UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the quarterly period ended September 30, 1996
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-25944
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FOHP, Inc.
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(Exact name of registrant as specified in its charter)
New Jersey 22-3314813
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2 Bridge Avenue, Building 6,
Red Bank, New Jersey 07701-1106
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(908) 842-5000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock-NJ, 2,100,173 shares outstanding as of November 12, 1996
<PAGE>
<TABLE>
<CAPTION>
INDEX PAGE NO.
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets - September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations 4
For the period January 1 to September 30, 1996 & 1995
For the period July 1 to September 30, 1996 & 1995
Condensed Consolidated Statements of Shareholders' Equity 5
For the period January 1, 1995 to December 31, 1995
For the period January 1, 1996 to September 30, 1996
Condensed Consolidated Statements of Cash Flows 6
For the period January 1, 1996 to September 30, 1996
For the period January 1, 1995 to September 30, 1995
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signature Page 16
</TABLE>
2
<PAGE>
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(unaudited) (audited)
<S> <C> <C>
Assets
Cash and cash equivalents ............................................................ $ 38,532,881 $ 23,882,286
Accounts receivable from owners/ providers ........................................... 10,050,596 6,341,092
Other accounts receivable (net of allowance for doubtful accounts
of $607,897 and $290,300, respectively) ............................................ 1,944,828 3,252,639
Prepaid expenses ..................................................................... 806,557 534,751
------------ ------------
Total current assets ................................................................. 51,334,862 34,010,768
Long-term Assets:
Restricted Cash .................................................................... 1,249,183 1,200,801
Furniture and equipment (at cost, net of accumulated depreciation
and amortization of $1,423,476 and $770,460, respectively) ........................ 2,267,106 1,859,131
Other assets ....................................................................... 571,375 291,133
------------ ------------
Total Assets ......................................................................... $ 55,422,526 $ 37,361,833
============ ============
Liabilities and Shareholders' Equity
Current Liabilities:
Medical claims payable ............................................................. $ 55,837,480 $ 26,960,273
Accrued expenses ................................................................... 4,070,585 3,284,971
Accounts payable ................................................................... 1,985,462 935,907
Unearned premium revenue ........................................................... 1,116,223 341,092
Other .............................................................................. 1,375,505 960,551
------------ ------------
Total current liabilities ............................................................ 64,385,255 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 ................................................................ (39,632,220) (25,790,452)
------------ ------------
Total shareholders' (deficiency) equity .............................................. (8,962,729) 4,879,039
------------ ------------
Total liabilities and shareholders' equity ........................................... $ 55,422,526 $ 37,361,833
============ ============
</TABLE>
See accompanying notes
3
<PAGE>
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue:
Premiums-hospitals/physicians ........ $ 33,002,584 $ 22,329,269 $ 100,981,053 $ 53,771,940
Other premium revenue ................ 33,979,097 8,135,977 70,871,936 13,912,869
Other, principally administrative
fees ............................... 1,946,321 1,728,751 5,827,805 5,563,667
Interest income ...................... 539,411 295,959 1,290,590 790,462
------------ ------------ ------------- ------------
Total Revenue .......................... $ 69,467,413 $ 32,489,956 $ 178,971,384 $ 74,038,938
------------ ------------ ------------- ------------
Expenses:
Medical and hospital services ........ 60,276,481 25,932,957 153,662,097 57,904,162
Selling, general and administrative .. 12,030,948 7,902,541 38,485,974 20,965,230
Depreciation and amortization ........ 242,630 179,637 658,853 470,884
Interest ............................. 2,899 23,670 6,228 100,820
------------ ------------ ------------- ------------
Total Expenses ......................... 72,552,958 34,038,805 192,813,152 79,441,096
------------ ------------ ------------- ------------
Net loss ............................... $ (3,085,545) (1,548,849) $ (13,841,768) $ (5,402,158)
============ ============ ============= ============
Net loss per common share .............. $ (1.47) $ (0.99) $ (6.59) (3.44)
============ ============ ============= ============
</TABLE>
See accompanying notes
4
<PAGE>
FOHP, INC. & 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 ............................................ 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
September 30, 1996 ................................. (13,841,768) (13,841,768)
---------- ------- ---------- ----------- -----------
Balance at September 30, 1996 (unaudited) ............... 2,100,173 21,002 30,648,489 $(39,632,220) $ (8,962,729)
========== ======= ========== ============ ============
</TABLE>
See accompanying notes
5
<PAGE>
FOHP, INC. & 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 Sept 30, 1996 to Sept 30, 1995
---------------- ----------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss $(13,841,768) $ (5,402,158)
Adjustments to reconcile net loss to cash flows from
(used in) operating activities:
Depreciation and amortization 658,853 470,884
Amortization of investment discounts (26,466) (35,701)
Changes in operating assets and liabilities:
Increase in accounts receivable, net (2,401,693) (2,443,929)
(Increase) decrease in prepaids and other current assets (271,806) 222,621
Increase in other assets (307,996) (566,808)
Increase (decrease) in accounts payable and
accrued expenses 1,835,169 (1,326,899)
Increase in medical claims payable 28,877,207 16,550,013
Increase (decrease) in unearned premium revenue 775,131 (79,024)
Increase (decrease) in other current liabilities 414,954 (14,096)
------------ ------------
Net cash flows from operating activities 15,711,585 7,374,903
Cash flows from investing activities
Increase in restricted cash -- (700,000)
Purchases of furniture and fixtures (1,060,990) (785,534)
------------ ------------
Net cash used in investing activities (1,060,990) (1,485,534)
Cash flows from financing activities
Proceeds from short-term loan -- 1,000,000
Common stock subscribed -- 7,837,125
Redemption of common stock -- (1,500)
Payment of stock issue costs -- $ (23,046)
------------ ------------
Net cash provided by financing activities -- 8,812,579
Net increase in cash and cash equivalents
at the end of the period 14,650,595 14,701,948
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 $ 38,532,881 $ 27,732,243
============ ============
Interest paid for the period $ 6,228 $ 58,663
============ ============
State income taxes paid for the period $ 1,198 $ 1,328
============ ============
</TABLE>
See accompanying notes
6
<PAGE>
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
1. General
FOHP, Inc. ("FOHP" or the "Holding Company") is a New Jersey corporation which
was formed in May 1994. The Holding Company was formed to effect a
reorganization (the "Reorganization") of First Option Health Plan of New Jersey,
Inc. ("FOHP-NJ"), which was consummated on June 8, 1995. The Reorganization was
completed through an exchange of FOHP-NJ's outstanding common stock for shares
of the Holding Company's Common Stock-NJ. In connection with the Reorganization,
FOHP-NJ distributed , as a dividend, all of the outstanding common stock of
First Managed Care Option, Inc. ("FMCO") to the Holding Company. Pursuant to the
Reorganization, FOHP-NJ and FMCO became wholly-owned subsidiaries of FOHP. Prior
to the Reorganization, the Holding Company did not conduct any business nor did
it have any significant assets or liabilities. The primary purpose of the
Reorganization was to facilitate the formation of additional health maintenance
organizations in states other than New Jersey.
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 Certificate of Authority ("COA") to operate as
a health maintenance organization ("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 financial information for the three and six month periods ended September
30, 1996 and September 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 included in Part I - Item 2 hereof.
2. Basis of Presentation and Significant Accounting Policies
The Holding Company has incurred a loss of $13,841,768 for the nine month period
ended September 30, 1996 and has an accumulated deficit of $39,632,220 as of
September 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 New Jersey Departments of Banking and Insurance and
Health and Senior Services (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
7
<PAGE>
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. In that connection, in October
1996, the Holding Company and FOHP-NJ entered into a Securities Purchase
Agreement (the "Purchase Agreement") with Health Systems International, Inc.
("HSI"), a Delaware corporation which is headquartered in Pueblo, Colorado and
Woodland Hills, California. HSI is a managed health care organization which
provides a wide range of health care services through HMOs located in
California, Connecticut, Pennsylvania, New Jersey, Washington, Oregon, Idaho,
Colorado and New Mexico. Pursuant to the purchase agreement, HSI will, among
other things, infuse $30 million into the Holding Company through the purchase
of convertible subordinated surplus debentures (the "Debentures"). The closing
of the purchase agreement is expected to occur by year end 1996 and is subject
to regulatory and shareholder approval.
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 $1,087,000 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 New Jersey Department of Banking and Insurance.
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 nine
month period ended September 30, 1996 and September 30, 1995 (2,100,173 at
September 30, 1996 and 1,571,786 at September 30, 1995).
8
<PAGE>
3. Common Stock
At September 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.
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 September 30, 1996 amounted to $11,951,000. In addition, under
the terms of its COA, if statutory net worth is less than 125% of the minimum
required ($14,938,000 at September 30, 1996), FOHP-NJ is required to submit a
plan of action to the New Jersey Department of Banking and 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 included in Part I - Item 2 hereof, FOHP-NJ's statutory
net worth deficiency at September 30, 1996 approximated $9,252,000, which was
$24,190,000 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 included in Part I -
Item 2 hereof. 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. As part of FOHP-NJ's plan of action to address its
statutory net worth deficiency, FOHP-NJ and the Holding Company have entered
into a purchase agreement with HSI, pursuant to which HSI will, among other
things, infuse $30 million into the Holding Company through the purchase of the
Debentures.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
OVERVIEW
The Holding Company, a New Jersey corporation, was formed in May 1994 to effect
the Reorganization which 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 Holding Company's
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. The
Holding Company does not intend to achieve profits by taking any action which
could have an adverse effect on the operations of a subsidiary formed to operate
as an HMO.
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 September 1996, FOHP-NJ had entered into provider
agreements with fifty-one (51) acute care institutions ("NJ Acute Care
Institutions"), approximately ten thousand (10,000) practitioners ("NJ
Practitioners"), and approximately seventy-five (75) other health care providers
("NJ Other Providers"). The provider agreements have an initial term of one year
and are renewable annually. Such agreements with NJ Acute Care Institutions and
NJ Other Providers may be terminated by mutual consent or, after the initial one
year term, by either party upon 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 an FOHP-NJ plan for any services paid for under such
plan except for any applicable copayment.
NJ Practitioners are paid pursuant to a fee schedule established by FOHP-NJ and
are prohibited from billing members of an FOHP-NJ plan except for copayments and
non-covered services, if any. Copayments, in amounts approved by FOHP-NJ, are
collected directly by the NJ Practitioner from the member.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION--(CONTINUED)
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 canceled by the employer group
upon thirty (30) days written notice. Under these contracts, FOHP-NJ has agreed
to provide the employer groups with health insurance 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 subscriber contracts
is recorded as revenue in the month in which subscribers are entitled to
service. Premiums collected in advance are reported as unearned premium revenue.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Premium Revenue. For the three-month period ended September 30, 1996, medical
premium revenue totaled $66,982,000 or $36,517,000 more than the $30,465,000 of
medical premium revenue generated during the same period in 1995. Medical
premium revenue generated by the Holding Company during the three-month period
ended September 30, 1996 was substantially greater than the medical premium
revenue generated by the Holding Company during the same period in 1995 due to
the significant subscriber growth experienced since the end of the third quarter
of 1995. Approximately 49% of medical premium revenue generated in the third
quarter of 1996 and approximately 73% of medical premium revenue generated in
the third quarter 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
three-month period ended September 30, 1996 was $1,946,000 compared to
$1,729,000 of other revenue for the same period of the prior year. This increase
is attributed to the significant subscriber growth in self-insured products.
Interest income for the third quarter of 1996 was $539,000, a $243,000 increase
from the $296,000 generated in the third quarter of 1995. The increase in
interest income was due to the larger cash reserves maintained by the Holding
Company in 1996.
Medical and Hospital Service Expenses. Total expenses attributable to medical
and hospital service for the three-month period ended September 30, 1996 were
$60,276,000 or $34,343,000 higher than expenses incurred for the same period in
1995. The increase in medical and hospital service expenses from 1995 to 1996
was primarily attributable to a significant increase in enrollees in FOHP-NJ
plans. The Holding Company believes that recent operational changes,
specifically the implementation of a modified provider reimbursement schedule,
will lower the percentage of medical expenses to premium dollars in future
quarters.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $12,031,000 for the three-month period ended
September 30, 1996 compared to $7,903,000 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.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION--(CONTINUED)
Other Expenses. Depreciation and amortization expenses for the three-month
period ended September 30, 1996 increased by $63,000 from the $180,000 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 1996 to $3,000 from the $24,000 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 NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Premium Revenue. For the nine-month period ended September 30, 1996, medical
premium revenue totaled $171,853,000 or $104,168,000 more than the $67,685,000
of medical premium revenue generated during the same period in 1995. Medical
premium revenue generated by the Holding Company during the period ended
September 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 third quarter of 1995.
Approximately 59% of medical premium revenue generated in the first nine months
of 1996 and approximately 79% of medical premium revenue generated in the first
nine 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
nine-month period ended September 30, 1996 was $5,828,000 compared to $5,564,000
of other revenue for the same period of the prior year. Interest income for the
first nine months of 1996 was $1,291,000, a $501,000 increase from the $790,000
generated in the first nine months of 1995. The increase in interest income was
due to the larger cash reserves maintained by the Holding Company in the first
nine months of 1996.
Medical and Hospital Service Expenses. Total expenses attributable to medical
and hospital service for the nine-month period ended September 30, 1996 were
$153,662,000 or $95,758,000 higher than 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 totaled $38,486,000 during the first nine months of 1996
compared to $20,965,000 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 nine-month period
ended September 30, 1996 increased by $188,000 from the $471,000 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 nine months of 1996 to $6,000 from the
$101,000 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.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION--(CONTINUED)
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 New Jersey Department of Banking and Insurance,
("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,
FOHP 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 FOHP 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 New Jersey Department of Health and Senior Services ("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, FOHP will contribute such capital to FOHP-NJ. To
assure that FOHP 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 to it,
certain directors and shareholders of FOHP either (I) arranged for the issuance
of letters of credit by various banks, against which FOHP 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 FOHP's capital obligation to
FOHP-NJ. In addition, pursuant to the plan of action, FOHP effected several
operational changes in order to increase capital in 1996. The operational
changes made by FOHP 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 FOHP'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 FOHP and providers in the FOHP-NJ network.
On June 12, 1996, the DOI and 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
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION--(CONTINUED)
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 FOHP or FOHP-NJ
board meeting and the minutes of certain committee meetings within thirty (30)
days of the date of any such meeting; (iv) neither FOHP 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 FOHP 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 FOHP stock to New Jersey providers must first be used
to pay the payable from FOHP 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 FOHP 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 FOHP
and FOHP-NJ shall be persons who are not affiliated with FOHP or FOHP-NJ or any
subsidiaries thereof, and who do not have any contractual relationship with FOHP
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 of solely outside directors (the
Holding Company intends to comply with subsections (ix) and (x) as soon as the
sale of the Debentures contemplated by the purchase agreement is consummated).
The aforementioned conditions are to continue until the DOI and 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 million, (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 FOHP to FOHP-NJ has been paid
in full. If the transactions contemplated by the purchase agreement are
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.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11 - See attached exhibit on following page regarding computation of
earnings per share.
Exhibit 27 - Financial Data Schedule
Reports on Form 8-K - During the third quarter ended September 30, 1996, the
following Current Reports on Form 8-K were filed by the Holding Company with
the Securities and Exchange Commission:
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOHP, Inc.
------------------------------------------
(Registrant)
Nov. 14, 1996 /s/ John W. Rohfritch
- ------------- ------------------------------------------
Date (Signature)**
John W. Rohfritch
President and Chief Executive Officer
Nov. 14, 1996 /s/ John G. McCarthy
- ------------- ------------------------------------------
Date (Signature)**
John G. McCarthy
Principal Financial and Accounting Officer
16
<PAGE>
EXHIBIT 11
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Income (Loss) .................................. $ (3,085,545) $ (1,548,849) $(13,841,768) $ (5,402,158)
Weighted average number of common shares:
Shares outstanding quarter ended 3/31/95 ......... 1,571,853
Shares outstanding quarter ended 6/30/95 ......... 1,571,753
Shares outstanding quarter ended 9/30/95 ......... 1,571,753 1,571,753
Shares outstanding quarter ended 3/31/96 ......... 2,100,173
Shares outstanding quarter ended 6/30/96 ......... 2,100,173
Shares outstanding quarter ended 9/30/96 ......... 2,100,173 2,100,173
Weighted average number of common shares outstanding
at September 30, 1996 and 1995 ..................... 2,100,173 1,571,753 2,100,173 1,571,786
------------ ------------ ------------ ------------
Net (loss) per common share ........................ $ (1.47) $ (0.99) $ (6.59) $ (3.44)
============ ============ ============ ============
</TABLE>
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 38,532,881
<SECURITIES> 0
<RECEIVABLES> 2,552,725
<ALLOWANCES> 607,897
<INVENTORY> 0
<CURRENT-ASSETS> 51,334,862
<PP&E> 3,690,582
<DEPRECIATION> 1,423,476
<TOTAL-ASSETS> 55,422,526
<CURRENT-LIABILITIES> 64,385,255
<BONDS> 0
0
0
<COMMON> 21,002
<OTHER-SE> (8,983,731)
<TOTAL-LIABILITY-AND-EQUITY> 55,422,526
<SALES> 0
<TOTAL-REVENUES> 178,971,384
<CGS> 0
<TOTAL-COSTS> 153,662,097
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,228
<INCOME-PRETAX> (13,841,768)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,841,768)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,841,768)
<EPS-PRIMARY> (6.59)
<EPS-DILUTED> (6.59)
</TABLE>
