED]
For so long as the Corporation is a subsidiary of FOHP, Inc. ("FOHP"), the
Board of Directors of the Corporation shall be comprised of the persons who are
elected to the Board of Directors of FOHP ("FOHP Board Members"); provided,
however, that the number of directors serving on the Board of Directors of the
Corporation may be increased by the Board of Directors of the Corporation to
include persons other than FOHP Board members if so required under applicable
law or by any governmental agency or department which has the authority to
regulate the business of the Corporation. FOHP, as sole shareholder of the
Corporation, shall take all action necessary for the election of the FOHP Board
Members to the Corporation's Board of Directors.
ARTICLE V
REGISTERED OFFICE AND AGENT
The address of the Corporation's registered office in the State of New
Jersey is 820 Bear Tavern Road, 3rd Floor, West Trenton, New Jersey 08628, and
the registered agent at such address is The Corporation Trust Company.
ARTICLE VI
LIMITATION ON LIABILITY OF DIRECTORS AND OFFICERS
To the fullest extent permitted by the laws of the State of New Jersey, as
they exist or may hereafter be amended, the directors and officers of the
Corporation shall not be personally liable to the Corporation or its
shareholders for damages for breach of any duty owed to the Corporation or its
shareholders, except that the provisions of this Article VI shall not relieve a
director or officer from liability for any breach of duty based upon an act or
omission (a) in breach of such person's duty of loyalty to the Corporation or
its shareholders, (b) not in good faith or involving a knowing violation of law,
or (c) resulting in receipt by such person of an improper personal benefit.
ARTICLE VII
COMPLIANCE WITH LAWS
Notwithstanding anything to the contrary contained herein or in the
Corporation's By-laws, the Corporation shall at all times comply with the laws
of the State of New Jersey applicable to the Corporation and its business.
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IN WITNESS WHEREOF, First Option Health Plan of New Jersey, Inc. has
caused this Amended and Restated Certificate of Incorporation to be executed on
the ____ day of ____________, 1996, by a duly authorized officer.
FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.
By: _______________________________________
Name: John W. Rohfritch
Title: President and Chief Executive Officer
Filed By:
PAUL T. COLELLA, ESQ.
Giordano, Halleran & Ciesla, P.C.
125 Half Mile Road
Lincroft, New Jersey 07738
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APPENDIX I
BY-LAWS
OF
FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.
ARTICLE I
OFFICES
Section 1. Principal Office. The principal office of First Option Health
Plan of New Jersey, Inc. (the "Corporation") shall be located at 2 Bridge
Avenue, Building 6, Red Bank, New Jersey 07701-1106 or at such other place as is
determined by the Corporation's Board of Directors (the "Board" or "Board of
Directors").
Section 2. Other Offices. The Corporation may also have offices at such
other places, both within and without the State of New Jersey, as the Board of
Directors may from time to time determine or as the business of the Corporation
may require.
ARTICLE II
SHAREHOLDERS
Section 1. Place of Meeting. All meetings of the shareholders for the
election of directors and for any other purpose may be held at such time and
place, within or without the State of New Jersey, as shall be stated in the
notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meeting. Annual meetings of shareholders shall be held
in the month of April or May on such day as the Board of Directors shall
designate at which the shareholders shall elect by plurality vote a Board of
Directors and transact such other business as may properly be brought before the
meeting.
Section 3. Notice of Annual Meeting. Notice of the annual meeting shall be
given by mailing, not more than sixty (60) days nor less than ten (10) days
prior to the date of the annual meeting, a written notice stating the date, time
and place thereof, directed to each shareholder of record entitled to vote at
the meeting at his, her or its address as the same appears upon the records of
the Corporation.
Section 4. List of Shareholders. Prior to each annual or special meeting
of the shareholders, the officer who has charge of the stock ledger of the
Corporation shall prepare and make a complete list of the shareholders entitled
to vote at said meeting, which shall be arranged in alphabetical order and
include the address of and the number of shares registered in the name of each
shareholder. The list shall be produced and kept at the place of the meeting
during the whole time thereof and may be inspected by any shareholder who may
be present.
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Section 5. Special Meetings. Special meetings of the shareholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the
Corporation's Certificate of Incorporation (the "Certificate of Incorporation"),
may be called by the Chairman of the Board or the President, and shall be called
by the President or Secretary at the request in writing of a majority of the
directors then in office. Such request shall state the purpose or purposes of
the proposed meeting.
Section 6. Notice of Special Meeting. Written or telegraphic notice of a
special meeting of shareholders, stating the date, time, place and purpose
thereof, shall be given to each shareholder entitled to vote thereat, not more
than sixty (60) days nor less than ten (10) days before the date fixed for the
meeting.
Section 7. Business Transacted at a Special Meeting. Business transacted
at any special meeting of shareholders shall be limited to the purpose or
purposes stated in the notice.
Section 8. Quorum. Except as otherwise provided in the Certificate of
Incorporation, the holders of issued and outstanding shares of Corporation
capital stock entitled to cast a majority of the votes at a meeting of
shareholders, present in person or by proxy, shall constitute a quorum for the
transaction of business at any meeting of the shareholders; provided, that when
a specified matter is required to be voted on by a class or series of capital
stock, voting as a separate class, the holders of issued and outstanding shares
of such series or class entitled to cast a majority of the votes at a meeting of
the holders of shares of such series or class, present in person or by proxy,
shall constitute a quorum for the transaction of business with respect to such
matter.
Section 9. Method of Voting. Except as otherwise provided in the
Certificate of Incorporation, each shareholder shall, at every meeting of the
shareholders, be entitled to one vote for each share of capital stock held by
such shareholder.
Every shareholder entitled to vote at a meeting of shareholders or to
express consent without a meeting may authorize another person or persons to act
for him, her or it by proxy. Every proxy shall be executed in writing by the
shareholder or his, her or its agent, except that a proxy may be given by a
shareholder or his, her or its agent by telegram or cable or its equivalent. No
proxy shall be valid for more than eleven (11) months, unless a longer time is
expressly provided therein. Unless it is coupled with an interest, a proxy shall
be revocable at will. A proxy shall not be revoked by the death or incapacity of
a shareholder but such proxy shall continue in force until revoked by the
personal representative or guardian of the shareholder. The presence at any
meeting of any shareholder who has given a proxy shall not revoke such proxy
unless the shareholder shall file written notice of such revocation with the
secretary of the meeting prior to the voting of such proxy.
A person named in a proxy as the attorney or agent of a shareholder may,
if the proxy so provides, substitute another person to act in his, her or its
place, including any other person named as an attorney or agent in the same
proxy. The substitution shall not be effective until an instrument effecting it
is filed with the Secretary of the Corporation.
Section 10. Action by Shareholders Without a Meeting. Whenever the vote of
shareholders at a meeting thereof is required or permitted to be taken in
connection with any corporate action by any provision of the New Jersey Business
Corporation Act or provision of the Certificate of Incorporation, the meeting
and the vote of shareholders may be dispensed with if all the shareholders who
would have been entitled to vote upon the action if such meeting were held shall
consent in writing to such corporate action being taken, and in the case of any
action to be taken pursuant to Chapter
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10 of Title 14A of the Revised Statutes of the State of New Jersey, the
Corporation provides to all other shareholders the advance notification required
by N.J.S.A. 14A:5-6(2)(b).
Section 11. Conduct at Meetings. At each meeting of shareholders, the
Chairman of the Board of Directors or in his or her absence the President of the
Corporation or in his or her absence any Vice President of the Corporation or in
his or her absence a chairman chosen by the vote of a majority in interest of
the shareholders present in person or represented by proxy and entitled to vote
thereat, shall act as chairman. The Secretary or in his or her absence an
Assistant Secretary or in the absence of the Secretary and all Assistant
Secretaries a person whom the chairman of the meeting shall appoint shall act as
secretary of the meeting and keep a record of the proceedings thereof. The Board
of Directors shall be entitled to make such rules or regulations for the conduct
of meetings of shareholders as it shall deem necessary, appropriate or
convenient. Subject to such rules and regulations, the chairman shall have the
authority to prescribe such rules, regulations and procedures and to do all such
acts as, in the judgement of such chairman, are necessary, appropriate or
convenient for the proper conduct of the meeting, including, without limitation,
establishing an agenda or order of business for the meeting, rules and
procedures for maintaining order at the meeting and the safety of those present,
limitations on participation in such meeting to shareholders of record of the
Corporation and their duly authorized and constituted proxies, and such other
persons as the chairman shall permit, restrictions on entry at the meeting after
the time fixed for the commencement thereof, limitations on the time allotted to
questions or comments by participants and regulations with respect to the
opening and closing of the polls for balloting on matters which are to be voted
on by ballot. The chairman shall have absolute authority over matters of
procedure and there shall be no appeal from the ruling of the chairman. The
chairman may rule that a resolution, nomination or motion not be submitted to
the shareholders for a vote unless seconded by a shareholder or a proxy for a
shareholder. The chairman may require that any person who is neither a bona fide
shareholder nor a proxy for a bona fide shareholder leave the meeting, and upon
the refusal of a shareholder to comply with a procedural ruling of the chairman
which the chairman deems necessary for the proper conduct of the meeting, may
require that such shareholder leave the meeting. The chairman may, on his or her
own motion, summarily adjourn any meeting for any period he or she deems
necessary if he or she rules that orderly procedures cannot be maintained at the
meeting. Unless, and to the extent, determined by the Board of Directors or the
chairman of the meeting, meetings of shareholders shall not be required to be
held in accordance with rules of parliamentary procedure.
Section 12. Procedure Necessary to Bring Business Before an Annual
Meeting. To be properly brought before an annual meeting of shareholders,
business must be either (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (b)
properly brought before the meeting by or at the direction of the Board, or (c)
properly brought before the meeting by a shareholder. In addition to any other
applicable requirements, for business to be properly brought before an annual
meeting by a shareholder, the shareholder must have given timely notice thereof
in writing, either by personal delivery or by United States mail, postage
prepaid, to the Secretary of the Corporation not less than one hundred twenty
(120) days in advance of the date of the Corporation's proxy statement
released to shareholders in connection with the previous year's annual meeting
of shareholders; provided, however, that if the Corporation did not release a
proxy statement in connection with the previous year's annual meeting then the
shareholder must give such notice not later than one hundred twenty (120) days
prior to the anniversary date of the immediately preceding annual meeting. A
shareholder's notice to the Secretary shall set forth as to each matter the
shareholder proposes to bring before the annual meeting (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (ii) the name and record
address of the shareholder proposing such
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business, (iii) the class and number of shares of the Corporation which are
beneficially owned by the shareholder, and (iv) any material interest of the
shareholder in such business.
Notwithstanding anything in the By-laws to the contrary, no business shall
be conducted at the annual meeting except in accordance with the procedures set
forth in this Section 12 of Article II and any other applicable requirements;
provided, however, that nothing in this Section 12 of Article II shall be deemed
to preclude discussion by any shareholder of any business properly brought
before the annual meeting.
The chairman of an annual meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting in accordance with the provisions of this Section 12 of Article II or
any other applicable requirements, which determination shall be conclusive, and,
as a result, any such business shall not be transacted.
ARTICLE III
DIRECTORS
Section 1. Number and Election of Directors. For so long as the
Corporation is a subsidiary of FOHP, Inc. ("FOHP"), the Board of Directors of
the Corporation shall be comprised of the persons who are elected to the Board
of Directors of FOHP ("FOHP Board Members"); provided, however, that the number
of directors serving on the Board of Directors of the Corporation may be
increased by the Board of Directors of the Corporation to include persons other
than FOHP Board members if so required under applicable law or by any
governmental agency or department which has the authority to regulate the
business of the Corporation. FOHP, as sole shareholder of the Corporation, shall
take all action necessary for the election of the FOHP Board Members to the
Corporation's Board of Directors. The directors shall be elected at the annual
meeting of shareholders, or at a special meeting of shareholders called for such
purpose, and each director elected shall hold office until his or her successor
is elected and qualified.
Section 2. Governance.
(a) General Business. The business of the Corporation shall be governed by
the Board. The Board of Directors may exercise all such powers of the
Corporation and do all such lawful acts and things as are not by statute or by
the Certificate of Incorporation directed or required to be exercised or done by
the shareholders.
(b) Board Approval Requirements.
(i) Actions Requiring Super-Majority Board Approval. The Board may
not approve any of the following corporate transactions or actions without the
approval of at least eighty (80%) percent of the directors on the Board:
A. any amendment to the Certificate of Incorporation or
these By-laws;
B. any capital expenditures by the Corporation which,
together with capital expenditures of FOHP and its
subsidiaries, exceed, in the aggregate, $1,000,000
during any calendar year;
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C. any material change in the scope of the business of the
Corporation;
D. any merger, consolidation or sale, mortgage, lease,
transfer or other disposition of all or substantially
all of the assets of the Corporation;
E. any filing for receivership, dissolution or bankruptcy
by the Corporation;
F. the declaration or payment of any dividend or other
distribution to shareholders of the Corporation on a
non-ratable basis;
G. the issuance or sale of any shares of capital stock, or
warrants, convertible instruments or other rights to
acquire authorized and unissued shares of capital stock
of the Corporation;
H. the borrowing by the Corporation, other than borrowing
in the ordinary course of business, of amounts which,
together with amounts borrowed by FOHP and its
subsidiaries, exceed, in the aggregate, $1,000,000
during any calendar year;
I. the creation of any security interest or lien on all or
substantially all of the assets of the Corporation;
J. any acquisition by the Corporation of equity securities
(other than pursuant to a buyback or repurchase of
equity securities issued by the Corporation) or assets
of any person or entity involving amounts which,
together with amounts involved in acquisitions of equity
by FOHP and its subsidiaries exceed, in the aggregate,
$1,000,000 during any calendar year, except for the
transactions contemplated by the Purchase Agreement (as
defined below);
K. a decision to file a registration statement for the
public sale of securities of the Corporation under the
Securities Act of 1933, as amended;
L. any loan of money to, or guarantee of any obligation of,
any officer, director or employee of the Corporation; or
M. entering into, assuming or becoming bound by any
agreement to do any of the foregoing or otherwise
attempt to do any of the foregoing.
(ii) Non-HSI Directors. In addition to the approval requirements set
forth in paragraph (i) of this Section 2(b), the Board may not approve any of
the following corporate transactions or actions without the approval of a
majority of the directors not designated by or affiliated with Health Systems
International, Inc. ("HSI"), a Delaware corporation:
A. any transaction by the Corporation involving a
contractual or other arrangement with HSI or any
subsidiary or affiliate thereof or successor thereto, or
any subsidiary or affiliate of any successor to HSI,
which is new or modified from the then-existing
contractual arrangements between the Corporation and
HSI;
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B. the issuance to HSI or any subsidiary or affiliate
thereof or successor thereto, or any subsidiary or
affiliate of any successor to HSI, of any shares of the
Corporation's capital stock, or options, stock
appreciation rights, warrants or other rights to acquire
the capital stock of the Corporation; or
C. any intentional act by HSI to cause the transfer of the
members of the health plans offered by the Corporation
or any subsidiary of FOHP, to HSI or any subsidiary or
affiliate thereof or successor thereto, or any
subsidiary or affiliate of any successor to HSI;
provided, however, that no such approval shall be required in the case of any of
clause A., clause B. or clause C. of this Section 2(b)(ii) with respect to any
transaction contemplated by the Securities Purchase Agreement, dated as of
October 24, 1996 among HSI, FOHP and the Corporation (the "Purchase Agreement").
Section 3. Removal. Any director or directors may be removed from office
either with or without cause by the shareholders pursuant to Section 14A:6-6 of
the New Jersey Business Corporation Act.
Section 4. Meetings. The Board of Directors of the Corporation may hold
meetings, both regular and special, either within or without the State of New
Jersey. The first meeting of each newly elected Board of Directors shall be held
at such time and place as shall be fixed by the vote of the shareholders at the
annual meeting, and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the shareholders to fix the
time or place of such first meeting of the newly elected Board of Directors, or
in the event such meeting is not held at the time and place so fixed by the
shareholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
Board of Directors, or as shall be specified in a written waiver signed by all
of the directors, or upon the conclusion of the shareholders' meeting at which
time they were elected, without further notice. At such meeting the Board of
Directors shall elect from their own number a Chairman of the Board for the
ensuing year and until his or her successor is elected and qualifies, and
transact such other business as may come before the meeting.
Section 5. Regular Meetings. Regular meetings of the Board may be held on
five (5) days written notice, at such time as shall be from time to time
determined by the Board. Written notice for any such meeting shall state the
place, date and time of the meeting and shall be delivered either personally or
by first class mail, facsimile or overnight courier service.
Section 6. Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman of the Board or the President, and shall be called
by the President or Secretary at the request in writing of at least one-third
(1/3) of the directors then in office. Written notice of any special meeting
shall be given, either personally or by first class mail, facsimile or overnight
courier service, to each director at least two (2) days prior to the date
thereof.
Section 7. Place of Meeting; Waiver of Notice. Meetings of the Board of
Directors shall be held at such place as shall be designated in the notice of
meeting if notice is required. Notice of any meeting, if required, need not be
given to any director who signs a waiver of notice before or after the meeting.
The attendance of any director at any meeting without the director protesting
prior
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to the conclusion of such meeting the lack of notice thereof shall constitute a
waiver of notice by such director.
Section 8. Quorum. Except as otherwise provided in the Certificate of
Incorporation, a majority of the directors then in office shall constitute a
quorum for the transaction of business at any meeting of the Board of Directors.
Section 9. Manner of Acting. Except as otherwise provided in the
Certificate of Incorporation or herein, the act of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors.
Section 10. Action Without a Meeting. Any action required or permitted to
be taken by the Board of Directors or by a committee thereof may be taken
without a meeting if, prior to such action, all of the members of the Board or
committee consent in writing to a resolution authorizing the action. Such
written consents may be executed in counterparts, and shall be filed with the
minutes of the Corporation.
Section 11. Telephonic Attendance at Meeting. Any or all directors may
participate in a meeting of the Board of Directors or a committee of the Board
by means of conference telephone or any means of communication by which all
persons participating in the meeting are able to hear each other.
Section 12. Committees Established Pursuant to the By-laws.
(a) Audit Committee. The Corporation shall have an audit committee
(the "Audit Committee"). Unless otherwise required by applicable law or by any
governmental agency or department which has authority to regulate the business
of the Corporation, for so long as the Corporation is a subsidiary of FOHP, the
Audit Committee of FOHP shall be the Corporation's Audit Committee.
(b) Other Committees. The Board of Directors may, by one or more
resolutions passed by a majority of the directors then in office, establish such
other committees as it shall determine necessary for the operations of the
Corporation; provided, however, HSI shall have the right to designate to any
committee, other than the Audit Committee, that number of committee members as
is commensurate with its representation on the Board. Such committee or
committees shall have such name or names as may be determined from time to time
by a resolution adopted by the Board. Moreover, upon a resolution passed by a
majority of the directors then in office, the Board may designate one or more
committees, comprised solely of directors of the Corporation, to exercise the
power of the Board in the management of the business and affairs of the
Corporation; provided, however, that for so long as any shares of FOHP's common
stock is held by any NJ Practitioner (as defined in Section 14 below), NJ Acute
Care Institution (as defined in Section 14 below), affiliates to a NJ Acute Care
Institution, or other health care provider to the Corporation, any such
committee of the Board shall include as members not less than three (3) persons
who are not HSI designees to the Board, one (1) of whom shall be a NJ
Practitioner and another a representative of a NJ Acute Care Institution. Only
committees whose membership is exclusively reserved for directors may be
vested with the powers of the Board. All other committees shall have and may
exercise such authority as the Board establishes by resolution or these By-laws
permit, subject to any limitation imposed by law. The filling of vacancies in a
committee, the abolishing of a committee and the removal of persons serving on a
committee shall be as set forth in a resolution adopted by the Board unless
otherwise set
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forth in the provisions of these By-laws applicable to such committee. Each
committee shall keep regular minutes of its meetings and report same to the
Board of Directors when required. Except as may otherwise be pro`vided in a
resolution adopted by the Board, committee members and chairpersons shall serve
one (1) year terms.
(c) Restrictions on Committee Members. Members of any committee of
the Corporation who are affiliated with or represent an entity, including its
officers, directors, employees and agents, that provides health care services on
behalf of the Corporation or any subsidiary or affiliate thereof pursuant to an
agreement with the Corporation or any subsidiary or affiliate thereof are
prohibited from using their participation as a committee member of the
Corporation to obtain or exchange competitive information pertaining to other
providers that provide similar health care services on behalf of the Corporation
or any subsidiary or affiliate thereof pursuant to an agreement with the
Corporation or any subsidiary or affiliate thereof. Competitive information
includes, but is not limited to, information related to an individual provider's
rates, discounts, costs, prices, salaries, terms of participation in other
health plans, or strategic or marketing plans.
(d) Quorum. A majority of the members of a committee or subcommittee
shall constitute a quorum for the transaction of business at any meeting of such
committee or subcommittee.
(e) Required Vote. The act of a majority of the members present at a
meeting at which a quorum is present shall be the act of the committee or
subcommittee.
Section 13. Compensation of Directors. The directors may be paid their
expenses, if any, relating to their attendance at meetings of the Board of
Directors, and directors who are not full-time employees of the Corporation may
be paid a fixed sum for attendance at meetings of the Board of Directors or a
stated salary as a director. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
Section 14. Definitions. For purposes of these By-laws: (a) "NJ Acute Care
Institution" shall mean a hospital or acute care institution, licensed by the
New Jersey Department of Health and Senior Services, or other health care
entity, licensed, certificated or authorized to operate in the State of New
Jersey, which has entered into a provider agreement with the Corporation to
provide health care related services to the members of the Corporation's health
care benefits plans; and (b) "NJ Practitioner" shall mean a member of the
medical staff of a NJ Acute Care Institution, or a physician designated by a NJ
Acute Care Institution, who (i) is licensed to practice medicine or osteopathy
in the State of New Jersey, and (ii) has entered into a provider agreement with
the Corporation to provide health care services to the members of the
Corporation's health care benefits plans.
ARTICLE IV
OFFICERS
Section 1. Officers. The officers of the Corporation shall be chosen by
the Board of Directors and shall be a Chairman of the Board, a President, one or
more Vice-Presidents, a Treasurer and a Secretary. The Board of Directors may
also choose one or more Assistant Secretaries or Assistant Treasurers, and may
designate one or more vice-presidents to be executive or senior vice-presidents.
One person may hold two (2) or more offices, but the person serving as President
may not serve simultaneously as Secretary.
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Section 2. Term; Removal. The officers of the Corporation shall hold
office until their successors are chosen and qualify. Any officer elected or
appointed by the Board of Directors may be removed or suspended at any time by
the affirmative vote of a majority of the directors at any meeting of the Board
at which there is a quorum, without the necessity of specifying any cause
therefor and without any prior notice of such action to the officer so removed
or suspended. All officers, employees and agents, other than officers elected or
appointed by the Board of Directors, may be suspended or removed by the
committee of the Board of Directors or officer appointing them.
Section 3. Chairman of the Board. The Chairman of the Board shall preside
at all meetings of the shareholders and the Board of Directors. He or she shall,
in the absence or the disability of the President, perform the duties and
exercise the powers of the President, and shall perform such other duties as may
be delegated to him or her by the Board of Directors.
Section 4. President. The President, who shall be the Chief Executive
Officer of the Corporation, shall in general, subject to the control of the
Board of Directors, supervise and control all of the business and affairs of the
Corporation. All other officers shall be subject to the authority and
supervision of the President. The President may enter into and execute in the
name of the Corporation contracts or other instruments in the regular course of
business or contracts or other instruments not in the regular course of business
which are authorized, either generally or specifically, by the Board of
Directors. The President shall have the general powers and duties of management
usually vested in the office of president of a corporation.
Section 5. Vice Presidents. The Board of Directors may appoint one or more
Vice Presidents who shall perform such duties and possess such powers as shall
be assigned him or her by the President or the Board.
Section 6. Treasurer and Assistant Treasurer. The Treasurer shall have
charge and custody of, and be responsible for, all funds and securities of the
Corporation, shall keep or cause to be kept regular books of account for the
Corporation and shall perform such other duties and possess such other powers as
are incident to the office of treasurer or as shall be assigned to the Treasurer
by the President or the Board. The Assistant Treasurer, or if there shall be
more than one, the Assistant Treasurers, in the order determined by the Board,
shall, in the absence or disability of the Treasurer, perform the duties and
exercise the powers of the Treasurer set forth herein and as the President or
the Board from time to time may prescribe.
Section 7. Secretary and Assistant Secretary. The Secretary shall cause
notices of all meetings to be served as prescribed in these By-laws or by
statute, shall keep or cause to be kept the minutes of all meetings of the
shareholders and of the Board of Directors, shall have charge of the corporate
records and seal of the Corporation and shall keep a register of the post-office
address of each shareholder which shall be furnished to the Secretary by such
shareholder. The Secretary shall perform such other duties and possess such
other powers as are incident to the office of the secretary or as are assigned
by the President or the Board. The Assistant Secretary, or if there shall be
more than one, the Assistant Secretaries, in the order determined by the Board,
shall, in the absence or disability of the Secretary, perform the duties and
exercise the powers of the Secretary set forth herein and as the President or
the Board from time to time may prescribe.
Section 8. Subordinate Officers and Agents. The Board may appoint such
other officers and agents as it shall deem necessary or desirable, who shall
hold their offices for such terms and shall exercise such powers and perform
such duties as shall be determined from time to time by the President or the
Board.
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ARTICLE V
EXECUTION OF DOCUMENTS
Section 1. Commercial Paper and Contracts. All checks, notes, drafts and
other commercial paper of the Corporation shall be signed by the President or
the Treasurer of the Corporation or by such other person or persons as the Board
of Directors may from time to time designate.
Section 2. Other Instruments. All contracts, deeds, mortgages and other
instruments shall be executed by the President or any Vice President, and, if
necessary or required by law, by the Secretary or any Assistant Secretary, or
such other person or persons as the Board of Directors may from time to time
designate.
ARTICLE VI
FISCAL YEAR
The fiscal year of the Corporation shall be the calendar year.
ARTICLE VII
CERTIFICATES REPRESENTING SHARES
Certificates representing shares of capital stock of the Corporation shall
be in such form as shall be determined by the Board of Directors and shall be
executed by the President or any Vice President and by the Secretary or the
Treasurer, unless the Board of Directors shall direct otherwise.
ARTICLE VIII
RECORD DATE
For the purpose of determining the shareholders entitled to notice of or
to vote at any meeting of shareholders or any adjournment thereof, or to express
consent to or dissent from any proposal without any meeting or for the purpose
of determining shareholders entitled to receive payment of any dividend or
allotment of any right, or in order to make a determination of shareholders for
any other purpose, the Board of Directors shall fix, in advance, a date as the
record date for any such determination of shareholders. Such date shall not be
more than sixty (60) days nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action or event to
which it relates. When a determination of shareholders of record for a
shareholders' meeting has been made as provided in this Article VIII, such
determination shall apply to any adjournment thereof, unless the Board of
Directors fixes a new record date for the adjourned meeting.
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ARTICLE IX
DIVIDENDS
The Board of Directors may from time to time declare, and the Corporation
may pay, dividends or make other distributions on its outstanding shares of
capital stock in the manner and upon the terms and conditions provided by the
Certificate of Incorporation and by statute.
ARTICLE X
AMENDMENT
These By-laws may be altered, amended or repealed, or new by-laws may be
adopted by the Board of Directors, at any regular meeting of the Board of
Directors or of any special meeting of the Board of Directors in accordance with
the vote required in Article III hereof; provided, however, that (i) any
alteration, amendment, or repeal of Sections 1, 2(b)(ii), 12(b) and 14 of
Article III of these By-laws requires the approval of a majority of the
directors who are not HSI designees, and (ii) any new by-laws which may be
adopted by the Board must contain the provisions found in Sections 1, 2(b)(ii),
12(b) and 14 of Article III of these By-laws for so long as any shares of FOHP's
common stock is held by any NJ Practitioner, NJ Acute Care Institution,
affiliate to a NJ Acute Care Institution or other health care provider to the
Corporation. These By-laws, or any new by-laws adopted by the Board, may also be
altered, amended or repealed, or new by-laws may be adopted, by the
shareholders, at any annual or special meeting of shareholders if notice of such
alteration, amendment, repeal or adoption of new by-laws is contained in the
notice of such meeting; provided, however, that (i) any alteration, amendment,
or repeal of Sections 1, 2(b)(ii), 12(b) or 14 of Article III of these By-laws
requires the approval of a majority of the directors who are not HSI designees,
and (ii) any new by-laws which may be adopted by the shareholders must contain
the provisions found in Sections 1, 2(b)(ii), 12(b) and 14 of Article III of
these By-laws for so long as any shares of FOHP's common stock is held by any NJ
Practitioner, NJ Acute Care Institution, affiliate to a NJ Acute Care
Institution or other health care provider to the Corporation.
ARTICLE XI
INDEMNIFICATION
Section 1. The Corporation shall indemnify a Corporate Agent (as defined
in Section 8 of this Article) against his or her expenses and liabilities
actually and reasonably incurred in connection with the defense of any
proceeding involving the Corporate Agent by reason of his or her being or having
been such a Corporate Agent, other than a proceeding by or in the right of the
Corporation, if (a) such Corporate Agent acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to the best interests of the
Corporation and (b) with respect to any criminal proceeding, such Corporate
Agent had no reasonable cause to believe his or her conduct was unlawful. The
termination of any proceeding by judgment, order, settlement, conviction or upon
a plea of nolo contendere or its equivalent, shall not of itself create a
presumption that such Corporate Agent did not meet the applicable standards of
conduct set forth in subparagraphs (a) and (b) herein.
Section 2. The Corporation shall indemnify a Corporate Agent against his
or her liabilities and expenses, actually or reasonably incurred by him or her
in connection with the defense, in any
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proceeding, by or in the right of the Corporation to procure a judgment in its
favor which involves the Corporate Agent by reason of his or her being or having
been such Corporate Agent, if he or she acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to the best interests of the
Corporation. However, in such proceeding no indemnification shall be provided in
respect of any claim, issue or matter as to which such Corporate Agent shall
have been adjudged liable to the Corporation unless and only to the extent that
the New Jersey Superior Court or the court in which such proceeding was brought
shall determine upon application that despite the adjudication of liability, but
in view of all circumstances of the case, such Corporate Agent is fairly and
reasonably entitled to indemnity for such expenses or liabilities as the New
Jersey Superior Court or such other court shall deem proper.
Section 3. The Corporation shall indemnify a Corporate Agent against
expenses (including attorneys fees) to the extent that such Corporate Agent has
been successful on the merits or otherwise in any proceeding referred to in
Sections 1 and 2 of this Article or in defense of any claim, issue or matter
therein.
Section 4. Any indemnification under Section 1 of this Article and, unless
ordered by a court, under Section 2 of this Article, may be made by the
Corporation only as authorized in a specific case upon a determination that
indemnification is proper in the circumstances because the Corporate Agent met
the applicable standard of conduct set forth in Sections 1 or 2 of this Article.
Such determination shall be made: (a) by the Board of Directors by a majority
vote of a quorum consisting of directors who were not parties to or otherwise
involved in the proceeding; (b) if such a quorum is not obtainable, or, even if
obtainable and such quorum of the Board of Directors by a majority vote of the
disinterested directors so directs, by independent legal counsel in a written
opinion, such counsel to be designated by the Board of Directors; or (c) by the
shareholders.
Section 5. Expenses incurred by a Corporate Agent in connection with a
proceeding may be paid by the Corporation in advance of the final disposition of
the proceeding, as authorized by the Board of Directors, upon receipt of an
undertaking by or on behalf of the Corporate Agent to repay such amount unless
it shall ultimately be determined that he or she is entitled to be indemnified
as provided in this Article XI.
Section 6. The indemnification and advancement of expenses provided by or
granted pursuant to the other sections of this Article shall not exclude any
other rights to which a Corporate Agent may be entitled under the Corporation's
Certificate of Incorporation, a By-law, agreement, vote of shareholders, or
otherwise; provided, that no indemnification shall be made to or on behalf of a
Corporate Agent if a judgment or other final adjudication adverse to the
Corporate Agent establishes that his or her acts or omissions (a) were in breach
of his or her duty of loyalty to the Corporation or its shareholders, (b) were
not in good faith or involved a knowing violation of law, or (c) resulted in
receipt by the Corporate Agent of an improper personal benefit.
Section 7. The Corporation shall have the power to purchase and maintain
insurance on behalf of any Corporate Agent against any expenses incurred in any
proceeding and any liabilities asserted against him or her by reason of his or
her being or having been a Corporate Agent, whether or not the Corporation would
have the power to indemnify him or her against such expenses and liabilities
under the provisions of this section. The Corporation may purchase such
insurance from, or such insurance may be reinsured in whole or in part by, an
insurer owned by or otherwise affiliated with the Corporation, whether or not
such insurer does business with other insureds.
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Section 8. For purposes of this Article XI the following definitions, as
well as all other definitions set forth in N.J.S.A. 14A:3-5 shall apply:
(a) "Corporate Agent" shall mean any person who is or was a
director, officer, employee or agent of the indemnifying corporation or of any
constituent corporation absorbed by the indemnifying corporation in
consolidation or merger and any person who is or was a director, officer,
trustee, employee or agent of any Other Enterprise, serving as such at the
request of the indemnifying corporation, or of any such constituent corporation,
or the legal representative of any such director, officer, trustee, employee or
agent. Furthermore, any Corporate Agent also serving as a "fiduciary" of an
employee benefit plan governed by the Act of Congress entitled "Employee
Retirement Income Security Act of 1974" (ERISA) as amended from time to time,
shall serve in such capacity as a Corporate Agent, if the corporation shall have
requested any such person to serve. Additionally, the corporation shall be
deemed to have requested such person to serve as a fiduciary of an employee
benefit plan, only where the performance by such person of his or her duties to
the corporation also imposes duties on, or otherwise involves services by, such
person to the plan or participants or beneficiaries of the plan.
(b) "Other Enterprise" shall mean any domestic or foreign
corporation other than the indemnifying corporation, and any partnership, joint
venture, sole proprietorship, trust or other enterprise (including employee
benefit plans governed by ERISA), whether or not for profit, served by a
Corporate Agent.
ARTICLE XII
INCONSISTENCY WITH CERTIFICATE OF INCORPORATION
In the event that any of the provisions of these By-laws is inconsistent
with any provision of the Corporation's Certificate of Incorporation, the
provision of the Certificate of Incorporation shall apply.
As Amended: _________ ___, 1996.
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PROXY
FOHP, INC.
Annual Meeting of Shareholders - December __, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby nominates and appoints John W. Rohfritch and Donald
Parisi, or any one of them, as the true and lawful attorneys, agents and proxies
of the undersigned, with full power of substitution to each, to vote with
respect to all of the shares of Common Stock-NJ of FOHP, Inc. (the
"Corporation") that the undersigned may be entitled to vote at the 1996 Annual
Meeting of Shareholders ("Annual Meeting") of said Corporation to be held at the
CNA Building, 3501 State Highway 66, Neptune, New Jersey on December ___, 1996
at ______ a.m./p.m. local time, and at any and all adjournment or adjournments
thereof, with all powers that the undersigned would possess if personally
present and especially (but without limiting the general authorization and power
hereby given) to vote as indicated herein.
The shares represented by this Proxy will be voted in the manner directed,
and if no instructions to the contrary are indicated, will be voted FOR the
proposal to approve the Securities Purchase Agreement described in paragraph 1
below and FOR all the nominees for director listed in paragraph 2 below.
1. To approve the Securities Purchase Agreement among the Corporation,
First Option Health Plan of New Jersey, Inc. and Health Systems International,
Inc., and the transactions contemplated thereby.
FOR |_| AGAINST |_| ABSTAIN |_|
2. To elect the following nominees for directors: Roger Birnbaum, Dr. John
F. Bonamo, Sister Jane Frances Brady, Bruce G. Coe, Christopher Dadlez, Dr. Mark
Engel, Dr. Thomas J. Feneran, Mr. John Gantner, Laurence M. Merlis and Dr. Om P.
Sawhney.
|_| |_|
FOR all nominees (except WITHHOLD AUTHORITY
as marked to the contrary to vote for all nominees
below)
INSTRUCTION: To withhold authority to vote for any individual nominee,
write that nominee's name in the space provided below.
__________________________________________________________________________
3. In their discretion, upon such other matters as may properly come
before the Annual Meeting or any adjournment or adjournments
thereof.
The Board of Directors recommends a FOR vote on the proposal to approve
the Securities Purchase Agreement described in paragraph 1 above and FOR all the
nominees for director listed in paragraph 2 above.
NOTE: Please mark, sign, date and return this Proxy promptly in the envelope
provided. No postage is required if mailed in the United States.
Dated:____________________, 1996
___________________________________________
___________________________________________
IMPORTANT: Please sign exactly as your name
appears at the left. When signing as
attorney, executor, administrator, trustee
or guardian, please set forth your full
title. If the signatory is a corporation,
please write the full corporate name and
have this proxy signed by a duly authorized
officer of such corporation, indicating the
office of such individual. Joint owners
should each sign.
