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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. 1)
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.
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(Name of Registrant as Specified in its Charter)
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(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
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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: _______________________________________________________
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PRELIMINARY COPY
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 March __, 1997 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 (i) consider and approve
the Amended and Restated Securities Purchase Agreement (the "Amended
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"), (ii) consider and approve 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 (collectively, the "Amendments"), and (iii) elect 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.
As of December 31, 1996, FOHP-NJ was approximately $45,300,000 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 and the
Amendments.
THE NEW JERSEY DEPARTMENT OF BANKING AND INSURANCE (THE "DOI") HAS
INFORMED HSI IN WRITING THAT, IF THE TRANSACTION IS NOT CONSUMMATED ON OR
BEFORE MARCH 31, 1997 (WHICH REQUIRES THE APPROVAL OF THE HOLDING COMPANY'S
SHAREHOLDERS OF THE
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TRANSACTION AND AMENDMENTS), THE DOI WILL SUSPEND OR REVOKE FOHP-NJ'S
CERTIFICATE OF AUTHORITY TO OPERATE AS A HEALTH MAINTENANCE ORGANIZATION IN
NEW JERSEY AND PETITION THE NEW JERSEY SUPERIOR COURT FOR AN ORDER TO ALLOW
THE DOI TO PLACE FOHP-NJ INTO REHABILITATION. IF FOHP-NJ IS PLACED INTO
REHABILITATION, IT IS LIKELY 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.
Below are the highlights of the proposed Transaction:
1. HSI will infuse $50,000,000 into the Holding Company through
the purchase of convertible debentures (the "Debentures"),
of which $41,600,000 will be infused at the initial closing
and the remainder will be infused on or prior to December
31, 1997. In addition, at the initial closing, through the
purchase of Debentures, HSI will infuse an amount equal to
the management fees that HSI would have received if HSI had
been managing all administrative services of the Holding
Company since January 1, 1997. At the initial closing, HSI
will be paid a phase-in management fee in such amount, based
on certain administrative services provided to the Holding
Company since January 1, 1997. It is currently estimated that
such amount will approximate $1,100,000.
2. The principal amount of the Debentures is convertible into
71% 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), subject to adjustment under
certain circumstances. Immediately after the initial closing,
HSI will convert the principal amount of the Debentures
relating to the management fees described in paragraph 1
above into shares of Holding Company common stock
representing approximately 1.5% of the Holding Company's
outstanding equity (based on $1,100,000 principal amount of
Debentures).
3. During 1999, HSI may, at its option, acquire, through a
tender offer or a merger, all the then outstanding shares of
Holding Company capital stock at a purchase price per share
that is determined by independent appraisers. The
shareholders of the Holding Company would receive for their
shares of Holding Company capital stock, at HSI's option,
either HSI common stock or cash.
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4. Prior to December 31, 1998, HSI may, at its option, acquire,
through a tender offer, any or all of the then outstanding
shares of Holding Company capital stock (a) at any purchase
price, provided that HSI will then be required to
subsequently effect the 1999 offer described in paragraph 3
above, (b) at a purchase price per share that is determined
by independent appraisers, or (c) at any purchase price, if
the tender offer described in clause (b) shall have
previously been made.
5. 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.
6. HSI and the Holding Company will enter into an agreement,
pursuant to which HSI, upon the satisfaction of certain
conditions in the agreement, would provide all claims
processing, recordkeeping and data processing services to all
FOHP-NJ health plans, provided that such agreement shall
only become effective at the option of HSI.
7. 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.
Although the Board of Directors believes that the consummation of the
Transaction is necessary for the continuation of the Holding Company's
business, the Board recognizes that the founding principle of the Holding
Company, i.e., the provision of health care services by an organization owned
and governed exclusively by health care providers, will be abandoned as a result
of the Transaction. If the Transaction is consummated, HSI will manage the
Holding Company and have significant influence over administrative and policy
decisions. As a result, the health care providers in the FOHP-NJ provider
network who are shareholders of the Holding Company will no longer control the
management or operations of the Holding Company. Consequently, HSI could
implement procedures and policies which are not as favorable to the health
care providers in the FOHP-NJ provider network as those currently in place.
In addition, if the Transaction is consummated, HSI will have the
ability to effect, in the future, a transaction which would result in each
shareholder of the Holding Company, other than HSI, being required to exchange
or sell his, her or its shares of Holding Company Common Stock for cash or
securities of an issuer other than the Holding Company. At such time, HSI has
informed the Holding Company that it will comply with
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applicable disclosure obligations under the Securities Exchange Act of 1934,
as amended, including without limitation applicable requirements under
Rule 13e-3.
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 we
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. The business of HSI is subject
to risks applicable generally to managed health care
organizations, including limitations on control over and
predictability of health care costs, high levels of
competition, dependence on ability to attract and retain
qualified health care providers, substantial government
regulation, dependence on effective information systems, the
possibility of the adoption of adverse legislation and
regulatory health care reform measures and exposure to
evolving theories of recovery for desired coverage. 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 While HSI's proposed merger with Foundation Health
Corporation involves customary uncertainties relating to the
integration of two companies that have previously operated
independently, such merger also 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. 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.
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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.
As a condition to the consummation of the Transaction, the
shareholders of the Holding Company must approve certain amendments to the
Certificates of Incorporation and By-laws of the Holding Company and FOHP-NJ.
If the Amendments are approved by the shareholders, the Certificates of
Incorporation and By-laws of the Holding Company and FOHP-NJ will be amended
by, among other things, (i) deleting each class of Holding Company capital
stock currently authorized, and substituting therefor 110,000,000 shares of
capital stock consisting of 100,000,000 shares of Common Stock, par value $.01
per share ("New Common Stock"), and 10,000,000 shares of Preferred Stock, par
value $1.00 per share, (ii) eliminating certain of the special shareholder
voting rights afforded shareholders of the Holding Company with respect to
matters such as amendments to the Certificate of Incorporation or By-laws of
the Holding Company or the certificate of incorporation or by-laws of any
subsidiary thereof, (iii) providing preemptive rights to the holders of New
Common Stock, (iv) permitting HSI to purchase shares of capital stock issued
by the Holding Company, (v) providing HSI and the Holding Company with certain
rights of first refusal with respect to the offer and sale of shares of New
Common Stock by the holders thereof, (vi) providing for cumulative voting in
connection with the election of directors, (vii) deleting current provisions
with respect to the composition of the Boards of Directors of the Holding
Company and FOHP-NJ, (viii) including the percentage of the Boards of Directors
of the Holding Company and FOHP-NJ which is required to be designated by HSI,
(ix) including a requirement that at least 80% of the directors serving on the
Boards of Directors of the Holding Company and FOHP-NJ must approve specified
transactions and a requirement that a majority of the non-HSI designated
directors must approve specified transactions involving HSI. Upon the filing
of the Certificate of Incorporation of the Holding Company, as proposed to be
amended, with the Office of the Secretary of State of the State of New Jersey,
each outstanding share of Holding Company Common Stock-NJ will automatically
convert into one share of New Common Stock.
Finally, if the Transaction and Amendments are approved by the
shareholders of the Holding Company, the shareholders will elect at the Annual
Meeting ten directors to serve on the Holding Company's Board of Directors for
the following year or until their successors have been duly elected and
qualify.
The Board of Directors has fixed the close of business on February 13,
1997 as the record date for determining shareholders entitled to receive
notice of and to vote at the Annual Meeting or any adjournment thereof.
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A full description of the Transaction, the Amendments and nominees
for director, 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, THE PROPOSAL TO APPROVE THE AMENDMENTS AND THE
NOMINEES FOR DIRECTOR NAMED IN THE PROXY STATEMENT ACCOMPANYING THIS LETTER.
By Order of the Board of Directors
DONALD PARISI
Acting President and
Chief Executive Officer
Red Bank, New Jersey
March ___, 1997
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. TO
ENSURE 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.
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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 ___________, MARCH ____, 1997.
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.
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PRELIMINARY COPY
[LOGO]
PROXY STATEMENT
FOHP, INC.
2 Bridge Avenue
Building 6
Red Bank, New Jersey 07701-1106
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
March __, 1997
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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 ______________, March __,
1997, commencing at ________ a.m./p.m. local time, for the following purposes:
1. To consider and vote upon a proposal to approve the Amended
and Restated Securities Purchase Agreement (the "Amended
Securities Purchase Agreement") by and among the Holding
Company, First Option Health Plan of New Jersey, Inc., a
wholly-owned subsidiary of the Holding Company ("FOHP-NJ"),
and Health Systems International, Inc., a Delaware
corporation ("HSI"), and the transactions
contemplated thereby, including, among others:
(a) the sale to HSI of convertible debentures in the
aggregate principal amount of $50,000,000, of which
$41,600,000 will be infused at the initial closing
and the remainder will be infused on or prior to
December 31, 1997 in one or more tranches, and the
sale to HSI at the initial closing of convertible
debentures in an amount equal to the management
fees that HSI would have received if HSI had been
managing all administrative services of the
Holding Company since January 1, 1997. (It is
currently estimated that such amount will
approximate $1,100,000.) The principal amount of
the debentures will be convertible, at the option
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of HSI, into 71% of the Holding Company's
capital stock, on a fully-diluted basis,
subject to adjustment under certain
circumstances;
(b) 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; and
(c) the execution by HSI and the Holding Company of a
Management Information Systems and Claims
Processing Services Management Agreement, pursuant
to which HSI would 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. (Such agreement
will become effective at HSI's option and upon the
occurrence of certain other conditions precedent.)
2. To consider and vote upon a proposal to approve amendments
to the Certificates of Incorporation and By-laws of the
Holding Company and FOHP-NJ, which are necessary for the
consummation of the transactions contemplated by the Amended
Securities Purchase Agreement and, if approved, will result
in, among other things:
(a) the deletion of each class of Holding Company
capital stock currently authorized, and the
substitution therefor of 110,000,000 shares of
capital stock consisting of 100,000,000 shares of
Common Stock, par value $.01 per share ("New Common
Stock"), and 10,000,000 shares of Preferred Stock,
par value $1.00 per share;
(b) the elimination of certain of the special
shareholder voting rights afforded shareholders of
the Holding Company with respect to matters such as
amendments to the Certificate of Incorporation or
By-laws of the Holding Company or the certificate
of incorporation or by-laws of any subsidiary
thereof;
(c) the holders of New Common Stock having certain
preemptive rights;
(d) HSI and the Holding Company having certain rights
of first refusal with respect to the offer and sale
of shares of New Common Stock by the holders
thereof;
(e) HSI being able to purchase Holding Company capital
stock;
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(f) cumulative voting in connection with the election
of directors to the Holding Company's Board of
Directors;
(g) a change in the composition of the Boards of
Directors of the Holding Company and FOHP-NJ;
(h) HSI being entitled to designate a specified
percentage of the Boards of Directors of the
Holding Company and FOHP-NJ;
(i) 80% of the persons serving on the Boards of
Directors of the Holding Company and FOHP-NJ having
to approve certain specified transactions and a
majority of the non-HSI designated directors having
to approve certain transactions involving HSI; and
(j) the conversion of each outstanding share of Holding
Company Common Stock-NJ into one share of New
Common Stock.
3. To elect 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
proposals in paragraphs 1 and 2 above are approved by the
shareholders of the Holding Company.
4. 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 February 13,
1997, 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
PROPOSALS AND THE NOMINEES FOR DIRECTOR NAMED IN THE PROXY STATEMENT
ACCOMPANYING THIS NOTICE.
By Order of the Board of Directors
DONALD PARISI
Acting President and
Chief Executive Officer
Red Bank, New Jersey
March __, 1997
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YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. TO
ENSURE 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.
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PRELIMINARY COPY
FOHP, INC.
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PROXY STATEMENT
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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 March
__, 1997, 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 March 7, 1997. The principal executive offices of
the Holding Company are located at 2 Bridge Avenue, Red Bank, New Jersey
07701-1106.
At the Meeting, the shareholders of FOHP will be asked to consider
and vote upon a proposal to approve the Amended and Restated Securities
Purchase Agreement (the "Amended Securities Purchase Agreement"), by and among
the Holding Company, First Option Health Plan of New Jersey, Inc., a New
Jersey corporation and wholly-owned subsidiary of the Holding Company which
operates as a health maintenance organization ("HMO") in New Jersey
("FOHP-NJ"), and Health Systems International, Inc., a Delaware corporation
("HSI"), and the transactions contemplated thereby, including the sale by FOHP
to HSI of convertible debentures (the "Debentures") in the aggregate principal
amount of $50,000,000, subject to adjustment under certain circumstances.
$41,600,000 in principal amount of Debentures will be initially issued and the
remaining $8,400,000, less all adjustments, will be issued in one or more
tranches on or prior to December 31, 1997. In addition, at the Initial Closing
(as hereinafter defined), through the purchase of Debentures, HSI will infuse
an amount equal to the management fees that HSI would have received under
the Administrative Management Agreement (as hereinafter defined) if HSI had
been managing all administrative services of the Holding Company since
January 1, 1997. It is currently estimated that such amount will approximate
$1,100,000. The issuance and sale of the Debentures to HSI and the other
transactions contemplated by the Amended Securities Purchase Agreement are
collectively referred to herein as the "Transaction." In addition, if the
Transaction is approved by the shareholders of FOHP, the shareholders will be
asked at the Meeting to consider and vote upon a proposal to approve
amendments to the Certificates of Incorporation and By-laws of the Holding
Company and
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FOHP-NJ (collectively, the "Amendments"). Approval of the Amendments by
the shareholders of FOHP is a condition to the consummation of the
transactions contemplated by the Amended Securities Purchase Agreement. If
the Transaction and Amendments are approved by the shareholders of the
Holding Company, the shareholders will then vote for and elect ten
directors to serve on the Holding Company's Board of Directors (the "Board"
or the "Board of Directors") until their successors have been duly elected
and qualify. If the Transaction and Amendments are 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 Meeting for
the purpose of electing a Board of Directors in accordance with the Holding
Company's existing Certificate of Incorporation and By-laws.
The New Jersey Department of Banking and Insurance (the "DOI") has
informed HSI in writing that, if the Transaction is not consummated on or
before March 31, 1997 (which requires the approval of the Holding Company's
shareholders of the Transaction and Amendments), the DOI will suspend or
revoke FOHP-NJ's Certificate of Authority ("COA") to operate as a health
maintenance organization in New Jersey and petition the New Jersey Superior
Court for an order to allow the DOI to place FOHP-NJ into rehabilitation.
If FOHP-NJ is placed into rehabilitation, it is likely 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.
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. Also, any grant by a
shareholder of a proxy subsequent to an earlier grant of a proxy, revokes the
earlier 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, FOR the proposal to approve the Amendments 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.
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.
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SUMMARY OF THE PROPOSED TRANSACTION
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'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 DOI a plan of action to address the deficiency or
expected deficiency. 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, including (i) the implementation of a modified provider
reimbursement schedule which became effective on April 1, 1996, for purposes
of reducing medical costs, (ii) the implementation of a hiring freeze and a
suspension of bonus payments and use of consultants in order to control the
Holding Company's administrative costs, (iii) 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, and (iv) the discontinuance of expansion
efforts in states other than New Jersey.
Although the operational changes implemented by the Holding Company
to increase capital in 1996 enabled the Holding Company to reduce operating
losses, the Board recognized that such changes would not allow the Holding
Company to adequately address FOHP-NJ's statutory net worth deficiency. In
order to adequately address FOHP-NJ's statutory net worth deficiency, the
Board believed that the Holding Company needed to infuse approximately
$25,000,000 of capital into FOHP-NJ. To raise the required capital, the
Holding Company considered offering, in a public offering, securities to the
providers in the FOHP-NJ network. However, because FOHP-NJ's statutory net
worth as of December 31, 1995 may have been below 125% of the minimum
requirement, the Holding Company's independent accountants issued a "going
concern" opinion in connection with their audit of the Holding Company's
financial statements for the year ended December 31, 1995. The Board
recognized that the "going concern" opinion would have a significant chilling
effect on its ability to raise capital through the sale of its securities to
the providers in the FOHP-NJ network. In addition, even if the Holding Company
did not receive a "going concern" opinion from its independent accountants,
the Board did not believe that the Holding Company could raise $25,000,000
from the providers in the FOHP-NJ network.
To raise the capital necessary for FOHP-NJ to remain in compliance
with its statutory net worth requirements, the Board determined that the
Holding Company needed to effect a private placement of capital to an investor
interested in acquiring a significant equity position in the Holding Company.
In that connection, the Holding Company engaged PaineWebber Incorporated
("PaineWebber") to assist it in soliciting potential investors.
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In August 1996, PaineWebber contacted 15 potential investors to
discuss an investment in the Holding Company. On August 19, 1996, PaineWebber
presented to the Board the letters of intent which had been received from
six potential investors. 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.
In late August 1996, the three potential investors selected by the
Board commenced due diligence investigations of the Holding Company, including
a review of the Holding Company's business plans, 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.
During the period the Holding Company reviewed the various proposals
from the potential investors, the DOI closely monitored the operations of the
Holding Company and reviewed each proposal that was submitted to the Holding
Company by a prospective investor. The DOI made it clear to the Board that the
Holding Company had to enter into a definitive agreement with a potential
investor by October 1996 or the DOI would take whatever action it deemed
necessary to ensure the continued health coverage of the members of the
FOHP-NJ health plans, including placing FOHP-NJ into rehabilitation or
liquidation.
Recognizing that it must enter into a definitive agreement by the end
of October 1996, the Holding Company and HSI, the only prospective investor
that had made an offer which had not been withdrawn or rejected, began
negotiating the terms of a definitive agreement in late September 1996. After
several weeks of negotiations between the Holding Company and HSI, on October
24, 1996, the Holding Company and FOHP-NJ entered into a Securities Purchase
Agreement with HSI (the "Original Securities Purchase Agreement") which
contemplated, among other things, that, subject to the approval by the
shareholders of the Holding Company:
o The Holding Company would have issued, and HSI would have purchased
Debentures in the initial aggregate principal amount of $30,000,000 (the
"Original Debentures") that (i) would have been convertible, at the option of
HSI, into shares of Common Stock, par value
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<PAGE>
$.01 per share ("New Common Stock"), of the Holding Company, which would
have represented 40% of the Holding Company's outstanding common equity
(after taking into account the exercise of the Option described below,
the conversion of the Original Debentures and the exercise of all
outstanding options and warrants exercisable for shares of New Common
Stock), and (ii) would bear interest at a rate (the "Rate") per annum
equal to the rate charged to HSI under its existing credit facility with
a consortium of commercial banks (as the Rate may be adjusted from time
to time).
o HSI would have been 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 Original 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, $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
Original Purchase Offer (as hereinafter defined) or redeemed by the Holding
Company in the Original Holding Company Offer (as hereinafter defined), as the
case may be.
o If the Option was exercised by HSI, the proceeds could have been
distributed to the shareholders of the Holding Company (other than HSI) as a
dividend. In the event that the rights of Sierra Health Services, Inc.
("Sierra") under the agreement dated January 16, 1995 (the "Sierra
Agreement"), between Sierra and FOHP-NJ were assigned to HSI, the proceeds
received by the Holding Company upon the exercise of the Option, less the
product of $3.93 multiplied by the number of shares of New Common Stock
purchased by HSI in the Original Purchase Offer or redeemed by the Holding
Company in the Original Holding Company Offer, as the case may be, would have
been distributed to the shareholders of the Holding Company other than HSI;
provided, however, that the Board of Directors of the Holding Company
determined that any such distribution was permitted under New Jersey law. In
the event that Sierra did not assign its rights in the Sierra Agreement to
HSI, the proceeds received by the Holding Company upon the exercise of the
Option, less 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 Original Holding Company Offer, as the case may be, would have
been distributed to the Holding Company's shareholders as soon as practicable
following the accumulation of retained earnings by the Holding Company from
and after the closing of the Original Securities Purchase Agreement in excess
of (x) the amount required for full satisfaction of all payments due Sierra
under the Sierra Agreement or (y) the amounts of a reserve established by the
Holding Company and HSI for payment due to Sierra under the Sierra Agreement;
provided, however, that the Board of Directors of the Holding Company
determined that any such distribution was permitted under New Jersey law.
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<PAGE>
o After the closing of the Original Securities Purchase Agreement,
HSI was obligated to either (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 (referred to herein as the "Original Purchase
Offer"), 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 Original Debentures), up to 857,284 shares of New Common
Stock at a per share price of $21.43 (referred to herein as the "Original
Holding Company Offer").
o After January 1, 1999, but prior to May 31, 1999, HSI was obligated
to initiate an offer to the Holding Company's shareholders pursuant to which all
shareholders of the Holding Company would have been 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) ("HSI Common Stock") or, at HSI's
option, (ii) cash. The amount of consideration a shareholder of the Holding
Company would have received for each share of New Common Stock offered for
exchange would have been agreed upon by the Holding Company and HSI, or if no
such agreement was reached, determined by an independent appraisal of the New
Common Stock; provided, however, that if the Holding Company's revenues
exceeded $62,500,000 for the quarter preceding HSI's offer, the value that a
shareholder would have received for one share of New Common Stock would have,
at the very least, reflected an aggregate valuation of the Holding Company of
$75,000,000 (or $21.43 per share).
o The Holding Company and HSI would have entered into a General
Administrative Services Management Agreement (the "Original Administrative
Management Agreement") pursuant to which HSI would have been engaged to manage
all of the Holding Company's administrative services.
o The Holding Company and HSI would have entered into a Management
Information Systems and Claims Processing Services Management Agreement (the
"Original MIS Management Agreement") pursuant to which HSI would have provided
claims processing, record keeping and data processing services to all of the
health plans offered, or to be offered, by the Holding Company and its
subsidiaries (collectively, the "FOHP Health Plans"). The Original MIS
Management Agreement would have become effective at HSI's option and upon the
occurrence of certain other conditions precedent.
o If all the transactions contemplated by the Original Securities
Purchase Agreement were effected, HSI could have acquired between 51% and 100%
of the outstanding capital stock of the Holding Company.
o The Holding Company would have amended its Certificate of
Incorporation and Bylaws, and FOHP-NJ would have amended its Certificate of
Incorporation and By-laws in
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<PAGE>
a manner substantially similar to that described in this Proxy Statement
under the captions "Summary of the Proposed Amendments" and "Proposal to
Approve the Amendments."
In early January 1997, the Holding Company learned from its actuaries
that it was necessary for FOHP-NJ to increase, as of the end of November 1996,
its incurred (but not reported) claims reserve by approximately $8,800,000
(the "Reserve Adjustment") as a result of a change of estimate based on
then-current claims information. As a result of the Reserve Adjustment, HSI
was no longer obligated to consummate the Transaction, as was contemplated
in the Original Securities Purchase Agreement. HSI notified the Holding
Company that, since the Reserve Adjustment resulted in a material adverse
effect to the financial condition of the Holding Company and negatively
affected the value ascribed to the Holding Company by HSI, HSI was not
willing to consummate the Transaction on the terms set forth in the Original
Securities Purchase Agreement, but that it would be willing to renegotiate
certain terms of the Transaction. In mid-January 1997, HSI and the Holding
Company began to discuss the renegotiation of the terms of the Original
Securities Purchase Agreement. During such negotiations, the DOI informed
the Holding Company and HSI that it viewed any delay in the consummation
of the Transaction as a threat to the health care coverage of the lives
covered in the FOHP-NJ health plans, and that a lengthy delay would
prompt the DOI to take whatever action it deemed necessary to ensure the
health care coverage of such covered lives. The Board considered, among other
factors, the DOI's concerns, the financial position of the Holding Company,
the potential long-term benefits to the shareholders and the ramifications of
not consummating the Transaction, when negotiating the terms of the Amended
Securities Purchase Agreement with HSI.
On February 6, 1997, the DOI sent HSI a letter approving the
Transaction and the Amended Securities Purchase Agreement (in substantially
the final form) and stating that, if HSI, the Holding Company and FOHP-NJ
executed the Amended Securities Purchase Agreement on or prior to February 10,
1997, the DOI would not, absent unforeseen circumstance, petition the New
Jersey Superior Court for an order to allow the DOI to rehabilitate FOHP-NJ
prior to March 31, 1997. The letter also stated that, if the Initial Closing
does not occur on or before March 31, 1997, and the rehabilitation order is
subsequently granted by the New Jersey Superior Court, the DOI may consider
petitioning the New Jersey Superior Court to allow the DOI to either (i)
enter into agreements substantially identical to the Administrative
Management Agreement and the Amended Securities Purchase Agreement with
HSI, or (ii) solicit bids for the purchase of FOHP-NJ.
On February 10, 1997, the Original Securities Purchase Agreement was
terminated and the Amended Securities Purchase Agreement was executed. The
Amended Securities Purchase Agreement did not become effective, however,
until March __, 1997, the date on which the conditions to the effectiveness
of the Amended Securities Purchase Agreement, as described under the caption
"Proposals to Approve the Transaction--The Amended Securities Purchase
Agreement--Modified Provider Agreements; Conditions Precedent to
Effectiveness" were
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<PAGE>
satisfied. The major differences between the Original Securities Purchase
Agreement and the Amended Securities Purchase Agreement are as follows:
o The principal amount of Debentures which the Holding Company will
issue, and HSI will purchase, was increased from $30,000,000 to $50,000,000,
of which $41,600,000 will be initially issued (together with the Phase-In
Period Management Fee Amount (as hereinafter defined), the "Initial
Debenture Advance Amount") at an initial closing (the "Initial Closing")
and the remaining $8,400,000 (the "Additional Debenture Advance Amount"),
less all Additional Debenture Advance Adjustments (as hereinafter defined),
will be issued at one or more later closings to occur on or prior to
December 31, 1997 (each, an "Additional Debenture Advance Closing"; any one
of the Initial Closing or an Additional Debenture Advance Closing shall be
referred to herein as a "Closing"). In addition, at the Initial Closing,
through the purchase of Debentures, HSI will infuse an amount (the
"Phase-In Period Management Fee Amount") equal to the management fees that
HSI would have received if HSI had been managing all administrative services
of the Holding Company since January 1, 1997 under the Administrative
Management Agreement. At the Initial Closing, HSI will be paid a management
fee equal to the Phase-In Period Management Fee Amount, based on certain
administrative services provided by HSI to the Holding Company since
January 1, 1997. It is currently estimated that the Phase-In Period
Management Fee Amount will approximate $1,100,000.
o The Debentures will now be convertible, at the option of HSI, into
shares of New Common Stock which will represent 71% (increased from 40%) of
the Holding Company's outstanding common equity (after taking into account the
conversion of the Debentures and the exercise of all outstanding options and
warrants exercisable for shares of New Common Stock), subject to adjustment
under certain circumstances. Immediately after the Initial Closing, HSI will
convert the principal amount of the Debentures evidenced by the Phase-In
Period Management Fee Amount into shares of common stock representing
approximately 1.5% of the Holding Company's outstanding equity (based on
$1,100,000 principal amount of Debentures).
o The Option to acquire 11% of the Holding Company's outstanding
common equity has been deleted from the Amended Securities Purchase Agreement.
o It is now a closing condition that the Sierra Agreement shall be
terminated prior to the Initial Closing without any residual liability or
obligations to the Holding Company or FOHP-NJ.
o The Original Purchase Offer and the Original Holding Company Offer
concepts have been deleted from the Amended Securities Purchase Agreement.
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<PAGE>
o During 1999, HSI may, at its option, acquire, through a tender
offer or a merger, all of the then outstanding shares of New Common Stock at a
purchase price per share that is determined by independent appraisers. The
shareholders of the Holding Company would receive for their shares of New
Common Stock, at HSI's option, either HSI Common Stock or cash.
o Prior to December 31, 1998, HSI may, at its option, acquire,
through a tender offer, any or all of the then outstanding shares of New
Common Stock (a) at any purchase price, provided that HSI will then be
required to subsequently effect the 1999 offer described in the preceding
paragraph, (b) at a purchase price per share that is determined by independent
appraisers or (c) at any purchase price, if the tender offer described in
clause (b) shall have previously been made.
o The terms of the Original Administrative Management Agreement and
the Original MIS Management Agreement have been revised (as revised, the
"Administrative Management Agreement" and the "MIS Management Agreement,"
respectively), primarily to increase the fees payable to HSI under the
Administrative Management Agreement.
o HSI's obligation to consummate the transactions contemplated by the
Amended Securities Purchase Agreement is subject to the satisfaction of
various conditions, including the execution by the Holding Company of the
Administrative Management Agreement and the MIS Management Agreement. Such
conditions, including the aforementioned condition, may be waived in writing by
HSI.
o If the transactions contemplated by the Amended Securities Purchase
Agreement are effected, HSI could acquire between 59.1% and 100% of the
outstanding capital stock of the Holding Company, with the likelihood that HSI
would acquire between 71% and 100% of the outstanding capital stock of the
Holding Company.
THE DOI HAS INFORMED HSI IN WRITING THAT, IF THE TRANSACTION IS NOT
CONSUMMATED ON OR BEFORE MARCH 31, 1997 (WHICH REQUIRES THE APPROVAL BY THE
HOLDING COMPANY'S SHAREHOLDERS OF THE TRANSACTION AND AMENDMENTS), THE DOI WILL
SUSPEND OR REVOKE FOHP-NJ'S COA TO CONDUCT BUSINESS AS AN HMO IN NEW JERSEY
AND PETITION THE NEW JERSEY SUPERIOR COURT FOR AN ORDER TO ALLOW THE DOI TO
PLACE FOHP-NJ INTO REHABILITATION. IF FOHP-NJ IS PLACED INTO REHABILITATION,
IT IS LIKELY 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.
Although the Board of Directors believes that the consummation of the
Transaction is necessary for the continuation of the Holding Company's
business, the Board recognizes that the founding principle of the Holding
Company, i.e. the provision of health care services by
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<PAGE>
an organization owned and governed exclusively by health care providers,
will be abandoned as a result of the Transaction. If the Transaction
is consummated, HSI will manage the Holding Company and have significant
influence over administrative and policy decisions. As a result, the health
care providers in the FOHP-NJ network who are shareholders of the Holding
Company will no longer control the management or operations of the Holding
Company. Consequently, HSI could implement procedures and policies which are
not as favorable to the health care providers in the FOHP-NJ network as those
currently in place.
In addition, if the Transaction is consummated, HSI will have the
ability to effect, in the future, a transaction which would result in each
shareholder of the Holding Company, other than HSI, being required, through a
merger, to exchange or sell his, her or its shares of Holding Company New
Common Stock for cash or securities of an issuer other than the Holding
Company. HSI has informed the Holding Company that, at such time, it will
comply with applicable disclosure obligations under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), including without limitation
applicable requirements under Rule 13e-3. See "Proposal to Approve the
Transaction - The Amended Securities Purchase Agreement - Merger."
Except as discussed in "Proposal to Approve the Transaction - Federal
Income Tax Consequences," the Holding Company does not believe that the
transactions contemplated by the Amended Securities Purchase Agreement will
result in any material federal income tax consequences to the Holding Company
or its shareholders. However, if any shares of New Common Stock are tendered
by a shareholder to the Holding Company or HSI for cash in excess of the
amount paid for such shares, the difference in the amount the shareholder paid
for the shares and the amount he, she or it receives for the shares from the
Holding Company or HSI generally will be taxed as a capital gain or ordinary
income.
HSI's obligation to consummate the Initial Closing is subject to the
satisfaction of various conditions, any of which may be waived by HSI in
writing, including, among others: (i) the representations and warranties of
the Holding Company and FOHP-NJ contained in the Amended Securities Purchase
Agreement shall be true and correct in all material respects as of the Initial
Closing Date (as hereinafter defined), (ii) all corporate and other
proceedings required to be taken by the Holding Company in connection with the
transactions contemplated by the Amended Securities Purchase Agreement,
including, but not limited to, approval by the shareholders of the Holding
Company, shall have been taken or obtained, (iii) the Amendments shall have
been approved by the shareholders and 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 of the State of New Jersey, (iv) the
delivery of Debentures having an aggregate principal amount equal to
$41,600,000 by the Holding Company, (v) the Holding Company shall have
received the Minimum Number of Modified Provider Agreements (as hereinafter
defined), (vi) all authorizations, approvals, consents and waivers of any
governmental authority necessary for the consummation of any and all of the
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<PAGE>
transactions contemplated by the Amended 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
governmental bodies (including shareholders of the Holding Company) that are
required in connection with the consummation of the transactions contemplated
by the Amended Securities Purchase Agreement shall have been obtained on terms
satisfactory to HSI and remain in full force and effect, (vii) 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 Amended Securities Purchase Agreement prior to or on the Initial
Closing Date, (viii) the Sierra Agreement shall have been terminated without
any residual liability or obligations of the Holding Company or FOHP-NJ, and
(ix) none of the letters of credit currently available to the Holding Company
or the guarantees of portions of the Holding Company's capital obligation to
FOHP-NJ shall have expired or terminated. HSI's obligation to consummate an
Additional Debenture Advance Closing is subject to the satisfaction of various
conditions, any of which may be waived by HSI in writing including, among
others: the conditions set forth in (vi) and (vii) above shall be satisfied
and the Administrative Management Agreement, and the MIS Agreement (if
effective), shall be in full force and effect or shall have been terminated
without cause by HSI. See "Proposal to Approve the Transaction - The Amended
Securities Purchase Agreement - Conditions Precedent to Closing."
In the event that all of the conditions for an Additional Debenture
Advance Closing are not satisfied with respect to any given Additional
Debenture Advance Amount, then HSI may, at its option: (a) elect in writing to
not advance such Additional Debenture Advance Amount (the "No Additional
Advance Option"); or (b) elect to deduct from such Additional Debenture
Advance Amount an amount equal to the Additional Debenture Advance Adjustment
relating to the conditions for an Additional Debenture Advance Closing not so
satisfied (the "Advance Adjustment Option"). "Additional Debenture Advance
Adjustment" is defined as the amount of all losses, claims, obligations,
demands, assessments, penalties, liabilities, costs, damages, attorneys' fees
and expenses asserted against or incurred by HSI by reason of or resulting
from the nonsatisfaction of the conditions for an Additional Debenture Advance
Closing. In calculating the amount of the downward adjustment to the
Additional Debenture Advance Amount in connection with the Advance Adjustment
Option, HSI is required in good faith to promptly (and prior to the applicable
Additional Debenture Advance Closing) prepare a reasonable estimate of any
Additional Debenture Advance Adjustment in consultation with the directors of
the Holding Company not affiliated with HSI (the "Non-HSI Directors"). In the
event HSI and the Non-HSI Directors are unable to agree on the correct amount
of any Additional Debenture Advance Adjustment, HSI's estimate of such
adjustment will be used for purposes of determining the Additional Debenture
Advance Amount for the Additional Debenture Advance Closing, and any dispute
with respect to the amount of such adjustment is required to be resolved by
binding arbitration.
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The Amended Securities Purchase Agreement may be terminated at any
time prior to the Initial Closing (i) by the mutual written consent of the
parties, (ii) by HSI, if any conditions set forth in the Amended Securities
Purchase Agreement to be performed by the Holding Company or FOHP-NJ have
not been satisfied or waived on or before the Initial Closing, or if there
has been a material breach on or before the Initial Closing of any of the
representations or warranties of the Holding Company and FOHP-NJ contained
in the Amended Securities Purchase Agreement, (iii) by the Holding Company,
if any conditions set forth in the Amended Securities Purchase Agreement
to be performed by HSI have not been satisfied or waived on or before
the Initial Closing, or if there has been a material breach on or
before the Initial Closing of any of HSI's representations or warranties
contained in the Amended Securities Purchase Agreement, or (iv) by either
party, if the Initial Closing is not consummated before July 31, 1997. See
"Proposal to Approve the Transaction - The Amended Securities Purchase
Agreement - Termination Provisions."
No shareholder of the Holding Company, including any shareholder who
is an executive officer, director or affiliate of the Holding Company, will
receive any benefit from the Transaction which is not shared on a pro rata
basis by all the other shareholders of the Holding Company. In addition,
shareholders of the Holding Company will have no dissenters' rights in
connection with the closing under the Amended Securities Purchase Agreement.
See "Proposal to Approve the Transaction - No Dissenters' Rights; Interest of
Executive Officers, Directors and Affiliates in the Transaction."
For a more detailed description of the Transaction, please see the
section of this Proxy Statement captioned "Proposal to Approve the
Transaction."
SUMMARY OF THE PROPOSED AMENDMENTS
As described herein under the caption "Proposal to Approve the
Amendments," as a condition to consummating the transactions contemplated by
the Amended Securities Purchase Agreement, the shareholders of the Holding
Company must approve the Amendments. If the Amendments are approved by the
shareholders, the Certificates of Incorporation and By-laws of the Holding
Company and FOHP-NJ will be amended by, among other things:
o deleting each class of Holding Company capital stock currently
authorized, and substituting therefor 110,000,000 shares of capital stock
consisting of 100,000,000 shares of New Common Stock and 10,000,000 shares of
Preferred Stock, par value $1.00 per share ("Preferred Stock");
o eliminating certain of the special shareholder voting rights
afforded shareholders of the Holding Company with respect to matters such as
amendments to the Certificate of
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Incorporation or By-laws of the Holding Company or the certificate of
incorporation or by-laws of any subsidiary thereof;
o providing certain preemptive rights to the holders of New Common
Stock;
o providing HSI and the Holding Company with certain rights of first
refusal with respect to the offer and sale of shares of New Common Stock by
the holders thereof;
o permitting HSI to purchase shares of capital stock issued by the
Holding Company;
o providing for cumulative voting in connection with the election of
directors;
o deleting current provisions with respect to the composition of the
Boards of Directors of the Holding Company and FOHP-NJ;
o providing that the persons comprising the Board of Directors of the
Holding Company also shall comprise the Board of Directors of FOHP-NJ;
o including the percentage of the Boards of Directors of the Holding
Company and FOHP-NJ which is required to be designated by HSI; and
o including a requirement that at least 80% of the directors serving
on the Boards of Directors of the Holding Company and FOHP-NJ must approve
specified transactions and a requirement that a majority of the non-HSI
designated directors must approve specified transactions involving HSI.
If the Amendments are approved by the shareholders, the Holding
Company's Certificate of Incorporation will be amended to delete most of the
special voting rights afforded to shareholders of the Holding Company.
Accordingly, certain actions which currently require approval of the
shareholders of the Holding Company could be effected by the Board of
Directors after the consummation of the Transaction without first being
approved by the providers in the FOHP-NJ network who are shareholders of the
Holding Company. In addition, except for Business Combinations (as hereinafter
defined) and issuances of New Common Stock to persons not named in the Holding
Company's Certificate of Incorporation as proposed to be amended, matters that
are voted on 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. See "Proposal to Approve the Amendments -
Proposed Amendments - Amended and Restated Certificate of Incorporation of the
Holding Company - Voting Rights."
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The Certificate of Incorporation of the Holding Company, as proposed
to be amended, includes a provision with respect to preemptive rights.
Pursuant 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 issuance of Holding
Company capital stock, but may increase such ownership interest in the event
that other shareholders do not exercise their preemptive rights. See "Proposal
to Approve the Amendments - Proposed Amendments - Amended and Restated
Certificate of Incorporation of the Holding Company - Preemptive Rights."
Generally, if the Transaction is consummated, the existing
restrictions on transfer provisions contained in the Certificate of
Incorporation of the Holding Company will be modified to allow provider
shareholders to sell shares of New Common Stock to any provider or to HSI
without first having to offer such shares to specific providers. The
Certificate of Incorporation of the Holding Company, as proposed to be
amended, also affords 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. See "Proposal to Approve the Amendments
- - Proposed Amendments Amended and Restated Certificate of Incorporation of the
Holding Company - Restriction on Transfer; Rights of First Refusal."
Inasmuch as the Boards of Directors of the subsidiaries of the
Holding Company will not designate the directors to serve on the Board of
Directors of 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, will be deleted in their entirety. In addition, the Certificate of
Incorporation of the Holding Company, as proposed to be amended, provides for
cumulative voting in connection with the election of directors. See "Proposal
to Approve the Amendments - Proposed Amendments - Amended and Restated
Certificate of Incorporation of the Holding Company - Composition of the Board
of Directors; Cumulative Voting."
The By-laws of the Holding Company are proposed to be amended to
provide that HSI shall have the right to designate such number of 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, the Bylaws of the
Holding Company will be amended to provide that 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. As a result, if HSI acquires more than 50% of
the outstanding shares of New Common Stock, HSI will have majority
representation on the Board of Directors of the Holding Company. Two-thirds of
the directors on the Board of Directors of the Holding Company who are not
designees of HSI shall be NJ Practitioners (as hereinafter defined) and
representatives of NJ Acute Care Institutions (as hereinafter defined). In
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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. See "Proposal to Approve the Amendments
- - Proposed Amendments - By-laws of the Holding Company."
If the Amendments are approved by the shareholders, the Certificate
of Incorporation and By-laws of FOHP-NJ will no longer afford each NJ Acute
Care Institution owning shares of Holding Company Common Stock, either
directly or through an affiliate, or NJ Practitioners, with the right to
designate representatives to the Board of Directors of FOHP-NJ. The By-laws
of FOHP-NJ are proposed to be amended to provide that 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. Consequently, the providers in the FOHP-NJ
network will no longer have a right to direct representation on the Board of
Directors of FOHP-NJ. See "Proposal to Approve the Amendments - Proposed
Amendments Certificate of Incorporation of FOHP-NJ; By-laws of FOHP-NJ."
For a more detailed description of the Amendments, please see the
section of this Proxy Statement captioned "Proposal to Approve the
Amendments."
THE DOI HAS INFORMED HSI IN WRITING THAT, IF THE TRANSACTION IS NOT
CONSUMMATED ON OR BEFORE MARCH 31, 1997 (WHICH REQUIRES THE APPROVAL BY THE
HOLDING COMPANY'S SHAREHOLDERS OF THE TRANSACTION AND AMENDMENTS), THE DOI WILL
SUSPEND OR REVOKE FOHP-NJ'S COA TO CONDUCT BUSINESS AS AN HMO IN NEW JERSEY
AND PETITION THE NEW JERSEY SUPERIOR COURT FOR AN ORDER TO ALLOW THE DOI TO
PLACE FOHP-NJ INTO REHABILITATION. IF FOHP-NJ IS PLACED INTO REHABILITATION,
IT IS LIKELY 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.
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 February 13, 1997, the number of outstanding shares of Common
Stock-NJ was 2,100,173. Only shareholders of record on the books of the
Holding Company at the close of business on February 13, 1997 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 the proposal to approve the Amendments and for electing
directors. Abstentions and broker non-votes will be counted for purposes of
determining whether a quorum is present at the Meeting.
15
<PAGE>
The proposals to approve the Transaction and Amendments must be
approved by the holders of at least 75% of the outstanding shares of Common
Stock-NJ. If the Transaction and Amendments are 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.
16
<PAGE>
PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information as of February 13, 1997,
with respect to the beneficial ownership (as defined in Rule 13d-3 of 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 5% of
Common Stock-NJ, and all directors, nominees for director and executive
officers of the Holding Company as a group:
<TABLE>
<CAPTION>
Beneficial Ownership of
Common Stock-NJ
-------------------------------------
Name of Percent of
Beneficial Owner No. of Shares (1) Class
---------------- ----------------- ----------
<S> <C> <C>
Saint Barnabas Corporation (2) .............. 206,677(3) 9.8%
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) ........................... --
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<PAGE>
Beneficial Ownership of
Common Stock-NJ
-------------------------------------
Name of Percent of
Beneficial Owner No. of Shares (1) Class
---------------- ----------------- ----------
Dr. Om P. Sawhney (4)(6) .................... 5,800(9) (8)
Roger Birnbaum (6) .......................... --
Dr. John F. Bonamo (6) ...................... 1,500 (8)
Sister Jane Frances Brady (6) ............... --
Bruce G. Coe (6) ............................ --
John Gantner (6) ............................ --
Laurence M. Merlis (6) ...................... --
Donald Parisi (4)(10) ....................... --
John W. Rohfritch (11) ...................... --
Dr. Joseph Singer (10) ...................... 8,000 (8)
Paul J. Kimmins (12) ........................ --
James S. Vaccaro (13) ....................... --
Sharon Seitzman (14) ........................ 266(15)
All Directors, Nominees for
Director and Executive Officers
as a Group (20 persons) ..................... 35,535(7)(9) 1.8%
(15)
</TABLE>
- ---------------
(1) Except as otherwise indicated, all of the shares of Common Stock-NJ
are held beneficially and of record.
18
<PAGE>
(2) Saint Barnabas Corporation's principal executive offices are located
at Old Short Hills Road, Livingston, New Jersey 07039.
(3) Saint Barnabas Corporation, on behalf of Saint Barnabas Medical
Center, owns 33,335 shares of Common Stock-NJ. In addition, Saint
Barnabas Corporation is the sole member of seven 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 Saint Barnabas Corporation, other than Saint 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;
Union Hospital - 13,334 shares; and West Hudson Hospital - 13,334
shares. Each hospital affiliated with Saint Barnabas Corporation
disclaims any beneficial interest in the shares of Common Stock-NJ
held by Saint Barnabas Corporation and the other hospitals
affiliated with Saint Barnabas Corporation.
(4) Such person currently serves as a director of the Holding Company.
(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. Rohfritch served as acting President and Chief Executive Officer
of the Holding Company from June 1996 to November 1996 and served as
an Executive Vice President of the Holding Company from June 8, 1995
to June 1996.
(12) Mr. Kimmins served as an Executive Vice President of the Holding
Company from June 1995 to January 1997.
19
<PAGE>
(13) Mr. Vaccaro served as an Executive Vice President and as the Chief
Operating Officer of the Holding Company from June 1995 to June 1996.
(14) 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.
(15) Represents all the shares held by Dr. Lawrence Seitzman, Ms.
Sietzman's husband, as to which shares Ms. Seitzman disclaims any
beneficial interest.
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 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 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 could 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
20
<PAGE>
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, (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, and (d) the discontinuance of expansion
efforts in states other than New Jersey.
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 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.
Although the operational changes implemented by the Holding Company
to increase capital in 1996 enabled the Holding Company to reduce operating
losses, the Board recognized that such changes would not allow the Holding
Company to adequately address FOHP-NJ's statutory net worth deficiency. In
order to adequately address FOHP-NJ's statutory net worth deficiency, the
Board believed that the Holding Company needed to infuse approximately
$25,000,000 of capital into FOHP-NJ. To raise the required capital, the
Holding Company considered offering, in a public offering, securities to the
providers in the FOHP-NJ network. However, because FOHP-NJ's statutory net
worth as of December 31, 1995 may have been below 125% of the minimum
requirement, the Holding Company's independent accountants
21
<PAGE>
issued a "going concern" opinion in connection with their audit of the
Holding Company's financial statements for the year ended December 31, 1995.
The Board recognized that the "going concern" opinion would have a significant
chilling effect on its ability to raise capital through the sale of its
securities to the providers in the FOHP-NJ network. In addition, even if the
Holding Company did not receive a "going concern" opinion from its independent
accountants, the Board did not believe that the Holding Company could raise
$25,000,000 from the providers in the FOHP-NJ network.
To raise the capital necessary for FOHP-NJ to remain in compliance
with the statutory net worth requirements, the Board determined that the
Holding Company needed to effect a private placement of capital to an investor
interested in acquiring a significant equity position in the Holding Company.
However, prior to soliciting any potential investors, the Holding Company was
approached in July and August 1996 by three separate parties interested in
discussing a potential investment in the Holding Company. On August 13, 1996,
the Holding Company engaged PaineWebber to assist the Holding Company in (i)
responding to the three potential investors who had contacted the Holding
Company, (ii) soliciting additional potential investors, and (iii) managing
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, including the three potential
investors who had contacted the Holding Company. Eight of the 15
potential investors entered into confidentiality agreements with the Holding
Company. In selecting the 15 potential investors, PaineWebber used its
knowledge, understanding and experience in the health care industry to
identify those companies who had (i) a history of either acquiring or
investing in other health care companies, (ii) the ability to infuse
approximately $25,000,000 into the Holding Company, and (iii) a philosophy
similar to that of the Holding Company's with respect to the provision of
medical services and profitability objectives.
In August 1996, PaineWebber had received letters of intent from six
potential investors, including HSI. On August 19, 1996, PaineWebber presented
to the Holding Company's Board of Directors the letters of intent which had
been received from six potential investors. 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, (v) the
similarity of views held by the potential investor
22
<PAGE>
and the provider owners 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.
The three letters of intent that the Board decided not to pursue were
rejected because either the value attributed to the Holding Company by a
potential investor was not consistent with the value attributed to the
Holding Company by the three potential investors selected by the Board or
the potential investor did not have the ability to provide the management
and information system expertise the Board believed critical to the future
success of the Holding Company. At the meeting, the Board of Directors did
not consider any potential investor who failed to provide a letter of intent.
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 plans, 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.
On September 20, 1996, HSI submitted an outline of the terms and
conditions of its proposal to invest capital in 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"). Although the
Holding Company had not solicited the Investor Group for a proposal, certain
participants in the Investor Group were participants in a letter of intent
submitted to the Board of Directors on August 19, 1996 (the "Original Investor
Group"). Such participants included several physician shareholders of the
Holding Company and a former officer and director of the Holding Company. The
Original Investor Group was one of three potential investors who had contacted
the Holding Company in July and August 1996 about a possible investment in the
Holding Company. The Original Investor Group's letter of intent was rejected
by the Board because the Original Investor Group could not provide the
management information system expertise that was deemed critical for the
future success of the Holding Company. 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.
23
<PAGE>
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. However, 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 Original Securities
Purchase Agreement. On October 15, 1996, the Holding Company's Board of
Directors met to consider the Original 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 Original Securities Purchase
Agreement and the potential consequences to the Holding Company if the
Original Securities Purchase Agreement was not consummated. The Board
noted that the proposed Original Securities Purchase Agreement provided
a means for the shareholders of the Holding Company to divest a portion
of their holdings in the Holding Company shortly after the Closing of
the Original Securities Purchase Agreement, which the Board believed
would be very attractive to those shareholders of the Holding Company
who wanted to liquidate a portion of their investment in the Holding Company.
In reviewing the HSI proposal, the Board recognized that if the
Holding Company entered into the Original Securities Purchase Agreement, the
Holding Company would be prohibited from soliciting other possible capital
infusions. The Board determined that the restriction placed on the Holding
Company with respect to the solicitation of other capital infusions was
customary in the sale of businesses or securities and, in any event, if the
Holding Company did not agree to such restriction and HSI refused to enter an
agreement with the Holding Company, it was extremely unlikely that the Holding
Company would be able to find a suitable investor by the end of October 1996
as required by DOI.
At the meeting held on October 15, 1996, the Board authorized a
special committee (the "Special Committee") to negotiate the final terms of
the Original Securities Purchase Agreement and authorized the officers of the
Holding Company to execute and deliver the Original Securities Purchase
Agreement after the Special Committee approved the final terms and conditions
thereof. The Special Committee was comprised of Christopher Dadlez, Dr. Mark
Engel and Dr. Om P. Sawhney, each a director of the Holding Company, John
Gantner, Chairman of the Holding Company's Finance Committee, and Laurence
Merlis, a director of FOHP-NJ. In forming the Special Committee, the Board
believed that the negotiations with respect to the Original Securities
Purchase Agreement would require many meetings between the Holding Company and
HSI and that it was not practicable for the Holding Company's 13 member Board
of Directors to participate in each meeting.
24
<PAGE>
On October 17, 1996, a physician shareholder of the Holding Company
submitted a letter of intent from a new investor group (the "New Investor
Group"). Representatives of PaineWebber, Holding Company management and its
counsel 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 Original Securities Purchase Agreement. On October 24,
1996, the Holding Company, FOHP-NJ and HSI entered into the Original
Securities Purchase Agreement.
In early January 1997, the Holding Company learned from its actuaries
that it was necessary for FOHP-NJ to increase, as of the end of November 1996,
its incurred (but not reported) claims reserve by approximately $8,800,000 as
a result of a change in estimate based on then-current claims information. As
a result of the Reserve Adjustment, HSI was no longer obligated to consummate
the Transaction, as was contemplated in the Original Securities Purchase
Agreement. HSI notified the Holding Company that since the Reserve Adjustment
resulted in a material adverse effect to the financial condition of the
Holding Company and negatively affected the value ascribed to the Holding
Company by HSI, HSI was not willing to consummate the Transaction on the terms
set forth in the Original Securities Purchase Agreement but that it would be
willing to renegotiate certain terms of the Transaction. In mid-January 1997,
HSI and the Holding Company began to discuss the renegotiation of the terms of
the Original Securities Purchase Agreement. During such negotiations, the DOI
informed the Holding Company and HSI that it viewed any delay in the
consummation of the Transaction as a threat to the health care coverage of the
lives covered in the FOHP-NJ health plans, and that a lengthy delay would
prompt the DOI to take whatever action it deemed necessary to ensure the
health care coverage of such covered lives. The Board considered, among other
factors, the DOI's concerns, the financial position of the Holding Company,
the potential long-term benefits to the shareholders and the ramifications of
not consummating the Transaction, when negotiating the terms of the Amended
Securities Purchase Agreement with HSI.
On February 6, 1997, the DOI sent HSI a letter approving the
Transaction and the Amended Securities Purchase Agreement (in substantially
the final form) and stating that, if HSI, the Holding Company and FOHP-NJ
executed the Amended Securities Purchase Agreement on or prior to February 10,
1997, the DOI would not, absent unforeseen circumstance, petition the New
Jersey Superior Court for an order to allow the DOI to rehabilitate FOHP-NJ
prior to March 31, 1997. The letter also stated that, if the Initial
25
<PAGE>
Closing does not occur on or before March 31, 1997, and the rehabilitation
order is subsequently granted by the New Jersey Superior Court, the DOI may
consider petitioning the New Jersey Superior Court to allow the DOI to either
(i) enter into agreements substantially identical to the Administrative
Management Agreement and the Amended Securities Purchase Agreement with HSI,
or (ii) solicit bids for the purchase of FOHP-NJ.
The February 6, 1997 DOI letter also stated that, if the Initial
Closing occurs on or prior to March 31, 1997, and FOHP-NJ increases its
statutory net worth to 100% of the minimum level required by law, as
expected in the Transaction, the DOI would immediately rescind the FOHP-NJ
plan of action approved by the DOI on June 12, 1996, subject to a guaranty
by HSI that FOHP-NJ will maintain surplus equal to or in excess of 100%
of the minimum net worth level required by law through December 31, 1997.
On February 10, 1997, the Holding Company, FOHP-NJ and HSI entered
into the Amended Securities Purchase Agreement. The Amended Securities
Purchase Agreement did not become effective, however, until March , 1997,
the date on which the conditions to the effectiveness of the Amended
Securities Purchase Agreement, as described under "Modified Provider
Agreements; Conditions Precedent to Effectiveness" below, were satisfied.
The terms of the Transaction were determined on the basis of arm's-length
negotiations and have been approved by the DOI.
THE DOI HAS INFORMED HSI IN WRITING THAT, IF THE TRANSACTION IS NOT
CONSUMMATED ON OR BEFORE MARCH 31, 1997 (WHICH REQUIRES THE APPROVAL BY THE
HOLDING COMPANY'S SHAREHOLDERS OF THE TRANSACTION AND AMENDMENTS), THE DOI WILL
SUSPEND OR REVOKE FOHP-NJ'S COA TO CONDUCT BUSINESS AS AN HMO IN NEW JERSEY
AND PETITION THE NEW JERSEY SUPERIOR COURT FOR AN ORDER TO ALLOW THE DOI TO
PLACE FOHP-NJ INTO REHABILITATION. IF FOHP-NJ IS PLACED INTO REHABILITATION,
IT IS LIKELY 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. CONSEQUENTLY, THE BOARD OF DIRECTORS OF THE HOLDING COMPANY
BELIEVES THAT THIS CONSUMMATION OF THE TRANSACTION WOULD BE IN THE BEST
INTERESTS OF THE SHAREHOLDERS OF THE HOLDING COMPANY.
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.
26
<PAGE>
THE AMENDED SECURITIES PURCHASE AGREEMENT
The Holding Company, FOHP-NJ and HSI have entered into the Amended
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 Amended Securities Purchase
Agreement, which is attached as Appendix A to this Proxy Statement. Although
the following summary includes all the material features of the Amended
Securities Purchase Agreement, it does not purport to be complete and is
qualified in its entirety by reference to the Amended Securities Purchase
Agreement.
General The Amended Securities Purchase Agreement provides that the
Holding Company will issue and sell, and HSI will purchase, Debentures in the
aggregate principal amount of $50,000,000, subject to adjustment under certain
circumstances. Principal amount of the Debentures of $41,600,000 will be
initially issued at the Initial Closing and the remaining $8,400,000, less all
Additional Debenture Advance Adjustments, will be issued in one or more
tranches on or prior to December 31, 1997. In addition, at the Initial
Closing, through the purchase of Debentures, HSI will infuse an amount equal
to the Phase-In Period Management Fee Amount, which is equal to the
management fees that HSI would have received if HSI had been managing all
administrative services of the Holding Company since January 1, 1997
under the Administrative Management Agreement. At the Initial Closing, HSI
will be paid a management fee equal to the Phase-In Period Management Fee
Amount, based on certain administrative services provided by HSI to the
Holding Company since January 1, 1997. It is currently estimated that the
Phase-In Period Management Fee Amount will approximate $1,100,000. See
"Proposal to Approve the Transaction - The Amended Securities Purchase
Agreement - Conditions Precedent to Closing" and "Description of the
Debentures."
The Initial Closing shall occur on a date (the "Initial Closing
Date") that is two business days after the satisfaction or waiver of all
conditions to the Initial Closing set forth in the Amended Securities Purchase
Agreement or (ii) such other date as shall be agreed upon by the Holding
Company and HSI. An Additional Debenture Advance Closing shall occur on a date
(an "Additional Debenture Advance Closing Date") which is on (i) the later of
(A) such date during the 1997 calendar year as shall be determined by HSI in
its sole discretion or (B) two business days after the satisfaction of waiver
of all conditions to such Additional Debenture Advance Closing set forth in
the Amended Securities Purchase Agreement or (ii) such other date as shall be
agreed upon by the Holding Company and HSI.
Standstill HSI has agreed that, prior to December 31, 1998, it will
not, without the prior written consent of the Holding Company, purchase or
acquire any New Common Stock, other than (i) in connection with the conversion
of the Debentures, (ii) 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, or (iii)
any purchase or acquisition of New Common Stock effected in connection with a
tender offer made by the Purchaser to
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holders of New Common Stock if such tender offer (A) is accompanied by an
irrevocable commitment to make an Exchange Offer or Cash Offer during 1999,
(B) determines the consideration to be offered in the same manner as is
required by an Exchange Offer or Cash Offer, or (C) is preceded by a tender
offer as described in clause (B) (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, initiate or encourage submission of any inquiry, proposal or offer
relating to any acquisition, purchase or sale of the assets or securities of,
or any merger, consolidation or business combination, liquidation,
reorganization or similar transaction with, 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 E with the Office of the Secretary of State of the State
of New Jersey, prior to the Initial Closing, and (b) adopt By-laws in the form
attached to this Proxy Statement as Appendix F, 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 Amended Securities Purchase
Agreement. In addition, FOHP-NJ has agreed that, prior to the Initial 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 G, and (ii) adopt By-laws in the form attached to this Proxy
Statement as Appendix H.
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 Initial 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 Initial 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
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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. The Holding Company or FOHP-NJ, as the case
may be, shall immediately provide written notice to HSI should they later
become required by the DOI or the DOH to draw any amounts under any letter of
credit, or incur any obligations under any other reimbursement or other
agreement relating to credit support therefor.
Capital Requirements The Holding Company and HSI have agreed that,
based on reasonable projections prepared by HSI or the Holding Company of the
Holding Company's net worth and statutory surplus relating to the net worth
requirements applicable thereto, 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 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,
provided that in the event any such Net Capital Shortfall is the result of
payments made by HSI in the 1998 calendar year under the Administrative
Management Agreement that would have qualified as Deferred Management Fees (as
hereinafter defined) had such payments not been made, the principal amount
(and interest thereon) of such additional convertible debenture related to
such payments shall only be convertible into New Common Stock if such
principal amount (and interest thereon) is not repaid to HSI on or before the
end of the calendar quarter immediately following such payments. If HSI does
not, within seven days of the receipt of any projections prepared by the
Holding Company, determine to advance funds to the Holding Company, then the
Board of Directors of the Holding Company shall have the right to initiate a
pro rata New Common Stock offering to all then-current shareholders of the
Holding Company to raise capital to satisfy the Net Capital Shortfall.
Sierra Agreement FOHP-NJ shall have terminated the Sierra Agreement
without any residual liability or obligations of the Holding Company or
FOHP-NJ and otherwise on terms acceptable 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., a New York
corporation and wholly-owned subsidiary of the Holding Company ("FOHP-NY"). In
the event that no such capitalization plan is developed and implemented prior
to June 30, 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 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 appraisal report or
fairness opinion, delivered by an independent nationally recognized valuation
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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.
Exchange/Cash Offer for Shares HSI may at any time during 1999, at
its option, either make an offer to shareholders of the Holding Company to
exchange shares of HSI Common Stock (referred to herein as the "Exchange
Offer") or make an offer to pay cash (referred to herein as the "Cash Offer")
for the shares of New Common Stock of the Holding Company held by the Holding
Company's shareholders. HSI is required to furnish the Holding Company with ten
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 would agree
to exchange, for each outstanding share of New Common Stock, the number of
shares of HSI Common Stock as shall have a Purchaser Stock Market Value (as
hereinafter defined) equal to the Holding Company Stock Value (as hereinafter
defined) of the share of New Common Stock that is being exchanged. In the Cash
Offer, HSI would agree to pay in cash, for each outstanding share of New
Common Stock, a purchase price equal to the Holding Company Stock Value of the
share of New Common Stock being purchased.
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 time be listed or quoted) for the five consecutive
trading days immediately preceding the date on which the Exchange Offer is
commenced by HSI; provided, however, that, in the event HSI Common Stock shall
at such time 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: HSI
and the Holding Company (through the Non-HSI Directors) shall, within ten days
after the Offer Notice Date, each select an independent qualified appraiser to
appraise the Holding Company Stock Value. The two independent qualified
appraisers shall exchange their respective appraisals within ten business days
and submit such appraisals to the Holding Company and HSI. 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.
If only one of such appraisers so submits an appraisal within the ten business
day period, the Holding Company Stock Value shall be the amount set forth in
such appraisal. If the two independent qualified appraisers submit their
appraisals within the ten business day period but 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. The third independent qualified appraiser shall submit its appraisal
with ten business days to HSI and the Holding Company. The Holding Company
Stock Value shall be determined by taking the
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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 above. Assuming that HSI's independent qualified appraiser
valued the aggregate Holding Company Stock Value at $50,000,000, the Holding
Company's independent qualified appraiser valued the aggregate Holding Company
Stock Value at $150,000,000 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 $101,700,000 (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.
Merger At any time during the 1999 calendar year, 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:
(a) the amount of consideration to be paid or distributed to
the shareholders of the Holding Company in respect of each share of New Common
Stock in connection with the Merger will either be (i) cash in an amount equal
to the Holding Company Stock Value of such share of New Common Stock or (ii)
such number of shares of HSI Common Stock as shall have a Purchaser Stock
Market Value equal to the Holding Company Stock Value of such share of New
Common Stock;
(b) the shareholders of the Holding Company, other than HSI,
shall be afforded 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 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 Amended
Securities Purchase Agreement and the Merger contemplated thereby; and
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(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 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 Amended 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 Amended Securities Purchase Agreement
and the Initial Closing, unless HSI shall have consented in writing thereto
and except as otherwise provided for in the Amended 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 Amended 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 Amended Securities Purchase Agreement; (iii) shall not amend its
certificate of incorporation or by-laws, except as provided for in the Amended
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,
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 Amended
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 enter into any amendment or modification of any of its agreements with
providers, other than amendments or modifications expressly contemplated by
the Amended Securities
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Purchase Agreement or with respect to which HSI shall have provided its prior
written consent; (xv) shall not make any contractual commitment (including
by way of renewal) with respect to any single account involving projected
annual premium revenues or health care costs in excess of $1,000,000; (xvi)
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); (xvii) shall not, except as otherwise
specifically disclosed in the Amended 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 (xviii) shall
not enter into any contract, commitment or arrangement to do any of the things
described in clauses (ii) through (xvii) above.
In addition, each of the Holding Company and FOHP-NJ has agreed that
between the date of the Amended Securities Purchase Agreement and the Initial
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 Amended 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 Amended Securities Purchase Agreement and the Initial
Closing, unless HSI shall have consented in writing thereto and except as
otherwise provided for in the Amended 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 Amended 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 Amended Securities
Purchase Agreement.
Modified Provider Agreements; Conditions Precedent to Effectiveness
The Holding Company agreed, as a condition to the effectiveness of the
Amended Securities Purchase Agreement, to deliver to HSI, on or prior to
March 7, 1997, evidence, satisfactory to HSI in its sole discretion,
that the Holding Company and FOHP-NJ shall have modified, in a legally
binding manner, FOHP-NJ's provider contracts so that (i) at least 90% of
individual physician providers who contract directly with FOHP-NJ and at
least 80% of the remaining individual
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physician providers (who contract with FOHP-NJ through physician groups)
are obligated to accept rates of reimbursement which will result in aggregate
payments of no more than (a) 115% of RBRVS with respect to all commercial
members, (b) 100% of RBRVS with respect to all Medicare members and (c) 65%
of RBRVS with respect to all Medicaid members and (ii) with respect to
institutional providers, the aggregate rate of reimbursement among all
FOHP-NJ institutional providers would reflect a reduction (compared to
calendar 1996 rates) of (x) 5% in in-patient costs (solely as a result of
rate reductions and not through utilization or medical management efforts)
and (y) 10% in out-patient costs (solely as a result of rate reductions and
not through utilization or medical management efforts). In addition, as
conditions to the Initial Closing, (i) individual institutional providers
representing at least 80% of FOHP-NJ's health care costs (as measured with
respect to the 1996 calendar year) shall have agreed to the modifications
to their provider contracts with FOHP-NJ as described in clause (ii) above,
and (ii) (a) each of the hospitals or acute care institution providers which
currently offers to its employees as its exclusive health benefits plan a
FOHP-NJ health benefits plan (each, an "Exclusive Plan Hospital Provider")
shall have delivered to the Holding Company and FOHP-NJ legally binding
commitments that all of their employees will continue to be covered by a
FOHP-NJ health benefits plan through the end of 1999 and that such employees
will constitute an aggregate of at least 1,614,660 "member-months" over the
terms of such respective commitments, including (I)(x) at least 621,100
"member-months" for the 1997 calendar year, (y) at least 496,780
"member-months" for the 1998 calendar year and (z) at least 496,780
"member-months" for the 1999 calendar year and (b) each of the hospitals or
acute care institution providers which currently offers to its employees on a
non-exclusive basis a FOHP-NJ health benefits plan (each, a "Non-Exclusive
Plan Hospital Provider") shall have delivered to the Holding Company and
FOHP-NJ satisfactory commitments that (I) employees representing a
minimum of annualized 238,800 member-months will continue to be covered by a
FOHP-NJ health benefits plan through the end of the 1997 calendar year and
(II) employees representing a minimum of annualized 382,080 member-months will
be covered by a FOHP-NJ health benefits plan for the 1998 and 1999 calendar
years. These agreements are collectively referred to herein as the "Modified
Provider Agreements" and the number of contracts required to be modified as
described above is referred to in this Proxy Statement as the "Minimum Number
of Modified Provider Agreements." The Holding Company also had agreed, as
a further condition to the effectiveness of the Amended Securities Purchase
Agreement, to deliver to HSI, on or prior to February 21, 1997, evidence,
satisfactory to HSI in its sole discretion, that the Holding Company and
FOHP-NJ had obtained a specified number of the Modified Provider Agreements
(less than the Minimum Number of Modified Provider Agreements).
In addition to the foregoing, the Holding Company agreed, as a
condition to the effectiveness of the Amended Securities Purchase Agreement,
to deliver to HSI, on or prior to March 7, 1997, evidence, satisfactory to
HSI in its sole discretion, of insurance coverage relating to all potential
losses, claims, obligations, demands, assessments, penalties, liabilities,
costs, damages, attorneys' fees and expenses due to any actions or lawsuits
brought by any
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person or entity, (including, without limitation, past or present shareholders
of the Holding Company) relating to actions or events occurring prior to the
execution of, or relating to the transactions contemplated by, the Amended
Securities Purchase Agreement, which insurance coverage shall (i) cover the
Holding Company and the past and present directors of the Holding Company, (ii)
be in the amount of $20,000,000 in coverage per event and (iii) provide the
Holding Company with the ability to purchase tail coverage to survive until the
earlier to occur of (A) six years from the Initial Closing or (B) the expiration
of all applicable statutes of limitations, at rates representing no more than
75% of the current premiums paid during the first year of such coverage.
The above conditions to the effectiveness of the Amended Securities
Purchase Agreement were satisfied on March , 1997 and, as a result, the
Amended Securities Purchase Agreement became effective on that date. If the
above conditions to the effectiveness of the Amended Securities Purchase
Agreement had not been satisfied by the Holding Company, or waived by HSI,
prior to the applicable dates set forth above, the Amended Securities Purchase
Agreement would have become null and void.
Representations and Warranties The Amended 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
Amended Securities Purchase Agreement, the Debentures, and the Management
Agreements (as hereinafter defined); capitalization; financial statements;
compliance with law and other instruments; litigation; governmental
proceedings; 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; the quality of HSI's claims processing system; and
certain SEC reports supplied to the Holding Company.
The representations and warranties of the Holding Company, FOHP-NJ
and HSI shall survive until the date that is the earlier of (i) the date that
is the later of (A) eighteen months following the Initial Closing Date and (B)
with respect to representations and warranties made by the Holding Company or
FOHP-NJ twelve months following the latest Additional Debenture Advance
Closing Date (in each case, except for certain representations and warranties
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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 Initial Closing
Date or 66 months following the applicable Additional Debenture Advance
Closing Date, as the case may be) 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, Merger, Standstill Agreement,
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
Initial Closing is subject to the satisfaction of the following conditions,
any of which may be waived by HSI in writing, including, among others: (i) the
delivery of Debentures having an aggregate principal amount equal to the
Initial Debenture Advance Amount by the Holding Company; (ii) the
representations and warranties of the Holding Company and FOHP-NJ contained
in the Amended Securities Purchase Agreement shall be true and correct in
all material respects as of the Initial Closing Date; (iii) all corporate
and other proceedings required to be taken by the Holding Company in
connection with the transactions contemplated by the Amended 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 of the 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 Amended Securities
Purchase Agreement; (vii) the Holding Company shall have entered into the
Management Agreements; (viii) the Holding Company shall have received the
Minimum Number of Modified Provider Agreements; (ix) the Holding Company shall
have entered into the agreement (the "Investors Agreement") described in this
Proxy Statement under the caption "Certain Voting Arrangements;" (x) HSI shall
have received opinions of counsel from counsel to the Holding Company and
FOHP-NJ; (xi) all authorizations, approvals, consents and waivers of any
governmental authority necessary for the consummation of any or all of the
transactions contemplated in the Amended 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 governmental bodies
(including shareholders of the Holding Company) that are required in connection
with the consummation of the transactions contemplated by the Amended
Securities Purchase Agreement shall have been obtained on terms satisfactory to
HSI and remain in full force
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and effect; (xii) 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 Amended Securities Purchase
Agreement prior to or on the Initial Closing Date; (xiii) the Sierra
Agreement shall have been terminated without any residual liability or
obligations of the Holding Company or FOHP-NJ; (xiv) none of the letters
of credit currently available to the Holding Company or the guarantees
of portions of the Holding Company's capital obligation to FOHP-NJ 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 Amended 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 Amended Securities Purchase Agreement or any
action or proceeding seeking a material amount of damages by reason of the
consummation of the Amended Securities Purchase Agreement or any of the
transactions contemplated thereby.
HSI's obligation to consummate an Additional Debenture Advance
Closing is subject to the satisfaction of various conditions, any of which may
be waived by HSI in writing, including, among others: the conditions set forth
in (v), (vi), (xi), (xii) and (xvi) above shall be satisfied as of the
Additional Debenture Advance Closing Date. In addition (A) the representations
and warranties of the Holding Company and FOHP-NJ contained in the Amended
Securities Purchase Agreement shall have been true and correct in all material
respects as of the Initial Closing Date and shall be true and correct in all
material respects on and as of the Additional Debenture Advance Closing Date
with respect to certain items to be set forth on a certificate of an executive
officer of the Holding Company to be dated as of such Additional Debenture
Advance Closing Date; and (B) the Administrative Management Agreement, and the
MIS Management Agreement (if effective), shall be in full force and effect
or shall have been terminated without cause by HSI.
In the event that all of the conditions for an Additional Debenture
Advance Closing are not satisfied with respect to any given Additional
Debenture Advance Amount, then HSI may, at its option: (a) elect the No
Additional Advance Option; or (b) elect the Advance Adjustment Option. In
calculating the amount of the downward adjustment to the Additional Debenture
Advance Amount in connection with the Advance Adjustment Option, HSI is
required in good faith to promptly (and prior to the applicable Additional
Debenture Advance Closing) prepare a reasonable estimate of any Additional
Debenture Advance Adjustment in consultation with the Non-HSI Directors. In
the event HSI and the Non-HSI Directors are unable to agree on the correct
amount of any Additional Debenture Advance Adjustment, HSI's estimate of such
adjustment will be used for purposes of determining the Additional Debenture
Advance Amount for the Additional Debenture Advance Closing, and any dispute
with respect to the amount of such adjustment is required to be resolved by
binding arbitration.
The Holding Company's obligation to sell the Debentures to HSI and to
consummate the transactions contemplated by the Amended Securities Purchase
Agreement shall be subject to the
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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 Initial Debenture Purchase Price;
(ii) the representations and warranties of HSI contained in the Amended
Securities Purchase Agreement shall be true and correct in all material
respects as of the Initial Closing Date; (iii) all corporate and other
proceedings required to be taken by HSI in connection with the transactions
contemplated by the Amended 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 Amended Securities Purchase Agreement prior to or on
the Initial Closing Date; (v) 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 Amended Securities Purchase
Agreement; (vi) 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 Initial Closing Date; (vii) the Holding Company shall have
received an opinion of counsel from counsel to HSI; and (viii) 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 Amended Securities Purchase Agreement, in any exhibit,
schedule, certificate or financial statement delivered under the Amended
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 representation,
warranty or covenant of HSI contained in the Amended Securities Purchase
Agreement, or in any exhibit, schedule or certificate delivered pursuant to
the Amended 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.
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Termination Provisions The Amended Securities Purchase Agreement may
be terminated at any time prior to the Initial Closing (i) by the mutual
written consent of the parties, (ii) by HSI, if any conditions set forth in
the Amended Securities Purchase Agreement to be performed by the Holding
Company or FOHP-NJ have not been satisfied or waived on or before the Initial
Closing, or if there has been a material breach on or before the Initial
Closing of any of the representations and warranties of the Holding Company
and FOHP-NJ contained in the Amended Securities Purchase Agreement, except
that the execution and delivery of the Amended Securities Purchase Agreement
and the exhibits thereto shall not be deemed to constitute a breach of any
such representation, warranty or covenant; 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 Amended Securities Purchase
Agreement, with respect to certain Material Contracts (as defined in the
Amended Securities Purchase Agreement) entered into in the ordinary course of
business subsequent to the date of the Amended 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 Amended Securities Purchase Agreement,
consider in good faith whether it will ultimately in any case be willing to
proceed with the transactions contemplated by the Amended 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 Amended 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 Amended
Securities Purchase Agreement to be performed by HSI have not been satisfied or
waived on or before the Initial Closing, or if there has been a material breach
on or before the Initial Closing of any of HSI's representations or warranties
contained in the Amended 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 Amended
Securities Purchase Agreement, consider in good faith whether it will
ultimately in any case be willing to proceed with the transactions contemplated
by the Amended 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 Amended
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 Initial
Closing is not consummated before July 31, 1997.
The Holding Company has agreed that if HSI terminates the Amended
Securities Purchase Agreement as a result of the failure of the Holding
Company to satisfy a condition to the Initial Closing or either the Holding
Company or HSI terminates the Amended Securities Purchase Agreement pursuant
to the provision which permits either party to terminate the agreement if the
Initial Closing has not occurred prior to July 31, 1997, and, in either case a
Competing Transaction (as hereinafter defined) is entered into at any time
within twelve months after the date of the Amended Securities Purchase
Agreement and then consummated within twelve months
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of its commencement, then on the Payment Date (as hereinafter defined), 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 Amended Securities Purchase Agreement
prior to the termination thereof. The "Payment Date" is the date ten days
following the consummation of a Competing Transaction.
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
Amended 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 Amended
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
Amended 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 Amended 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 Amended 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 Amended Securities Purchase
Agreement.
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DESCRIPTION OF THE DEBENTURES
Presented below is a summary of certain provisions of the Debentures,
the form of which is attached as Appendix B to this Proxy Statement. Although
the following summary includes all the material features of the Debentures, it
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 aggregate principal
amount equal to the sum of (i) $50,000,000 and (ii) the Phase-In Period
Management Fee Amount (currently estimated to approximate $1,100,000)
(collectively, the "Principal Amount"), of which the initial principal amount
will be the sum (such sum being referred to herein as the "Initial Debenture
Amount") of (A) $41,600,000 plus (B) the Phase-In Period Management Fee Amount
and the additional principal amount will be the remaining $8,400,000 (the
"Additional Debenture Advance Amount"), less all Additional Debenture Advance
Adjustments. The Principal Amount will be increased by the aggregate amount of
Defaulted Interest (as hereinafter defined), the aggregate amount of Unpaid
Management Fees (as hereinafter defined) and Indemnification Obligations (as
hereinafter defined) 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 the fifth anniversary of the Initial Closing Date, 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, which is the rate charged to HSI under its credit facility
(the "BA Facility") issued by a consortium of commercial banks led by Bank of
America, National Trust & Savings Association or such credit facility as is
used to refinance the BA Facility, 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 ten days after the 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.
Conversion Unless HSI elects the No Additional Advance Option, or
if HSI commits to not exercise the No Additional Advance Option in the
future, then the Initial Debenture Amount, together with the Additional
Debenture Advance Amount, shall be convertible in its entirety, at any time on
or before the Maturity Date, at the option of HSI or any subsequent holder
thereof, into such number of shares (referred to herein as "Conversion Shares")
of New Common Stock of the Holding Company as is equal to 71% of the total
equity of the Holding Company as of the date of the Debentures (as such total
equity may be increased from time to time to reflect any securities expressly
contemplated to be issued under the Amended Securities Purchase Agreement)
on a fully-diluted basis (i.e., taking into account the conversion of the
Initial Debenture Amount and the Additional Debenture Advance Amount of the
Debentures, the exercise of all warrants and options exercisable for shares of
New Common Stock and the
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conversion of all other securities convertible into shares of New Common
Stock). In the event HSI elects the No Additional Advance Option, with regard
to any given Additional Debenture Advance Amount, the Initial Principal
Amount shall be convertible at any time on or before the Maturity Date, at the
option of HSI or any subsequent holder thereof, into such number of Conversion
Shares as is equal to 59.1% of the total equity of the Holding Company as of
the date of the Debentures (as such total equity may be increased from time
to time to reflect any securities expressly contemplated to be issued under
the Amended Securities Purchase Agreement) on a fully-diluted basis (i.e.,
taking into account the conversion of such Initial Principal Amount and
Additional Debenture Advance Amounts, the conversion of all other securities
convertible into shares of New Common Stock and the exercise of all warrants
and options exercisable for shares of New Common Stock), and all other
Additional Debenture Advance Amounts shall be convertible at any time on or
before the Maturity Date, at the option of HSI or any subsequent holder
thereof, into Conversion Shares at the Conversion Ratio.
Any and all portions of the Principal Amount other than the Initial
Debenture Amount and the Additional Debenture Advance Amount shall be
convertible into such number of Conversion Shares at any time prior to or on
the Maturity Date at the rate (the "Conversion Ratio") which will equal, for
each $1,000,000 of Principal Amount so converted, an additional 1.42% of the
total equity of the Holding Company, as of the date of the Debentures (as such
total equity may be increased from time to time to reflect any securities
expressly contemplated to be issued under the Amended Securities Purchase
Agreement) on a fully-diluted basis (i.e., taking into account the conversion
of the Initial Principal Amount and Additional Debenture Advance Amounts, the
conversion of all other securities convertible into shares of New Common Stock,
the exercise of all warrants and options exercisable for shares of New Common
Stock, and such partial conversion of such Principal Amount).
As set forth above, the Initial Principal Amount shall be
convertible, in part, at any time on or before the Maturity Date, at the
option of HSI or any subsequent holder thereof, into such number of Conversion
Shars which will equal, for each $1,000,000 of Initial Principal Amount so
converted, an additional percentage of the total equity of the Holding
Company (to be calculated by multiplying (i) 1.42% by (ii) a fraction of which
the numerator is (a) the Initial Principal Amount less the Phase-In Period
Management Fee Amount and (b) the denominator of which is the Initial Principal
Amount), as of the date of the Debentures (as such total equity may be increased
from time to time to reflect any securities expressly contemplated to be issued
under the Amended Securities Purchase Agreement) on a fully diluted basis
(i.e., taking into account such partial conversion of the Initial Principal
Amount and the conversion of the remainder of such Initial Principal Amount,
the conversion of all Additional Debenture Advance Amounts, the conversion of
all other securities convertible into shares of New Common Stock and the
exercise of all warrants and options exercisable for shares of New Common
Stock).
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As set forth above, the Additional Debenture Advance Amounts of the
Debentures shall also be convertible, in part, at any time on or before the
Maturity Date, at the option of HSI or any subsequent holder thereof, into
Conversion Shares at the Conversion Ratio.
Immediately after the Initial Closing, HSI will convert the principal
amount of the Debentures evidenced by the Phase-In Period Management Fee
Amount into shares of common stock representing approximately 1.5% of the
Holding Company's outstanding equity (based on $1,100,000 principal amount
of Debentures).
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 rights, 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.
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.
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 ten business days in advance of any such payments that the Holding
Company's statutory surplus
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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 net worth,
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 Initial
Debenture Amount and the Additional Debenture Advance 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 amounts owed to HSI under
the Administrative Management Agreement are not paid (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; provided, however, that for purposes of
the Debentures, Unpaid Management Fees shall not include amounts that become
due and payable in the 1998 calendar year but which are not paid because of
actual or projected statutory net with deficiencies of the Holding Company
(the "Deferred Management Fees"), provided that such Deferred Management Fees
are ultimately paid on or before the end of the immediately following calendar
quarter.
In the event the Holding Company becomes obligated to make one or
more indemnification payments to HSI under the Amended 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 Amended Securities Purchase Agreement with respect to such
indemnification payment, or (ii) six months after adjudication of such claim.
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
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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 such operating 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 Amended 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 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,
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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 for those the violations
of which would not have a Material Adverse Effect 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 hereinafter defined) or any event which with the giving
of notice or the passage of time, or both, would constitute any such Event
of Default.
Board Composition Prior to full conversion of the Debentures and
while they are outstanding, HSI shall be permitted to designate such number of
directors as represents the greater of (i) not 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 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 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. The Holding Company shall
provide written notice to HSI of its intent to draw any amounts under any
letter of credit during the period when the Debentures are outstanding.
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
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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 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) 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 Amended 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 Amended
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, 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, or grant any preemptive rights or rights of first refusal to
the existing shareholders of the Holding Company. 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 by-laws;
(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:
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(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 Amended 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), 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 Amended
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;
(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 or any of its
subsidiaries bankrupt or insolvent under, or ordering relief against the
Holding Company or any of its subsidiaries under, or approving a
properly-filed petition seeking relief against the Holding Company or any of
its subsidiaries or by the DOI 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
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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 MANAGEMENT AGREEMENTS
HSI's obligation to consummate the Initial Closing is conditioned
upon, among other things, the Holding Company entering into (i) the
Administrative Management Agreement, and, at HSI's option, (ii) the 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 C and D to this Proxy
Statement. Although this summary includes all the material features of the
Management Agreements, it 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
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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
Initial Closing Date.
Terms Each of the Management Agreements shall have an initial term of
five years, subject to automatic one year renewal terms unless either party
provides written notice of non-renewal to the other party at least two years
prior to the then current term of the agreement. A party may terminate either
of the Management Agreements if (i) the other party is in material breach of
the agreement (subject to certain rights to cure any such breach); (ii) the
other party (a) becomes insolvent, (b) voluntarily seeks, consents to or
acquiesces in the benefit or benefits of any Debtor Relief Law (as defined in
the Management Agreements) or (c) becomes a party to (or be made the subject
of) any proceeding provided by any Debtor Relief Law, other than as a creditor
or claimant (unless, in the event the proceeding is voluntary, the petition
instituting the voluntary proceeding is dismissed within 45 days of the date
it was filed).
The Administrative Management Agreement will not become effective
prior to the receipt of all necessary government approvals; provided, however,
that, so long as the Initial Closing and the execution and delivery of the
Administrative Management Agreement occur prior to July 31, 1997, the
Administrative Management Agreement shall be deemed to be effective 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 (a) 2% of
the total revenue of the FOHP Health Plans for such month plus (b)
reimbursement for (i) direct expenses incurred by third parties and (ii)
salaries and benefits of the Executives employed by HSI in accordance with the
Administrative Management Agreement; provided, however, that the aggregate
amount of payments to be made to HSI with respect to clause (a) for each
calendar year during the term of the Administrative Management Agreement
(including, with respect to the 1997 calendar year for this purpose, any
Phase-In Period Management Fee Amount) shall in no event be less than
$5,000,000.
At the time of the Initial Closing, the Holding Company shall pay HSI
the Phase-In Period Management Fee Amount, which is an amount equal to the
Management Fees for all full months during the 1997 calendar year ending prior
to the Initial Closing Date, based on certain administrative services provided
by HSI to the Holding Company since January 1,
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1997. It is currently estimated that the Phase-In Period Management Fee Amount
will approximate $1,100,000.
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. The Management Fee for any
month shall become payable within ten days after receipt by the Holding
Company from HSI of the statements for such month.
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 any of the Management Fees due and payable to HSI under
the Administrative Management Agreement are not paid, such Management Fees
may, at HSI's option, be added to the principal amount evidenced by the
Debentures except that Management Fees due and payable during calendar year
1998 may only be added to such principal amount to the extent permitted by the
Debentures. Any due and payable but unpaid Management Fees not added to the
principal amount evidenced by the Debentures shall bear interest at the Rate
until paid in their entirety or added to the principal amount evidenced by 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
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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 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.
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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 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
Non-HSI Designees. During the term of the Investors Agreement, HSI shall not
vote any of its shares of New Common Stock 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
Non-HSI Designees. The Investors Agreement will terminate at the earlier of
(i) such time as HSI shall own no New Common Stock and no securities of the
Holding Company exercisable or convertible into shares of New Common Stock 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.
NO DISSENTERS' RIGHTS; INTEREST OF EXECUTIVE OFFICERS, DIRECTORS AND
AFFILIATES IN THE TRANSACTION
No shareholder of the Holding Company, including any shareholder who
is an executive officer, director or affiliate of the Holding Company, will
receive any benefit from the Transaction which is not shared on a pro rata
basis by all the other shareholders of the Holding Company. In addition,
shareholders of the Holding Company will have no dissenters' rights in
connection with the closing under the Amended Securities Purchase Agreement.
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FEDERAL INCOME TAX CONSEQUENCES
Except as discussed below, the Holding Company does not believe that
the transactions contemplated by the Amended Securities Purchase Agreement
will result in any material federal income tax consequences to the Holding
Company or its shareholders. However, if any shares of New Common Stock are
tendered by a shareholder to the Holding Company or HSI for cash in excess of
the amount paid for such shares, the difference in the amount the shareholders
paid for the shares and the amount he, she or it receives for the shares from
the Holding Company or HSI generally will be taxed as a capital gain or
ordinary income.
Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), imposes an annual limitation (a "Section 382 limitation") on a
corporation's utilization of its federal net operating losses and certain
"built-in deductions" if the corporation undergoes a qualified "ownership
change." In general, a corporation will be deemed to have gone through an
ownership change if the percentage stock ownership of one or more qualified
shareholders ("5% Shareholders") increases by 50 or more percentage points
during any three-year period. Under these rules, the Transaction will be
considered an ownership change and the Holding Company will be subject to a
Section 382 limitation.
The annual limitation imposed by Section 382 would be calculated by
multiplying the fair market value of the Holding Company as of the day of the
Transaction (as determined by the rules of Section 382 and the regulations
thereunder), by the long-term tax exempt interest rate provided in the Code.
The Section 382 limitation sets a yearly cap on the amount of post-transaction
federal taxable income that may be offset by pre-transaction net operating
losses and built-in deductions. The calculated Section 382 limitation may,
depending on its magnitude, result in a portion of the net operating loss
being lost due to expiration. The Section 382 limitation would not apply to
any federal net operating losses incurred after the date of the Transaction.
As of September 30, 1996, the Holding Company had an estimated federal
consolidated net operating loss of $28,089,000 and built-in deductions,
consisting mainly of pre-licensure operating expenses and organization costs
capitalized under Sections 195 and 248 of the Code, of approximately
$5,003,000. The amount of built-in deductions is estimated and would be
subject to redetermination by the Internal Revenue Service upon audit.
New Jersey has not adopted the state law equivalent to Section 382,
but has its own provision limiting New Jersey net operating loss utilization
under certain circumstances. Under New Jersey law, if there is a 50 percentage
point change in the ownership of a corporation and the corporation changes
from the business giving rise to the loss, then the New Jersey net operating
loss is eliminated. Since the operation of this law depends upon future
circumstances not currently being contemplated, the New Jersey limitation
should not apply.
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THE DISCUSSION SET FORTH ABOVE DOES NOT PURPORT TO BE A COMPLETE
DESCRIPTION OF ALL TAX CONSEQUENCES OF THE TRANSACTIONS CONTEMPLATED BY THE
AMENDED SECURITIES PURCHASE AGREEMENT. EACH SHAREHOLDER'S INDIVIDUAL
CIRCUMSTANCES MAY AFFECT THE TAX CONSEQUENCES OF A PARTICULAR TRANSACTION
CONTEMPLATED BY THE AMENDED SECURITIES PURCHASE AGREEMENT TO SUCH SHAREHOLDER.
IN ADDITION, NO INFORMATION IS PROVIDED HEREIN WITH RESPECT TO TAX
CONSEQUENCES OF THE TRANSACTIONS CONTEMPLATED BY THE AMENDED SECURITIES
PURCHASE AGREEMENT UNDER APPLICABLE FOREIGN OR LOCAL LAWS. CONSEQUENTLY, EACH
SHAREHOLDER OF THE HOLDING COMPANY IS ADVISED TO CONSULT HIS, HER OR ITS OWN
TAX ADVISOR AS TO SPECIFIC TAX CONSEQUENCES OF THE TRANSACTIONS CONTEMPLATED
BY THE AMENDED SECURITIES PURCHASE AGREEMENT.
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.
As of December 31, 1996, FOHP-NJ was approximately $45,300,000
below 125% of the statutory net worth requirement applicable to it, and
approximately $41,600,000 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 $11,000,000, which would leave FOHP-NJ
with a statutory net worth deficit of approximately $34,300,000 at 125% of
the statutory net worth requirement applicable to it and approximately
$30,600,000 at 100% of such statutory net worth requirement. The DOI has
informed HSI in writing that, if the Transaction is not consummated on or
before March 31, 1997 (which requires the approval by the Holding Company's
shareholders of the Transaction and Amendments), the DOI will suspend or revoke
FOHP-NJ's COA to conduct business as an HMO in New Jersey and petition the
New Jersey Superior Court for an order to allow the DOI to place FOHP-NJ into
rehabilitation. If FOHP-NJ is placed into rehabilitation, it is likely 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.
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USE OF PROCEEDS
If the Transaction is consummated, all of the Initial Debenture
Amount and the Additional Debenture Advance Amounts 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 was paid 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 Holding
Company or is otherwise not 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, and the rules promulgated thereunder, consummation of the Transaction
is subject to the expiration or prior termination of a specified 30-day
waiting period. On December 31, 1996, HSI and the Holding Company received
notification of the termination of the waiting period.
EFFECT OF CONVERSION OF DEBENTURES ON HOLDERS OF COMMON STOCK
Except as otherwise described under the section herein captioned
"Proposal to Approve the Amendments - Proposed Amendments - Amended and
Restated Certificate of Incorporation of the Holding Company - Rights of First
Refusal," the issuance of New Common Stock upon the conversion of the
Debentures 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
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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 conversion of the principal amount of the Debentures
received by HSI, HSI will be the owner of between 59.1% and 71.0% 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 Initial Closing, except by tender offer or through
the Merger or as otherwise contemplated by the Amended Securities Purchase
Agreement during such five-year period, subject to the Standstill Agreement.
HSI informed the Holding Company that, at the time of any such acquisition
transaction, it will comply with applicable disclosure obligations under the
Exchange Act, including, without limitation, the applicable requirements under
Rule 13e-3.
INFORMATION CONCERNING HSI
HSI is one of the largest managed health care companies in the United
States, with more than 1.9 million 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 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
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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. No assurance can be
given that the application of HSI's medical management techniques to FOHP-NJ
can achieve the same results as those achieved when such techniques were
applied to M.D. Health Plan or HSI's Southwest and Northwest plans.
The business of HSI is subject to risks applicable generally to
managed health care organizations, including limitations on control over and
predictability of health care costs, high levels of competition, dependence on
ability to attract and retain qualified health care providers, substantial
government regulation, the possibility of the adoption of adverse legislation
and regulatory health care reform measures and exposure to evolving theories
of recovery for desired coverage. In addition, HSI's business is significantly
dependent upon effective information systems. HSI is in the process of
attempting to reduce its number of systems and also upgrade and expand its
systems capabilities. Failure by HSI to maintain an effective and efficient
information system could result in adverse consequences to HSI and (if the
Transaction is consummated) the Holding Company and FOHP-NJ.
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In October 1996, HSI announced its intention to merge with Foundation
Health Corporation. Such merger is expected to close in February 1997. While
such contemplated merger involves customary uncertainties relating to the
integration of two companies that have previously operated independently, such
merger also will create the nation's fourth largest publicly traded managed
health care company and an organization well-positioned for accelerated growth
in the health care industry and throughout the United States.
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 Common Stock-NJ.
PROPOSAL TO APPROVE THE AMENDMENTS
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
expansion efforts in New York, Pennsylvania and Maryland. In addition, the
Board recognized the 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 September 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 Original Securities Purchase Agreement, which
contemplated, 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. On February 10, 1997, the
Holding Company and HSI entered into the Amended Securities Purchase
Agreement, which agreement substantially preserves the amendments to the
Certificate of Incorporation and By-laws of the Holding Company and FOHP-NJ
contemplated in the Original Securities Purchase Agreement.
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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 Original
Securities Purchase Agreement required that the composition of the Board
include NJ Practitioners (as hereinafter defined) and representatives of NJ
Acute Care Institutions (as hereinafter defined) 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 material features 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 E, the By-laws of the Holding Company annexed hereto as
Appendix F, the Amended and Restated Certificate of Incorporation of FOHP-NJ
annexed hereto as Appendix G, and the By-laws of FOHP-NJ annexed hereto as
Appendix H. 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.
If the Transaction is not approved by the Holding Company's
shareholders, the shareholders will not vote on the Amendments at the Annual
Meeting.
Amended and Restated Certificate of Incorporation of the Holding
Company
CAPITAL STOCK OF THE HOLDING COMPANY - If the Transaction and
Amendments are 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
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consisting of 100,000,000 shares of New Common Stock and 10,000,000 shares of
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 would have provided 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. The Board recognizes
that issuance of Preferred Stock could affect the rights of holders of New
Common Stock. For example, holders of Preferred Stock could be afforded
preferential rights with respect to distributions or dividends by the Holding
Company. 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 and Amendments are
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 in the FOHP-NJ network who are shareholders of the Holding
Company. In addition, except for issuances of New Common Stock to persons not
named in the Holding Company's Certificate of Incorporation as proposed to be
amended or Business Combinations, 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.
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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."
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 debenture granted or issued by the Holding
Company to HSI ("HSI Conversion Shares"). Prior to the proposed issuance of
capital stock by the Holding Company (other than an issuance of HSI Conversion
Shares), 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.
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 and Amendments are
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.
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VOTING AGREEMENT - The Certificate of Incorporation of the Holding
Company, as proposed to be amended, deletes 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. 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 and Amendments are 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, are no longer necessary and therefore have been
deleted.
RESTRICTIONS ON ISSUANCE - The Certificate of Incorporation of the
Holding Company, as proposed to be amended, permits HSI and any successor
to HSI to purchase shares of capital stock issued by the Holding Company.
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 Certificate of
Incorporation of the Holding Company, as proposed to be amended, modifies
existing restrictions on transfer provisions contained in the Certificate of
Incorporation 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 (i) an Exchange
Offer or Cash Offer or (ii) the
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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 Certificate of
Incorporation of the Holding Company, as proposed to be amended, provides that
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") shall continue until December 31, 1999. Currently, the
covenants, as they apply to any individual NJ Institutional Shareholder,
expire on the second anniversary of the date a FOHP-NJ health plan was first
offered to the employees of the NJ Institutional Shareholder or, if the NJ
Institutional Shareholder is not a NJ Acute Care Institution, the second
anniversary of the date a FOHP-NJ health plan was first offered to the
employees of its affiliated NJ Acute Care Institution. As a result of the
aforementioned proposed amendment to the Holding Company's Certificate of
Incorporation, NJ Institutional Shareholders and their affiliated NJ Acute
Care Institutions will be required to keep their employees in a FOHP-NJ health
plan for a longer period of time if the NJ Acute Care Institution does not
want to be in breach of the covenants and thus risk having its shares of New
Common Stock redeemed by the Holding Company.
The Certificate of Incorporation of the Holding Company also is
proposed to be amended to provide that, if, upon the termination of the
covenants contained therein as they relate to a specific NJ Institutional
Shareholder, the NJ Institutional Shareholder or its affiliated NJ Acute Care
Institution proposes to offer to its employees any health 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 hereinafter defined) by such other health
benefits plans. In the event FOHP-NJ offers to provide an FOHP-NJ health plan
containing terms at least as favorable in all material respects to the
employees of the NJ Institutional Shareholder or its affiliated NJ Acute Care
Institution as those contained in the Bona Fide Offer, such NJ
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Institutional Shareholder or its affiliated NJ Acute Care Institution shall
offer such FOHP-NJ health plan to its employees on the same basis as it would
have been obligated under the covenants if such covenants had not terminated.
In the event a NJ Institutional Shareholder or its affiliated NJ Acute Care
Institution (i) breaches any of the covenants in the proposed Certificate of
Incorporation of the Holding Company applicable to it, or (ii) fails to
provide reimbursement rates (a) for in-patient visits at the lower of (I) the
lowest rate of reimbursement received by such provider from nongovernmental
payors for each line of business, or (II) the rate of reimbursement reflecting
a reduction (compared to calendar 1996 rates) of 5% in in-patient
costs, provided that such reduction is solely as a result of rate reductions
and not through utilization or medical management efforts, and (b) for
out-patient visits at the lower of (I) the lowest rate of reimbursement
received by such providers from nongovernmental payors for each line of
business, or (II) the rate of reimbursement reflecting a reduction (compared
to calendar 1996 rates) of 10% in out-patient costs, provided that
such reduction is solely as a result of rate reductions and not through
utilization or medical management efforts, then the 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
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holding sufficient shares to obtain Board representation. For example, if ten
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
will be elected to the Board.
COMPOSITION OF THE BOARD OF DIRECTORS - The Certificate of
Incorporation, as proposed to be amended, deletes the provisions in the
Certificate of Incorporation of the Holding Company currently in effect, with
respect to the 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 Board of Directors of the Holding Company if the
Transaction is consummated.
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 involving
the Holding Company may be effected only if approved by the affirmative
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.
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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 ten 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 six
nor more than 50 directors. The exact number of directors which shall
constitute the whole Board prior to the election to the Board of any person
designated by HSI, shall be ten directors. The number of directors which shall
constitute the whole Board shall be increased to accommodate the number of
designations to which HSI is so entitled. After the Board includes any HSI
designees, the number of directors which shall constitute the whole Board may
be increased or decreased for whatever reason by a resolution of the Board,
provided that such increase or decrease is approved by the HSI designee or
designees to the Board.
(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
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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. The Board may not approve any of
the following corporate transactions or actions without the approval of at
least 80% of the directors on the Board; provided, however, that, subsequent
to the conversion of all the Debentures issued by the Holding Company to HSI
pursuant to the Amended Securities Purchase Agreement, the corporate
transactions and actions set forth in subparagraphs (b), (g), (h), (j), (k)
and (l) will no longer require the approval of at least 80% of the directors
on the Board:
(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;
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(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; provided, however, that the Board approval
requirement in this subparagraph (d) shall not apply to any merger of the
Holding Company with HSI as contemplated in the Amended Securities Purchase
Agreement;
(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 Debentures contemplated in the Amended Securities
Purchase Agreement and the shares of capital stock issuable upon exercise of
the 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 buy back 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 Amended 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
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(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 any
members of the FOHP Health Plans 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
transaction contemplated by the Amended Securities Purchase Agreement or any
of the agreements entered into in connection with the Amended Securities
Purchase Agreement.
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 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.
ADJOURNMENT - Any meeting of the Board or any committee established
by the Holding Company shall be adjourned upon the request of a majority of
the directors on the Board or persons on the committee designated by HSI who
were present at the meeting, for a period of not more than ten days.
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, for so
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long as any shares of the Holding Company's New Common Stock are held by a NJ
Practitioner, NJ Acute Care Institution, affiliate to a NJ Acute Care
Institution or other health care provider to FOHP-NJ, 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 are 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 and Amendments are 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 and Amendments are 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 applicable to
FOHP-NJ which are 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
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, for so long as
any shares of 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.
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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 of the 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
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.
VOTE REQUIRED
Approval by the Holding Company's shareholders of the proposal to
approve the Amendments requires the affirmative vote of the holders of at
least 75% of the outstanding Common Stock-NJ.
THE DOI HAS INFORMED HSI IN WRITING THAT, IF THE TRANSACTION IS
NOT CONSUMMATED ON OR BEFORE MARCH 31, 1997 (WHICH REQUIRES THE APPROVAL
BY THE HOLDING COMPANY'S SHAREHOLDERS OF THE TRANSACTION AND AMENDMENTS), THE
DOI WILL SUSPEND OR REVOKE FOHP-NJ'S COA TO CONDUCT BUSINESS AS AN HMO IN NEW
JERSEY AND PETITION THE NEW JERSEY SUPERIOR COURT FOR AN ORDER TO ALLOW THE
DOI TO PLACE FOHP-NJ INTO REHABILITATION. IF FOHP-NJ IS PLACED INTO
REHABILITATION, IT IS LIKELY THAT NONE OF THE SHAREHOLDERS OF THE HOLDING
COMPANY
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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.
THE BOARD OF DIRECTORS OF THE HOLDING COMPANY HAS APPROVED
THE AMENDMENTS AND RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR
THE PROPOSAL TO APPROVE THE AMENDMENTS.
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 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:
(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");
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(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
that 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 or any successor to 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 any option or the conversion
of any convertible debenture granted to or issued by the Holding Company to
HSI. Any holder of shares of the Holding Company's capital stock issued upon
the exercise of any option or conversion of any convertible debenture granted
or 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 (other than an issuance of HSI Conversion Shares), 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
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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 by 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 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
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of New Common Stock being offered by the selling shareholder, the Holding
Company shall have 15 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 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 hereinafter
defined); 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, excluding any convertible debentures
issued to HSI, 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.
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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, however, 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 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
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
three years in equal annual installments commencing one 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
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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 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 health plan to its employees as its exclusive health 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 health 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 health plan to its employees
and 50% of such employees are required to be covered by a FOHP-NJ health plan
by January 1, 1996, and
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75% of such employees are required to be covered by a FOHP-NJ health plan by
January 1, 1997; or (c) if the NJ Institutional Shareholder or its affiliated
NJ Acute Care Institution offers a health 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 health plan to
its non-union employees on a non-exclusive basis, (2) use its best efforts to
qualify a FOHP-NJ health plan as the union designated health plan, and (3) pay
reasonable deductibles or other costs to qualify a FOHP-NJ health plan as the
union designated health plan.
The covenants of a NJ Institutional Shareholder shall terminate on
December 31, 1999; 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 - Covenants of NJ Institutional
Shareholders") offered by such other health benefits plan, and, should FOHP-NJ
offer a FOHP-NJ health plan containing terms at least as favorable in all
material respects to the employees of the NJ Institutional Shareholder or its
affiliated NJ Acute Care Institution, the NJ Institutional Shareholder or
affiliated NJ Acute Care Institution shall be required to offer such FOHP-NJ
health 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 FOHP-NJ reimbursement rates (a) for in-patient visits at the lower of
(I) the lowest rate of reimbursement received by such provider from
nongovernmental payors for each line of business, or (II) the rate of
reimbursement reflecting a reduction (compared to calendar 1996 rates) of 5%
in in-patient costs, provided that such reduction is solely as a result of
rate reductions and not through utilization or medical management efforts,
and (b) for out-patient visits at the lower of (I) the lowest rate of
reimbursement received by such providers from nongovernmental payors for each
line of business, or (II) the rate of reimbursement reflecting a reduction
(compared to calendar 1996 rates) of 10% in out-patient costs, provided that
such reduction is solely as a result of rate reductions and not through
utilization or medical management efforts, then the 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.
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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.
ELECTION OF DIRECTORS
If the Transaction and Amendments are 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 50 members. In
addition, if the Transaction and Amendments are 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 13
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. Donald Parisi, Mr. Mark
D. Pilla, Mr. William B. Roberts and Dr. Om P. Sawhney.
Mr. Dadlez, Dr. Engel, Dr. Feneran and Dr. Sawhney have been
nominated for reelection to the Board. These four as well as 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.
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<PAGE>
NOMINEES
The nominees, their ages and their principal occupations or
employment, are as follows:
<TABLE>
<CAPTION>
Principal Occupation
Nominee Age or Employment
------- --- --------------------
<S> <C> <C>
Mr. Roger W. Birnbaum 60 President of Princeton HealthCare
1460 Route 9 North Group
Woodbridge, NJ 07095
Dr. John F. Bonamo 46 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 Medical Center Hospital and Medical Center
703 Main Street
Paterson, NJ 07503
Mr. Bruce G. Coe 66 President Emeritus of New Jersey
41 Lambert Lane Business and Industry Association
Lambertville, NJ 08530
Mr. Christopher M. Dadlez 43 Executive Vice President of Saint
Monmouth Medical Center Barnabas Health Care System and
300 Second Avenue a Director of FOHP
Long Branch, NJ 07740
Dr. Mark Engel 50 Ophthalmologist and a Director of
733 North Beers Street FOHP
Holmdel, NJ 07733
Dr. Thomas J. Feneran 48 Urologist and a Director of FOHP
53 Nautilus Drive
Manahawkin, NJ 08050
Mr. John Gantner 44 Senior Vice President of Finance
Robert Wood Johnson University Hospital and Treasurer of the Robert Wood
One Robert Wood Johnson Place Johnson University 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
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<PAGE>
Principal Occupation
Nominee Age or Employment
- ---------------- --- ---------------------------------
Dr. Om P. Sawhney 59 Plastic Surgeon and a Director of
1550 Park Avenue FOHP
South Plainfield, NJ 07080
</TABLE>
- --------------------------
Each director will hold office until the next annual meeting of
shareholders or until his or her successor is duly elected and qualifies.
There are no family relationships among the current directors, executive
officers or persons nominated by the Holding Company to become directors.
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.
Birnbaum 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. Sister Jane Frances Brady 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. Mr. Coe serves
on the Boards of Directors of New Jersey Resources Corporation and New Jersey
Manufacturers Insurance Company. He also serves on the Boards of Trustees of
New Jersey Future and New Jersey Historical Society.
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<PAGE>
Mr. Christopher M. Dadlez, FACHE, has been Executive Vice President
of the Saint Barnabas Health Care System since June 1996. From March 1992 to
June 1996, Mr. Dadlez served as President and Chief Executive Officer of
Monmouth Medical Center. From January 1995 to May 1996, Mr. Dadlez served as
the President of Mid-Atlantic Health Group. From June 1984 to March 1992, he
was Executive Vice President and Chief Operating Officer of Sinai Hospital,
Baltimore, Maryland. Mr. Dadlez serves on the 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, an ophthalmologist, has served as President of
Ophthalmic Physicians of Monmouth since August 1975. From January 1989 through
December 1990 he served as President of the Bayshore Hospital Medical Staff.
Dr. Engel is a trustee of Ophthalmic Physicians of Monmouth 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 Boards 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 January 1974. Dr. Sawhney is
Chairman of the Audit Committee - Medical Inter Insurance Exchange and the
Board of Managers of Associates in Medical Service at Muhlenberg, L.L.C. He is
on the Board of Directors of the Muhlenberg Foundation and the Central Jersey
I.P.A. Dr. Sawhney is also President of Associates in Medicine and Surgery,
P.A.
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<PAGE>
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, 1996, the Board of
Directors of the Holding Company held 14 meetings of the Board. During fiscal
1996, except for Mr. Roberts, Mr. Azzara, Mr. Kopicki, Dr. Lehrer, Mr.
Ostrowsky and Mr. Pilla, 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.
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. As a result of FOHP-NJ's statutory net worth
deficiency and the hiring and bonus freeze implemented by the Holding Company
to address such deficiency, during the fiscal year ended December 31, 1996,
the Compensation Committee did not formally meet. If the Transaction and
Amendments are 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 are set forth below and brief summaries of
their business experience and certain other information with respect to each
of them is set forth in the information which follows the table:
Name Age Position
---- --- ---------
Donald Parisi 40 Acting President and Chief
Executive Officer, Secretary
and General Counsel
Dr. Joseph Singer 39 Executive Vice President
and Chief Medical Officer
- --------------------
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<PAGE>
In December 1996, Donald Parisi, who has served as Senior Vice
President, Secretary and General Counsel of the Holding Company since June 8,
1995, was appointed acting President and Chief Executive Officer of the
Holding Company. Mr. Parisi is expected to serve as acting President and Chief
Executive Officer until a permanent replacement is appointed. 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.
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.
85
<PAGE>
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, 1996, 1995 and
1994, of the persons serving as the Chief Executive Officer of the Holding
Company during the fiscal year ended December 31, 1996 and the next four
highest paid executive officers of the Holding Company in fiscal 1996
(collectively, the "Named Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
-------------------- --------
Other Securities All
Annual Restricted Underlying Other
Compen- Stock Options/ LTIP Compensa-
Name and Principal Year Salary($) Bonus($) sation($) Award(s)($) SARs(#) Payouts tion($)(1)(2)
- ------------------ ---- --------- -------- --------- ----------- ------- ------- -------------
Position
- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Donald Parisi(3) 1996 $144,231 ---- ---- ---- ---- ----$ 4,981
Acting President and 1995 120,019 ---- ---- ---- ---- ---- ----
Chief Executive Officer 1994 45,673(4) ---- ---- ---- ---- ---- ----
John W. Rohfritch(5) 1996 195,000 ---- ---- ---- ---- ---- 75,770(6)(7)
Former President and 1995 186,254 43,000 ---- ---- ---- ---- ----
Chief Executive Officer 1994 118,846 ---- ---- ---- ---- ---- ----
John L. Adessa(8) 1996 180,154(9) ---- ---- ---- ---- ---- 36,819(10)(11)
Former President and 1995 250,000 593,720(12) ---- ---- ---- ---- ----
Chief Executive Officer 1994 215,369 75,000 ---- ---- ---- ---- ----
Joseph Singer 1996 239,354 ---- ---- ---- ---- ---- ----
Executive Vice President 1995 177,217 ---- ---- ---- ---- ---- ----
and Chief Medical 1994 ---- ---- ---- ---- ---- ---- ----
Officer
Paul Kimmins(13) 1996 150,000 ---- ---- ---- ---- ---- ----
Former Executive Vice 1995 124,731 15,000 ---- ---- ---- ---- 5,404
President 1994 ---- ----
James S. Vaccaro(14) 1996 121,811 ---- ---- ---- ---- ---- 58,838(15)
Former Executive Vice 1995 114,788 ---- ---- ---- ---- ---- ----
President and Chief 1994 ---- ---- ---- ---- ---- ---- ----
Operating Officer
Sharon Seitzman(16) 1996 83,251 ---- ---- ---- ---- ---- 78,507(17)
Former Executive Vice 1995 122,777 25,113 ---- ---- ---- ---- ----
President 1994 99,140 21,205 ---- ---- ---- ---- ----
</TABLE>
(1) Includes amounts contributed by the Holding Company under its 401(k)
Plan. All full-time employees who have completed 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
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<PAGE>
employees to save up to 15% of their pre-tax compensation (subject to
a maximum amount per year established annually pursuant to the Code)
through a payroll deduction. Subject to the discretion of the 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 1996 are as follows: Mr.
Parisi - $4,750; Mr. Rohfritch - $3,006; Mr. Adessa - $4,149; Dr.
Singer - $4,750; Mr. Kimmins - $4,750; Mr. Vaccaro - $4,750; and Ms.
Seitzman - $4,750.
(2) Includes amounts of insurance premiums paid by the Holding Company in
fiscal 1996 with respect to term life insurance for the benefit of
the Named Officers. Amounts paid by the Holding Company for the
benefit of the Named Officers are as follows: Mr. Parisi - $231; Mr.
Rohfritch - $673; Mr. Adessa - $193; Dr. Singer - $155; Mr. Kimmins -
$654; Mr. Vaccaro - $88; and Ms. Seitzman - $142.
(3) Mr. Parisi was appointed acting President and Chief Executive Officer
of the Holding Company in December 1996.
(4) Represents the period from August 8, 1994 to December 31, 1994.
(5) Mr. Rohfritch served as acting President and Chief Executive Officer
of the Holding Company from June 25, 1996 to December 13, 1996.
(6) Includes unused vacation pay of approximately $30,000.
(7) Includes relocation expenses of $41,709 which were paid by the
Holding Company.
(8) Mr. Adessa served as President and Chief Executive Officer of the
Holding Company from its inception in May 1994 to June 1996.
(9) Of this amount, $21,000 is for services provided by Mr. Adessa in
1995.
(10) Includes unused vacation pay of approximately $27,000.
(11) Of this amount, $5,060 represents life insurance premiums paid by the
Holding Company on the life of Mr. Adessa for his benefit for the
year ended December 31, 1996.
(12) Of this amount, $500,000 represents the initial valuation bonus
contemplated in the Adessa Employment Agreement (as hereinafter
defined) 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.
(13) Mr. Kimmins served as Executive Vice President of the Holding Company
from June 1995 to January 1997.
(14) Mr. Vaccaro served as Executive Vice President and Chief Operating
Officer of the Holding Company from June 1995 to June 1996.
(15) Of this amount, approximately $54,000 was paid to Mr. Vaccaro for
consulting services he provided to the Holding Company from June 1996
to November 1996.
(16) 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.
(17) Of this amount, $73,615 was paid to Ms. Seitzman as severance in
connection with her resignation as an Executive Vice President of the
Holding Company in May 1996.
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<PAGE>
EMPLOYMENT AGREEMENTS
Joseph Singer, M.D., pursuant to an agreement between the 58 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 years after
date of employment. At the conclusion of the initial two 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 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 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 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.
88
<PAGE>
Paul J. Kimmins, former Executive Vice President 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. Pursuant to the terms of the Kimmins Employment Agreement, Mr.
Kimmins will receive an annual salary of $150,000. In addition, since the
Holding Company has not renewed the Kimmins Employment Agreement, Mr. Kimmins
will receive a lump sum payment of $75,000 on or about September 15, 1997.
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.
Members of the Board of Directors of FOHP-NJ currently do not receive
any compensation for their services to FOHP-NJ as directors. 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 $139,000 during the fiscal year
ended December 31, 1996 to physician directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1996, 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
$6,000,000 of the Holding Company's
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<PAGE>
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' $6,000,000
guaranty, Mr. Roberts secured from Chase Manhattan Bank (formerly Chemical
Bank), a $3,000,000 letter of credit (the "Chase Manhattan 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 Holding Company paid $48,500 in bank fees in connection
with the Chase Manhattan Letter of Credit. Contemporaneously with the issuance
of the Chase Manhattan Letter of Credit, 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 Chase
Manhattan Bank in connection with any draw against the Chase Manhattan 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 Chase Manhattan Letter of Credit terminates.
The Chase Manhattan Letter of Credit was to expire on January 2,
1997. However, in December 1996, the Chase Manhattan Letter of Credit was
extended until March 31, 1997. In connection with the extension of the Chase
Manhattan Bank Letter of Credit, the Holding Company paid $8,550 in bank fees
and is obligated to pay Mr. Roberts a fee of $20,000 for each month the letter
of credit remains outstanding.
Prior to making any draw against the Chase Manhattan 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 Chase Manhattan 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 than the letter of credit secured by Mr. Adessa. See "Related
Party Transactions."
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 Chase Manhattan 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
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<PAGE>
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 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 $15 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 Chase Manhattan 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 Chase Manhattan 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, 1996, 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 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 former 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
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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 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
Donald Parisi is currently serving as acting President and Chief
Executive Officer of the Holding Company. Mr. Parisi, who ordinarily serves as
the Holding Company's Senior Vice President, Secretary and General Counsel,
was appointed by the Board of Directors in December 1996 to serve as acting
President and Chief Executive Officer until a permanent replacement is
appointed. Mr. Parisi replaced John W. Rohfritch who, prior to his resignation
on December 13, 1996, had been serving as acting President and Chief Executive
Officer since June 1996. For the year ended December 31, 1996, Mr. Rohfritch
was paid approximately $195,000 pursuant to an Employment Agreement which he
entered into in December 1994 and Mr. Parisi was paid approximately $144,000.
Neither Mr. Rohfritch or Mr. Parisi was paid any additional compensation for
serving as acting President and Chief Executive Officer of the Holding
Company.
For the period commencing January 1, 1996 and ending June 25, 1996,
Mr. Adessa, the former President and Chief Executive Officer of FOHP, was paid
a salary of approximately $159,000. 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 FOHP Health Plans
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
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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.
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. See "Employment Agreements."
As a result of the Holding Company's implementation of a hiring
freeze and its suspension of bonus payments in 1996 to address FOHP-NJ's
statutory net worth deficiency, the Compensation Committee did not meet in
1996. The Compensation Committee expects to resume meeting shortly after the
Transaction is either approved or disapproved by the shareholders of the
Holding Company. If the Transaction is approved by the Holding Company, the
Compensation Committee is expected to consult with HSI regarding salaries and
benefits to be paid or awarded to the permanent President and Chief Executive
Officer of the Holding Company.
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,
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
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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, 1996, 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).
[THE NARRATIVE AND/OR TABULAR INFORMATION BELOW IS A FAIR AND ACCURATE
DESCRIPTION OF GRAPHIC OR IMAGE MATERIAL OMITTED FOR THE PURPOSE OF
EDGAR FILING.]
LEGEND
<TABLE>
<CAPTION>
Symbol CRSP Total Returns Index for: 12/31/92 12/31/93 12/30/94 12/29/95 12/31/96
- ------ ---------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
______ ? FOHP, Inc. 100.0 100.0 100.0
...... ? NYSE/AMEX/Nasdaq Stock Market
(US Companies) 88.9 98.9 98.4 134.1 162.6
- ------ ? Nasdaq Health Services Stocks 78.3 90.4 96.9 123.1 123.3
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 reweighted 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 12/31/96.
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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 or their affiliates 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, Executive Vice President of Saint Barnabas Health Care System; Mr.
Kopicki, President and Chief Executive Officer of Muhlenberg Regional Medical
Center; Mr. Ostrowsky, Executive Vice President and General Counsel of Saint
Barnabas Health Care System; and Mr. Pilla, Executive Vice President of Saint
Barnabas Health Care System, President of Community Memorial Health Services
Corporation, an affiliate of Community Medical Center and Kimball Medical
Center, and President and Chief Executive Officer of each 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 health 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
$6,000,000 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'
$6,000,000 guaranty, Mr. Roberts secured from Chase Manhattan Bank a
$3,000,000 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 $3,475,000 letter of credit
(the "Carnegie 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 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
Carnegie Letter of Credit. Contemporaneously with the issuance of the Carnegie
Letter of Credit, the Holding Company entered into a separate reimbursement
agreement with each NJ Practitioner who secured the Carnegie 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 Carnegie Letter of Credit by the Holding
Company. Under the terms of
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the reimbursement agreements, the Holding Company paid to the NJ
Practitioners who secured the Carnegie 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 Letter of Credit.
The Carnegie Letter of Credit was to expire on January 1, 1997.
However, in December 1996, the Carnegie Letter of Credit was extended until
March 31, 1997. In connection with the extension of the Carnegie Letter of
Credit, the Holding Company paid $14,681 in bank fees and an aggregate fee of
approximately $43,000 to the NJ Practitioners who secured the Carnegie Letter
of Credit.
Prior to making any draw against the Carnegie 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 Chase
Manhattan Letter of Credit. See "Compensation Committee Interlocks and Insider
Participation." Moreover, under its reimbursement agreements with the NJ
Practitioners who secured the Carnegie 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 Holding Company
against the letter of credit. Interest on the Holding Company's reimbursement
obligation to a NJ Practitioner securing the Carnegie 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 nine months from the date the obligation is first
incurred by the Holding Company.
For so long as the Carnegie 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 six-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 (the "CoreStates
Letters 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 $300,000 letter of
credit and Mr. Adessa secured a $323,000 letter of credit. The Holding Company
paid $7,199 in bank fees in connection with the
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CoreStates Letters of Credit. In connection with the issuance of the
CoreStates Letters of Credit, 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 CoreStates 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 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, and on
January 1, 1997, the remaining amount of the letter of credit expired.
The letter of credit secured by Dr. Krakauer was to expire on January
1, 1997. However, in December 1996, the letter of credit secured by Dr.
Krakauer was extended until March 31, 1997. In connection with the extension
of the letter of credit, the Holding Company paid approximately $800 in bank
fees and a fee of $1,875 to Dr. Krakauer.
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) - $250,000; Saint
Barnabas Corporation (an affiliate of Saint 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
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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 Guarantee 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 Guarantee. 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 months
from the date the obligation is first incurred by the Holding Company.
For so long as an Institutional Guarantee 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 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 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 Guarantee to which the guarantor is a party, such
Institutional Guarantee will be void and of no further effect unless such
breach is cured by the Holding Company within 30 days of its receipt
of written notification from the guarantor of such breach.
Each guarantor's liability under its Institutional Guarantee was to
expire on January 1, 1997. However, in December 1996, each Institutional
Guarantee was extended until March
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31, 1997. In connection with the extension of the Institutional Guarantees, the
Holding Company paid $100 to each guarantor.
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 3 required to be filed by Klas T. Booth
in March 1996 when he became an Executive Vice President of the Holding
Company. Mr. Booth promptly filed a Form 3 in May 1996 when informed of the
inadvertent omission.
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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. 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 January 31, 1997, FOHP-NJ had entered into
provider agreements with 51 NJ Acute Care Institutions, approximately
10,000 NJ Practitioners and approximately 75 other health care providers. The
provider agreements have an initial term of one year and are renewable
annually. Such agreements with NJ Acute Care Institutions and other health
care providers who are not NJ Practitioners may be terminated by mutual
consent or, after the initial one year term, by either party upon 90 days
notice; agreements with NJ Practitioners may be terminated by either party
upon 60 days notice. The agreements also may be terminated for breaches
specified therein. The terms and conditions of a provider agreement or any
agreement with a subscriber are not affected by whether the provider or
subscriber is, or is not, a shareholder of the Holding Company.
FOHP-NJ's agreements with NJ Acute Care Institutions provide for,
among other things, a reimbursement schedule setting the amounts to be paid to
the NJ Acute Care Institutions by FOHP-NJ for services provided to members.
The reimbursement schedule of a provider agreement between a NJ Acute Care
Institution and FOHP-NJ is individually negotiated. Rates paid to NJ Acute
Care Institutions for services provided to members of FOHP-NJ's health plans
vary from institution to institution and are based on, among other things, the
type of services provided by, and the location of, the NJ Acute Care
Institution. Agreements with participating NJ Acute Care Institutions prohibit
the NJ Acute Care Institutions from billing a member of a
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FOHP-NJ health 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 health plan
except for co-payments and non-covered services, if any. The fees paid to NJ
Practitioners are based on a percentage of the fees payable under the fee
schedule developed for Medicare. Co-payments, 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 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 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 NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Premium Revenue For the nine-month period ended September 30, 1996,
medical premium revenue totalled $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 health
plans. The Holding Company believes that the percentage of medical premium
revenue attributable to NJ Acute Care Institutions will continue to decrease
as FOHP-NJ's operations grow and FOHP-NJ 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
103
<PAGE>
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 versus total
costs attributable to medical and hospital services 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 health plans.
Selling, General and Administrative Expenses Selling, general and
administrative expenses versus costs 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.
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
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 health plans. The Holding Company believes that the
percentage of medical premium revenue attributable to NJ Acute Care
Institutions will continue to decrease as FOHP-NJ's operations grow and
FOHP-NJ 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.
104
<PAGE>
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 health 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 1995,
FMCO received less referrals from a major referral source. As a result,
revenue generated from referrals decreased by approximately $125,000 per month
in 1995. In December 1995, management determined that due to the recent loss
of business volume resulting from less referrals 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.
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.
105
<PAGE>
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
106
<PAGE>
obtain additional capital to remain in compliance with the statutory net worth
and other capital requirements applicable 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, (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, and (d) the discontinuance of expansion
efforts in states other than New Jersey.
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 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 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;
107
<PAGE>
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 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. On February 6, 1997, the DOI sent
HSI a letter stating, among other things, that, if the Initial Closing
occurs on or before March 31, 1997, and FOHP-NJ increases its statutory net
worth to 100% of the minimum level required by law, as expected in the
Transaction, the DOI would immediately rescind the FOHP-NJ plan of action
approved by the DOI on June 12, 1996, subject to a guaranty by HSI that
FOHP-NJ will maintain surplus equal to or in excess of 100% of the minimum
net worth level required by law through December 31, 1997.
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 years ended December 31, 1995 and 1996 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.
108
<PAGE>
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 April 30, 1997. 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, THE PROPOSAL TO APPROVE THE
AMENDMENTS 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
DONALD PARISI
Acting President and
Chief Executive Officer
March __, 1997
109
<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
September 30, 1996
Condensed Consolidated Balance Sheets...........................F-23
Condensed Consolidated Statements of Operations.................F-24
Condensed Consolidated Statements of Shareholders' Equity.......F-25
Condensed Consolidated Statements of Cash Flows.................F-26
Notes to Consolidated Financial Statements......................F-27
F-1
<PAGE>
[ERNST & YOUNG LLP LETTERHEAD]
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
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,
F-2
<PAGE>
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 January 31, 1997.
Iselin, New Jersey
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 SHAREHOLDERS'
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 Cash Flows
<TABLE>
<CAPTION>
PERIOD MAY 19,
1993 (DATE OF
INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31,
1995 1994 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 are required to enter into
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)
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") and has been included in expenses in
1994.
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:
<TABLE>
<CAPTION>
<S> <C>
Purchase price $900,000
Liabilities in excess of net assets acquired 206,668
----------
Cost in excess of net assets acquired $1,106,668
==========
</TABLE>
In December 1995, management determined that due to the loss of business
volume in 1995 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:
<TABLE>
<CAPTION>
1994 1993
------------------------------------
<S> <C> <C>
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)
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
--------------------------
<S> <C> <C>
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 $ - $ -
==========================
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
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 -% -% -%
==== ==== ====
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994
-------------------------
<S> <C> <C>
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)
---------- ----------
Furniture and Equipment, net $1,859,131 $1,401,907
========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C>
1996 $1,905,524
1997 1,462,870
1998 1,439,393
1999 297,843
2000 40,536
----------
$5,146,166
==========
</TABLE>
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 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
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)
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 initially approved a $30 million investment by Health Systems
International, Inc., a California based managed health care organization
("HSI"), into the Holding Company in October, 1996. At closing, HSI was to
purchase $30 million of debentures convertible into 40% of the Holding
Company's outstanding equity and HSI would have received an option to acquire
another 11% ownership. After closing, HSI would have been obligated to either
acquire up to an additional 20% of the outstanding equity of the Holding
Company, or require the Holding Company to have repurchased that amount with
HSI financing. However, due to a significant increase in required medical
claims as of November 30, 1996, in January 1997 HSI exercised its right to
renegotiate certain terms
F-21
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
12. SUBSEQUENT EVENT (CONTINUED)
of the Securities Purchase Agreement among HSI, the Holding Company and
FOHP-NJ (the "Purchase Agreement"). Under the terms of the renegotiated
Purchase Agreement, HSI will invest up to $50 million into the Holding
Company. At closing, which is expected in the first quarter of 1997, HSI will
purchase up to $50 million of debentures convertible into up to 71% of the
Holding Company's outstanding equity. HSI will also have the right to acquire
the remaining shares of the Holding Company's outstanding equity through
December 31, 1999 by tender offer or merger.
F-22
<PAGE>
FOHP, Inc. and 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 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 1,006,131
Unearned premium revenue 1,116,223 341,092
Other 1,375,505 890,327
----------- -----------
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
F-23
<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 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
F-24
<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 10,061 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
F-25
<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 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
Decrease (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
F-26
<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.
During the summer of 1996, as a result of FOHP-NJ's statutory net worth
deficiency discussed in Note 4 hereof and the conditions imposed by the New
Jersey Departments of Banking and Insurance and Health and Senior Services
(the "Departments") in connection therewith, the Board of Directors of the
Holding Company discontinued the Holding Company's expansion efforts in states
other than New Jersey, including expansion efforts in New York, Pennsylvania
and Maryland. It is not determinable at this time when, or if, the Holding
Company will continue expansion efforts in any state other than New Jersey.
The financial information for the three and nine month periods ended September
30, 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
F-27
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
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 102 of the Proxy Statement.
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 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 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, (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, and (d) the discontinuation of
expansion efforts in states other than New Jersey.
The Holding Company is also considering raising capital through the private
placement and/or public sale of common stock. In that connection, in October
1996, the Holding Company and FOHP-NJ entered into the Securities Purchase
Agreement with 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 Securities Purchase
Agreement, HSI will, among other things, infuse $30 million into the Holding
Company through the purchase of the Debentures. The closing of the Securities
Purchase Agreement is expected to occur in early 1997 and is subject to
regulatory and shareholder approval.
The success of the Holding Company's efforts to increase capital is essential
in order for FOHP-NJ to meet its statutory net worth requirements.
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-28
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (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. 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 DOI.
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).
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.
F-29
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
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 DOI 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
102 of the Proxy Statement, statutory net 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 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 102 of the Proxy Statement. On June 12, 1996, the
Departments approved the plan of action subject to certain reporting and other
conditions, including a condition requiring the Holding Company to
F-30
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
obtain prior approval of the DOI before making any expenditure related to
activities in jurisdictions other than New Jersey. 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 the Amended Securities Purchase Agreement with HSI, pursuant to which HSI
will, among other things, infuse up to $50 million into the Holding Company
through the purchase of Debentures.
F-31
<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.
February 10, 1997
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
SALE AND PURCHASE OF SECURITIES......................................1
1.1 Purchase of Debentures......................................1
1.2 Closings....................................................2
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND FOHP-NJ............3
2.1 Organization; Subsidiaries; and Good Standing...............3
2.2 Power; Authorization; Binding Agreements....................4
2.3 Capitalization..............................................4
2.4 Financial Statements........................................5
2.5 Absence of Certain Developments.............................6
2.6 Noncontravention............................................6
2.7 Litigation..................................................6
2.8 No Governmental Proceeding or Litigation....................7
2.9 Compliance with Laws........................................7
2.10 Material Contracts..........................................7
2.11 Consents, Etc...............................................9
2.12 Licenses, Permits and Governmental Approvals................9
2.13 Securities Exchange Act Reports Supplied to Purchaser......10
2.14 Environmental Matters......................................10
2.15 Title to Properties and Assets.............................11
2.16 Taxes......................................................11
2.17 DOI Reports................................................11
2.18 Information Supplied.......................................12
2.19 Certain Business Practices and Regulations.................12
2.20 Insurance..................................................13
2.21 Labor Issues...............................................13
2.22 Employment/Severance Matters...............................13
2.23 Absence of Undisclosed Liabilities.........................14
2.24 Intellectual Property......................................14
2.25 Employee Benefit Plans.....................................14
2.26 Brokerage and Other Fees...................................15
2.27 Accuracy of Information....................................15
i
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.....................16
3.1 Organization and Good Standing.............................16
3.2 Authorization; Power.......................................16
3.3 Purchase for Investment....................................16
3.4 Unregistered Securities; Legend............................17
3.5 Access to Data; Experience; Investment Decision............17
3.6 Brokerage and Other Fees...................................17
3.7 No Financing Required......................................18
3.8 Litigation.................................................18
3.9 Claims Processing System...................................18
3.10 Securities Exchange Act Reports Supplied to the Company....18
ARTICLE IV
PRE-CLOSING COVENANTS OF THE COMPANY................................19
4.1 Fulfillment of Obligations.................................19
4.2 Access.....................................................19
4.3 Conduct of Businesses......................................19
4.4 No Solicitation of Other Offers............................22
4.5 Interim Financial Statements...............................22
4.6 Updated Disclosure; Breaches...............................22
4.7 Consummation of Amended Agreement..........................23
4.8 Approvals of Third Parties.................................23
4.9 Restated Certificates and By-laws..........................23
4.10 Proxy Statement............................................23
4.11 Provider Contracts.........................................24
4.12 Letters of Credit; Guarantees..............................25
4.13 Liability Insurance........................................25
ARTICLE V
COVENANTS OF THE PURCHASER..........................................26
5.1 Consummation of Agreement..................................26
5.2 Claims Processing System...................................26
5.3 Updated Disclosure; Breaches...............................26
5.4 Standstill.................................................26
ii
<PAGE>
ARTICLE VI
OTHER AGREEMENTS....................................................27
6.1 Provider Contracts.........................................27
6.2 Capital Requirements.......................................28
6.3 New York Subsidiary........................................28
6.4 Post-Closing Acquisition...................................29
(a) Exchange/Cash Offer for Shares....................29
(b) Post-Closing Merger...............................30
6.5 Additional HSR Act Filings.................................31
6.6 Liability Insurance........................................31
ARTICLE VII
CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATIONS.................32
7.1 Conditions Precedent to Initial Closing....................32
7.2 Conditions Precedent to each Additional
Debenture Advance Closing................................34
7.3 Additional Debenture Advance Elections and Adjustment......36
ARTICLE VIII
CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS...................37
8.1 Receipt of Payment.........................................37
8.2 Representations and Warranties.............................38
8.3 Proceedings and Documents..................................38
8.4 Covenants..................................................38
8.5 Injunction, Etc............................................38
8.6 Approvals..................................................38
8.7 Investors Agreement........................................38
8.8 Opinion of Counsel.........................................38
ARTICLE IX
INDEMNIFICATION.....................................................38
9.1 Indemnification by the Company.............................38
9.2 Indemnification by the Purchaser...........................39
9.3 Conditions of Indemnification..............................40
9.4 Remedies Not Exclusive.....................................41
ARTICLE X
SURVIVAL OF REPRESENTATIONS.........................................41
iii
<PAGE>
ARTICLE XI
TERMINATION.........................................................42
11.1 (a) Termination Events................................42
(b) Termination Fees..................................43
ARTICLE XII
MISCELLANEOUS.......................................................44
12.1 Entire Agreement; Amendments and Waivers...................44
12.2 Governing Law..............................................44
12.3 Notices....................................................44
12.4 Effect of Headings.........................................46
12.5 Severability...............................................46
12.6 Confidentiality; Publicity and Disclosures.................46
12.7 Assignment.................................................46
12.8 Expenses...................................................47
12.9 Counterparts...............................................47
12.10 Further Assurances.........................................47
12.11 Effectiveness of Amended Agreement.........................47
EXHIBITS
Exhibit A Form of Debentures
Exhibit B-1 Form of Amended and Restated Certificate of Incorporation of
FOHP, Inc.
Exhibit B-2 Form of By-laws of FOHP, Inc.
Exhibit B-3 Form of Amended and Restated Certificate of Incorporation of
FOHP-NJ.
Exhibit B-4 Form of By-laws of FOHP-NJ
Exhibit C-1 Form of Exclusive Plan Hospital Provider Agreement
Exhibit C-2 Forms of Non-Exclusive Plan Hospital Provider Agreements
Exhibit D-1 Form of General Administrative Services Management Agreement
Exhibit D-2 Form of Management Information Systems and Claims Processing
Services Agreement
Exhibit E Form of Investors Agreement
Exhibit F Form of Opinion of Outside Counsel of FOHP, Inc. and FOHP-NJ
Exhibit G Form of Officer's Certificate
Exhibit H Form of Opinion of Outside Counsel of Health Systems
International, Inc.
iv
<PAGE>
SCHEDULES
Schedule 2.1A Subsidiaries
Schedule 2.1B Good Standing
Schedule 2.3 Rights of First Refusal
Schedule 2.4(a) SEC Reports
Schedule 2.4(b) Unreported Liabilities and Obligations
Schedule 2.5 Company's Reports
Schedule 2.6 Noncontravention
Schedule 2.7 Litigation
Schedule 2.9 Compliance with Law
Schedule 2.10 Certain Material Contracts and Defaults
Schedule 2.11 Consents
Schedule 2.12 Licenses, Permits and Governmental Approvals
Schedule 2.14 Environmental Matters
Schedule 2.15 Properties and Assets
Schedule 2.16 Taxes
Schedule 2.20 Insurance
Schedule 2.22 Employment/Severance Matters
Schedule 2.25 Employee Benefit Plans
v
<PAGE>
AMENDED AND RESTATED
SECURITIES PURCHASE AGREEMENT
This Amended and Restated Securities Purchase Agreement (this "Amended
Agreement"), dated February 10, 1997, 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 (the "Purchaser"), and shall be effective as of
the Effective Date (as such term is defined in Section 12.11 hereof).
WITNESSETH:
WHEREAS, the Company, FOHP-NJ and the Purchaser are parties to a
Securities Purchase Agreement, dated as of October 24, 1996 (the "Original
Agreement"), pursuant to which, among other things, the Company would issue and
sell to the Purchaser, and the Purchaser would purchase from the Company,
convertible subordinated surplus debentures in the initial aggregate principal
amount of $30,000,000; and
WHEREAS, each of the Company, FOHP-NJ and the Purchaser believe it
necessary and appropriate to amend and restate the Original Agreement to modify
various agreements and terms and conditions, including an increase in the
aggregate principal amount of convertible subordinated surplus debentures (the
"Debentures") committed to be purchased by the Purchaser to the sum of
$50,000,000 (subject to adjustment as set forth herein), plus the Phase-In
Period Management Fee Amount (as such term is defined in Section 4.4 of the
General Administrative Services Management Agreement the form of which is
attached hereto as Exhibit D-1);
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 Amended Agreement, (a) the Purchaser
agrees to purchase from the Company, and the Company agrees to issue and sell
to the Purchaser at the Initial Closing (as such term is defined in Section
1.2(a) hereof), Debentures, in the form attached hereto as Exhibit A, in
aggregate principal amount equal to the sum of (i) $41,600,000 and (ii) the
Phase-In Period Management Fee Amount (referred to herein as the "Initial
Debenture Advance Amount") and (b) during the remainder of the 1997 calendar
year (and in no
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event later than December 31, 1997), the Purchaser shall loan and advance to
the Company additional principal amounts (the principal amount of each such
loan and advance being referred to herein as an "Additional Debenture Advance
Amount"), from time to time and in Additional Debenture Advance Amounts as
determined, in each case, by the Purchaser in its sole discretion; provided,
however, that all such Additional Debenture Advance Amounts shall, in the
aggregate, taken together with the Initial Principal Advance Amount, equal the
amount of (i) the sum of (A) $50,000,000 and (B) the Phase-In Period Management
Fee Amount less (ii) the amount of all Additional Debenture Advance Adjustments
(as defined in Section 7.3 hereof) (such net amount referred to as the
"Debentures Commitment Amount").
1.2 Closings.
(a) The closing of the purchase and sale of the Debentures (the
"Initial Closing") shall occur on (i) the date that is two business days
after the satisfaction or waiver of all conditions set forth in Section
7.1 or Article VIII hereof or (ii) such other date as shall be agreed upon
by the Company and the Purchaser (the "Initial Closing Date"). The Initial
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 Initial Closing, the Company shall deliver to the
Purchaser the Debentures purchased by the Purchaser (which Debentures
shall be registered in the Purchaser's name), and the Purchaser shall
deliver to the Company a sum equal to the Initial Debenture Advance Amount
(the "Initial Debenture 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.
(b) The closing (each such closing being referred to herein as an
"Additional Debenture Advance Closing") of any loan and advance by the
Purchaser to the Company of any Additional Debenture Advance Amount shall
occur on (i) the later of (A) such date during the 1997 calendar year as
shall be determined by the Purchaser in its sole discretion (but in no
event later than December 31, 1997) or (B) two business days after the
satisfaction or waiver of all conditions set forth in Section 7.2 hereof
with respect to such advance of an Additional Debenture Advance Amount or
(ii) such other date as shall be agreed upon by the Company and the
Purchaser (the "Additional Debenture Advance Closing Date"). The Purchaser
shall provide to the Company at least 10 days' prior notice of an
Additional Debenture Advance Closing, including in such notice the
Additional Debenture Advance Amount to be advanced by the Purchaser to the
Company at such Additional Debenture Advance Closing (along with a
description of any Additional Debenture Advance Adjustment used to arrive
at such Additional Debenture Advance Amount as described in Section 7.3
hereof). At each Additional Debenture Advance Closing, the Purchaser shall
deliver to the Company a sum equal to the Additional Debenture Advance
Amount to be advanced by the Purchaser to the Company at such Additional
Debenture Advance Closing by certified check or wire transfer of
immediately
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available funds in accordance with wire transfer instructions provided by
the Company, denominated in United States dollars, and such Additional
Debenture Advance Amount shall be added to the Debentures as Principal
Amount (as such term is defined in the Debentures) which the Company is
obligated to pay to the Purchaser pursuant to the terms of the Debentures.
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.
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2.2 Power; Authorization; Binding Agreements. The Company has the
power and authority to enter into this Amended Agreement and to perform fully
its obligations hereunder (other than the issuance and sale of the Debentures
and the issuance of the shares of common stock of the Company (the "Conversion
Shares") issuable upon conversion of the Debentures) and, upon approval of the
shareholders of the Company as described in Section 2.11 hereof, to issue and
sell the Debentures and to issue the Conversion Shares. FOHP-NJ has the power
and authority to enter into this Amended Agreement and to perform fully its
obligations hereunder. The execution and delivery of this Amended Agreement,
the issuance and sale of the Debentures, the issuance of the Conversion Shares
upon conversion of the Debentures and the consummation of the other
transactions contemplated hereunder and thereunder have been duly authorized by
all necessary corporate action of the Company (except as disclosed in Section
2.11 and Section 12.11 hereof). This Amended 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 Management Agreements (as such term is defined
in Section 7.1(g) hereof) and the other agreements required to consummate the
transactions contemplated thereunder and under this Amended Agreement will be,
on or prior to the Initial 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 Initial Closing Date
neither the Debentures nor the Conversion Shares (issuable upon conversion of
the Debentures) 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 Amended Agreement, as of
the Initial 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 Amended 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
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contemplated by this Amended Agreement, there is currently not, and as of the
Initial 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 maximum number of
Conversion Shares issuable upon conversion of the Debentures in the amount of
the Debenture Commitment Amount will, as of the Initial Closing, be duly and
validly reserved and, when issued upon conversion of the Debentures, will be
duly and validly issued, fully paid and non-assessable. At the Initial 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, the
Purchaser will receive good title to the Conversion Shares 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 such
term is hereinafter defined), a list of which SEC Reports is attached as
Schedule 2.4(a) hereto, and the Company's balance sheet as of September
30, 1996 and the related income statement for the fiscal quarter then
ended (referred to herein, collectively, as the "September 30 Statement"
and together with such financial statements contained in the SEC Reports
as the "Past Financial Statements") was prepared in accordance with 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 operations
and cash flows for the periods indicated of the Company and the
Subsidiaries, except that the September 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
and on Schedule 2.4(b) (including any related notes and schedules), other
than liabilities incurred since September 30, 1996 in the ordinary course
of their respective businesses or liabilities incurred in connection with
the proposed issuance of the Debentures expressly contemplated or
permitted by this Amended 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 January 3, 1997, the claims backlog of the Company and
FOHP-NJ consisted of 35,775 claims received but not reflected in the
claims processing system thereof and 102,485 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
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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 Amended Agreement
or as described on Schedule 2.5 hereto or as disclosed on any of the Quarterly
Reports on Form 10-Q of the Company for the quarters ended March 31, 1996, June
30, 1996, or September 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 Amended 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
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 Amended Agreement do not, and the execution and delivery of
the Debentures 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,
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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
Amended 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 Amended 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 Amended 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
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
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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 which is not (I) provided as an exhibit to the Annual
Report on Form 10-K of the Company for the year ended December 31, 1995 or
(II) expressly called for to be executed in this Amended Agreement. 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.
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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), except for those Material Contracts described in Sections
2.10(a)(v)(B), (C) and (D) hereof, the termination or failure to renew of
which would not in the aggregate have a Material Adverse Effect on the
Company or any of the Subsidiaries.
(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 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 Amended 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
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Schedule 2.12. No License by its terms will terminate or lapse by reason of the
transactions contemplated by this Amended 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 (a) 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 Amended
Agreement, then on the date of such filing), (b) were filed with the SEC during
the 12 months preceding the date hereof on a timely basis, and (c) 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 Amended 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.
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
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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 September 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 September 30 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
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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 (a) 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 Amended 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 Amended 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 (b) 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 Amended 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 Amended 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 (a) made or agreed to make any contribution, payment or gift to
any customer, supplier, governmental official, employee or agent
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where either the contribution, payment or gift or the purpose thereof was
illegal under any law, (b) 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, (c)
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 (d) 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
the 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
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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.
2.23 Absence of Undisclosed Liabilities. Except as described in
Sections 2.4 and 2.7 hereof and Schedules 2.4(b) and 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
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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.
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 Amended 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 Amended 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.
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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 Amended 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 Amended Agreement and to perform fully its obligations hereunder. This
Amended 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
Amended 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 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 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.
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3.4 Unregistered Securities; Legend. The Purchaser understands that
the securities to be issued pursuant to this Amended 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 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 Amended Agreement and has independently evaluated the
transactions contemplated by this Amended Agreement and reached its own
decision to enter into this Amended 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 Amended Agreement) or
to imply that the Purchaser is not, in entering into this Amended
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
Amended Agreement and is not relying upon any statements made by
PaineWebber Incorporated regarding the Company or the transactions
contemplated by this Amended Agreement.
3.6 Brokerage and Other Fees. No broker, finder, agent, consultant or
similar intermediary has acted on the Purchaser's behalf in connection with the
transactions contemplated by this Amended Agreement other than Shattuck Hammond
Partners Inc., and there are no brokerage commissions, finder's fees or similar
compensation based on any arrangement or agreement made by or on behalf of the
Purchaser other than that payable to Shattuck
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Hammond Partners Inc. The Purchaser will indemnify and hold the Company
harmless against any liability or expense arising out of any such claim.
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 Amended 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 Amended 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.
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ARTICLE IV
PRE-CLOSING COVENANTS OF THE COMPANY
The Company covenants and agrees with the Purchaser that between the
date hereof and the Initial Closing:
4.1 Fulfillment of Obligations. The Company shall observe and comply
fully with all of the terms, conditions and covenants of this Amended
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,
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 Amended 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 Amended 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;
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(b) In addition to the foregoing (and in no way limiting the
generality of the foregoing), between the date hereof and the Initial
Closing, unless the Purchaser shall have consented in writing thereto and
except as otherwise provided for in this Amended 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 Amended Agreement;
(iv) shall not amend its certificate or incorporation or
by-laws, except as provided for in this Amended 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;
(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;
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(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 not enter into any amendment or modification of any
of its agreements with providers, other than amendments or
modifications expressly contemplated hereby or with respect to which
the Purchaser shall have provided its prior written consent;
(xvi) shall not make any contractual commitment (including by
way of renewal) with respect to any single account involving
projected annual premium revenues or health care costs in excess of
$1,000,000;
(xvii) 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;
(xviii) 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;
(xix) 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
(xx) shall not enter into any contract, commitment or
arrangement to do any of the things described in clauses (iii)
through (xvi) and clause (xix) above.
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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 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 Amended Agreement and before
the Initial Closing, the Company will deliver to the 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
Amended Agreement until the Initial Closing, the Company shall promptly notify
the 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 Amended 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 Amended Agreement which
would be likely to result in any condition to the obligations of any party to
effect the transactions contemplated by this Amended Agreement not be satisfied
or (iii) any representation, warranty or information set forth in this Amended
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 Amended 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
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Company relating to regulatory compliance resulting from regulatory action
occurring after the date hereof).
4.7 Consummation of Amended 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.
4.9 Restated Certificates and By-laws.
(a) Subject to receipt of necessary shareholder approval as
contemplated in Section 4.10 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 Initial 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 and restated
by-laws, which amended and restated certificate of incorporation and
amended and restated by-laws shall in no way be breached, violated or
conflict with the transactions contemplated hereby.
(b) FOHP-NJ shall, prior to the Initial 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 the State of New Jersey and (ii) adopt by-laws
in the form attached hereto as Exhibit B-4.
4.10 Proxy Statement.
(a) Subject to the terms and conditions of this Amended 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 Amended 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 Amended Agreement, the Company shall use all reasonable
efforts to have the Proxy Statement cleared for mailing by the SEC. The
Company will (i) take
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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 Amended 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 4.10.
4.11 Provider Contracts.
(a) (i) The Company and FOHP-NJ shall use all reasonable efforts to
modify their provider contracts (A) with each physician provider so that
(I) the aggregate rate of reimbursement with respect to all FOHP-NJ
commercial members is reduced to an average of 115 percent of RBRVS and
(II) the aggregate rate of reimbursement with respect to all FOHP-NJ
Medicare members is reduced to an average of no more than 100 percent of
RBRVS, and (III) the aggregate rate of reimbursement with respect to all
FOHP Medicaid members is reduced to an average of no more than 65 percent
of RBRVS and (B) with each hospital or acute care institution provider so
that (I) the rate of reimbursement applicable to in-patient visits will be
the lower of (x) the lowest rate of reimbursement received by such
provider from nongovernmental payors for each line of business, or (y) the
rate of reimbursement reflecting a reduction (compared to calendar 1996
rates) of five percent in in-patient costs (solely as a result of rate
reductions and not through utilization or medical management efforts) and
(II) the rate of reimbursement applicable to out-patient visits will be
the lower of (x) the lowest rate of reimbursement received by such
provider from nongovernmental payors for each line of business, or (y) the
rate of reimbursement reflecting a reduction (compared to calendar 1996
rates) of 10 percent in out-patient costs (solely as a result of rate
reductions and not through utilization or medical management efforts). The
Company and FOHP-NJ will also use all reasonable efforts to, in the case
of any physician or hospital or acute care institution 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.
(ii) The Company and FOHP-NJ shall use all reasonable efforts to
(A) enter into an agreement, in substantially the form attached
hereto as Exhibit C-1, with each hospital or acute care institution
provider (referred to herein as an "Exclusive Plan Hospital
Provider") which currently offers to its employees as its exclusive
health benefits plan a FOHP-NJ health benefits plan committing such
Exclusive Plan Hospital Provider to
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continue to offer such FOHP-NJ plan to its employees as its exclusive
health benefits plan through the end of 1999 or such other period as
the parties thereto may mutually agree on the same terms and
conditions as currently in effect except that reimbursement rates
under such plan with respect to renewals commencing in the 1998 and
1999 calendar years shall be adjusted in accordance with the
methodology set forth in such form of agreement and (B) enter into an
agreement, in substantially the form attached hereto as Exhibit C-2,
with each hospital or acute care institution provider (referred to
herein as a "Non-Exclusive Plan Hospital Provider") which currently
offers to its employees on a non-exclusive basis a FOHP-NJ health
benefits plan committing such NonExclusive Plan Hospital Provider to
continue to offer such FOHP-NJ plan to its employees through the end
of 1999 or such other renewal as the parties thereto may mutually
agree on the same terms and conditions as currently in effect except
that reimbursement rates under such plan with respect to the renewals
commencing in 1998 and 1999 calendar years shall be adjusted in
accordance with the methodology set forth in such form of agreement.
(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 Initial 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.
4.12 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.
The Company or FOHP-NJ, as the case may be, shall immediately provide written
notice to HSI should they become required by the New Jersey Department of
Banking and Insurance or the New Jersey Department of Health and Senior
Services to draw any amounts under any letter of credit, or incur any
obligations under any other reimbursement or other agreement relating to credit
support therefor.
4.13 Liability Insurance. The Company shall continue to keep in effect
its directors' and officers' liability insurance coverage policies with
National Union Fire Insurance Co., American Alliance and Executive Risk
Indemnity Inc. as are listed on Schedule 2.20 hereto.
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ARTICLE V
COVENANTS OF THE PURCHASER
5.1 Consummation of Agreement. The Purchaser shall, between the date
hereof and the Initial Closing, use all reasonable efforts to cause the
consummation of the transactions contemplated hereby in accordance with their
terms and conditions.
5.2 Claims Processing System. The Purchaser shall, between the date
hereof and the Initial 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.
5.3 Updated Disclosure; Breaches. From and after the date of this
Amended Agreement until the Initial Closing Date, 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 the Company to effect the
transactions contemplated by this Amended 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 Amended
Agreement which would be likely to result in any condition to the obligations
of any party to effect the transactions contemplated by this Amended Agreement
not be satisfied or (c) any representation, warranty or information set forth
in this Amended 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 5.3 shall not cure any breach
of any representation or warranty requiring disclosure prior to the date of
this Amended Agreement or otherwise limit or affect the remedies available to
the Company (other than as described in Section 11.1(a)(iii) hereof).
5.4 Standstill. Prior to December 31, 1998, 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); provided, however, that the restriction on the
Purchaser set forth in this Section 5.4 shall not apply to (a) the transactions
contemplated herein, (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 or (c) any purchase or acquisition of Common Stock effected in
connection with a tender offer made by the Purchaser to holders of Common Stock
if such tender offer (i) is accompanied by an irrevocable commitment of the
Purchaser to make an Exchange Offer or Cash Offer in accordance with Section
6.4 hereof in 1999, or (ii) provides for the determination of consideration to
be offered to be made in accordance with the provisions of Section 6.4 hereof
or (iii) is preceded by a tender offer in which the determination of
consideration to be offered is made in accordance with clause (ii) of this
Section 5.4(c) hereof.
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ARTICLE VI
OTHER AGREEMENTS
6.1 Provider Contracts.
(a) From and after the Initial Closing, the Company and FOHP-NJ shall
continue to use all reasonable efforts to modify such remaining provider
contracts as were not modified prior to the Initial Closing in
satisfaction of the condition set forth in Section 7.1(h)(ii) hereof (i)
with each physician provider so that (A) the aggregate rate of
reimbursement with respect to all FOHP- NJ commercial members is reduced
to an average of 115 percent of RBRVS, (B) the aggregate rate of
reimbursement with respect to all FOHP-NJ Medicare members is reduced to
an average of 100 percent of RBRVS, and (C) the aggregate rate of
reimbursement with respect to all FOHP Medicaid members is reduced to an
average of no more than 65 percent of RBRVS and (ii) with each hospital or
acute care institution provider so that (A) the rate of reimbursement
applicable to in-patient visits will be the lower of (I) the lowest rate
of reimbursement received by such provider from nongovernmental payors for
each line of business, or (II) the rate of reimbursement reflecting a
reduction (compared to calendar 1996 rates) of five percent in in-patient
costs (solely as a result of rate reductions and not through utilization
or medical management efforts) and (B) the rate of reimbursement
applicable to out-patient visits will be the lower of (I) the lowest rate
of reimbursement received by such providers from non-governmental payors
for each line of business, or (II) the rate of reimbursement reflecting a
reduction (compared to calendar 1996 rates) of 10 percent in out-patient
costs (solely as a result of rate reductions and not through utilization
or medical management efforts). 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.
(b) From and after the Initial Closing, the Company and FOHP-NJ shall
continue to use all reasonable efforts to (i) enter into an agreement, in
substantially the form attached hereto as Exhibit C-1, with each remaining
Exclusive Plan Hospital Provider as did not enter into such an agreement
prior to the Initial Closing in satisfaction of the condition set forth in
Section 7.1(h)(i) hereof, committing such Exclusive Plan Hospital Provider
to continue to offer such FOHP-NJ plan to its employees as its exclusive
health benefits plan through the end of 1999 or such other period as the
parties thereto may mutually agree on the same terms and conditions as
currently in effect except that reimbursement rates under such plan with
respect to the renewals commencing in 1998 and 1999 calendar years shall
be adjusted in accordance with the methodology set forth in such form of
agreement and (ii) enter into an agreement, in substantially the form
attached hereto as Exhibit C-2, with each remaining Non-Exclusive Plan
Hospital Provider as did not
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enter into such an agreement prior to the Initial Closing in satisfaction
of the conditions set forth in Section 4.11 hereof, committing such
Non-Exclusive Plan Hospital Provider to continue to offer such FOHP-NJ
plan to its employees through the end of 1999 or such other period as the
parties thereto may mutually agree on the same terms and conditions as
currently in effect except that reimbursement rates under such plan with
respect to the renewals commencing in 1998 and 1999 calendar years shall
be adjusted in accordance with the methodology set forth in such form of
agreement.
6.2 Capital Requirements. The parties hereto agree that, based on
reasonable projections, prepared by the Purchaser or the Company, of the
Company's net worth and statutory surplus in relation to the net worth
requirements applicable thereto, 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 after the date as of which the aggregate of all
Additional Debenture Advance Amounts and the Initial Debenture Advance Amount
shall equal the Debentures Commitment Amount, if it is determined that the
Company needs capital to satisfy such net worth requirements ("Net Capital
Shortfall"), then 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 additional convertible debentures in form substantially similar to the
Debentures; provided that in the event any such Net Capital Shortfall is the
result of payments made to the Purchaser under the General Administrative
Services Management Agreement that would have qualified as Deferred Management
Fees under Section 5.1 of the Debentures had such payments not been made, the
principal amount and interest thereon of such additional convertible debentures
related to such payments shall only become convertible into Common Stock if
such principal amount and interest thereon related to such payments is not
repaid to the Purchaser on or before the end of the calendar quarter
immediately following such payments. If the Purchaser does not, within seven
days of the receipt of any such projections as were prepared by the Company,
determine to so advance funds to the Company, then the Board of Directors of
the Company shall have the right to initiate a pro rata offering of the Common
Stock to all then-current shareholders of the Company to raise capital to
satisfy such Net Capital Shortfall.
6.3 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 June 30, 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.
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6.4 Post-Closing Acquisition.
(a) Exchange/Cash Offer for Shares. (i) The Purchaser may at any time
during 1999, at its option, 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 of any
successor corporation of the Purchaser (in either case referred to herein
as "HSI Common Stock"), or make an offer (referred to herein as the "Cash
Offer") to pay cash, for the shares of the 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 prior written notice
of its intention to promptly make such Exchange Offer or Cash Offer, as
the case may be (such notification being referred to herein as the "Offer
Notice"). In the Exchange Offer, the Purchaser would agree to exchange,
for each share of Common Stock of the Company, such number of shares of
HSI Common Stock as shall have a Purchaser Stock Market Value (as such
term is defined in paragraph (ii) of this Section 6.4(a)) equal to the
Company Stock Value of such share of Common Stock of the Company. In the
Cash Offer, the Purchaser would agree to pay cash, for each share of
Common Stock of the Company, equal to the Company Stock Value (as such
term is defined in paragraph (iii) of this Section 6.4(a) hereof) 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 (a)(iii) of this Section
6.4.
(iii) For purposes hereof, "Company Stock Value" shall be
determined as follows: Each of the Purchaser and the Company (through
its directors who are unaffiliated with the Purchaser) shall promptly
(and in no event later than 10 days after the Offer Notice) select an
independent qualified appraiser to appraise the Company Stock Value.
Upon completion of such appraisal by each of such appraisers within
10 business days of the selection thereof, 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 only one of such appraisers so submits an appraisal within
the 10-business day
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period subsequent to the selection thereof, the Company Stock Value
shall be the amount set forth in such appraisal. If the two
independent qualified appraisers submit their appraisals within such
10-business day period but do not promptly 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 within 10 business days of the selection thereof, 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 6.4. 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 for purposes
of this Section 6.4 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 6.4 would be approximately $101.7 million (the average
of all three). For purposes of this Section 6.4, the term
"independent qualified appraiser" shall mean any appraiser which, for
at least two years prior to the date of appointment hereunder (A) is
a nationally recognized investment banking firm or has been in the
business of appraising managed health care businesses with revenues
and membership comparable to that of FOHP-NJ and (B) 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) Post-Closing Merger. (i) The parties hereto agree that, at any
time after the consummation of the Exchange Offer or the Cash Offer, as
the case may be, or otherwise at any time during the 1999 calendar year,
the Purchaser may (after providing at least 30 days advance written notice
thereof to the Company and providing other legally required notices)
effect a merger, business combination or consolidation transaction (the
"Merger Transaction") involving the Company for the purpose of obtaining
100 percent of the then-outstanding equity of the Company. The
consideration to be paid or distributed in connection with the Merger
Transaction to the shareholders of the Company other than the Purchaser in
respect of each share of Common Stock of the Company held thereby shall
consist of (A) cash in an amount equal to the Company Stock Value of such
share of Common Stock of the Company or (B) such number of shares of HSI
Common Stock as shall have a Purchaser Stock Market Value equal to the
Company Stock Value of such share of Common Stock of the Company.
(c) The Board of Directors of the Company has approved the Merger
Transaction for purposes of Section 14A:10A-4 of the New Jersey
Shareholders Protection
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Act, and the Company agrees to separately provide to the Purchaser
evidence, satisfactory to the Purchaser, of such approval prior to the
Initial Closing. For purposes hereof, any such Merger Transaction must
provide: (i) in connection therewith, the shareholders of the Company,
other than the Purchaser, shall be afforded dissenters' rights in the same
manner and under the same conditions as are 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; (ii) 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 years from the date of the Merger
Transaction, 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 this Amended Agreement and the Merger
Transaction contemplated hereby; and (iii) the Company, or any successor
thereto, shall maintain officers' and directors' liability insurance
coverage policies with terms and conditions contained in the officers' and
directors' liability insurance coverage policies currently maintained by
the Company for the period ending six years from the date of the Merger
Transaction, 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 this Amended Agreement and the Merger
Transaction contemplated hereby, which insurance shall provide coverage
for former directors of the Company.
6.5 Additional HSR Act Filings. Each of the Company and the Purchaser
agrees that, in the event that any additional filings are required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), subsequent to the Initial 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 Federal Trade Commission (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.
6.6 Liability Insurance. The Company shall continue to keep in effect
its directors' liability insurance coverage policies with National Union Fire
Insurance Co., American Alliance and Executive Risk Indemnity Inc. as are
listed on Schedule 2.20 hereto through September 15, 1997 and shall renew such
coverage or substantially the same terms as are now in effect for at least six
years from and after the Initial Closing Date or for such shorter period as the
Purchaser may agree in writing.
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ARTICLE VII
CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATIONS
7.1 Conditions Precedent to Initial Closing. The Purchaser's
obligations to purchase the Debentures and consummate the other transactions
contemplated hereby shall be subject to the satisfaction of the following
conditions, any of which may be waived in writing:
(a) Delivery of Debentures. The Company shall have delivered to the
Purchaser the Debentures.
(b) 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 Initial Closing Date, with the same effect as though made on and as of
the Initial Closing Date.
(c) Corporate Proceedings. All corporate and other proceedings
required to be taken by the Company in connection with the transactions
contemplated hereby, including, without limitation, 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.
(d) Amended and Restated Certificates and 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 and restated 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.
(e) Good Standing Certificates. The Purchaser shall have received (i)
a copy of the Certificate certified as of a recent date by the Secretary
of State of the State of New Jersey and (ii) 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.
(f) Secretary's Certificate. The Purchaser shall have received
certificates of the Secretary of each of the Company and FOHP-NJ
certifying that (i) 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
Initial Closing Date, and (ii) the names and true signatures of each
officer of the Company and
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FOHP-NJ who has been authorized to execute and deliver this Amended
Agreement, the Debentures and any other document to be delivered by the
Company at the Initial Closing.
(g) Management Agreements. The Company shall have entered into the
Management Agreements in the forms attached as Exhibit D-1 and D-2 hereto.
(h) Modified Provider Agreements. The Company shall have delivered to
the Purchaser evidence, satisfactory to the Purchaser in its sole
discretion, that (i) the Company and FOHP-NJ shall have modified, in a
legally binding manner, FOHP-NJ's provider contracts so that (A) at least
90 percent of individual physician providers who contract directly with
FOHP-NJ and at least 80 percent of the remaining individual physician
providers (who contract with FOHP-NJ through physician groups) are
obligated to accept rates of reimbursement which will result in aggregate
payments of no more than (I) 115 percent of RBRVS with respect to all
commercial members, (II) 100 percent of RBRVS with respect to all Medicare
members and (III) 65 percent of RBRVS with respect to all Medicaid members
and (B) with respect to institutional providers, (I) the aggregate rate of
reimbursement among all FOHP-NJ institutional providers would reflect a
reduction (compared to calendar 1996 rates) of (x) five percent in
in-patient costs (solely as a result of rate reductions and not through
utilization or medical management efforts) and a reduction (compared to
calendar 1996 rates) of (y) 10 percent with respect to out-patient costs
(solely as a result of rate reductions and not through utilization or
medical management efforts) and (II) individual institutional providers
representing at least 80 percent of FOHP-NJ's health care costs (as
measured with respect to the 1996 calendar year) shall have modified their
provider contracts with FOHP-NJ as described in Section 4.11(a)(i)(B)
hereof and (ii) (A) the Exclusive Plan Hospital Providers shall have
delivered to the Company and FOHP-NJ legally binding commitments, in
substantially the form of Exhibit C-1 hereto, that all of their employees
will continue to be covered by a FOHP-NJ health benefits plan through the
end of 1999 and that such employees will constitute an aggregate of at
least 1,614,660 "member-months" over the terms of such respective
commitments, including (I)(x) at least 621,100 "member-months" for the
1997 calendar year, (y) at least 496,780 "member-months" for the 1998
calendar year and (z) at least 496,780 "member-months" for the 1999
calendar year and (B) the Non-Exclusive Plan Hospital Providers shall have
delivered to the Company and FOHP-NJ satisfactory commitments, in
substantially the form of Exhibit C-2 hereto, that (I) employees
representing a minimum of annualized 238,800 member-months will continue
to be covered by a FOHP-NJ health benefits plan through the end of the
1997 calendar year and (II) employees representing a minimum of annualized
382,080 member-months will be covered by a FOHP-NJ health benefits plan
for the 1998 and 1999 calendar years.
(i) Investors Agreement. The Company shall have entered into the
Investors Agreement in the form attached hereto as Exhibit E.
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(j) Opinions of Counsel. The Purchaser shall have received from
Shereff, Friedman, Hoffman & Goodman, LLP, Giordano, Halleran & Ciesla,
P.C. and the general counsel of the Company, opinions of counsel, dated
the Initial Closing Date, containing the opinions set forth in, and
allocated as designated in, the form attached as Exhibit F hereto.
(k) 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 Amended 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 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.
(l) 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 Initial Closing Date.
(m) Sierra Contract. The Agreement dated January 16, 1995, between
Sierra and FOHP-NJ shall have been terminated on terms without any
residual liability or obligations of the Company or FOHP-NJ and otherwise
on terms acceptable to the Purchaser.
(n) Letters of Credit; Guarantees. With the exception of the Letter
of Credit issued by CoreStates Bank and secured by John L. Adessa, none of
the Letters of Credit or guarantees set forth on Schedule 2.6 hereto shall
have expired or terminated.
(o) 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.
(p) 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
Amended Agreement, and there shall not be any action or proceeding seeking
a material amount of damages by reason of consummation of this Amended
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.
7.2 Conditions Precedent to each Additional Debenture Advance Closing.
The Purchaser's obligation hereunder to loan and advance to the Company
Additional
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Debenture Advance Amounts at each Additional Debenture Advance Closing shall be
subject to the satisfaction of the following conditions, any of which may be
waived by the Purchaser in writing, subject to the further conditions and
elections set forth in Section 7.3 below:
(a) 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 (i) have been true and correct in all material respects as
of the Initial Closing Date and (ii) with respect to all items set forth
on a certificate of an executive officer of the Company in substantially
the form attached hereto as Exhibit G, be true and correct in all material
respects on and as of the Additional Debenture Advance Closing Date, the
Additional Debenture Advance Amount being so advanced, with the same
effect as being made on and as of such Additional Debenture Advance
Closing Date, and such certificate shall have been delivered to the
Purchaser.
(b) Good Standing Certificates. The Purchaser shall have received (i)
a copy of the Certificate certified as of a recent date by the Secretary
of State of the State of New Jersey and (ii) certificates as of a recent
date of the Secretary of State of each state in which the Company or
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.
(c) Secretary's Certificate. The Purchaser shall have received
certificates of the Secretary of each of the Company and FOHP-NJ
certifying that (i) attached to the certificate is a true and correct copy
of its By-laws of the Company, as in full force and effect at the
Additional Debenture Advance Closing Date with respect to the Additional
Debenture Advance Amount being so advanced, and (ii) the names and true
signatures of each officer of the Company and FOHP-NJ who has been
authorized to execute and deliver any document to be delivered by the
Company at such Additional Debenture Advance Closing.
(d) Management Agreements. The General Administrative Services
Management Agreement, and the Management Information Systems and Claims
Processing Services Management Agreement, if effective, shall be in full
force and effect or shall have been terminated without cause by the
Purchaser.
(e) Approvals and Consents. All authorizations, approvals, consents
and waivers of any government authority necessary in the good-faith
judgment of the Purchaser for the loan and advance by the Purchaser of
such Additional Debenture Advance Amount being so advanced 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 that are required in connection with the loan and advance by the
Purchaser of such
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Additional Debenture Advance Amount 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.
(f) Covenants. The Company shall have performed and complied in all
material respects with all obligations, agreements and covenants required
to be performed by it hereunder prior to or on the Additional Debenture
Advance Closing Date with respect to the Additional Debenture Advance
Amount being so advanced.
(g) Action or Proceeding. There shall not be any action or proceeding
by or before any court or other governmental body that shall seek to
restrict, prohibit or invalidate the loan and advance by the Purchaser of
the Additional Debenture Advance Amount being so advanced, and there shall
not be any action or proceeding seeking a material amount of damages by
reason of the advance by the Purchaser of such Additional Debenture
Advance Amount the defense of any of which would involve expending a
length of time that would be materially adverse to the interest of the
Company or the Purchaser.
7.3 Additional Debenture Advance Elections and Adjustment.
(a) In the event all of the conditions set forth in Section 7.2 above
are not satisfied with respect to any given Additional Debenture Advance
Amount, then the Purchaser may, at its option:
(i) elect in writing to not advance such Additional Debenture
Advance Amount (the "No Additional Advance Option"); or
(ii) elect in writing to deduct from such Additional Debenture
Advance Amount an amount equal to the Additional Debenture Advance
Adjustment relating to the conditions set forth in Section 7.2 not so
satisfied (the "Advance Adjustment Option").
The Additional Debenture Advance Adjustment shall mean the amount of all
losses, claims, obligations, demands, assessments, penalties, liabilities,
costs, damages, attorneys' fees and expenses asserted against or incurred by
the Purchaser by reason of or resulting from the nonsatisfaction of the
conditions set forth in Section 7.2 relating to the Additional Debenture
Advance Amount. In calculating the amount of the downward adjustment to the
Additional Debenture Advance Amount in connection with the exercise of the
Advance Adjustment Option, the Purchaser shall in good faith promptly (and
prior to the applicable Additional Debenture Advance Closing) prepare a
reasonable estimate of the Additional Debenture Advance Adjustment in
consultation with the directors of the Company not affiliated with the
Purchaser (the "Non-HSI Directors"). In the event the Purchaser and the Non-HSI
Directors disagree on the correct amount of the Additional Debenture Advance
Adjustment, the Purchaser's estimate of such adjustment shall prevail for
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purposes of determining the Additional Debenture Advance Amount for the
applicable Additional Debenture Advance Closing, and the procedures contained
in Section 7.3 (b) shall be utilized to resolve any proposed changes or
inaccuracies of such estimate. In addition, it is further agreed that any
Additional Debenture Advance Adjustment shall not be considered to be Damages
of the Purchaser for the purposes of Article IX.
(b) In the event of any dispute, controversy, claim or
difference which arises out of or relates to the Purchaser's estimate of the
amount of such Additional Debenture Advance Adjustment, the Non-HSI Directors
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 of the Company and FOHP-NJ, on the one hand,
and HSI, on the other hand, 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 7.3(b) 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
7.3, including disputes over whether and how to arbitrate, shall be arbitrated.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS
The Company's obligation to sell the Debentures to the Purchaser and
to consummate the other 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
Initial Debenture Purchase Price as provided in Section 1.2 hereof.
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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 Initial Closing Date,
with the same effect as though made on and as of the Initial Closing Date.
8.3 Proceedings and Documents. All corporate and other proceedings
required to be taken in connection with the transactions contemplated by this
Amended 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 Initial Closing Date.
8.5 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.
8.6 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 Amended Agreement, shall have been obtained and shall not
be terminated, suspended or withdrawn as of the Initial Closing Date.
8.7 Investors Agreement. The Purchaser shall have entered into the
Investors Agreement in the form attached hereto as Exhibit F.
8.8 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
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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 other agreement or document
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 Amended 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.
(d) The amount of Damages for which the Company or FOHP-NJ shall have
an obligation to indemnify Purchaser and its directors, officers, agents
and affiliates resulting from a breach of any representation or warranty
arising more than 18 months after the Initial Closing Date (or the date
that is 6 years following such Initial Closing Date, as relates to the
representations and warranties set forth in Section 2.14 and Section 2.16
hereof) shall be limited to the aggregate Additional Debenture Advance
Amounts advanced to the Company by the Purchaser within one year (or 66
months, as relates to Damages by reason of or resulting from a breach of
any representation or warranty set forth in Section 2.14 or Section 2.16
hereof) of the date on which such claim for Damages shall have arisen.
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) 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 Amended Agreement.
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(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
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party to assume the defense of such claims at any time prior to
settlement, compromise or final determination thereof.
(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) the date that is the later of (i) 18 months
following the Initial Closing Date (or the date that is six years following
such Initial Closing Date, as relates to the representations and warranties set
forth in Section 2.14 and Section 2.16 hereof) or (ii) with respect to
representations and warranties made by the Company or FOHP-NJ one year
following the Additional Debenture Advance Closing Date latest in time (or the
date that is 66 months following such Additional Debenture Advance Closing
Date, as relates to the representations and warranties set forth in Section
2.14 and Section 2.16 hereof) or (b) such time as at least 50 percent of such
principal amount of the Debentures as is equal to the Debentures Commitment
Amount shall have been converted into shares of Common Stock pursuant to the
terms of the Debentures. 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
5.4, 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.
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ARTICLE XI
TERMINATION
11.1 (a) Termination Events. This Amended Agreement may be terminated
prior to the Initial 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 by the Purchaser on or before the Initial Closing
or if there has been a material breach on or before the Initial
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 Amended
Agreement, except that the execution and delivery of this Amended
Agreement (and the execution and delivery of all exhibits hereto)
shall not be deemed to constitute a breach of any such
representation, warranty or covenant; 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 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 Amended 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 Amended
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 Amended
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 by the Company on or before the Initial Closing or if there
has been a material breach on or before the Initial 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
Amended 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 Amended
Agreement in light of the information provided in such written
update, in which case the Company shall inform the Purchaser in
writing that such written 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
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Amended 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
Amended Agreement; or
(iv) by either party if the Initial Closing shall not have
occurred before July 31, 1997.
(b) Termination Fees.
(i) The Company agrees that if the Purchaser shall terminate
this Amended Agreement pursuant to Section 11.1(a)(ii) or Section
11.1(a)(iv) hereof, or the Company shall terminate this Amended
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 Amended 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 Amended 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
Amended 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 Amended Agreement, all remedies available to the Purchaser
either in law or equity shall be preserved and survive the
termination of this Amended Agreement.
(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 Amended Agreement.
(iv) Competing Transaction. For purposes of this Amended
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 Amended Agreement):
(A) any merger, consolidation,
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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 4.10
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 4.10 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 Amended 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 (including the Original Agreement). Changes in or additions to
this Amended Agreement may be made only upon written consent of the Company,
FOHP-NJ and the Purchaser.
12.2 Governing Law. This Amended 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 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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(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:
First Option Health Plan of New Jersey, Inc.
2 Bridge Avenue
Red Bank, New Jersey 07701
Attention: Senior Vice President, General Counsel and Secretary
Fax: (908) 842-5404
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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.
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 Amended 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 Amended 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 Amended 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 Amended Agreement and its terms confidential, and shall make no press
release or public disclosure, either written or oral, regarding the
transactions contemplated by this Amended 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 Amended 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.
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12.8 Expenses. Each party hereto shall bear its own fees for counsel
and accountants and other expenses relating to this Amended Agreement and the
transactions contemplated hereby.
12.9 Counterparts. This Amended 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 Amended Agreement. In case at
any time any further action is necessary or desirable to carry out the purposes
of this Amended Agreement, the proper officers of each party to this Amended
Agreement are hereby directed and authorized to use their best efforts to
effectuate all such action.
12.11 Effectiveness of Amended Agreement.
(a) The parties hereto agree that this Amended Agreement shall not be
effective until, and shall be null and void unless, the following
conditions shall have been satisfied by the Company or waived by the
Purchaser in its sole discretion prior to or on February 21, 1997 (unless
such date is extended at the sole discretion of the Purchaser):
(i) Evidence shall have been delivered to the Purchaser by the
Company, satisfactory to the Purchaser in its sole discretion, that
(A) institutional providers representing at least 40 percent of
FOHP-NJ's health care costs (as measured with respect to the 1996
calendar year) incurred with respect to all institutional providers
in the FOHP-NJ provider network, shall have modified their provider
contracts with FOHP-NJ as described in Section 4.11(a)(i)(B) hereof,
and (B) Exclusive Plan Hospital Providers and Non-Exclusive Plan
Hospital Providers shall have delivered to the Company and FOHP-NJ
legally binding commitments regarding coverage of all of their
employees (in the case of Exclusive Plan Hospital Providers) or a
portion of their employees (in the case of Non-Exclusive Hospital
Plan Providers) so that FOHP-NJ health benefits plan will cover
employees constituting an aggregate of at least 1,117,770
"member-months" over the terms of such respective commitments,
including (I) at least 429,950 "member-months" for the 1997 calendar
year, (II) at least 343,910 "member-months" for the 1998 calendar
year, and (III) at least 343,910 "member-months" for the 1999
calendar year; and
(ii) The Purchaser shall have received evidence from the
Company, satisfactory to the Purchaser in its sole discretion, that
the Company has obtained from such institutional providers as are
separately agreed to in writing by the Company and the Purchaser the
legally binding commitments, contemplated in Section 7.1(h) hereof.
(b) In addition to the conditions to effectiveness set forth in
paragraph (a) of this Section 12.11, the parties hereto agree that this
Amended Agreement shall not be
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<PAGE>
effective until, and shall be null and void unless, the following
conditions shall have been satisfied by the Company or waived by the
Purchaser in its sole discretion prior to or on March 7, 1997 (unless such
date is extended at the sole discretion of the Purchaser):
(i) Evidence shall be delivered to the Purchaser by the Company,
satisfactory to the Purchaser in its sole discretion, that the
conditions set forth in Section 7.1(h) hereof shall have been
satisfied; and
(ii) Evidence shall have been delivered to the Purchaser by the
Company of insurance coverage, satisfactory to the Purchaser in its
sole discretion, relating to all potential losses, claims,
obligations, demands, assessments, penalties, liabilities, costs,
damages, attorneys' fees and expenses (collectively, "Insured
Events") due to any actions or lawsuits brought by any person or
entity (including, without limitation, past or present shareholders
of the Company), relating to actions or events occurring prior to the
execution of, or relating to the transactions contemplated by, this
Amended Agreement which such insurance coverage shall (A) cover the
Company and the past and present directors and officers of the
Company, (B) be in the amount of $20 million in coverage per Insured
Event and (C) provide the Company with the ability to purchase tail
coverage to survive for either six years or the expiration of any
applicable statute of limitations (whichever period is shorter), at
rates representing no more than 75 percent of the current premiums
paid during the first year of such coverage.
(c) HSI acknowledges and agrees that the Phase-In Management Fee
Amount concept set forth herein has not, as of the date hereof, been
approved by the Board of Directors of the Company. The parties hereto
agree that the Amended Agreement shall not be effective until, and shall
be null and void unless (in addition to the conditions to effectiveness
set forth in paragraph (a) of this Section 12.11), (i) the Purchaser shall
have received evidence from the Company, satisfactory to the Purchaser in
its sole discretion, that the Board of Directors of the Company shall have
approved the Phase-In Period Management Fee Amount concept and provisions
set forth herein, in the Debentures and in the General Administrative
Services Management Agreement, or (ii) the Purchaser waives such condition
to effectiveness in its sole discretion.
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<PAGE>
IN WITNESS WHEREOF, this Amended Agreement has been executed by the
parties hereto as of the date first set forth above.
FOHP, INC.
By:_______________________________________
Name:
Title:
FIRST OPTION HEALTH PLAN
OF NEW JERSEY, INC.
By:_______________________________________
Name:
Title:
HEALTH SYSTEMS INTERNATIONAL, INC.
By:_______________________________________
Name:
Title:
49
<PAGE>
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) the sum (such sum being referred to herein as the "Initial
Principal Amount") of (A) $41,600,000 plus (B) the "Phase-In Period
Management Fee Amount" (as such term is defined in Section 4.2(a) of the
General Administrative Services Agreement, dated as of the date hereof,
between the Company and HSI, (ii) the Additional Principal Advance Amounts
(as such term is defined in the Amended and Restated Securities Purchase
Agreement, dated as of February 10, 1997 (the "Purchase Agreement"), among
HSI, the Company and First Option Health Plan of New Jersey, Inc.,
a wholly-owned subsidiary of the Company ("FOHP-NJ")) advanced by HSI to
the Company pursuant to Section 1.1 of the Purchase Agreement, (iii) the
aggregate amount of Defaulted Interest (as such term is defined in Section 1
hereof), (iv) 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) and (v) 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 _____ ___, 2002, 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 the Purchase Agreement.
HSI and the Company have also entered into (i) the General Administrative
Services Management Agreement (the
<PAGE>
"Administrative Management Agreement") and (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") each dated as of
______________ ___, 1997.
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 (the
"BA Facility") issued by a consortium of commercial banks led by Bank of
America, National Trust & Savings Association or such credit facility as is
used to refinance the BA Facility (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 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.
(a) Unless HSI elects to exercise the "No Additional Advance
Option" (as defined in Section 7.3 of the Purchase Agreement), or if HSI
commits to not exercise the No Additional Advance Option in the future, then
the aggregate of the Initial Principal Amount in its entirety and all
Additional Debenture Advance Amounts (if any) shall be convertible at any
time on or before the Maturity Date, at the option of HSI or any subsequent
holder hereof, into such number of shares (referred to herein as "Conversion
Shares") of common stock, par value $.01 per share ("Common Stock"), of the
Company as is equal to 71 percent of the total equity of the Company (or
5,141,803 shares given the 2,100,173 shares currently outstanding) as of the
date hereof (as such total equity may be increased from time to time to
reflect any securities issued pursuant to Section 6.2 of, or otherwise
expressly contemplated to be issued under, the Purchase Agreement) on a
fully-diluted basis (i.e., taking into account the conversion of such Initial
Principal Amount and Additional Debenture Advance Amounts, the conversion of
all other securities convertible into shares of Common Stock and the exercise
of all warrants and options exercisable for shares of Common Stock). In the
event HSI elects to exercise the No Additional Advance Option with regard to
any given Additional Debenture Advance Amount, the Initial Principal Amount
shall be convertible at any time on or before the Maturity Date, at the option
of HSI or any subsequent holder hereof, into such number of Conversion Shares
as is equal to 59.1% of the total equity of the Company as of the date hereof
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(as such total equity may be increased from time to time to reflect any
securities issued pursuant to Section 6.2 of, or otherwise expressly
contemplated to be issued under, the Purchase Agreement) on a fully diluted
basis (i.e., taking into account the conversion of such Initial Principal
Amount and all other Additional Debenture Advance Amounts, the conversion of
all other securities convertible into shares of Common Stock and the exercise
of all other warrants and options exercisable for shares of Common Stock), and
all Additional Debenture Advance Amounts shall be convertible at any time on or
before the Maturity Date, at the option of HSI or any subsequent holder
thereof, into Conversion Shares at the Conversion Ratio (as defined below)
(as a result, in the event that HSI elects to exercise the No Additional Advance
Option, to reach the 71% equity ownership level the aggregate amount of
Additional Debenture Advance Amounts would have to equal $8,400,000, based on
calculations performed as of the date hereof (i.e., 59.1%+(8.4 x 1.42%) = 71%)).
(b)(i) Any and all portions of the Principal Amount other
than the Initial Principal Amount and Additional Debenture Advance Amounts
shall be convertible into such number of Conversion Shares at any time prior
to or on the Maturity Date (such conversion ratio being referred to herein as
the "Conversion Ratio") which will equal, for each $1,000,000 of Principal
Amount so converted, an additional 1.42% percent of the total equity of the
Company, as of the date hereof (as such total equity may be increased from
time to time to reflect any securities issued pursuant to Section 6.2 of, or
otherwise expressly contemplated to be issued under, the Purchase Agreement)
on a fully-diluted basis (i.e., taking into account the conversion of the
Initial Principal Amount and Additional Debenture Advance Amounts, the
conversion of all other securities convertible into shares of Common Stock,
the exercise of all warrants and options exercisable for shares of Common
Stock, and such partial conversion of such Principal Amount).
(ii) Consistent with Section 2(a) hereof, the Initial
Principal Amount shall be convertible, in part, at any time on or before the
Maturity Date, at the option of HSI or any subsequent holder hereof, into such
number of Conversion Shares which will equal, for each $1,000,000 of Initial
Principal Amount so converted, an additional __% [percentage to be calculated
by multiplying (A) 1.42 percent by (B) a fraction of which the numerator is
(I) the Initial Principal Amount less the Phase-In Period Management Fee
Amount and (II) the denominator of which is the Initial Principal Amount] of
the total equity of the Company, as of the date hereof (as such total equity
may be increased from time to time to reflect any securities issued pursuant to
Section 6.2 of, or otherwise expressly contemplated to be issued under, the
Purchase Agreement) on a fully-diluted basis (i.e., taking into account such
partial conversion of the Initial Principal Amount and the conversion of the
remainder of such Initial Principal Amount, the conversion of all Additional
Debenture Advance Amounts, the conversion of all other securities convertible
into shares of Common Stock and the exercise of all warrants and options
exercisable for shares of Common Stock).
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<PAGE>
(iii) Consistent with Section 2(a) hereof, the Additional
Debenture Advance Amounts of these Debentures shall also be convertible, in
part, at any time on or before the Maturity Date, at the option of HSI or
any subsequent holder hereof, into Conversion Shares at the Conversion Ratio.
(c) 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 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.
(d) In order to exercise its conversion rights 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 and Insurance (the "New Jersey
Department") at least three 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.
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.
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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.
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 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 net worth, as determined by the New Jersey
Department, is inadequate to make interest payments on these
Debentures.
(ii) It is acknowledged by the parties that only
the Initial Principal Amount and Additional Debenture Advance Amounts
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.
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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 are not
paid (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; provided,
however, that, for purposes of these Debentures, Unpaid Management Fees shall
not include amounts that become due and payable in the 1998 calendar year but
which are not paid because of actual or projected statutory net worth
deficiencies of the Company (the "Deferred Management Fees") provided that
such Deferred Management Fees are ultimately paid on or before the end of the
immediately following calendar quarter.
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.
6. Covenants.
6.1 Affirmative Covenants. From and after the date hereof
until the earlier of the Maturity Date or the conversion
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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.
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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 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 such operating
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.
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(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 Composition.
(a) Prior to full conversion of these Debentures
and while they are outstanding, HSI shall be permitted to designate
such number of directors as represents the greater of (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 on the
Board of 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
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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. The
Company shall provide written notice to HSI of its intent to draw any amounts
under any letter of credit during the period when these Debentures are
outstanding.
6.1.8 Use of Proceeds. (a) The Company shall, immediately
upon receipt of the Initial Principal Amount at the Initial 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 Initial Closing pursuant
to the Purchase Agreement) to FOHP-NJ.
(b) The Company shall, immediately upon receipt
of any sums payable at any Additional Debenture Advance Closing (as such term
is defined in the Purchase Agreement) on the date thereof, make a capital
contribution of such amount (less fees and expenses incurred by the Company in
connection with the transactions consummated at such Additional Debenture
Advance 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
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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.
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) 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
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(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, 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 Granting of Pre-Emptive Rights and Rights
of First Refusal. Except as otherwise expressly contemplated herein, the
Company will not, without the prior written consent of the holder hereof,
grant any pre-emptive rights or rights of first refusal to any shareholders of
the Company.
6.2.8 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;
(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
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(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
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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 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 or any of its operating subsidiaries bankrupt or insolvent
under, or ordering relief against the Company or any of its operating
subsidiaries or by the New Jersey Department under, or approving a
properly-filed petition seeking relief against the Company or any of
its operating subsidiaries 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 this Section
7.1 (e) 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
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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 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 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 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
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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.
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 ______ ___, 1997 (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 ______ ___, ____.
--------------------
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APPENDIX C
GENERAL ADMINISTRATIVE SERVICES MANAGEMENT AGREEMENT
This General Administrative Services Management Agreement (this
"Agreement") is entered into this _____ day of ____________, 1997, 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 the Amended and Restated Securities Purchase
Agreement dated as of February 10, 1997 (the "Purchase Agreement"), with FOHP
and First Option Health Plan of New Jersey, Inc. (a wholly owned subsidiary of
FOHP) pursuant to which HSI has committed to purchase (on specified terms and
conditions) convertible subordinated surplus debentures of FOHP in the
aggregate principal amount of (1) the sum of $50 million (subject to
adjustment as set forth therein) and (2) the Phase-In Period Management Fee
Amount (as such term is defined in Section 4.2(a) hereof) (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
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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.
(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 willful 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, so long as the Initial
Closing (as such term is defined in the Purchase Agreement) and the execution
and delivery of this Agreement occurs prior to July 31, 1997, this
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Agreement shall be deemed to be effective for the purposes of Section 4
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.
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).
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
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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.
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,
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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) the product of (i) the total revenue
of the FOHP Health Plans for such month, multiplied by (ii) two percent, 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; provided,
however, that the aggregate amount of payments to be made by FOHP to HSI with
respect to clause (a) of this Section 4.1 for each calendar year during the
term of this Agreement (including, with respect to the 1997 calendar year for
this purpose, any Phase-In Management Fee Amount (as such term is defined
in Section 4.2 hereof) paid to HSI pursuant to Section 4.2 hereof) shall in
no event be less than $5,000,000 (irrespective of the amounts calculated in
such clause (a)).
4.2 Payment Procedure.
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(a) At the time of the Initial Closing and simultaneously with
the execution and delivery of this Agreement, FOHP shall pay to HSI
an amount equal to the Management Fee for all full months during
the 1997 calendar year ending prior to the date of such Initial
Closing, as reflected in statements provided prior to the Initial
Closing by HSI to FOHP for such months (such amount being referred
to herein as the "Phase-in Period Management Fee Amount"). [This
Section 4.2(a) shall not be included in this Agreement unless the
board of directors of FOHP approves such provision].
(b) At the end of each month during the term of this Agreement
subsequent to the Initial Closing, HSI shall provide FOHP with
statements setting forth HSI's Management Fee 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.
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, between FOHP and Health Systems Integration, Inc. (as amended).
4.4 Unpaid Management Fees. In the event any of the Management Fees
due and payable to HSI under this Agreement are not paid, such Management Fees
may, at HSI's option, be added to the principal amount evidenced by the
Debentures except that Management Fees due and payable during the 1998 calendar
year may only be added to such principal amount to the extent permitted by
Section 5.1 of the Debentures. Any due and payable but unpaid Management Fees
shall bear interest until paid in their entirety or so added to such principal
amount evidenced by the Debentures. Such interest shall accrue at an annual
rate equal to the rate charged to HSI under its credit facility (the "BA
Facility")
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<PAGE>
issued by a consortium of commercial banks led by Bank of America, National
Trust & Savings Association or such credit facility as is used to refinance
the BA Facility (the "Rate"), which Rate shall be subject to adjustment at
the beginning of each calendar quarter.
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.
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<PAGE>
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) termination in
accordance with the terms of this Section 6.1 by one of the parties hereto
after the material breach of this Agreement by the other party hereto; or (c)
termination by one of the parties hereto after the other party hereto (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 as described in clause (b) of 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.
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<PAGE>
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
(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
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<PAGE>
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 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
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<PAGE>
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 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.
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<PAGE>
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
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<PAGE>
delivered shall be an original, but all of such counterparts shall together
constitute one and the same instrument.
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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<PAGE>
APPENDIX D
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
______, 1997, 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 the Amended And Restated Securities Purchase
Agreement dated as of February 10, 1997 (the "Purchase Agreement"), with FOHP
and First Option Health Plan of New Jersey, Inc. (a wholly owned subsidiary of
FOHP), pursuant to which HSI has committed to purchase (on specified terms and
conditions) convertible subordinated surplus debentures of FOHP in the
aggregate principal amount of $50 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
<PAGE>
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 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.
(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 willful 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).
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<PAGE>
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 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.
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<PAGE>
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.
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
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<PAGE>
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) termination in accordance with this Section 6.1
by one of the parties hereto after the material breach of this Agreement
by the other party hereto; or (c) termination by one of the parties
hereto after the other party hereto (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 as described in clause (b)
of 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
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<PAGE>
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: (719) 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, 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
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<PAGE>
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 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
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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. (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
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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.
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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 E
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
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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 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 (referred to herein as "HSI Conversion
Shares") 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., a Delaware corporation ("HSI"). Any holder
of 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 Paragraph C. Prior to any proposed
issuance of capital stock by the Corporation (other than an issuance of HSI
Conversion Shares), 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
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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");
(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
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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, or any successor of 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, 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
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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 Subparagraph 5. below) or the
conversion into Common Stock of any portion of the
convertible 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
right of first refusal under this Subparagraph 2., 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
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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 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 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 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
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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.
(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
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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 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, excluding any convertible debentures issued to HSI,
prepared in accordance with generally accepted accounting principles
for the most recently completed fiscal year
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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 Subparagraph 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 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
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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 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
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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 Subparagraph 1. above shall terminate with respect
to an individual NJ Institutional Shareholder on December 31, 1999;
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 Subparagraph 1. above, and, provided
further that,
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(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 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 AcuteCare Institution, if any, fails to
perform its obligations pursuant to Paragraph A. above, or (ii) during the
period ending December 31, 1999, an NJ Institutional Shareholder or its
affiliated NJ Acute Care Institution, if any, should fail to provide
reimbursement rates (a) for in-patient visits at the lower of (1) the lowest
rate of reimbursement received by such provider from nongovernmental payors
for each line of business, or (2) the rate of reimbursement reflecting a
reduction (compared to calendar 1996 rates) of five (5%) percent in in-patient
costs, provided that such reduction is solely as a result of rate reductions
and not through utilization or medical management efforts, and (b) for
out-patient visits at the lower of (1) the lowest rate of reimbursement
received by such providers from nongovernmental payors for each line of
business, or (2) the rate of reimbursement reflecting a reduction (compared to
calendar 1996 rates) of ten (10%) percent in out-patient costs, provided that
such reduction is solely as a result of rate reductions and not through
utilization or medical management efforts, then the 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
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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 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:
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[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.
ARTICLE XII
DISSENTERS' RIGHTS
In the event HSI elects to effect a merger involving the Corporation,
as contemplated in Section 6.4(b) of the Amended and Restated Securities
Purchase Agreement dated February 10, 1997, among the Corporation, FOHP-NJ and
HSI, each and every shareholder of the Corporation shall be afforded the
dissenters' rights 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.
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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 ____________,
1997, by a duly authorized officer.
FOHP, INC.
By:__________________________________
Name: Donald Parisi
Title: Acting 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 F
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
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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.
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 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
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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).
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
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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
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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 prior to the election to the Board of any person
designated by Health Systems International, Inc., a Delaware corporation
("HSI"), shall be ten (10) directors. The number of directors which shall
constitute the whole Board shall be increased to accommodate the number of
designations to which HSI is so entitled. After the Board includes any HSI
designees, the number of directors which shall constitute the whole Board may
be increased or decreased for whatever reason by resolution of the Board;
provided, that such increase or decrease is approved by the HSI designee or
designees to 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 HSI 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 outstanding
shares of common stock of the Corporation. In addition, for so long as HSI
holds convertible 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, immediately upon the receipt of
a request by HSI, increase the number of directors
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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
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,
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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 (i) 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 (ii) 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: (A) the name and address of the shareholder who intends
to make the nomination and of the person or persons to be nominated; (B) 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 by proxy at the meeting to nominate the person or persons specified in the
notice; (C) 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; (D) 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 (E) 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, (i) 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 (ii) 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
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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.
(b) BOARD APPROVAL REQUIREMENTS.
(i) Actions Requiring Super-Majority Board Approval. The
Board may not approve any of the following corporate transactions or actions
with out the approval of at least eighty (80%) percent of the directors on the
Board; provided, however, that subsequent to the conversion of all the
convertible debentures issued by the Corporation to HSI pursuant to the
Amended and Restated Securities Purchase Agreement (the "Purchase Agreement"),
dated February 10, 1997, among the Corporation, HSI and FOHP-NJ, the corporate
transactions and actions set forth in subparagraphs B, G, H, J, K and L will
no longer require 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;
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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; provided, however, that
the Board approval requirement in this Section 4(b)(i)D
of these By-laws shall not apply to any merger of the
Corporation with HSI as is contemplated in Section 6.4 of
the Purchase Agreement;
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,
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$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;
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 subsidiary 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 Purchase Agreement or any of the
agreements entered into in connection with the Purchase Agreement (including
the exhibits to the Purchase Agreement), including (1) any issuance of
securities by the Corporation to HSI contemplated therein, and (2) the
business transactions contemplated in Section 6.4 of the Purchase Agreement.
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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.
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. ADJOURNMENT. Any meeting of the Board of Directors shall
be adjourned upon the request of a majority of the directors on the Board
designated by HSI who are present at the meeting, for a period of not more
than ten (10) days. Also, any meeting of a committee of the Board or any other
committee established by the Corporation shall be adjourned upon the
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request of a majority of the persons on the committee designated by HSI who are
present at the meeting, for a period of not more than ten (10) days.
SECTION 11. 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 12. 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 13. 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 14. 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 15. 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.
(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
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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 16. 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.
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Members of special or standing committees may be allowed like compensation for
attending committee meetings.
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 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.
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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.
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
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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.
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
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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
15(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, for so long as any shares of the Corporation's 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, 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
15(b) of Article III of these By-laws for so long as any shares of the
Corporation's 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. 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 15(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, for so long as any shares of the Corporation's common stock are held
by any NJ Practititioner, NJ Acute Care Institution, affiliate to a NJ Acute
Care Institution or other health care provider to FOHP-NJ, 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 15(b) of Article III of
these By-laws for so long as any shares of the Corporation's 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.
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,
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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.
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
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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
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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 and Restated: _________ ______, 1997.
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APPENDIX G
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.
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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.
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
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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 Bylaws, the Corporation shall at all times comply with the laws
of the State of New Jersey applicable to the Corporation and its business.
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 ____________, 1997, by a duly authorized officer.
FIRST OPTION HEALTH PLAN OF NEW
JERSEY, INC.
By: ___________________________________
Name: Donald Parisi
Title: Acting 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 H
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
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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.
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 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
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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).
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
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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 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
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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; provided, however, that subsequent to the conversion of all the
convertible debentures issued by FOHP to Health Systems International, Inc., a
Delaware corporation ("HSI"), pursuant to the Amended and Restated Securities
Purchase Agreement (the "Purchase Agreement"), dated February 10, 1997, among
the Corporation, FOHP and HSI, the corporate transactions and actions set
forth in subparagraphs B, G, H, J, K, and L will no longer require 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;
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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;
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;
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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
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
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 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 Purchase Agreement or any of the agreements
entered into in connection with the Purchase Agreement (including the exhibits
to the Purchase Agreement), including (1) any issuance of securities by the
FOHP to HSI contemplated therein, and (2) the business transactions
contemplated in Section 6.4 of 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
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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 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. ADJOURNMENT. Any meeting of the Board of Directors shall
be adjourned upon the request of a majority of the directors on the Board
designated by HSI who are present at the meeting, for a period of not more
than ten (10) days. Also, any meeting of a committee of the Board or any
other committee established by the Corporation shall be adjourned upon the
request of a majority of the persons on the committee designated by HSI who
are present at the meeting, for a period of not more than ten (10) days.
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SECTION 10. 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 11. 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 12. 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 13. 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 15 below), NJ Acute Care Institution (as defined in Section
15 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
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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 14. 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 15. 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
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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.
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.
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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.
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
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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.
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
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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), 13(b) and 15 of
Article III of these By-laws requires the approval of a majority of the
directors who are not HSI designees for so long as any shares of FOHP's 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 the Corporation,
and (ii) any new by-laws which may be adopted by the Board must contain the
provisions found in Sections 1, 2(b)(ii), 13(b) and 15 of Article III of these
Bylaws for so long as any shares of FOHP's 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 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),
13(b) or 15 of Article III of these Bylaws requires the approval of a majority
of the directors who are not HSI designees for so long as any shares of FOHP's
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 the
Corporation, and (ii) any new by-laws which may be adopted by the shareholders
must contain the provisions found in Sections 1, 2(b)(ii), 13(b) and 15 of
Article III of these By-laws for so long as any shares of FOHP's 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 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
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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.
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,
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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
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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 and Restated: _________ ___, 1997.
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PROXY
FOHP, INC.
ANNUAL MEETING OF SHAREHOLDERS - MARCH ___, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby nominates and appoints Donald Parisi and John
McCarthy, 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 March ___,
1997 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 AMENDED AND RESTATED SECURITIES PURCHASE
AGREEMENT DESCRIBED IN PARAGRAPH 1 BELOW, FOR THE PROPOSAL TO APPROVE THE
AMENDMENTS TO THE CERTIFICATES OF INCORPORATION AND BY-LAWS DESCRIBED IN
PARAGRAPH 2 BELOW AND FOR ALL THE NOMINEES FOR DIRECTOR LISTED IN PARAGRAPH 3
BELOW.
1. To approve the Amended and Restated Securities Purchase Agreement
among the Corporation, First Option Health Plan of New Jersey, Inc.
("FOHP-NJ") and Health Systems International, Inc., and the transactions
contemplated thereby.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. To approve the amendments to the Certificates of Incorporation and
By-laws of the Corporation and FOHP-NJ.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
<PAGE>
3. 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 as WITHHOLD AUTHORITY
marked to the contrary below) to vote for all nominees
INSTRUCTION: To withhold authority to vote for any individual nominee,
write that nominee's name in the space provided below.
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4. 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 VOTE FOR THE PROPOSAL TO APPROVE
THE AMENDED AND RESTATED SECURITIES PURCHASE AGREEMENT DESCRIBED IN PARAGRAPH
1 ABOVE, FOR THE PROPOSAL TO APPROVE THE AMENDMENTS TO THE CERTIFICATES OF
INCORPORATION AND BY-LAWS DESCRIBED IN PARAGRAPH 2 ABOVE AND FOR ALL THE
NOMINEES FOR DIRECTOR LISTED IN PARAGRAPH 3 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:____________________, 1997
------------------------------------------
------------------------------------------
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.
2
